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Discussion: Co-ops Not Just for Farmers Anymore

July 29, 2014 By John Van Hecke, Publisher

Co-ops are a jointly owned and managed business structure based on member cooperation rather than direct competition. Members share the organization’s profits and benefits.

The best known co-ops are Minnesota’s oldest and largest co-ops like CHS, Land-O-Lakes and American Crystal Sugar. Co-ops regularly touch all Minnesotans lives yet most of us barely recognized their impact, much less their potential for growing Minnesota’s economy.

How do we use co-ops to help people create wealth, grow family stability and anchor communities?

How can we move from traditional co-ops to new uses?

Economic Development Fellow and international co-op expert Lee Egerstrom will join us today from 8-9:30 am.

 

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28 Comments:

  • Rachel says:

    July 29, 2014 at 6:18 am

    Good morning! Lee will be joining us at 8 to answer any questions. What would you like to know about the possibilities of co-ops for economic growth? How have you seen co-ops showing up in your everyday life?

  • Mark Ritchie says:

    July 29, 2014 at 7:50 am

    One of the most important leaders of Minnesota’s modern cooperative movement, Chuck Kanten, passed away last week. I will be talking about his role in cooperatives and how he helped to fuel a renewed understanding and appreciation of cooperation in business and community life, at his memorial service coming up this Sunday at 2:30 PM at the Lutheran Church in Milan, Minnesota.  For more on Chuck’s life see http://www.stenshoelhouske.com/obituary/Charles-Robert-Chuck-Kanten/Crookston-MN/1403374

    • Rachel says:

      July 29, 2014 at 7:59 am

      Thank you, Mark!

  • Will says:

    July 29, 2014 at 7:53 am

    You guys should check out Fair State Brewing, Minnesota’s first cooperative brewery. They are about to open a tap room in northeast Minneapolis: http://fairstate.coop/.

    Cheers!

    • Lee Egerstrom says:

      July 29, 2014 at 7:59 am

      Northeast! Perhaps we should say Skol!

    • Rebecca White says:

      July 29, 2014 at 9:14 am

      Will—

      There is another cooperative brewery organizing in Andrew Volstead’s old stomping grounds of Granite Falls—Bluenose Gopher Brewery. They’ve just started accepting member investments this summer. My husband and I are proud member-owners #32 and #33. http://www.bluenose.coop

  • Lee Egerstrom says:

    July 29, 2014 at 7:56 am

    Hi Rachel, everyone.

  • Rebecca White says:

    July 29, 2014 at 7:59 am

    I am an organizer with Land Stewardship Project’s Community Based Food Systems program, and I work with several food co-ops in west central Minnesota. I’m interested in the role retail and producer co-ops can have in local and regional food systems—making good food more widely available to the public, and also playing a role in storage, aggregation, and distribution. We’ve seen the Twin Cities Co-ops build a mechanism for doing this over the last couple of decades—what are the possibilities for cooperative food systems development in more rural regions of our state?

    • Lee Egerstrom says:

      July 29, 2014 at 8:11 am

      You and LSP probably have a better feel for this than I do, but I keep seeing signs rural communities are embracing the local foods movement. Each time a community, like my old hometown of Kerkhoven to name just one, starts a localized farmers market builds momentum for more local and regional development.  This looks promising to me.

      • Rebecca White says:

        July 29, 2014 at 8:35 am

        As a member-owner and board member of a 35 year old food co-op in tiny Ortonville, I often hear comments like, “How is it possible that a food co-op exists here?” Well, no one’s going to open a Whole Foods in Big Stone County, so the answer is because of member-owner investment that allows us to provide good food choices for ourselves and the rest of our community and region. It’s a powerful engagement tool. People tend to think of food co-ops as an urban/suburban (population dense) thing, but the model makes as much, if not more sense in rural “food deserts” that lack food choice.

        Still, the distribution “system” for the local food we source is primitive at best. Principle Six gives some guidance in that area—the rural co-ops can work together with each other and with producers to alleviate some of the inefficiencies.

    • Randy McLaughlin says:

      July 29, 2014 at 9:30 am

      While I have been a co-op advocate starting with my outreach work in the early 70s for Peoples’ Warehouse, I have to question whether we are limiting ourselves by focusing on the cooperative model without understanding its limitations.  If our shared goal is development of a more regionally-based and sustainable food distribution system, co-ops certainly play a role but there may be other organizational models that should not be dismissed. Unfortunately, there is a great deal of parochialism in the cooperative community that may be inhibiting better solutions.

      Rebecca brings up the dream of extending the Twin Cities food co-op model into rural areas.  My observation is that while this may work in regional centers, it is more difficult to make a co-op work using that model in a smaller community.  Back in the 70s, I envisioned a food co-op in every county, but this has proven to be much more difficult to achieve.  Recent experience here in Red Wing demonstrates this.  While a cooperative might make it in this small market if everything goes right, there is little tolerance for mistakes.  We had a cooperative that struggled to raise adequate capital, opened too soon in too large a space, ran for several months with spotty inventory and finally failed.  Anyone proposing a co-op in a similar or smaller market should pay just as much attention to failures like this than to rosy projections. 

      Meanwhile, in the same market, I have been a part of a cooperative buying club that has run for 27 years, pursuing a model that has been abandoned and dismissed by the greater cooperative leadership.  I strongly feel that rural expansion must include a strong preorder component.  But as I search for a model that would allow expanding the preorder model, I find it very limiting to look only at a cooperative organizational model.

      • Rebecca White says:

        July 29, 2014 at 10:45 am

        Randy—

        Thank you for your response. I agree with you that there are a number of useful models besides cooperatives. As a rural organizer (and resident), I certainly don’t think that the same model that works in population dense areas will work in population-dispersed areas, but I’m definitely interested in thinking about what lessons and components of the Twin Cities local food system might be useful for us.

        For instance, the food hub model that locates a facility in a population center might work when a lot of population is in or near that center, but out here in western Minnesota, the distances get to be too far for one big facility in one place to make much sense. We are looking at the potential for smaller, more dispersed “nodes” that may only contain the basic components that farmers in that particular area need—and using unused or underutilized existing infrastructure on those farms and in those communities.

        • Randy McLaughlin says:

          July 29, 2014 at 12:34 pm

          I think it’s easy to look at the Twin Cities food system, get stuck on the food co-ops and miss what else is going on or could be going on. Although the co-ops work hard to feature and promote local food they do not serve well as food hubs.  The co-ops are increasingly relatively upscale retail facilities, often located in crowded neighborhoods with limited parking and even more limited loading and unloading facilities.  Their business is dictated by the need to generate the revenue to support their operations and often to service their debt.  A hub would do better in more bare-bones industrial space with easy shipping access.

          The problem with food hubs, for me, is that they are often so focused on gathering food for institutional or wholesale customers that they leave out any means for local individuals to access food grown or produced in their own area.  At best, you might find a few string beans grown by a local farmer on sale by the local grocer who has procured them through a wholesaler in the Cities who in turn got them from the hub down the road.

          The problem I am trying to solve is how to provide access to a rural consumer to the full range of product produced in their area as well as the broad variety of products they might otherwise have to travel to the Cities to find.  In my mind it requires a much more bare-bones industrial facility than you are likely to find looking at the Twin Cities co-ops.  Amazon.com has shown that people will order things in advance, based only on a limited description and yet we seem to be stuck in a retail model that relies on speculative inventory and the struggle to move that inventory quick enough to pay for facilities and labor.  If we are to reverse the trend of retail migration to regional centers, we’ve got to come up with a different model.

          I’ve digressed from the cooperative discussion, but hopefully in doing I can better make my point.  Although cooperatives may be useful, we would be best to be open to whatever organizational model works best for a given problem.  Cooperatives struggle under a very limiting capitalization model.  Because of this, especially at the consumer level, they often work more like a non-profit: seeking donations and member loans.  Commonly, a start-up co-op has far more debt capital than member capital and end up more beholden to servicing debt than to serving member needs. Even when a cooperative becomes profitable, they are always saddled with the additional overhead of accounting for memberships, shares and dividends. In food retailing, volume and efficiency is the name of the game. Feeding the perception that a co-op is members-only works against volume.  In a mature market, it is difficult for a co-op to compete on price alone.

          Maybe it would be just as well to organize as a non-profit and still end up with a business that exists to serve its community.  I think we also should be looking at the new opportunity here in Minnesota to organize as a Benefit Corporation, allowing the capitalization advantages of a conventional business while allowing community benefit to drive policy. And let us not forget that if we are talking about a local food system, things are going to happen to a large extent because of individual initiative.  Perhaps we should be exploring how to better empower and focus that initiative rather than taking the attitude that too often accompanies cooperatives that any kind of initiative or financial gain is evil.

  • Lee Egerstrom says:

    July 29, 2014 at 8:07 am

    To enlist comments on where we might go with cooperative development, let’s remind everyone that co-ops have been a useful tool for centuries to help people and communities overcome market imperfections. In some cases, it can be complete market failure. More often, however, co-ops have been a tool to bring market power or a market presence when imperfections cause problems or hardships. The proper question isn’t “do markets work?” The question should be asked, “For whom do they work?” With that in mind, how about offering some suggestions about industry adn service areas that could use a good dose of cooperation in the current state, national and global economies.

    • Deb Balzer says:

      July 29, 2014 at 8:27 am

      Hi Lee,  would you provide some examples of how co-ops have been useful in the past and what you think we can do better here in Minnesota.

      • Lee Egerstrom says:

        July 29, 2014 at 8:57 am

        Let me deal with the examples of co-op successes first. I’ll come back to the second part of your question in a separate response.
        Page 14 of our Cooperatively Moving Minnesota Forward report of April 2011 (http://mn2020.org/assets/uploads/article/cooperatively_moving_mn_forward2.pdf) shows how diverse the cooperative movement has become in Minnesota. Researchers at the University of Wisconsin Center for Cooperatives 1,016 co-ops operating in Minnesota in 2010. Housing co-ops accounted for 305 of them, followed by the better know farm supply and marketing co-ops (229). There were also 156 credit unions that are internationally recognized as co-ops even though they are charter under different papers of incorporation in America. Other co-op sectors included arts & crafts/entertainment, biofuels, finance, daycare, education, electric, farm credit, grocery and retailing, media, mutual insurance, telephone service, transportation, and water and waste services. Combined, they make Minnesota the most cooperatively organized state in the nation.

        • Lee Egerstrom says:

          July 29, 2014 at 9:29 am

          Circling back, I’ve got to say the diversity of co-op ventures we have in Minnesota support my contention that cooperative business models are under utilized tools for future growth and development. There are few sectors of the economy that couldn’t sustain co-op enterprises. Even though we are the No. 1 co-op state in the nation, we almost seem to be in co-op infancy compared with some northern European countries. Our possibilities are nearly limitless.

  • John Van Hecke says:

    July 29, 2014 at 8:22 am

    If I want to go to graduate business school to study co-ops as a business tool, do I have any options? Are any MBA programs even teaching about cooperatives?

    • Lee Egerstrom says:

      July 29, 2014 at 8:41 am

      Oh, but you’ve raised a touchy subject. Most grad schools of business and management ignore cooperative business models. The Carlson School at the University of Minnesota is among the few such schools nationally to actually offer a full course on co-ops in league with the University’s Law School. It is scheduled for the fall semester this year and will feature a prominent attorney and an applied economist. Both are nationally recognized cooperative experts. Like most matters, money is the reason for most business school oversights. Going back to the time of President Lincoln, the government’s biggest push for cooperative development has come down through USDA and the land grant university system. Thus, departments of agricultural, resource or now applied economics have contained the academic support for cooperatives even though co-ops have long since spread from the farms to most other areas of life. Business schools, meanwhile, get financial support from privately held and public stock corporations, thus ignoring co-ops. The same problem exists in many European countries where the cooperative movement tended to grow up from an agricultural base. Here’s a problem: co-ops need the educated talents in management that come out of the business schools. But then the co-ops must give their new managements OJT training to understand and appreciate their democratic form of member ownership and other unique features of co-op principles and practices.

      • Lee Egerstrom says:

        July 29, 2014 at 9:24 am

        Another thought occurs. There seems to be increased interest in learning about cooperatives stirring among undergraduate at Minnesota campuses. I hear from students from time to time. Also, I should mention that a class for the Master of International Business program at St. Mary’s University in Minneapolis has at least one lecture each semester that deals with cooperatives and cooperative development abroad. And, there is a professor of accounting at Bemidji State University who is completing a doctoral dissertation on Minnesota’s hybrid 308b cooperative law. I have to believe his students at BSU are learning something about cooperatives along the way.

  • Joe says:

    July 29, 2014 at 8:56 am

    As Lee likes to remind me, co-ops are inter-tangled with the founding of this country. The forerunner for our modern home security and property causality insurance was started in Philadelphia by Ben Franklin. The company still exists today.  Co-ops are a great way to help ameliorate some the issues we associate with making business risks and infrastructure a public costs but privatizing the resulting profits.

    • Lee Egerstrom says:

      July 29, 2014 at 9:05 am

      You are so right, Joe. The oldest continuing co-op in America is the Philadelphia Contributorship for the Insuring of Homes from Loss by Fire. (How’s that for a name!) Ben Franklin started it in 1752. The second oldest co-op is the Associated Press (1846) started by New York newspapers to arrange coverage of the pending Mexican-American War, 1946-1848.  And some of our urban friends still shrug and say, “Co-ops. Isn’t that something farmers do?”

  • Rebecca White says:

    July 29, 2014 at 8:59 am

    Another issue I’ve come across in my work (which you touch on somewhat in your discussion of cooperative training in business schools) is that producers who want to work cooperatively lack the connections and resources/expertise to know how to form a legal cooperative structure. A couple of weeks ago, I was talking to yet another group of producers who were advised by their legal counsel to incorporate as a non-profit because incorporating as a cooperative is too complex, too difficult. How much more difficult is it to incorporate as a cooperative than a non-profit? Is this perception simply due to a lack of training, information, and connections to the right people and resources?

    • Lee Egerstrom says:

      July 29, 2014 at 9:17 am

      Rebecca, you are most likely right on all your points. I can’t second guess from afar what legal issues may have been involved with the group you mention. But I do know that the greatest cooperative legal expertise in the Twin Cities has resulted from firms doing in house training through their own cooperative law departments. I should point out accountants have a similar problem and must learn co-op accounting on the job or under fire. The accountants recognize this is a challenge and have both a national and regional professional organization to help them with continuing education.

  • Randy McLaughlin says:

    July 29, 2014 at 10:08 am

    As a manager of a small cooperative food buying club, this is one of the problems that has lead me to increasingly question the cooperative model.  Every year, I spend way too much time allocating and distributing profits to members.  It’s ludicrous, when you think of it, that I spend as much unpaid time as I do making sure that a profit is not made from the members.  I do the work but the members share what little profit is made.

    Starting a co-op requires a lot of work and sacrifice.  But the benefits, profits and accountability go to “the members”.  In a simplified view, the members are the organizers and they have all shared in the sacrifices needed to make the co-op work.  But the more fluid the membership and the more the co-op sells to non-members, the co-op becomes a pump that drains its organizers to the benefit of people who come along later and have a much more casual relationship with the co-op.  Is it any wonder that co-ops aren’t springing up more rapidly?

    Another issue that I think cooperatives simply ignore is that unless there is a concerted effort to retire inactive memberships, the cooperative is increasingly owned by people who have moved away, have died or for some other reason no longer patronize the cooperative.  If the model is retaining 80% of profits in member certificates indefinitely, the co-op’s capital is increasingly owned by non-patron members and their heirs.  This does not strike me as a sustainable model.”

    • Tom P says:

      July 31, 2014 at 8:02 pm

      Randy, it sounds like the buying club needs to pay you a stipend (at least!) for your work. Most perpetually operating cooperatives have paid staff which addresses this ‘pump’ problem you’ve raised as far as ongoing efforts are concerned. Are you sure you’re not exploiting yourself in this situation? Regarding founders the problem is harder to solve, to be sure. Founders put an incredible amount of energy in and then members can join up and reap many of the benefits immediately. In worker-owned cooperatives there are several ways to reward founders in an ongoing way, or upon exit, but in consumer cooperatives there’s often the assumption that the founders are doing the work for the good of the community. It’s a lot to ask of one another, so the instances of new start-ups should really be focused on where there’s a compelling need. This is something Lee spoke to above in his comments.
      Regarding inactive members, you’re right, co-ops need to be diligent in retiring inactive members. As long as the system gets put in place it’s not such a problem - and the State has laws around unclaimed property, which compels co-ops to retire those inactive members…so maintaining inactive members shouldn’t be seen as an ongoing attribute of the cooperative model, it’s a red flag if those inactive members are accumulating.

      • Randy McLaughlin says:

        August 1, 2014 at 11:46 am

        If I were to operate the buying club as a sole proprietor, I could pocket the small profit the buying club made even though that would be far less than minimum wage per hour invested.  But if a co-op wanted to pay its workers, on the other hand, it would have to pay them minimum wage and comply with all the other laws pertaining to employment.  Below a certain level of business, and generally during startup, a cooperative must rely upon volunteer labor.  But should that co-op be profitable those profits belong not to the volunteers but to the member patrons.  Unless the work, from day one, is equitably distributed among all patrons (hard to achieve) or the co-op is able to pay competitive wages to everyone involved from its inception, economic exploitation is an inevitable consequence.

        Co-op promoters will often use a phrase like that in the introduction to this discussion: “members share the organization’s profits and benefits” but seldom mention the more exploitive and less egalitarian aspects.  Members share the profits but organizers may not even receive thanks.

        Around this part of the country, someone can promote the creation of a new food co-op, point to the privately owned store around the corner derisively as exploitive and undemocratic, and get a number of people to commit time and money to the vision of a new food co-op in town.  But in the end, both stores operate in the same market. Price depends more upon volume than it does on profit. The real competition, though, are the multinational corporations: flush with capital, managed by business school graduates and managing integrated supply chains.  Maybe we should spend less time and energy sniping about the theoretical purity of ownership and be more open to whatever organizational model allows us to successfully meet whatever challenge we are attempting to meet.

  • D Rud says:

    July 29, 2014 at 10:33 am

    co ops were marketed by individuals & groups (politics) as benefits for the little guy(farmers mainly) as a benefit to a large community pool rather than individual person.

    They have benefited the rural area such as communication (phones, internet, entertainment & news,leasing equipment,) & provided service, lower rates & dividends to customers.

    Over the years co ops have developed missions & goals to favor of a self centered political & individual benefit of power, control rather than its original intention.

    Today, we have them using poor to middle class monies to compete against small business owners in the market place, involving themselves in the corporate world that benefits large corporations much more than individuals, high middle class and above individuals run the boards and decisions, dividends have shrunk to a 5-7 year payback that when inflation is calculated, you receive very little to no benefits, prices for retail merchandise & products are no cheaper than other competition, individuals of management & boards receive benefits of great retirement, health insurance & investments that the average poor & middle class pays for & that’s why there are no significant dividends(returns) & they appease the public by their semi annual events of coffee & lunch & prices to pacify the general public & engage in a one party political agenda using the people’s dollars.