What does a changing marketplace mean for cooperatives?

4th Tap, a small worker-owned brewery in Austin, TX, is among an emerging crop of worker cooperatives thriving in a changing marketplace. [photo courtesy 4th Tap]4th Tap, a small worker-owned brewery in Austin, TX, is among an emerging crop of worker cooperatives thriving in a changing marketplace. [photo courtesy 4th Tap]4th Tap, a small worker-owned brewery in Austin, TX, is among an emerging crop of worker cooperatives thriving in a changing marketplace. [photo courtesy 4th Tap]This article is based on Andrew Jacob’s address at NCBA CLUSA’s Annual Meeting & Virtual Town Hall last month. Jacob is chair of NCBA CLUSA’s Board of Directors and executive vice president for Regulatory, Legislative & Compliance at CoBank. If you missed NCBA CLUSA president and CEO Doug O’Brien’s message at our Annual Meeting, find it here.

Keep reading to learn how the cooperative ecosystem is facing challenges and benefiting from opportunities that come with a changing economic landscape, and why NCBA CLUSA stands out as a champion—not only of a wide spectrum of co-op sectors, but also the business model that enables those sectors to build a more inclusive economy. 

Over the past three years, I have had the honor and privilege of serving as board chair for NCBA CLUSA, working alongside our other directors and our senior management team to promote the cooperative model throughout the United States and around the world. I have also continued in my regular job as head of compliance and regulatory/legislative affairs at CoBank, a $133 billion financial institution that is cooperatively structured and that finances myriad cooperative enterprises that form the backbone of the U.S. rural economy.

These experiences have provided me with something of a panoramic view of how cooperatives are faring today. And from my vantage point, it definitely feels as though we are at an inflection point in the history of the cooperative movement, with two different trends occurring simultaneously:

  • On one hand, there is a whole universe of cooperatives in mature industries that are well established in terms of their business models, but which are experiencing a fair amount of pressure to change to meet the evolving demands of the marketplace.

  • On the other hand, we’re seeing a strong renewal of interest in cooperatives in emerging areas, which has been sparked at least in part by the millennial generation and its progressive values.

I think this is a very interesting dynamic, and it raises a number of questions. In such a period of change, how can cooperatives help create a more inclusive economy? Are cooperatives achieving their universal objective of enabling people to participate more fully in economic life and have greater control over their future as workers, consumers and business owners? And how can cooperatives contribute to our nation’s future economic growth and prosperity, not only in mainstream industries but for people on the margins?

The answers to these questions matter enormously to all of us who care about cooperatives, and who believe that co-ops need the continued support of policymakers in order to meet their full potential.

Agribusiness cooperatives
One mature industry where cooperatives are very well-established is agribusiness. For over a century, American farmers have used cooperatives to gain purchasing power and also to market various commodities—from row crops like corn and soybeans to milk to specialty crops like cranberries. Today, ag co-ops serve 2.3 million farmer members and have annual sales of over $200 billion. They are a critical piece of the value chain in the broader U.S. farm economy and are a big part of the reason why our country leads the world in agricultural production.

And yet the industry is changing, especially when it comes to consolidation. The number of farmer-owned cooperatives has declined by 25 percent over the past 10 years. Co-ops continue to combine as their boards and management teams seek the scale they need to compete in the global marketplace. Much of this co-op consolidation is driven by consolidation at the farm level. As farmers themselves get bigger and more sophisticated, cooperatives need to get bigger as well to remain relevant and effectively meet the needs of their members.

Rural electric cooperatives
Another mature industry where cooperatives play a critical role is the rural electric industry. There are over 900 electric cooperatives in the U.S. that generate, transmit and distribute electrical power to more than 40 million people in 47 states, mostly in rural communities. The vast majority of these organizations date back to the rural electrification program launched by President Franklin Roosevelt to bring reliable, affordable power to rural communities that were not being served by investor-owned utilities.

Like agribusiness co-ops, rural electric co-ops are also coming under pressure from potentially disruptive changes. One challenge is demographics, which is contributing to decreasing electricity sales in many areas. Over 40 percent of electric co-ops saw sales decline in 2016 (the last year for which statistics are available). Much of that is a result of population decline in rural America. Another challenge is more energy efficient buildings given that newly constructed buildings simply require less power for heating and cooling compared to older buildings. Yet another challenge is the proliferation of rooftop solar technology in some markets, which enables homeowners and businesses to generate their own power and sell it back to the grid.

From a business model perspective, electric co-ops have relatively high fixed costs due to the capital-intensive nature of the business. Traditionally they have purchased power from generation companies under very long-term agreements that can last for more than 50 years. On the other hand, the vast majority of their revenue comes from energy sales, which are variable. The combination of fixed costs and downward pressure on revenue is making things tougher for this industry.

Rural telephone cooperatives
Another cooperative sector that has been coping with disruptive pressure for many years is the nation’s 260 rural telephone co-ops.

Like electric cooperatives, these businesses were formed decades ago when communications looked much more like a utility business. It was a much easier business back then, with slow technology change, monopoly service territories and predictable rates of return. There was only one product—voice service over landline networks. Co-ops and other rural service providers also benefited from universal service funding and other support to help them serve their members.

Since the 1990s, the entire communications industry has been remade by the development of the internet, mobile technology and other disruptive changes. Back in 2004, over 90 percent of U.S. households had landline telephones. Today the number is less than 50 percent. A majority of households now rely only on their mobile phones. And those mobile phones are more for information sharing than for talking.

Financial cooperatives
Another mature industry where cooperatives are under pressure is financial services. The cooperatively-organized Farm Credit System, which includes CoBank, is now over 100 years old and is larger than ever when measured by assets. Farm Credit had $330 billion in assets at the end of 2017. It continues to provide approximately 40 percent of all loans to U.S. agriculture, and much of rural America by extension.

But Farm Credit faces significant consolidation pressure. We have 25 percent fewer institutions in Farm Credit than we did a decade ago due to ongoing mergers of local associations. Similar to cooperatives in other industries, Farm Credit associations are combining in search of scale and cost efficiency.

A very similar trend is occurring with credit unions. Even though credit unions are growing in terms of their assets, their numbers are shrinking. Back in 2010, there were over 7,300 federally insured credit unions in the U.S. Today there are fewer than 5,600.

Like their counterparts in the Farm Credit System, credit unions are facing evolving demands from the marketplace, including potentially disruptive technology changes like blockchain. We’ve moved into an era where you can get a home mortgage on your mobile phone. Financial services is increasingly a technology business, and all lenders are under pressure to invest in digital solutions that enhance efficiency and quality of service for the customer.

New & emerging cooperatives
When you stand back and look at the bigger picture in mature industries, a real pattern emerges. Cooperatives across all the sectors described above, and no doubt in others as well, are consolidating and scaling up in order to remain competitive and effectively serve their members.

At the same time, we are also seeing new entrants embrace the cooperative model across in a number of different areas:

  • Food distribution cooperatives are helping farmers capitalize on the growing interest in local foods. A great example is Wisconsin Food Hub Cooperative in Madison, WI. Founded in 2012, the co-op makes it easy for the retail, institutional and foodservice sectors to buy locally and enables area farmers to access wholesale markets through marketing, sales, aggregation and logistics. The cooperative sells all products under the cooperative name as a brand, while maintaining farmer identity and farm brands from the farmer to the end market.

  • Employee-owned cooperatives are enabling workers to participate in the marketplace with a higher level of control over business decisions and practices. Take 4th Tap, a small, worker-owned brewery located in Austin, TX. The co-op opened its doors in late 2015 with a focus on using “inspired ingredients to make honest beer.” Today it is one of the city’s most popular brew pubs—and the fact that it is worker-owned helps to differentiate it in the marketplace.

I don’t have statistics to prove this, but my hypothesis is that a lot of this renewed interest in forming cooperatives is being driven by millennials and other young people who are drawn to cooperative principles and values. Personally, I very much hope that this younger generation will help breathe additional life into the cooperative movement.

Advocating for the cooperative model
As these trends continue, it will be more important than ever that people who work for and believe in cooperatives keep coming together to promote the cooperative model. It is essential that legislators understand how cooperatives work and that they maintain and support a legal and policy framework under which cooperatives can thrive. It’s also critical that the general public have a better grasp of the vital role that co-ops play in so many sectors of the economy.

But we have a big challenge in this regard. Most trade associations are organized to protect the interests of specific industries, rather than a type of “corporate form.” Even in the cooperative world, most mainstream co-op associations are focused on the issues of their particular sector. Only a small handful of organizations exist to promote the cooperative business model itself as a force for economic and social good in the world.

That’s why it is so important that NCBA CLUSA continues its vital work highlighting the value of cooperatives and the role they play in creating a more inclusive economy. Through advocacy, thought leadership, development and increased membership, our organization can help ensure the success of the cooperative model for decades to come.

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