Journal Entry (Reflection)

ARE 132: COOPERATIVE BUSINESS ENTERPRISES

Prof. Kiesel

Lecture logistics

 Lectures will be recorded and posted

 Lecture slides are posted (including Notetaking handouts)

We will use icklicker/Reef app for active participation during live lectures

Participation

Click on this button (below assignment text) and log in to iclicker App at least once Note: This button is only visible when canvas site is opened in a browser, not in canvas App!

What do you know about Cooperatives?

Why study Cooperatives?

What do you want know about Cooperatives?

Surprising Numbers  10 % of world’s total employment happens through

co-ops (International Cooperative Alliance)  The world’s 2.6 million co-ops count over 1 billion

members, and $20 trillion in assets, and revenue up to 4.3% of global GDP (United Nations)

 Country with the largest total number of co-op membership (though many don’t know themselves as such) is the U.S.

 80% of consumers would choose co-ops over other options (2017 survey, Cooperatives for a Better World)

Co-ops are as old as you want them to be

 Cooperation is as old as economic activities  Rochdale Society of Equitable Pioneers (1844) often

cited as the origin of co-ops  Mondragon as largest, most known worker co-op

“It has been said that cooperativism is an economic movement that uses methods of education [...] This definition can also be modified to affirm that cooperativism is an educational movement that uses methods of economics" Arizmendi (ca 1952)

 African Americans have a long, rich history of cooperative ownership, especially in reaction to market failures and economic racial discrimination

 Cooperatives in Socialism and Communism  Education as key principle of co-ops, but co-ops are

also a good educational tool to understand economics and business (management)

Co-ops are as old as you want them to be (cont.)

Co-ops can provide timely solutions

Cooperatives are more than just a business model Address a variety of environmental, economic, and

social justice challenges or our time Co-op movement is a democratic movement Co-operative ideas influence general business

principles

Learning Objectives  By the end of this quarter you will have a basic

understanding of the  fundamentals of cooperative business enterprises.  key economic functions of cooperatives.  conditions amenable to cooperative structures.  experiences shared by professionals working in

cooperative businesses.

We will focus on cooperatives as economic organizations

Required Reading

 No comprehensive textbook available We are using: Cooperatives: Principles and practices in the 21st century. Kimberly A. Zeuli and Robert Cropp, University of Wisconsin Cooperative Extension, A1457. An Introduction to Cooperation and Mutualism. Michael Boland, University of Minnesota (2017). (Additional Articles)

Recommended Reading

 Everything for Everyone: The Radical Tradition that is Shaping the Next Economy, Nathan Schneider. Nation Books (2018)

 Collective Courage: A History of African American Cooperative Economic Thought and Practice, Jessica Gordon Nembhard, The Pennsylvania State University (2014)

 Food Co-ops in America: Communities, Consumption, and Economic Democracy, Anne Mais Knupfer (2013, posted on canvas)

Final (Group) Project

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 In order to apply the learned material throughout the quarter, you will complete a business case study on a cooperative business of your choice

You will be working on this project in groups of 4-5 students. Groups will be assigned during the second week of instructions. In a first attempt, we will match students according to their interests in certain businesses

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Making mistakes is an important part of learning (Opportunities for low-stakes mistakes; applications, peer-based learning)

• Use Canvas discussion board, student hours, and FAQ module for additional questions (email for confidential concerns)

I am here to help!

Supporting Learning versus Assessment of Skills

Academic Honesty (Peer-learning vs cheating)

Academic Conduct: You are an active member of the UC Davis campus and essential in our efforts to create a fair and honest community. Please review the Code of Academic Conduct. Familiarize yourself with your rights and responsibilities as you are required to acknowledge them for each of your courses. I encourage you to work together as I strongly believe it supports the learning process. However, your submitted quiz and exam answers need to be your own, and any sources used in the preparation of your group project need to be properly cited (Please refer to additional information on proper citation). Any violation will result in you receiving no credit for the assignment or exam in question, and me reporting the incident to the Office of Student Support & Judicial Affairs. Copyright: My lectures and course materials, including PowerPoint presentations, quizzes and exams, assignments, and additional handouts, are protected by U.S. copyright law and by University policy. I am the exclusive owner of the copyright in those materials I create. You may take notes and make copies of course materials for your own use to support your learning. You may also share those materials with other students who are enrolled in or auditing this course except when taking quizzes and exams. You may not reproduce, distribute or display (post/upload) lecture notes, recordings, quizzes and exams, and all other course materials in any other way — whether or not a fee is charged — without my expressed prior written consent. You also may not allow others to do so. Any violation will result in me reporting the incident to the Office of Student Support & Judicial Affairs. (Information included on Syllabus)

Weekly Reflections

 Keep a “Journal”: Opportunity to provide feedback and comments on the assigned readings, lectures and sections, and additional information posted. You can also discus ideas related to each week’s material in preparation for your final project.

Turn in at least six weekly journal entries electronically by midnight each Friday

Quizzes

 One weekly quiz posted on Canvas:  Pre-lecture (available 24 hours prior)

 7 quizzes total (two lowest scores dropped)

First Pre-lecture quiz next week (Lockdown browser required)

Practice quiz posted

Student hours

 M 6:00 –7:00pm: Zoom link (on Canvas)

 F 8:00 – 9:00am: Zoom link (on Canvas)

Please note that the chosen times allow students in different time zones to join as well. You will be able to socialize and work with others in breakout rooms during those times, and/or ask me anything you would like. Please come with questions or identify areas you want to talk about. I am happy to talk and provide feedback, advise you on anything we cover in class, or have a more personal conversation and provide advice as best as I can. I will, however, not prepare and present additional course material during those times.

INTRODUCTION

What is a Cooperative Cooperative principles

Agricultural Marketing Co-ops

 Blue Diamond Growers  Owned by 3,500+ almond growers in

California  Shell, process & market members’ almonds

and almond-based products  Sells packaged and bulk in US and abroad  Sales exceeded $1.5 billion in 2018

Wholesale (Purchasing) Co-ops  Ace Hardware

 Owned by member stores that buy most of their merchandise from the cooperative

 4,476member stores--in all 50 states and 60 countries

 Record fiscal 2018 revenues of $5.7 billion (an increase of 6.1 percent from pervious year

 Paid record patronage dividends of $145.9 million to hardware store members

 Recognized as one of the “2018 Best and Brightest Companies to Work For in the Nation” by the National Association of Business Resources

Consumer Co-ops  REI  Nation’s largest consumer co-op with18 million members  Headquartered in Seattle area, 129 stores  Outdoor sports/recreation equipment & clothing  One-time membership fee ($20)  Record annual revenues of $2.8 billion in 2018, 6 percent

growth  Record $204 million shared with REI members through

annual dividends and credit card rebates  Gave $77 million to employees through

profit sharing and retirement  Invested $8.4 million in 2018 in nonprofits

working on outdoors projects

Worker Co-ops  Cheese Board (Arizmendi)

 Owned by its workers (two owners opened a small cheese store in 1967 and sold their business to their employees)

 Employs about 40 worker/owners with an annual revenue approximately $2 Million

 Sell almost 400 different cheeses and an extensive selection of freshly baked breads and pastries

 Pizzeria sells one type of vegetarian pizza each night, using fresh ingredients, unusual cheeses from the Cheese Board, all on top of a thin, sourdough crust.

Utility Co-ops  Provide:  Electricity  Telephone  Internet service  Satellite television  Wind energy  Leadership in economic development

Cooperative Banks, Housing Co-ops, Artists Co- ops, Social services Co-ops…

Source NCB Co-op 100 Statistics, 2019

Cooperative Principles

What is a Cooperative?

A cooperative is a business owned and democratically controlled by the people who use its services and whose benefits are derived and distributed equitably on the basis of use.

 The user-owners are called members (USDA)

Cooperative principles distinguish cooperatives from other forms of business

Contemporary or Co-op Principles (USDA)

 User-benefit Sole purpose is to provide & distribute

benefits to its users on basis of their use  User-owned

People who own & finance the cooperative are those who use the cooperative

 User-control People who control the cooperative are

those who use it

Seven Cooperative Principles (ICA)

Voluntary & Open Membership Democratic Member Control Members’ Economic Participation Autonomy & Independence Education, Training & Information Cooperation among Cooperatives Concern for Community

What is a Cooperative?

A cooperative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. (International Coop Alliance)

Political Economy and Common-pool Resources

 Olstrom (Nobel-laureate) seven design principles for common pool resources:  Clearly defined boundaries  Local rules adapted to local conditions and needs  Mechanisms for those affected by the rules to change then  Monitoring of participant behavior  Appropriate consequences for rule violations  Processes for conflict resolution  Free and flexible self-organization,

and additional principle for large systems: Principle of federation: A pattern of nesting, so that smaller decisions happen in smaller groupings, which in turn defer to larger institutions for larger challenges

INTRODUCTION (cont.)

 What is a cooperative?  How is it different from other businesses?

 Are there commonly agreed upon cooperative principles?  How were they determined?  How have they involved over time?  How valid are they today?  What cooperative principles if followed, will optimally position

cooperatives in the future?

 Cooperatives are a unique form of businesses or organization

What is a Cooperative? (Review) A cooperative is a business owned and democratically controlled by the people who use its services and whose benefits are derived and distributed equitably on the basis of use. (USDA)

 User-owned  People who own & finance the cooperative are those who

use the cooperative

 User-control  People who control the cooperative are those who use it

 User-benefit  Sole purpose is to provide & distribute benefits to its users on

basis of their use

(Narrower USDA definition)

What is a Cooperative?

A cooperative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. (International Coop Alliance)

 Seven Principles

(Broader ICA definition)

Three (Four) classes of principles of cooperatives (Cobia)

Seven Cooperative Principles (ICA)

Voluntary & Open Membership Democratic Member Control Members’ Economic Participation Autonomy & Independence Education, Training & Information Cooperation among Cooperatives Concern for Community

Why Cooperate?

 Producers (Farmers) create supply or marketing cooperatives to help maximize net profits Market products at better prices Keep input costs low

Consumers can buy products or use services they want but cannot find elsewhere at affordable prices

 Employees organize bargaining associations and labor unions to negotiate collectively for increased wages and benefits, general working conditions and job security

Example: Reason for Co-ops among Farmers

1. Pool their (financial) resources 2. Carry out business activities they could not perform

independently as efficiently

 Existing businesses/structures have not provided them with goods and services, they desired

 Existing businesses have followed monopolistic practices

 Create economies of scope and scale

Application: Local food systems (food hubs and food incubators) CSA’s

Example: Reason for Co-ops among Agricultural Producers (cont.)

 Benefits include favorable prices, services that would otherwise not be available, access to markets and assured supply, as well as patronage refunds  Cooperative with $200,000 in revenue and 180,000 in

expenses, has $20,000 left as net income to return to patrons:

 A patron that does $4000 worth in business with the cooperative receives a refund of proportional share (4,000/200,000=400 or 3=2%)

 Cooperatives provide access to markets and market or bargaining power to its users*

*Users are patrons; patrons eligible to vote are members

Why do Farmers Join Together?

 Reasons farmers joined together include: 1. To obtain a fair or efficient price (correct market failure) 2. Reduce costs through economies of scope and scale 3. To provide supplies, and services that are missing or in

danger of being lost, access to markets 4. To pool risks 5. To capture profits from another level (vertical integration) 6. To benefit from increased market power

markets

Classification Cooperatives by primary business activity:

Agricultural Production Cooperatives Purchasing Cooperatives Consumer Cooperatives Service Cooperatives

Finance Insurance Electricity Housing Healthcare

Classification of Co-ops(cont.) Cooperatives by market area:

Local Cooperatives Interregional and national

Cooperatives International Cooperatives

Classification of Co-ops(cont.)  Cooperatives by ownership structure:

Centralized Cooperatives Federated Cooperatives Hybrid Cooperatives

Other business structures New Generation Cooperatives (NGCs) Wyoming Cooperative model Worker-owned Cooperative

Terminology  Cooperatives are also sometimes called nonprofit

corporations or patron-owned corporations  Firm other than co-ops are often called: noncooperatives,

investor owned, proprietary or profit, private, ordinary, standard, other corporations or just corporations.

 Can get confusing and be misleading

 Key difference: Co-ops return net income to users or patrons, while other firms return net income to investors

 We will try to use Co-ops* versus Investor oriented firms (IOF)

* Owned by customers or patrons (few by employees)

Matrix of Cooperative member and patron classification (Cobia)

Stakeholders  Each business has a set of key stakeholders: 1. Owners or investors (controlling or noncontrolling owners) 2. Employees, who work for the business in some capacity (labor

or management) 3. Patrons or customers, who patronize business by using it as

source of supply or service or as an outlet for services they produce

4. Other stakeholders (e.g. creditors and suppliers)

 Any person can be all four types  In Co-ops, roles are closely connected

Stakeholders

Legal Forms of Businesses Proprietorship is a business owned and controlled by one entrepreneur who provides the equity capital, makes key management decisions, and bears unlimited liability for debts and losses in exchange for the opportunity to receive profits.

Partnership is similar to a proprietorship, except that it is owned and controlled by two or more people.

Corporation is a legally chartered institution formed by a group of people or businesses who are granted a s body of one.

 Cooperative corporation

Limited Liability Company(LLC) is similar to a partnership but all partner have limited liability

Legal Forms of Businesses Basic Legal Business Forms

Proprietorship Corporation Partnership

IOF Corporation Cooperative Nonprofit

BusinessConsumer Employee Nonprofit and government

Goods Services AgriculturalNon-Agricultural

Marketing Supply Service Marketing Supply Service

Comparison of legal forms of doing business (Cobia)

Comparison of legal forms of doing business (cont. )

Comparison of legal forms of doing business (cont. )

Individual Proprietorship

+ Easy and inexpensive to organize + Owner has complete control + Owner receives all income - Owner has unlimited liability - Owner is taxed on all business profits - Not suitable for large or complex businesses

Partnerships

+ Easy to organize + Partners share control + Partners receive all income - Some partners have unlimited liability - Partners are taxed on all business profits - Personality differences may cause problems

Limited Liability Company (LLC)

+ Easier to organize + Democratic control + Limited Liability - Owners are taxed on all business profits - Too easy for owners to exit - May be cumbersome with large number of

partners

C-Corporations

+ Larger pool of investors and easier to raise capital + Business life is perpetual + Owners have limited liability - Double taxation to corporation and stockholders - Owners have little control - Complex and costly to organize

S-Corporations

+ Business life is perpetual + Owners have limited liability + Taxed as partnership - Limit of 75 stockholders

Key Concepts

 The following concept to enhance understanding of Co-ops:

1. The primary purpose is economic benefits for members 2. Members are usually patrons 3. Members own and control the Co-op 4. Qualifying patrons receive distribution of benefits 5. Co-ops are private organizations 6. Public policy establishes the institutional framework

Issues and Discussion

 Much of controversy stems from whether guidelines are considered mandatory principles, strongly recommended policies, or common practices

Discussion questions: Do economists behave differently? (Frank et al, 1993) Why are cooperative principles important? What is the difference between principles, policies, and practices? (Give an example of each). What are the advantages and disadvantages of strictly following a commonly accepted set of principles?