The Agricultural Cooperative Business Model
The agricultural cooperative is one of the oldest and most successful crop and livestock business models in the Ag value chain. Since time immemorial, livestock farmers and growers have pooled their resources to ensure the individual farmer’s survival and the community’s success at large.
Ag cooperatives, also commonly referred to as Ag co-ops, are owner operated and integrate single growers and farmers into a collaborative network that utilizes the democratic principle of the”power in numbers.”
Co-ops offer manifold benefits to ag business owners by allowing them to buy inputs at lower costs, enhance agricultural production and yield, and enter larger markets with higher profit potential. The net result of joining a cooperative effort is enhanced economic development potential, the ability to create sustainable models, and the capacity to scale in ways unavailable to single farmers and business owners.
This phenomenon is often defined as synergy where the whole is far greater than the sum of the parts, and two or more entities working in tandem can produce an outcome that is difficult to achieve by either party on their own. As a result, many growers, and cattle and dairy farmers elect to join a cooperative network for the myriad benefits it affords the individual farmer.
Here are some interesting facts about co-ops from the National Cooperative Business Association:
- There are approximately 2,100 co-ops in the U.S. with more than 2 million members based primarily in the Midwest
- There are more than 1.2 million global agricultural co-ops generating $6.5 billion in income per year
- More than 250,000 people are employed by farmer-owned co-ops
The Anatomy of Agricultural Cooperatives
There are three main types of cooperatives: agricultural service cooperatives, agricultural supply cooperatives, and agricultural marketing cooperatives.
Supply cooperatives pool the resources of their members to purchase, store, and distribute high-quality inputs at wholesale prices for their members for use in agricultural production.
Marketing cooperatives create sales and distribution pathways for their members. This gives co-op members entre to larger markets and manufacturing and distribution opportunities unavailable to individual farmers and growers.
Service cooperatives help create sustainable models in rural communities by filling market gaps, assisting residents in forming cooperatives, and bringing essential services to communities such as electricity, internet and telecommunications, housing, and financial services.
Buying Power and Profitability
Successful ag cooperatives are driven primarily by the exponential benefits derived by applying the cost savings assured by supply cooperatives on the front end (inputs) and margin-boosting distribution channels created by marketing cooperatives on the post-production end (outputs). Although other types of ag cooperatives help drive growth and scale, such as credit unions and energy cooperatives, supply and marketing co-ops are the secret sauce behind much of the success of this business model.
Members combine their resources to purchase materials and inputs at wholesale discounts, including seeds, fertilizers, fuel types, and equipment, the savings of which help each member to achieve increased margins on production output.
Additionally, since much of the agricultural marketing and distribution of products happens via the instrument of the co-op itself, the proverbial middleman is removed from the equation, further helping farmers become more profitable. Leveraging the collective power of the network, members gain entry into larger markets, allowing them to sell their products at higher prices. At the same time, marketing co-ops create pathways in transportation, packaging, distribution, and, of course, marketing.
This model operates according to the concept of economies of scale, where an entity obtains cost savings or advantages based on the size or scale of its enterprise. With our global population expanding exponentially, ways of making ag operations more cost-effective and profitable are one of the mechanisms we’ll use to double food production to feed the world’s population.
One of the most significant ancillary benefits and, therefore, critical architectural functions of any cooperative is to mitigate risk for its members. When a farmer’s risk is minimized or distributed among members, every group member is naturally more productive and successful in their economic growth. With climate change and unpredictable weather patterns making production output susceptible to loss, cooperatives help hedge against loss by distributing risk.
Autonomy and Security
Although members join a co-op, they still operate as an independent business. As a result, they enjoy all the benefits and security of being part of a cooperative entity, such as input supplies and output marketing, yet retain full autonomy. In many ways, this represents a “best of both worlds” scenario. Rather than rely on a centralized government or an investment dividend model such as farmland investment independent ownership allows farmers the self-determination to create profitable products, services, and operations that benefit the farmer rather than the profit concerns of the co-op.
Effect on Markets
In addition to cost savings and profit-generating outcomes, Ag co-ops also serve a distinct function in local and regional markets by affecting the price of products, supplies, and services. By providing services at cost to its members, co-ops inadvertently create a measurable level of competitiveness, prompting other businesses to offer discounts and adjustments to stay competitive. In this way, co-ops have an enduring effect on market prices which, in turn, help farmers and growers to become profitable by keeping costs to a minimum.
In many rural communities, cooperatives may be the only business offering the community goods and services, job opportunities, and food supplies. In addition, ag co-ops help communities obliquely by supplying non-farmers with electricity, fuel, or telecommunications providers by the co-op to community members.
Agricultural cooperatives help growers acquire high-quality inputs at wholesale prices and establish marketing and distribution channels to help growers build profit. In addition, USDA cooperative services help develop and foster sustainable communities by filling market gaps. Co-op Services often bring a range of services such as electricity, housing, financial services, health care, capital investment, financial services, telecommunications, and e-connectivity to rural communities.
Agricultural cooperatives serve to stabilize farming communities and supply chains making them the backbone of our nation’s food systems.
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