Category: Specialty Topics

The cooperative business model has been very successful in the U.S. and cooperatives are particularly successful in the agricultural sector.  Many U.S. agricultural cooperatives are approaching or exceeding 100 years of existence.   Despite that historical success we are starting relatively few new agricultural cooperatives.  Many of our existing agricultural cooperatives started with a handful of producers joining together to address a common need.  We don’t see that same type of activity today or, if we do, it is not structured as a cooperative business.  That raises the question of why we don’t start more cooperatives.

The first reason for the infrequency of new cooperatives is lack of understanding of the cooperative business model. Even producers who are members of a cooperative likely do not know that a cooperative is a corporation, how to incorporate a cooperative or all the details of the cooperative financial model. Even if a producer knows that incorporating as a cooperative is an option, they likely feel that the process is more opaque, mysterious, and complicated relative to other options.  That leads to the second impediment to cooperative development, most producers and professional advisors are more familiar with Limited Liability Companies and investor-based business forms. A student could graduate with a business degree and go on to get an MBA while never hearing the word “cooperative”.  Advisors, attorneys, and accountants are more likely to understand LLCs relative to cooperative corporations.  That makes LLC formation the path of least resistance.

The final factor limiting new cooperative development is access to capital.  Most existing U.S. agricultural cooperatives are capitalized from decades of retained profits.  New opportunities for cooperatives often require substantial amounts of up-front capital.  There are cooperative models, such as the closed membership cooperative and the hybrid member-investor model that address those issues.  The formation of those types of cooperatives requires not only an understanding of their structures but also the ability and willingness to make substantial up-front investment.  

I can think of many agricultural situations from machinery sharing, to condo grain storage to feral hog trapping operations where small scale cooperatives could be logical and successful. Those small cooperatives could be formed under the closed membership cooperative model with members receiving a usage right (bushel of grain stored, acre of machinery use, one week usage of trapping equipment) for a share of membership stock.  By receiving patronage in proportion to use the members would achieve services at essentially an at cost basis and the cooperative could issue stock patronage to fund any necessary re-investment in equipment and infrastructure.  Members wishing to exit the cooperative could sell their share and usage rights to another eligible producer with approval of the cooperative board.  The cooperative model would provide economies of scale and let the members receive a service at much lower cost than they could achieve on their own.   Opportunities for new agricultural cooperatives exist but we rarely hear them discussed.  Perhaps we just need to recycle some good old ideas!

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Kenkel, Phil. “Why Don’t We Start More Cooperatives?” Southern Ag Today 4(20.5). May 17, 2024. Permalink

Apples are often viewed as a perennial crop commonly produced for fresh consumption in the Northeast and Pacific Northwest. However, Southern apple orchard production has a history that begins with the earliest settlers in Virginia around 1622 (Flynt, 2023). As heterozygous plants, each apple seed is a blend of parent tree genetics which spurs completely new varieties. In the South, these new varieties flourished for much of the country’s history until the early 1900’s when commercial apple production expanded in the Pacific Northwest. While apples in the South were used for eating raw, many were processed into an alcoholic beverage called hard cider. Much like wine, apple varieties have distinct flavor attributes that contribute to the taste and marketing abilities of hard cider. 

After a decline in cider production and consumption that occurred during prohibition in the 1920s, production of Southern apples became a small part of agricultural productivity. However, the last 20 years have seen a renewed interest in craft, hard cider production and the revival of southern apples varieties such as Queen Pippin shown in Figure 1. Yet, marketing has long been difficult given the unknown identity of this beverage in the larger marketplace to consumers who are largely unfamiliar with the product. Recent research has shown that consumers are interested in hard cider and associate it as a complement to wine (Neill et al., 2024). By using consumer-oriented flavor language and co-marketing with wine, hard cider and southern apple production has the potential to return to its storied past with vigor. 

Figure 1: Example of a Historical Southern Apple Variety that was Rediscovered and Being Produced in Commercial Orchards

Funding Statement: This work was supported by the USDA-NIFA AFRI under Grant #2020-68006-31682.

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References: 

Flynt, Diane. 2023. Wild, Tamed, Lost, Revived: The Surprising Story of Apples in the South. UNC Press Books. 

Neill, C. L., Lahne, J., Calvert, M., and Hamilton, L. (2024). Contextualizing hard ciderflavor language and market position. Journal of Wine Economics, 1–20. https://doi.org/10.1017/jwe.2024.13

Commercial banks play an important role in the agricultural sector and communities. These financial institutions not only accept deposits but also provide relationship-based and information-intensive banking services to small businesses, including some family farms, and depositors of low to moderate wealth (Kgoroeadira et al., 2019; Keeton et al., 2003; Cole, 1998; Berger and Udell, 1995). Community banks are often more flexible in tailoring their loan policies to small business customers (Yeager, 1999). The banking sector’s involvement in agriculture has grown significantly, from providing about 8% of real estate loans in the 1980s to over 30% in 2023, second only to the Farm Credit System’s 49%. Commercial banks also serve as the largest lenders to agricultural producers for non-real estate loans (43%), compared to 38% from the Farm Credit System. Additionally, commercial banks have positive impacts on community development by providing capital to new and existing businesses for expansion or growth purposes, thereby fueling local economic growth and employment. Despite their increasing role in the community and the agricultural sector, the development and application of advanced information technologies are altering the finance market, leading to a reduction in the presence of local branches in both urban and rural areas (Dahl et al., 2021).

The number of banks across the southern states has decreased over time (see Figure 1). Since the 1980s, we have observed the consolidation of banks contributing to this trend, with large banks merging with other large banks and acquiring smaller regional banks (Gilbert, 2000). However, while the number of branches increased between 1980 and 2010, a downward trend followed thereafter (see Figure 2). The more recent closure of branches across the states is primarily attributed to the growing acceptance and use of online or mobile banking. Branch closures, for the most part, were concentrated in areas with branch duplication rather than those dependent on a single branch (Dahl et al., 2021). One of the economic impacts of these closures has been the reduction in employment and multiplier effects in five of the thirteen southern states (Alabama, Georgia, Kentucky, South Carolina, and Texas). Georgia experienced a significant drop of 61% in employment over the past decade, from 42,302 employees in 2014 to 16,329 in 2023. Additionally, Dahl et al. (2021) found that the median extra distance traveled to the nearest branch following a closure is 0.18 miles in urban areas and 0.64 miles in rural areas.

Bank closures have also been found to have a lasting and significant impact on credit supply to local small businesses, remaining depressed for up to 6 years (Nguyen, 2019). However, Nguyen (2019) noted that these effects were very localized, dissipating within six miles of the area where the closure occurs. Furthermore, bank closures or consolidations have a greater impact on the more vulnerable members of society. Although online banking is gaining popularity due to its cost-effectiveness and potential to reach a larger customer base, many rural areas still lack broadband access or may not be technologically savvy enough to participate in online banking. Hence, physical banking continues to play a crucial role for many consumers, especially lower-income, rural, older, and disabled individuals (Dahl et al. 2021). Therefore, the lack of nearby bank branches could disrupt access to banking services for some of the most vulnerable groups in our communities. This lack of access can, in turn, limit opportunities to improve financial health and build wealth, ultimately impacting community economic development. Thus, it is important to pay attention to potential bank mergers and acquisition strategies and their associated effect on community bank trends, as changes in this sector can strengthen access to financial services in communities affected by closures.

Figure 1: Total Insured Commercial Banks

Figure 2: Total Branches of Commercial Banks

References

Berger, Allen N., and Gregory F. Udell. 1995. The Journal of Business. 68(3): 351-381. https://www.jstor.org/stable/2353332

Cole, Rebel A. 1998. The importance of relationships to the availability of credit. Journal of Banking & Finance, 22(6–8): 959-977.

Dahl, Drew, Michelle Franke, and James Fuchs. 2021. How Branch Closures Affect Access to Banking Services. Regional Economist, Federal Reserve Bank of St. Louis (January 2021). https://www.stlouisfed.org/publications/regional-economist

Gilbert, R Alton. 2000. Big Fish, Small Ponds: Large Banks In Rural Communities. Regional Economist, Federal Reserve Bank of St. Louis (July 2000). https://www.stlouisfed.org/publications/regional-economist

Keeton, William, James Harvey, and Paul Willis. 2003. The Role of Community Banks in the U.S. Economy. Federal Reserve Bank of Kansas City Economic Review (Q2):15–43

Kgoroeadira, Reabetswe, Andrew Burke, and André van Stel. 2019. Small Business Economics. 52(1): 67-87. https://www.jstor.org/stable/48701893

Nguyen, Hoai-Luu Q. 2019. American Economic Journal: Applied Economics. 11(1): 1-32. https://www.jstor.org/stable/26565512

Yeager, Timothy J. 1999. Down, But Not Out: The Future of Community Banks. Regional Economist, Federal Reserve Bank of St. Louis (October 01, 1999). https://www.stlouisfed.org/publications/regional-economist

Cooperative manager groups, comprising the boards and managers, play a pivotal role in the success of cooperatives. However, what if their management performance deteriorates as a result of the Principal-Agent (PA) problem? The principal-agent problem highlights the inherent dilemma that emerges when an individual or entity (the principal) entrusts tasks or decisions to another party (the agent), who may prioritize their own interests over fulfilling the principal’s objectives, often stemming from information imbalances.

Should we be concerned about the possible PA problem in our local cooperatives? The short answer is “yes.” In fact, many existing studies have pointed out that cooperatives’ relationships between manager groups (the boards & managers) and members are actually more vulnerable than investor-oriented firms (IOFs). This is because while shareholders of IOFs can continuously monitor their management groups’ performance via external information, such as stock exchanges, cooperatives do not have a market for their equity, which hinders their members from monitoring the actions of their manager groups. 

Furthermore, the lack of monitoring from coop members may not only lead to a moral hazard where managers incentivize themselves, but might also intensify the adverse relationship between the boards and managers if they already had a hostile relationship. A recent study (Seo et al., in press) suggested some possible instances of internal governance issues and structural characteristics that may lead to such hostile relationships between the boards and managers. For example, the managers of agricultural cooperatives, who are also members of their cooperatives, tend to experience increased conflict despite the high level of loyalty towards their organizations. Because becoming a board member does not necessarily require board candidates to have accredited business management skills, the board of directors’ management knowledge, such as understanding of governance management or sector of supply chains, is often questioned (Park et al, 2019). In this situation, conflict may arise due to the board’s lack of perceived knowledge if board members attempt to over-manage managers’ boundaries. Moreover, if non-member board members, who potentially lack knowledge of their cooperative’s sector in the supply chain, influence cooperatives’ investment decisions, then conflict may arise in a similar way. This is why many existing studies emphasize the importance of cooperative board leadership training.

Though the PA problem is pervasive across almost every firm, existing studies have suggested some possible factors that alleviate the PA problem in cooperatives. Some potential solutions include enhancing social capital (trust), building favorable conditions that enhance the relationship between principals and agents, providing appropriate incentives for agents, and creating elaborate contract structures (i.e. laws and sophisticated contracts lead to human behaviors). Using one or more of these measures is recommended to create “anti-PA problem” environments in local cooperatives to prevent possible management performance loss and maximize manager groups’ performance.

References

Seo et al. 2024. Managers, Boards, and the Principal-Agent Problem in Cooperatives: A Survey 

of  Cooperative Managers in Texas. Accepted for publication in the Journal of Cooperatives on 30^th. January, 2024.

Park et al. 2019. A Framework for Training and Assessment of the 21st Century Cooperative. 

Western Economics Forum. Volume 17,Issue Number 2. https://ageconsearch.umn.edu/record/298048/

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Seo, Frank. “What is the Principal Agent problem, and should I be concerned about it in my local cooperative?” Southern Ag Today 4(14.5). April 5, 2024. Permalink

Economic Choice Sets for US Specialty Crop Industry Success 

(to see Part 1 click here)

Differentiation Strategies

To thrive in a competitive market, growers are encouraged to focus on differentiation of crops and market outlets. This involves communicating a compelling brand message through robust measurement, reporting, and verification practices. Furthermore, aligning product offerings with local consumer preferences and establishing personalized product relationships may enhance market positioning.

Motivation Through Innovation

Incentivizing on-farm worker productivity is pivotal for efficiency, which requires investment of time and training to ensure the health, safety, and wellbeing of the humans needed to achieve this goal. Collaborating with ag tech startups prioritizing sustainability offers avenues for innovation adoption. Embracing the energy and fresh perspectives of younger innovators in the industry fosters a culture of continuous improvement and adaptability.

Cooperation for Integrated Solutions

Collaboration is key to addressing the multifaceted challenges of the specialty crop sector. Evolving towards integrated solutions involves navigating trust issues around data sharing, managing expectations for return on investment, and actively seeking partnerships with nontraditional allies who share common goals.

Localizing Production with Precision Agriculture

Improving resilience requires a concerted effort to build production around technology, rather than crafting technology to suit existing production practices. Precision agriculture continues to serve as a transformative tool. Further, enabling sustainable food supply systems through use of data-driven tools offer ways to improve decision-making, resource optimization, and enhanced productivity.

In conclusion, the US specialty crop industry stands at a crossroads, necessitating considerations of an economic risk management approach to navigate the complexities of the market, labor dynamics, and global challenges. By cultivating resilience, embracing innovation, and making strategic choices aligned with market demands, stakeholders can fortify and sustain profitability of the specialty crop industry in the United States. 

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Morgan, Kimberly. “Part 2: Cultivating Resilience and Innovation in US Specialty Crop Economics: Navigating Market Dynamics, Labor Challenges, and Global Realities.” Southern Ag Today 4(13.5). March 29, 2024. Permalink