Trouble ahead? Low commodity prices, ag economy are major problems facing co-op management - USDA report "Problems and Issues Facing Farmer Cooperatives"

Rural Cooperatives, May-June, 2002 by Charles A. Kraenzle, Thomas W. Gray

Editor's Note: USDA/RBS Research Report 192, "Problems and Issues Facing Farmer Cooperatives," examines more fully the various survey responses discussed in this article. It should be available by late June on the Internet at www.rurdev.usda.gov, or by calling (202) 720-8381 for a hard copy ($5 each).

A USDA survey of more than 3,000 U.S. farmer cooperatives reveals that low commodity prices, the general agricultural economy, operational difficulties and increasing costs are the major problems facing cooperative management. Survey results indicate deep-seated concerns about the future viability of both cooperatives and agriculture in general.

Survey respondents were asked two open-ended questions regarding what they saw as the major problems during the past year, and what they foresee as the major problems in the next year or two. The same four major problem areas were identified by both questions, but with shifts in emphasis (see table 1).

Among the four major problem areas identified during the past year, nearly one-fifth of the responses cited low commodity prices--making it the most common response. This included low prices for cotton, cottonseed, sweet potatoes, almonds, apples, pears, fresh fruit, milk, sugar, grains and eggs.

The general agricultural economy was the second most cited problem area. A broad range of responses was included in this category, such as concern about: "the depressed farm economy," "loss of acreage and farmers," "number of dairy farmers quitting business and leaving the farm," and "producer profitability." Other responses included: "size of farms getting bigger, farmers bypassing local co-op for supplies and sales," "shrinking ag market," and "too many big farmers." As a result of the changing structure of agriculture, many said their cooperative's sales and profitability were declining.

Cooperative operational problems, cited third most frequently, included such diverse concerns as: "need for more working capital," "financing," "debt management," "equity management," "need to increase sales," "marketing issues" and "acquisition of another company and adding its operations to ours." Examples of other responses in this category included: "working through merger," "loss of feed customers," "reducing our expenses by closing smaller branches to meet larger farmer needs more competitively," "understanding and responding to our strengths and weaknesses," and "identifying and persuading directors to pursue non-traditional income opportunities."

The fourth most often cited problem for the past year was increasing costs. Nearly one-third of the respondents mentioned the rising costs of fuel as a concern. Others mentioned increased cost of doing business because of higher costs for labor, insurance, supplies and other expenses. Examples of responses included: "rising costs, particularly for energy," " high fuel prices causing cash flow problems," "rising labor costs," "rising overhead--insurance, health insurance, utilities, etc.," "increasing costs of operations; labor, repairs, depreciation" and "construction costs."

Problems in the near future

The same four problem areas were identified for the near future, but with the agricultural economy moving up to the top concern, followed by low commodity prices, operational difficulties, and increasing costs. The character of comments offered for near-future problems varied little from those given for the past year. Respondents may have been more hopeful for better prices in the future, but were aware that structural concerns--such as "the continuing trend toward larger farmers," "lack of production (in local areas)," and the increasing integration of multinational agribusinesses--were likely to continue to be problems in the near future.

There was less frequent concern with prices and the weather, more frequent acknowledgment of major structural difficulties of the agricultural economy, and greater concern about competition. However, problem areas identified as difficult during the past year--low commodity prices, agricultural economy, operational difficulties, increasing costs, labor, low margins, competition and weather--continued to be cited as future concerns.

Influence of co-op function

Whether a cooperative was primarily involved in marketing, or providing farm supplies or service had an impact on which problems were cited most often. Marketing cooperatives more frequently cited operational difficulties and competition as concerns. In the context of low prices and declining numbers of farmers and production, marketing cooperatives may plan to expand sales and markets, recruit new and larger members, or--at a minimum--maintain current market share.

Intense competition from larger organizations may make these plans difficult and raise various other operational issues for future survival.

As did marketing cooperatives, farm supply cooperatives frequently identified "the agricultural economy" as well as "low commodity prices" as major problems. However, farm supply cooperatives more frequently identified "low margins," rather than "operational and competitive" concerns. With farmers going out of business, low prices, and farmers not being able to pay bills, many farm supply cooperatives may not be able to maintain margins. Responses from supply cooperatives cited: "loss of sales, lack of earnings in the agricultural industry and high cost of products for resale."