United StatesDepartment ofAgriculture

Rural Business–CooperativeService

RBS ResearchReport 185

CooperativeConversion andRestructuring In Theoryand Practice

Abstract This report is intended to develop the outlines of a sociological theory of cooperatives.This objective is accomplished by: 1) critiquing neoclassical economic analyses ofcooperative conversions, (restructuring, acquisition, or sale of agricultural cooperativessuch that an investment-oriented firm is created in its place), 2) examining historicaldata on cooperative restructuring generally and conversions as a subset of this dataand 3) developing a theoretical approach to a sociology of cooperatives, that is induc-tive and retains cooperative tensions (e.g. democracy versus economy, local versusglobal).

Keywords: Cooperatives, sociological theory and conversions

Cooperative Conversion and Restructuring in Theory and Practice

Patrick Mooney, Ph.D. Thomas W. Gray, Ph.D.Department of Sociology Cooperative Resource and Management DivisionUniversity of Kentucky Rural Business-Cooperative ServiceLexington, Kentucky U.S. Department of Agriculture

Washington, DC

Research Report 185

January 2002

Price: Domestic: $5Foreign: $5.50

Acknowledgments

The authors thank Bruce Reynolds and Edmond DeGaiffier for their insightful comments.

Preface Ideally, theory development and practical development continuously inform one anoth-er, each providing feedback so each can progress and deepen. Most cooperative theo-ry development has occurred in the area of neoclassical economics. While a powerfulmechanism of analysis for generic investment firms, the approach is deductive andnon-historical. It also tends to analytically homogenize goals and objectives.Cooperatives are complex organizations that emerge out of historical circumstanceswith complex economic and sociological goals. This report demonstrates the narrow-ness of a neoclassical analysis, by examining the cooperative conversion phenome-non. It then develops a sociological approach to cooperative analysis that retains vari-ous tensions and contradictions within cooperatives, while considering varioussociological and historical influences.

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Contents Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Restructuring and the Conversion ‘Problem’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

The Conversion Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Economic Explanations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Empirical Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Theoretical Explanations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

The Cooperative Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Cooperative Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Political Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Analytical Homogenization of Diverse Interests . . . . . . . . . . . . . . . . . . . . . . . .5

Sociological and Economic Analyses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Unit of Analyses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Assessing the Equity Conversion Theses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Method of Analyses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Non-Economic Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Examining the Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Restructuring Cooperative Theory Toward a Sociological Approach . . . . . . . . . . . .10

Democratic Capitalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Production and Consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Local and Global . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Traditional and New Social Movements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

Conclusions and Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

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Highlights This report is intended to develop the outlines of a sociological theory of cooperatives.This objective is accomplished by: 1) critiquing neoclassical economic analyses ofcooperative conversions, (restructuring, acquisition, or sale of agricultural cooperativessuch that an investment-oriented firm (IOF) is created in its place), 2) examining histor-ical data on cooperative restructuring generally and conversions as a subset of thisdata, and 3) developing a theoretical approach to a sociology of cooperatives, that isinductive and retains cooperatives’ tensions and internal contradictions, and is pre-sented in contradistinction to a neoclassical economics approach.

Cooperatives are multi-dimensional, contain multiple values and objectives (includingcontradictory ones), and emerge out of historically specific circumstances. The mostrecent theory development of cooperatives, accomplished in the field of neoclassicaleconomics, tends to be unidimensional, non-historical, and deductive.

Both neoclassical economic empirical studies and theoretical conceptualizations areused to explain conversions.

Various empirical studies focus on the economic motives of individual investment,including investment incentives that may be derived from cooperative business suc-cess. Excluded from the analyses are such other economic interests as those embed-ded in farm families and communities. Non-economic motivations are not allowed intothe analyses.

Theoretical arguments tend to be organized around understanding of cooperatives as"pacemakers" or as having temporary "yardstick" functions that fix malfunctioning mar-kets. Given the deductive nature of these arguments, these conversion theories tendto miss the boom-and-bust character of agricultural markets, as well as their historicaltendency toward consolidation and oligopolization (concentration). Conversion argu-ments that understand cooperatives as "yardsticks" and "pacemakers" tend towardhistoric meaninglessness, because cooperatives must become a permanent part of thebooms and busts, and as a countervailing force against continuing consolidation andoligopolization of the market.

Neoclassical approaches tend to model cooperatives in the image of investment firms,force fitting them to the model as if they were an intermediate and less advanced orga-nizational type.

Cooperatives are different from IOFs in their basic organizing principles, means- and-ends rationality, and their inherent diversity of interests. Applying investment models tocooperatives obscures this diversity and these differences. Cooperatives pursue avariety of goals, some of which may be in conflict with one another. A cooperative maymeet multiple goals, but no single one completely.

To some extent in neoclassical analyses, the act of cooperation itself is a problem tobe explained. This occurs because the predominant focus of these analyses is on anabstract, self-interested individual pursuing a single goal, e.g. to maximize a return oninvestment. This individual is also assumed to be in competitive relationships with oth-ers. "Cooperative" behavior tends to lie outside of the neoclassical framework.

Unlike neoclassical economics, (as well as investment-firm models of analysis), socio-logical and institutional economics do not give a predominant focus to an individualactor (or an individual enterprise). Rather, sociology focuses on the interaction

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Highlights between two or more individuals and to the character of that interaction. This may beone of competition but, may also be characterized by conflict and/or cooperation.

A sociological (and institutional economics) approach can more readily focus on issuesof power and inequalities in assets in specific historical interactions. Cooperation isless problematic for the sociologist. The development of cooperatives is more easilyunderstood as a response to enduring, unequal power relationships in the booms andbusts of an agricultural marketplace.

Sociology tends to recognize that in actual concrete reality, a plurality of values andobjectives are being pursed simultaneously by most people. Some of these interestsmay be in conflict. Neoclassical economics tends to focus on the pursuit of specificeconomic interests and to exclude other interests from analysis.

Analyses are scientifically sound if they represent all or a representative sample ofpotential cases for conversion. The specific economic analyses of conversions report-ed here failed to consider non-events, i.e., cooperatives with market values greaterthan their book values that did no convert.

Rather than analyzing case studies, a more comprehensive assessment of conver-sions can be made by examining restructuring events generally. The data show thatduring the last 10 years, the most dominant form of restructuring has occurred entirelywithin the cooperative sector. More than one-third (36.6 percent) of the restructuring(consolidation, merger, alliance, joint ventures, acquisition) has occurred betweencooperatives and not between IOFs and cooperatives. Nearly one-quarter (23.2 per-cent) of these events involved the expansion of existing cooperatives. Various forms ofstructural interaction between cooperatives and IOFs (joint ventures, strategicalliances) constituted 15.3 percent of restructuring events. Less than 5 percent (4.8percent) consisted of a full conversion from a cooperative to an IOF. The frequency ofcooperatives acquiring IOF assets was more than three times as common (16.6 per-cent) as IOFs acquiring cooperative assets.

While neoclassical models of the firm expect successful cooperatives to be purchasedby IOFs, the data suggest that successful cooperatives are more likely to expand theirown enterprises, form alliances and/or mergers with other cooperatives, or acquire IOFassets.

These theories that suggest conversion in their subtext may in fact be promulgatingconversions, rather than providing neutral studies of them. Conversion recommenda-tions become an artifact of the orientation itself. The neoclassical (and investment firm)modeling of cooperatives is in its approach deductive, non-historical, and one-dimen-sional. It is not designed to include multidimensional and opposing tensions that canbe understood and observed inductively from a particular historical context.

A sociological theorization presented in this report complements the single dimension-ality of neoclassical economics. Four cooperative and societal tensions are presentedas historically and inductively derived: 1) democracy versus capitalist economy, 2) pro-duction versus consumption, 3) local versus global, and 4) traditional versus newsocial movement characteristics.

Democracy versus capitalist economy: Cooperatives are both economic and politi-cal (democratic) organizations. The principles of democratic governance give priority to

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Highlights collective use of the cooperative for service (broadly defined) versus its use as amechanism for individual investment. Pressures upon cooperative democracy canexist with 1) a management predominantly oriented to investment logic, 2) an organi-zation that becomes so bureaucratic that little participation can occur, and 3) withfinancial conversion to an investment firm. A cooperative that makes no margins willnot reproduce itself to provide a service. Democratic considerations may slow or com-plicate these earnings. However, to rid the organization of its democratic aspects willfragment its definitional characteristics. Democracy versus economy is an inherent partof cooperative organizational definition. Current restructurings test this tension, withsome stakeholders seeking to eliminate it by pushing the organization into an invest-ment orbit, rather than contending, adapting, and strengthening it.

Production versus consumption: Cooperatives function in a marketplace organizedaround a fundamental tension between production and consumption, and producersand consumers. The paradox is that this antagonism is also a relation of interdepen-dency in which these interests can be viewed as inter-connected. This history of thecooperative movement reflects an interest in overcoming this division, e.g., "develop-ment of a cooperative commonwealth." New social issues organized around food andproduction--human health, food safety, environmental issues, land use, communitysustainability—suggest a need for integrating (or regulating) food and fiber productionand consumption interests. The cooperative has the potential advantage of providing amiddle course of regulation, between the pure economic sphere (market regulation ora private corporate regulation) and the public sphere of State regulation. Cooperativeregulation could entail control by producers and consumers in economic organizations(cooperatives) with internal political structures that are democratized. The potentialsynthesis of these spheres—production and consumption—is a cooperative advantageover IOFs. IOFs tend to exclude larger social, ecological, and community costs, andinterests, making these organizations ill-designed to internalize and resolve largersocietal problems. Production and consumption (producers and consumers) are insome respects in opposition. The retention of this tension in a cooperative form couldprovide a democratic mechanism for resolving some of the more troubling societal diffi-culties.

Local versus global: Cooperatives function in an increasingly global economy.However parallel and in some ways contradictory developments exist that give priorityto local needs and demands, i.e., localization. The equity retention principle in cooper-atives functions to tie the organization to a particular geographic place. From thestandpoint of capital mobilized for investment, this may appear as an unnecessary andunwanted constraint. From the standpoint of cooperative capital, it is a way to preventcapital flight from local areas and into powerful global movements that shift value tohigh-potential (geographic) investment points. The local ties of cooperatives also cre-ate the potential for local knowledge and innovation in the face of these same globaliz-ing influences and pressures. Globalization tends to homogenize regional differences,push products and service toward standardization, and eliminate unique local qualities.The global and local tension points in the cooperative demand an expression of com-petitiveness without loss of local connection and commitment.

Traditional and new social movement: Agricultural cooperatives have been orga-nized around production and farmer issues to retain value on the farm and to maintainfinancial solvency. In these respects, agricultural cooperatives are fairly traditional intheir pursuits of particular class (farm) interests. New social movements are oriented toincreasing and generally giving priority to democratization in civil society. The basic

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Highlights principles of user ownership, user control, and user benefits—in the context of deepen-ing societal interest in democratic relations—brings new social movement aspects tothese more traditional organizations. It also brings greater visibility to tensions betweenparticipation and bureaucracy, and member grass-roots interests and managerialexpertise. The tensions are embedded in cooperative organizations. Their resolution,rather than a movement and tradeoff between them, would signal the end of the coop-erative organization.

This report contends that conflicting interests, values, and objectives exist within coop-eratives. To eliminate, or to think about and analyze cooperatives as if these tensionsdon’t exist, denies central and fundamental aspects of cooperative organization. Theacceptance and acknowledgement of these tensions can open up cooperatives togreater overall effectiveness and adaptability without sacrificing several of their defin-ing characteristics.

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Cooperative Conversion and Restructuring In Theory and Practice

Patrick Mooney, Ph. D.ProfessorUniversity of Kentucky

Thomas W. Gray, Ph. D.Rural SociologistRural Business-Cooperative Service

I. Introduction

This report is concerned with the restructuring ofU.S. agricultural cooperatives, and whether thisreflects a movement toward their conversion toinvestor-oriented firms (IOFs). Recent historical trendsin restructuring will be examined to evaluate the actu-al extent of cooperative conversion.

These developments will be used to consider therelationship between cooperative practice and theory.Ideally, theoretical and practical development shouldcontinuously inform one another, and provide feed-back that enables both to progress as evenly as possi-ble. When cooperative practice moves ahead withoutregard to theory or when theory moves ahead withoutregard to the actual practices of cooperation the basicprinciples of cooperation can be endangered.

This report argues recent theory has developedwith too much independence from the actual practicesof cooperatives and cooperators. Thus, the cooperative"conversion problem" may have become overstated.

Further, the extent to which conversion hasoccurred may, in fact, reflect this very separation oftheory from practices. The conversions, themselves,may have been informed by, or be an effect of, a theoryof cooperatives that fails to resonate with the defini-tional principles of cooperation. Much cooperative the-ory contains assumptions that are not grounded in thecomplex logic, the multiple values, broader--though attimes conflicting--interests and "common sense" thatunderlies cooperatives as they actually function ineveryday life.

This report suggests that the theory of coopera-tion is increasingly accomplished primarily within theframework of neoclassical economics. This model haseclipsed the earlier institutional economics approaches

by which cooperation had been guided. This distanc-ing of cooperative theory from actual behavior isinherent in the deductive logic of neo-classical eco-nomics. The theory tends to assume a unidimensionalmotivation to behavior and decision making, and thenmoves from these abstractions to examine actual con-ditions.

This tends to restrict observation to only thatbehavior which is covered by such abstractions. This isin direct contrast to the inductive quality of an institu-tional economics or a grounded sociological approachin which the theory is derived (induced) from the actu-al principles and behavior of the actors and institu-tions themselves, i.e. the cooperatives, the members,and the complex environment in which they exist.

Cooperative leaders, themselves, increasingly callfor flexibility in adaptation to the global marketplace(Fairbarin1999). However, the unidimensionality of theneoclassical model may lead practice along a relativelyinflexible road just when flexibility is most necessary.Thus, new approaches (or even revival of older ones,such as an institutional economics) are needed to gen-erate multi-dimensional, interdisciplinary, holistic, andgrounded theories of cooperation. Such theoreticaldevelopments are potentially more sensitive to theactual practices of cooperatives and more compatiblewith the basic principles of cooperation.

This latter model development should not dis-place purely economic theories of cooperation, butrather complement them. This report seeks to developa theory that can recognize and use the adaptabilityand flexibility inherent in the multi dimensional inter-ests, values, and practices of cooperative institutions.It is a "ground-up" theory rather than "top down." Ascooperatives continuously restructure in adapting to achanging environment, so too, a restructuring of coop-erative theory is needed so theoretical guides remain

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embedded in the concrete reality of cooperative orga-nization, rather than in an autonomous logic indepen-dent of environment and history (such as neo- classicaleconomics).

This report will first discuss the "conversionproblem" as interpreted by neo- classical economics,and then critiques that interpretation based onassumptions inherent in the model itself. After a briefdiscussion of a sociological understanding of coopera-tion as a form of social interaction, we will then exam-ine data on the "conversion problem" in relation toother forms of cooperative restructuring.

Finally, we will explore a different approach tothinking about cooperatives. This latter model focuseson the tensions inherent in the practice of cooperation.Rather than seeking to eliminate those tensions (asneoclassical economics tends to do), this model usesthose tensions as sources of innovation and flexibilitythat can help a cooperative adapt to a constantlychanging economic and political environment, whileretaining its defining characteristics.

II. Restructuring and the Conversion ‘Problem’

As we entered the 21st century, U.S. agriculturalcooperatives evaluated by almost any measure havebeen highly successful. In the early 1960s, agriculturalcooperatives began to control at least 25 percent offarm marketing (as high as 33 percent in 1981). Sincethe early 1970s, farm production supply cooperativeshave held more than 25 percent of the market (USDA,1993).

Suffering somewhat during the farm crisis of the1980s, cooperatives rebounded strongly in the 1990s.Although not the dominant form of agribusiness(except in a few commodities), in recent years thecooperative market share is nearly one third of market-ed goods and more than a quarter of farm productionsupplies (USDA, 1998).

Between 1992-97, cooperative gross business vol-ume grew from $93.4 billion to $126.7 billion beforedropping somewhat in 1998, primarily due to lowerfarm commodity prices. Between 1989-98, cooperativenet income grew from $1.85 billion to a record $2.36billion in 1995 before dropping back to $1.7 billion in1998, due to a combination of poor farm commodityprices and rising costs of farm supplies and services.

During this time, cooperative total assets grewfrom $29.6 billion in 1989 to 46.6 billion in 1998. In1989, total net worth of U.S. agricultural cooperativestotaled $13.3 billion and climbed to nearly $20 billion

by 1998. In 1998, net worth or equity financed 42.9 per-cent of total cooperative assets. This is, overall, astrong balance sheet and from a historical point ofview, must be recognized a success given the difficultorigins of the movement.

It has been a hard won form of resistance to theeconomic conditions faced by farmers at the turn ofthe century, i.e. monopoly and oligopoly power atlocal, regional, and national levels.

However, some analysts are concerned about thehealth of the cooperative sector in the face of an accel-erated pace of overall economic restructuring andglobalization processes.

The Conversion IssueThe general problem this report reviews is "the

conversion issue," i.e. agricultural cooperatives con-verting to investor oriented firms (IOFs). With the sig-nificant exceptions of Torgerson (1990) and Ketilson(1995), that discussion has been largely confined to thesphere of neoclassical agricultural economics.

Schrader (1989) and Collins (1991a, 1991b) exam-ined the financial details of six cases of conversion orpartial restructuring by agricultural cooperatives. Oneinvolved restructuring a cooperative as an IOF. Threecases involved the sale of the business and dissolutionof the cooperative (although one of these sold its tex-tile mill to another cooperative). The final two casesinvolved restructuring small segments of the coopera-tives as conventional corporations with minority pub-lic ownership. Since then, numerous other conversionshave taken place. We will evaluate the extent of thesechanges later in this report, but first will examine someof the current explanations for these conversions.

Economic Explanations

There are both economic empirical studies thatseek to explain conversions, as well as theoretical con-ceptualizations. The empirical studies seek to identifyvarious conditions and motives to conversion; the the-oretical conceptualizations provide explanations froman orthodox neoclassical "free market" approach.

Empirical StudiesSuccess--Schrader (1989) raises the apparently

paradoxical notion that intrinsic structural features ofcooperatives lead to their subsequent dissolution.More specifically, he contends that certain cooperativepractices, as well as various State and Federal laws (allbased on fundamental cooperative principles) "result

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in a chronic shortage of capital and the lack of a meansto reflect equity appreciation to owners (1989:51)."Ironically, this is especially a problem for "successful"cooperatives, if "success" is defined as an increase inthe market value in relation to its book value.

The difference between the book value of a coop-erative’s assets and its value as a going business con-cern grow with this form of success. This eventuallyresults in the cooperator’s dilemma: "a cooperativethat produces net earnings in excess of the opportunitycost of equity capital may be worth more to investorsas an ordinary corporation than it is to many coopera-tive patrons (Schrader 1989)." That is, the value ofmembers' investment in the enterprise as a conven-tional business may exceed the value of their participa-tion in it as a cooperative, particularly if they have lim-ited patronage horizons, e.g. a farmer close toretirement. Schrader suggests this dilemma is the pri-mary motivation for cooperative conversion. Decisioninterests are defined as individual- financial invest-ment interests.

Motives--Collins (1991a, 1991b) refers to thepossibility that the market value of members' equityexceeds the book value as the equity liquidationmotive. He suggests three other hypotheses or motivesthat might explain the conversion phenomenon. Thefour motives are allowed to compete against oneanother in developing an explanation of conversion.

The equity access motive posits that cooperativesmay gain greater access to capital by selling stock tothe general public. This motivation is primarilyassigned to "managers who see growth as essential"but who face a membership that is reluctant to borrowmoney or to provide enough equity capital to meetthose expansions needs (Collins 1991).

The corporate acquisition motive posits that conver-sions may be advisable when the market value of thecooperative is high, and various parties want to buyparts of the business as stock, and/or buy the entirebusiness.

The cost of equity motive refers to selling stockwhen demand for the business is high resulting notonly in access to greater amounts of capital, but at alow cost to the cooperative. While motives or causes ofconversion are discussed, all motivations are strictlylimited to economic interests.

Exclusion of Other Interests--Thesestudies exemplify some of the limits of neo- classicalmodels for the analysis of cooperative enterprise. Theyassumed that patronage horizons are limited to

individuals. This neglects various other "economic"interests that are embedded in the families, andcommunities where cooperators live. Further, no "non-economic" motivations are permitted as possibleexplanations. As a rather striking example of thedeductive logic of this view and its detachment froman empirical grounding, Collins concludes:

"It is also clear from careful scrutiny of thepublic documents associated with theseconversions that, in at least some cases, thereasons stated by the cooperative are notcredible. As a result, it is prudent to staywith the usual presumption of economiststhat aggregate economic choices may bepredicted by economic incentives".

In other words, in explaining conversion, cooper-ators and cooperatives themselves, often claim inter-ests broader than mere economics. However, ratherthan acknowledging such claims, the neoclassicalframe may simply dismiss these claims as unbeliev-able. This occurs because these non-economic interestslie outside the neoclassical frame or model, renderingthem invisible or not credible to the observer.

Theoretical Explanations

Modeled in the Image of an IOF-- Arelated theoretical strategy to explain cooperativebehavior has been to simply analyze IOFs andcooperatives in the same way. Much of cooperativetheory has been driven by the desire to findsimilarities, rather than differences, betweencooperatives and IOFs. This strategy forcescooperatives into models designed for the analysis ofIOFs, and minimizes or excludes those aspects ofcooperatives that deviate from IOFs.

Torgerson (1990) suggests this results in a theo-retical forced-fitting in which agricultural cooperativesare often treated as deviant or degraded "firms" oreven as an intermediate organizational type--as agri-culture is assumed to tend toward total industrializa-tion and cooperatives shift toward IOFs.

Harte (1995), for example, describes the "lifecycle" of cooperatives in which "a transition fromcooperative to company structure would be expectedin a competitive market." This is a Noursian positionthat challenges the conception that there is a continu-ous need for agricultural cooperatives in the economy.Nourse (1991) argued that cooperatives emerge whenservice is inadequate, missing, or costly. "It is impor-tant that cooperatives recognize when they have in fact

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attained their real objective by demonstrating a superi-or method of processing or distribution or by breakinga monopolistic bottleneck, and they should then becontent merely to maintain standby capacity or a yard-stick operational position rather than try to occupy thewhole field or a dominating position within it. In somecases, they may be well advised to entirely terminateoperations once they have stimulated regular commer-cial or manufacturing agencies to competition amongstthemselves."

This position reflects the assumption that theonly environment in which a cooperative "lives" is eco-nomic. Although this position certainly has advan-tages in arguments that advocate for the conversion ofcooperative capital, its defense on scientific and theo-retical grounds is problematic.

For example, Harte assumes that market perfor-mance will tend to improve with industrialization andwill diminish the need for cooperatives. He alsoassumes that in the long run, the cooperative form isless efficient than its corporate counterpart. He arguesagainst the maintenance of cooperatives to perform aregulatory "yardstick" function in the market, due tothe difficulty of proving or disproving this functionwithout dissolving the cooperative.

Of course, the author misses the point that it isjust as difficult to prove that competitive markets canbe maintained without the role of cooperatives,because history presents us with markets that tend, nottoward competitiveness and equilibrium, but towardchronic failure (Lauch 2000).

We suggest that the "boom/bust" history of mod-ern agricultural economies--as well as continuing ten-dencies toward oligopolization (concentration)-- sug-gest more evidence for chronic market failure. ForHarte (1995), "only in the special case of chronic mar-ket failure would an infinite life be predicted for coop-eratives." Far from a special case, we argue that agri-cultural markets have historically been moreoligopolistic than truly competitive (especially region-ally, which is what matters most for the farmer). Andgiven a boom/bust character to the agricultural econo-my, the argument for "life cycle" conversions begins tocollapse, since the "yardstick" or "pacemaker" functionof the cooperative must be made a permanent part ofthe economy.

A valid scientific test of this hypothesis woulddemand a relatively long period of truly competitivemarkets, a condition that may, in fact, never exist inthe historically concentrated and monopolistic marketsthat most farmers have confronted in practice.However, we can make a test of this hypothesized "life

cycle" in terms of the actual history of the last decade,a period of unusually high levels of restructuring.First, we will examine some of the ways in whichcooperatives differ from IOFs to show why they needto be theorized independently.

III. The Cooperative Difference

Cooperative principlesExamination of the differences between IOFs and

cooperatives can begin with the basic cooperative prin-ciples. Adherence to these principles means that coop-erative "investors" interests in the organization arequalitatively different from those of conventionalinvestors.

Cooperative member interests derive from ongo-ing organizational use, control, and benefit, implying along-term horizon, versus short-term profit interests.Both Lasley (1981) and Ketilson (1995) imply thatcooperatives combine multiple interests in a singleenterprise. Cooperatives are hybrid organizations(Pestoff, 1992). They are simultaneously voluntaryassociations and commercial firms and yet, by combin-ing parts of both, are neither.

Moreover, agricultural cooperatives are often sig-nificant features of the communities of which they area part, and in ways that are not typical for IOFs (e.g.,social networking; potential for localized, democraticcontrol; and information dissemination). Finally, dueto their history and relationship to rural communities,agricultural cooperatives are part of a social movementthat developed as a response to the disadvantages ofsmall and medium producers caught in investment-oriented markets with strong concentration and cen-tralization tendencies.

Thus, cooperatives are unique. They exist betweenmarkets and politics and when owned by those whouse the cooperative, they constitute a fundamentalbuilding block of a community of interests (i.e., pro-ducers or consumers of similar products, rather thanmerely owners of investment capital as in IOFs). Inagricultural cooperatives it is a community of farmers.

When principles are followed, cooperatives com-prise a third way of organizing economic activity.Analytically, they represent an alternative to the sim-ple dichotomies: "market versus state" or "public ver-sus private (Pestoff, 1992)."

Rationality--A further difference betweencooperatives and IOFs is based in their differentapproaches to profits and service. Cooperatives need

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to make a margin over costs (loosely understood asprofit) to continue providing for patron’s long-termneeds. IOFs, on the other hand, provide services togenerate a profit. The singular interest in profit isassumed to reflect diverse needs.

Other interests, such as democratic or local con-trol, and/or helping to sustain local communities, adispersed agriculture and family farm survival forexample, are subordinated, if not eliminated--insofaras these interests and values cannot always be boughtor even measured in accounting books.

Managerial and director attitudes can be funda-mental to what values are privileged. Profits (financialreturns) and service, and means, and ends can becomeconfused. According to Ketilson (1995), "Briscoe foundin his study that many managers and directors ofcooperatives perceived cooperative values to beincompatible with business success." Managers whoheld this view suffered from what he termed the"frozen co-op syndrome." They were unable to formu-late long-term goals and strategies that would enablethem to move out of this situation, to profitable posi-tions without compromising cooperative character.

The confinement of cooperative managerial styleto a neoclassical model of investment (and profits asan end) can paralyze a cooperative and impede itsability to meet the long-term service interests of itsmembers. In part, this results from the dismissal of"non-economic interests," as well as an insistence thatIOFs hold superior efficiency advantages over cooper-atives. As an example, Harte (1995) argues, "the effi-ciency of cooperatives is not proven by their survivaland development over so many years, as cooperativesin most countries have been favored by governmentpolicies (and sometimes used as instruments of gov-ernment policy) through tax breaks and other directand indirect supports."

Of course, this ignores the tremendous supportthat IOFs have enjoyed in most Western societies in theform of tax breaks, state sponsored research and devel-opment, infrastructural development (O’Connor 1973;Barlett and Steele, 1998). (Ironically, the first coopera-tives in the U.S. grew out of the reaction of farmersagainst the transportation monopolies created by hugeland grants from the Federal Government to railroadcompanies.)

Further, these arguments dismiss the political byisolating the economic and speaking of "efficiency"only in terms of economics. Thus, the practical politi-cal question is not raised. Why would there be such apattern "in most countries" that would lead govern-ments to support cooperatives in this way?

Perhaps there is a political efficiency in this. Ifcooperatives have this efficiency, even if derived fromthe political sphere, it doesn't invalidate their capacityto survive or function to meet some (perhaps unspo-ken or unheard) needs of society, even if the economicmodel dismisses those interests. The theoretical exclu-sion of extra-economic interests from the model does-n't amount to the elimination of their practical or his-torical role.

Political InterestsIn their historical origin, cooperatives were clear-

ly also political institutions. Their development hasvariously generated intense political opposition fromcompeting economic interests. The neoclassical fram-ing of cooperatives tends to minimize or exclude thesepolitical histories. Fraser (1989) describes this processin reference to the power of administrative expertise."Experts" translate broad human needs into adminis-trable needs by uncoupling them from their social, cul-tural, and political context. In the process, the originaloppositional quality of the stated needs tends to belost.

The complex needs of social actors are simplifiedand transformed into purely economic issues and tech-nical problems. The democratic interests of cooperativepatrons, for instance, can than become depoliticizedfrom any social movement base, and may be "rewrit-ten" by, or for, cooperative management, for govern-ment administrative interests, or even in the academ-ic’s interest of better fitting within an economic model.This economic reductionism then tends to narrow, andconstruct simpler problems from a much broader arrayof needs and concerns.

Analytical HomogenizationFraming the cooperative as a "firm" also tends to

eliminate other "irrationalities" or interests that areexternal to a neoclassical focus. By taking the enter-prise as the unit of analysis, the heterogeneity anddiversity of a cooperative's membership tends to beignored--as are the divergent, perhaps conflictinginterests between members and management.

Harte (1995:9) views the plurality and diversityof interests represented by cooperatives’ democraticorganization as "confused objectives." He recognizesthe non- coincidence of interests between managementand members as being a control "problem" for coopera-tives. His solution is to concentrate ownership as wellas control under fewer persons and a single objective.

However, the natural plurality of interests intrin-sic to cooperatives is glossed over, if not eradicated, by

5

viewing the cooperative as a single and homogenousentity that "seeks to maximize a single objective (Staatz1989)," i.e., the maximization of net margins. Ketilson(1995:6) specifically addresses this issue with a con-trary view. She writes:

"unlike the picture of goal setting andbehavior posited by rational models oforganizations, not all behavior in the coop-erative organization is completely integrat-ed or functionally indispensable, contribut-ing to the achievement of an ultimate goal.Rather, the cooperative pursues a variety ofgoals, some of which may be in competitionwith each other. It is possible that conflictcan be resolved only be serial attention tothis multiplicity of goals, but the end resultmay be that no one goal is adequatelyachieved. In order to understand whattherefore is perceived as seemingly erraticor non-rational behavior, a multi-con-stituent perspective regarding goal settingand decision-making is required."

The models we propose seek to deal with the plu-ralism and the diversity of interests within coopera-tives as an advantage rather than a liability.To formu-late this model, we first consider some basicdifferences between sociological and neoclassical eco-nomics approaches.

IV. Sociological and Economic Analyses

Most of the analysis of this conversion processhas been within the framework of neoclassical eco-nomics. We propose an alternative model with whichto view cooperative restructuring and conversion.After introducing the basic premises of a sociologicalframework, we examine some data concerning thenature of restructuring and conversion in order toassess the relative usefulness of the two frameworks.

Next, we will return to specify in more detail asociological approach to cooperation. We will notargue that one frame is true and the other false--onlythat the two models provide different vantage pointsof the same phenomenon. Thus, a sociological framingof the conversion issue will raise different questionsand accentuate different concerns.

Unit of AnalysisSometimes the difference between the two

approaches is in the unit of analysis. Neo-classical eco-

nomics begins with a focus on the individual actor (orenterprise) as the initiating unit of analysis. The sociol-ogist, on the other hand, begins with the interaction, orthe relationship itself, between two or more individu-als (or enterprises).

Social relationships can take many forms. From asociological view an interaction might be understoodas characterized by conflict, as in the case of the rela-tionship between a buyer and seller or a landlord andtenant. One actor’s gain comes at a cost to the other.An interaction might be characterized by competition,as in the case of two gas station owners at the sameintersection or two carpenters bidding for work on thesame house. An interaction might be characterized bycooperation such as two assembly line workers or twocarpenters building the same house.

In agriculture, two or more farmers producingthe same commodity can choose to compete with oneanother in the market (like the two carpenters biddingagainst one another) or they can choose to cooperate withone another, pooling resources to confront the markettogether (like the two carpenters building the housetogether).

The neoclassical economics model generallyassumes competition among actors as the predominantrelationship. Social relationships are assumed to becompetitive with similar members of the environmentand conflictual with dissimilar members (althoughthe languages of market power, rather than conflict

are used). These assumptions are then applied in adeductive manner in the analyses.

Sociologists generally assume these relationships--competition, conflict, cooperation--are empirical ques-tions. They seek to discover the predominant form ofinteraction in social relationships which are generallyunderstood as adaptations to complex cultural, histori-cal and environmental conditions. The analysis isinductive.

To some extent, for neoclassicists, the act of coop-eration can become a "problem" to be explained. Thisoccurs because, first, the unit of analysis is the self-interested individual pursuing a single goal. Second,because that individual is also assumed to be in com-petitive relations with other actors, cooperative behav-ior tends to lie outside the boundaries of the neoclassi-cal framework.

The Noursian framing of cooperation can be seenin this light. Nourse assumes that cooperation is anaberration, a "problem" to be explained. Cooperationonly emerges from the "failure" of the competitivemarket and should recede once it has accomplished itscorrective function. This view of cooperation derives

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from the deductive logic, and assumptions of isolatedand rational individuals acting in their own best inter-est in the context of a competitive market.

For sociologists, none of these assumptions aregiven. Because the focus is on the social interactionand the analysis is inductive, alternative forms ofinteraction-- competition, conflict cooperation--aremore easily considered. The actor is neither in isolationnor is the interaction (the market) assumed to be char-acterized as competitive. A sociological (and institu-tional economics) approach can more easily give atten-tion to issues of power and inequalities in assets orresources brought by respective actors to historicallygiven interactions.

These factors make the issue of cooperation lessproblematic for the sociologist (and the institutionaleconomist). The actual development of cooperatives ismore easily understood as a response to enduring,unequal power relationships in the boom and bustagricultural marketplace.

Finally, sociologists do not always assume indi-viduals to be rational. Nor is there a need to privilegerationality as an assumption in the approach. Indeed,though rational action is a possibility and some socio-logical models make this assumption explicit as ameans of simplifying explanations, social action mayalso be driven by emotion, affection, or tradition.

The economist actors’ rationality consists of ameans-ends schema, i.e., what is the most "rational"means by which a particular end can be attained? Thesociologist also entertains the possibility of a differenttype of rationality in which the means and ends tendto be fused around the adherence to a particular valueor a constellation of values.

For example, the common expressions, "Winningisn’t everything, it is the only thing" and "it is notwhether you win or lose, but how you play the game"would be examples of this difference. The formerexpression suggests that all play is subordinated to thesingular objective of victory, i.e., the play is only ameans to the end of winning. The latter expressionsuggests the orientation toward winning the game isnot necessarily subordinated to the play itself butexists in a tension with, or as part of, the process ofplaying the game, i.e., means and ends are fused.

This points to a larger distinction between theneoclassical economic and sociological framing.Sociologists tend to recognize that in actual social life,a plurality of values and objectives are being pursuedsimultaneously, while the economist tends to focus onthe pursuit of economic objectives and to the exclusionof other interests. The sociologist might, for example,

view cooperative economic practices as simultaneous-ly satisfying such other (non-economic) interests asdemocratic decision-making, the enhancement of acommunity’s solidarity by extending social networks,and/or deepening commitments to historic coopera-tive traditions. We return to some of these issues andthese differences between sociological and economicanalysis in more detail later.

The bulk of existing literature on cooperativeconversions has been written from the neoclassicaleconomics point of view. Insofar as the conversion ofcooperatives has, thus far, been explained largely as afunction of various interests in equity capital, the soci-ological analysis must ask, Is there more at stake in theconversion of cooperatives to IOFs than equity inter-ests alone? More specifically, we must consider: 1)other values that might be lost or sacrificed with con-version, and 2) alternative functions of cooperativesnot captured by the (neoclassical imputed) analyses ofself-conscious interest (e.g., to impede capital flightfrom specific geographic places). Such considerationspull upon the strengths of sociological approaches andcan supplement the weaknesses of neoclassical eco-nomics.

V. Assessing the Equity Conversion Theses

Method of AnalysisWe have reviewed the incompleteness of theories

of cooperatives based solely in neo-classical concepts.However, we also question the case study methodolo-gy used in these analyses. Schrader and Collins tookexisting conversions and explained them in light ofwhat would be expected of "successful" cooperatives,i.e., those whose market value is greater than theirbook value.

This is the equivalent of studying a number ofcases of juvenile delinquency, finding the predomi-nance of low socio-economic status in cases of juvenilearrest and conviction, and concluding that low socio-economic status causes delinquency. This conclusionwould have been reached without examining all thoseother cases of low socio-economic status that do notresult in juvenile delinquency.

The conversion case studies are scientificallysound, only if the cases studied represent all, or atleast a representative sample, of the potential cases forconversion. However, there are, in fact, many othercooperatives that have market value far in excess of

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their book value that haven’t converted or perhapshaven’t even considered conversion (Wissman,Kraenzle).

Thus, the most that can be said about the fourhypothesized explanations is that these may be neces-sary, but not sufficient conditions for conversion. Mostcooperatives do not convert, even though they meetthe equity conditions for it. Anticipating sociologicalconsiderations, we then ask, why aren’t these sufficientconditions? There must be other intervening variablesthat modify or reduce the significance of thesemotives.

Non-Economic InterestsSociological analyses suggest there are other val-

ues held by cooperatives and their members that arenot willingly sacrificed in the interests of short-term ormore fluid equity.

Non-economic interests may include a democrati-cally structured organization, the valuing of a locallycontrolled economic organization, self determinationand self reliance, political networks and power devel-oped via cooperative organization, and/or leadershipdevelopment potential of the cooperative. In asking,"How would rural America and Midwest farming dif-fer if cooperatives had never existed?," Torgerson(1999) has posited several of these "other than economic"values and interests.

Thousands of American farmers exercise a simi-lar rationality in practice every day. They have consid-erable capital invested in their farms. The marketvalue of their land may yield more income (as liquidat-ed capital assets) than they can make by farming. Yet,they do not convert this equity. The common saying,"Farmers live poor and die rich," expresses this behav-ior. There may be many reasons why this equity is notconverted. The economic explanation would likely belimited to the hypothesis that the farmer hopes orexpects the value of the farm to increase and is simplywaiting for a higher return on his or her investment ata later date.

The sociologist examines other values or eventraditions and emotions that inhere in this decision (ornon-decision). Salamon (1992) has shown that manyfarmers in central Illinois have a greater interest inpassing the land on to the next generation than inholding the land for speculative purposes. Indeed, herobservations point to the fact that it is the profit-maxi-mizers that actually disappear from agriculture. They"cash in" on the value of their farms, retrieve the equi-ty, and leave farming to be replaced by those whoplace other interests above profit, per se.

Another such interest might be in the indepen-dence (being "my own boss") afforded by farmingcompared with many other occupations. Some farmerssimply value the farm work itself, the immediate inter-action with nature, with the land or the animals; or thediversity of tasks demanded by farming comparedwith most other occupations (Mooney 1988). The samelogic that supports maintenance of a cooperative, evenat the cost of access to invested equity is similar to thatplayed out on the farm. Economically, invested equitypermits the existence of the cooperative to provideeconomic services and functions that might not be pro-vided otherwise. However, cooperatives can also pro-vide a range of social, political, and cultural capital forfarmers and their communities that IOFs are generallyincapable of creating (Torgerson 1999).

Other Economic Interests--Sociology looksbehind the actions, values, and interests of individualsand toward deeper structural explanations. Theretention of equity capital by the cooperative can beunderstood as a functional adaptation to the cyclicalcharacter of the agricultural economy. Whether or notmembers or even leaders are conscious of thisfunction, cooperatives function to impede the problemof capital flight. It is precisely in the retention of equitythat this mechanism is located.

An IOF might readily abandon a community dur-ing a prolonged recession because its primary objec-tive, the pursuit of profit, is impeded by such condi-tions. This is much less likely in the case of thecooperative which, by holding the equity reserves ofmembers, is not only more likely to survive the crisisbut is impeded from leaving the community and relo-cating.

This insight derives from the sociological (andinstitutional economics) tendency to view structureswithin a historical context. When the analytical focus ison the individual (as is the case with neoclassical eco-nomics) structural considerations that span genera-tions, and account for community changes, tend not tobe readily considered, and are easily overlooked.

Those cooperatives that convert to IOFs sacrificethis structural function. Should hard times come totheir region or commodity, there will be no assurancethat this service will be sustained by an IOF. Undersuch circumstance, it may simply close down the oper-ation or move to a more profitable location. In fact, theIOF would be obligated to its stockholders to do exact-ly that, just as the cooperative would be obligated toits members-owners to stay put.

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In staying put, other economic interests or valuesare met, and at the level of the family and/or the com-munity, not just with the individual. Torgerson (1999)posits such values and interests are in the form of eco-nomic "public goods" such as strengthening overallrural economic infrastructure, access to markets forsmaller farms, market development via cooperativepromotion programs, and bargaining power in con-tract negotiation.

Conversion tends to be expected from the neo-classical perspective (and from Noursian views ofcooperatives). However, this suggests that its anticipa-tion may lie more in the realm of theory than practice.It is an action expected by the theory due to unjustifiedassumptions. When conversion occurs, it may be causefor celebration of the theory being realized in practice.However, it may in fact be an exception to actual his-torical developments.

Just what is the extent of cooperative conversion?Considerable cooperative restructuring has taken placein the last decade. The extent to which this is actuallyconversion from cooperative forms to IOFs needs to beexamined. It is possible that much of the restructuringis simply taking place within the cooperative sectoritself and does not reflect a shift to IOFs.

Market share analysis does not indicate any sig-nificant losses in the cooperative sector as a whole.While there are periodic ups and downs in marketshare, the general trend indicates a strong and healthymarket share and net worth (Kraenzle).

Examining the EvidenceWadsworth’s recent publications on cooperative

restructuring (1998) and cooperative unifications(1999) may be helpful in measuring the extent of coop-erative conversions. Wadsworth has drawn from vari-ous news sources and USDA’s Rural Cooperativesmagazine as well as those cooperatives that have beendropped from USDA’s mailing list as they have beenrestructured or converted out of existence for one rea-son or another. We have reformulated Wadsworth’ssix-fold classification (expansion, contraction, revamp-ing, agreement, unification, and joint venture) into sixdifferent categories that better address the questionwith which we are concerned. These categories are:

1. Interaction between two or more cooperatives:a. alliances,b. joint ventures,c. mergers, andd. acquisition of assets.

2. Acquisition of some or all of an IOFs assets by acooperative.

3. Other forms of interaction between a cooperativeand an IOF.

a. an allianceb. joint venture

4. Acquisition of some or all of a cooperative’sassets by an IOF.

5. Expansion of a cooperative (building of newfacility, investment in renovation, etc.)

6. Other forms of closure, consolidation.

We eliminated from Wadsworth’s sample other lessrelevant forms of restructuring such as changes inlocation of headquarters, changes in name or logo,reports of study or talks of mergers, cases reportedmore than once, etc.

These data show clearly that the most dominantforms of restructuring occur entirely within the cooper-ative sector. While there is considerable consolidation,merger, alliance, and joint venture activity, more thanone-third (36.6 percent) of this is between cooperatives.Nearly another quarter (23.2 percent) is merely expan-sion of existing cooperatives.

Various forms of interaction between coopera-tives and IOFs that fell short of outright conversion(alliance, agreements, and joint ventures) constituted15.3 percent of the sample. Less than 4 percentinvolved the closure of cooperatives. About 5 percentof the sample actually consisted of full conversion, i.e.,the acquisition of cooperative assets by an IOF.Actually, the frequency of cooperatives acquiring IOFassets was more than three times as common (16.6 per-cent) as IOFs acquiring cooperative assets!

While the neoclassical economic model wouldexpect successful cooperatives to be purchased byIOFs, it appears that successful cooperatives might be

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Table 1--Form of restructuring Number Percent

Cooperative/cooperativeinteraction 115 36.6

Cooperative acquires IOF assets 52 16.6Cooperative/IOF interaction 48 15.3IOF acquires cooperative assets 15 4.8Expansion of cooperative 73 23.2Closure of cooperative 11 3.5

—— ———

Total 314 100.0

far more likely to simply expand their own enterprise,to achieve some alliance or merger with another coop-erative, or acquire IOFs. This quite clearly contradictsthe various concerns posed by the economic framingand the idea that cooperatives should mature intoIOFs.

These data would suggest that the "threat" of atendency toward conversion of cooperative capital toprivate capital is not nearly so great as might beimplied by neo- classical economic and Noursian theo-ry. The greater threat to cooperation probably lies inthe increase in scale that inheres in the process of con-centration (merger, joint venture, alliance, etc.) that is,in fact, taking place within the cooperative sector. AsTorgerson (1998) notes, "This isn’t your father’s coop-erative." Cooperatives are changing to remain competi-tive, sometimes in the belief that they need to be one ofthe two or three competitors in any sector that areincreasingly assumed to constitute the upper limits ofwhat now passes for "competition" in contemporarymarkets (Merlo 1998).

Heffernan (quoted in Merlo) claims he is less con-cerned with cooperatives merging with each other,than cooperatives merging and forming joint venturesand strategic alliances with IOFs. This form of restruc-turing is more prominent than outright conversion,although still not as pervasive as cooperative expan-sion or various forms of intra-cooperative restructur-ing.

Can the democratic principle of one-member/one-vote, which is the basis of user- owner-ship, user-benefit, and user-control, survive suchincreases in scale? Torgerson (quoted in Merlo) cau-tioned, "The administrative hierarchy can get farremoved from the cooperative’s member orienta-tion…there’s a danger that the cooperative could beviewed as just another business." In this setting, andparticularly in the cooperative/IOF interactions, thefirm might shift to a "culture that is more corporatethan cooperative."

The model that we will now develop seeks tofocus on tensions within cooperatives. The presence ofthese tensions has been, and can continue to be, a posi-tive force in the cooperative movement. Most currentcooperative theory, however, seeks to eliminate ten-sions in the attempt to develop a unidimensionalmodel that unrealistically simplifies the intrinsic socialand political character of economic action and agricul-tural cooperatives.

VI. Restructuring Cooperative Theory:

Toward A Sociological Approach

In 1935, George Fauquet observed, "A coopera-tive consists of two essential elements, a democraticassociation of persons and an economic enterprise. Inseparating these for the purposes of analysis the essen-tial is lost. It is the manner in which the two are coor-dinated that forms the basic problem of cooperatives(Vitaliano 1977)."

Much of our criticism of the neoclassicalapproach can be traced back to this impulse of cooper-ative theory to separate these elements of cooperation.Theorization has generally been made as if coopera-tives and the cooperative movement were an abstrac-tion separate from the socioeconomic and historicalcontext in which they exist.

This model seeks to 1) theorize cooperation with-out separating the economic from the democratic and2) to inductively incorporate aspects of the cooperativecontext into the theorization. To consider both the eco-nomic and the democratic simultaneously necessitatestheorizing aspects of cooperation that are frequently intension or in contradiction with each other. The reten-tion of contradictions in our theorization serves toresist the simplification and single dimension typicalof such models as neoclassical economics.

The model developed here seeks to retain ten-sions between opposing tendencies in cooperatives asthey actually operate, and to account for a context thatitself, is frequently laden with contradictions. To fol-low Grabher and Stark (l998), "although organizationalhomogenization may foster adaptation in the shortrun, a loss of the diversity inherent in conflicting ten-sions and interest, can impede organizational adapt-ability in the long run. Institutional friction that blockstransition to an already designated future [e.g. conver-sion] keeps open a multiplicity of alternative paths tofurther exploration." Four contradictory tensions willbe theorized (figure 1).

First, and following Fauquet, as a capitalist eco-nomic form usually governed by a democratic principle,cooperatives bring together qualities that do not easilyco-exist--democracy versus bureaucracy, and economicperformance versus participation. (This can becomemanifest paradoxically in the need to accommodate toa diversity of membership interests, and in an interestto develop a more governable, homogeneous whole.)Second, cooperatives also provide the tensions notedby Friedmann (1995) in her work on the relationship

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between production and consumption. Third, in this timeof increased attention to processes of globalization,cooperatives present unique tensions between the glob-al and the local. Finally, in terms of the sociology of col-lective action, the predominant representation of coop-eratives would lead us to classify them as traditionalsocial movements. However, there are at least latent ele-ments of "new" social movements within even the mosttraditional cooperatives.

In these ways, the cooperative organizationalform encompasses tensions that (in separating the ele-ments of democratic association from economic enter-prise) have too often been seen as an obstacle to thepursuit of a single-minded interest. Those very ten-sions may, in fact, be the wellspring of strength, inno-vation, and flexibility that has historically served mul-tiple and sometimes, apparently contradictoryfunctions quite well.

Democratic CapitalismThe most apparent manner in which cooperatives

reveal a contradictory tension is in the interfacebetween their economic and political elements. As eco-nomic entities, cooperatives are capitalist enterprises,created, in part, to compete with monopoly and oli-gopoly enterprises. The historical conditions that gaverise to U.S. agricultural cooperatives led to a strong,although sometimes merely formal, democratic struc-ture in their organization.

Unlike other capitalist enterprises, cooperativeshave traditionally incorporated a democratic politicalprinciple (one member, one vote) into their internalgovernance. This aspect has always stood in contrastto IOFs in which voting privileges are directly propor-tional to levels of investment.

The vast majority (93 percent) of agriculturalcooperatives are still formally run by democratic prin-ciples (Reynolds, Gray, and Kraenzle, 1997). However,this democratic quality is increasingly coming intoquestion. Two forces seem to be largely responsible forthis challenge.

First, following the logic of only the economicelement of cooperatives, some theorists find coopera-tives’ democratic element to be at odds with purelyeconomic interests. This leads to calls for either whole-sale restructuring of cooperatives as IOFs or for theelimination of the "one member, one vote" principleand substituting proportional representation. The sim-plified logic and interests of size and scale of individ-ual members (and implicitly investment) are given pri-ority over the broader and more complex interests ofthe community of diverse members (as privileged bythe one member, one vote principle).

The conversion to an IOF is a logical outcome inan analysis that considers only the investment andmarket value of the cooperative to the exclusion ofmore general values embedded in the cooperativeprinciples i.e. user-ownership, user-control, user-bene-fit. Under democratic governance, the priority of dis-persed and collective use of the cooperative is protect-ed against its usurpation as a mechanism forindividual exchange, and ultimately individual invest-ment. Substituting proportional voting can compro-mise the mutually democratic character of the coopera-tive by allowing into the decision making processesthe disproportionate representation of larger farm andinvestment interests. That erosion, in turn, can threat-en other fundamental principles of cooperation.

A second force opposing the democratic principleis the increasing bureaucratization of ever larger andmore complex cooperative organizations. Control isassumed by management, as members are increasinglydefined as incapable of making decisions on "techni-cal" matters that only experts are held qualified toevaluate. Drawing on Lasley’s (1981) analysis of coop-eratives’ inherent "dual objectives," Seipel andHeffernan (1997) argue that maintaining memberinvolvement and the generation of profit necessary forsurvival in the economic marketplace can be inherent-ly contradictory. They contend that as authority hasincreasingly been delegated to hired management andstaff, purely economic interest has become dominantin cooperative decision making.

This latter form of erosion of the democratic ele-ment may be more threatening than actual conver-sions. As indicated earlier, cooperatives are not con-verting to IOFs in substantial proportions, but ratherare consolidating or merging with other cooperatives.This restructuring adds to the complexity and scale ofcooperative organizations, creating large bureaucraciesfar removed from the member. As a general managerof a large dairy cooperative recently noted, "Size canbe traded for the members’ best interests. You get big-

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Figure 1--Institution friction Site of Tensions

Capitalism/Democracy Political EconomyProduction/Consumption Social RelationsGlobal/Local Spatial RelationsTraditional/New Social

Movement Collective Action

ger to create positive efficiencies but the best interestsof local members are traded for the greater good of thewhole (Merlo 1998)." However, local members can beleft wondering if the cooperative is truly different fromany other large organization.

A third tension pulling against democraticaspects of the cooperative can be management itself.Drawing on agency theory, Seipel and Heffernan(1997) argue that cooperative management may devel-op a set of interests that are quite distinct from theinterests of the cooperatives’ members. Cooperativemanagers may tend to administer it as an IOF, single-mindedly focusing on "earnings or sales growth" to the"neglect of other activities that could enhance memberservice or meet other member goals." This can happenwhen managers’ thinking is confined to a neoclassicaleconomic perspective or, when they have an interest inenhancing their own individual marketability as busi-ness managers in the IOF labor market.

Active democratic participation is the way anautonomous interest of management can be countered.Democratic participation may ensure that multipleobjectives, if they exist, remain "on the table," and arenot reduced to a single objective. Retention of democ-ratic principles facilitates the institutional friction thatmanagerial interests tend to work against as they seekto rationalize the cooperative along a singular, moreeasily administered, dimension of economic interest.

However, if this friction is overcome by manage-ment, bureaucracy, and/or conversion, it will fragmentthe multiple interests members have in the organiza-tion. Cooperatives are both economic and political(democratic) organizations. Without this tension, theorganization would not be a cooperative. Its continuedpersistence allows for addressing multiple if not con-tradictory although contentious interests.

Production and ConsumptionCooperatives function in a context of a market

place organized around a fundamental tensionbetween production and consumption, and betweenproducers and consumers. The paradox here is thatthis antagonism is also, of course, a relation of interde-pendency--interests can be connected. Indeed, eachsphere can only be meaningfully understood in rela-tion to the other.

The history of the cooperative movement reflectsan interest in overcoming this division. The vision of acooperative commonwealth (Voorhis 1961) recognizedboth the distinctive and common interests of produc-ers and consumers and sought to create an organiza-tional structure that unified these interests.

Voorhis expressed this longstanding interest tolink production and consumption through cooperativestructures, "…if a considerable proportion of farmcrops could be sold directly by farmer-owned enter-prises to consumer-owned ones, the ‘spread’ betweenwhat farmers receive and what consumers pay wouldamount simply to the costs of processing, transporta-tion, and sale."

Further, he argued strongly for the developmentof consumer cooperatives. "But only as major con-sumer needs are met cooperatively, only as the peoplecome into ownership of businesses supplying thethings on which their big expenditures are made-- onlythen can the full influence of cooperative enterpriseupon a nation’s economy be brought to bear. Only thencan ‘consumer preference’ begin to have any meaning,and only then can the consumer interest begin to beasserted and defended."

More recently, Friedmann (l995) contended thatthere are a series of "newer" problems--human healthand food safety, environmental issues, land use, com-munity sustainability--that suggest a need for integrat-ing (or regulating) food and fiber production and con-sumption interests. However, how to effectivelymobilize to address these problems is not clear.

Friedman (l995) argues that "strategic power [toaffect change in agriculture] has shifted from farmersto corporations." Further, she contends that"Economists and corporate managers, who have con-siderable clout in setting political agendas, count [suchcosts as] hunger and the ecological costs of mono-cul-tural farming as "external [and therefore of little priori-ty, relative to their own explicit institutional agendas]."

Some suggest agricultural policy is at an impasseto confront these problems with no readily identifiedmechanism for solution. A possible alternative couldinvolve revitalization of the older cooperative com-monwealth view. "An environmentally and sociallysensitive agriculture presupposes consumers whosefood needs are effectively transmitted to farmers, aswell as citizens whose environmental needs are effec-tively transmitted to farmers (Friedmann)."

These varied needs can be internalized via pro-ducer cooperatives (production) and supply and ser-vice cooperatives (consumption). Cooperatives orient-ed to either production concerns, or consumerinterests, share the capacity of democratizing bothspheres. This long-standing interest of the cooperativemovement can be found in recent comments by ElroyWebster, co-chair of Cenex Harvest States, in reference

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to their mega-merger. "We wanted to create a seamlessagricultural food system to link producer to consumer(Merlo 1998)."

Friedmann asks if there is some happy medium"between public regulation and private power" overfood production and consumption. The cooperativeform has the advantage of providing a middle coursein which regulation lies neither purely in theeconomic sphere (market regulation, or a private, cor-

porate regulation) nor in the public sphere of state reg-ulation.

Rather, cooperative regulation could entail con-trol by producers and consumers of food in economicorganizations whose internal political structure isdemocratized. The synthesis of these spheres--produc-tion and consumption--is a cooperative advantage.Democratization via distinct (producer and consumer)cooperative structures could ameliorate the tendencyto view many of the "costs" of the current food produc-tion and consumption as external costs.

To the extent that cooperatives tend to be tied to ageographic place more than IOFs, democratically orga-nized cooperatives present a potential for internalizinginto a community of members, health, environmental,and land-use issues as part of one’s everyday lifeworld. This internalization is not open to investmentorganizations, given their strong internal tendencies toexclude and make external to the firm, larger social,ecological, and community costs.

Local and GlobalCooperatives function in an increasingly global

economy. However, parallel and in some ways contra-dictory developments exist that give priority to localneeds and demands. The equity retention principles incooperatives tie them to a particular geographic place.From the standpoint of capital mobilized for invest-ment, this may appear as an unnecessary and unwant-ed constraint.

Paradoxically, from the standpoint of cooperativecapital, it is a way to prevent capital flight from areasdue to various globalizing tendencies. Economic mod-els that emphasize returns on investment to holders ofcapital may criticize this lack of mobility as likely inef-ficient. However, a more historical and holistic viewreveals this "place- fixedness" as a long-term, adapta-tion that protects cooperatives (and their communities)from recessionary periods when strict capital invest-ment interests may opt to leave a geographic area(Mooney 1995).

Agricultural cooperatives were partly created tocompete with and challenge oligopoly (concentrated)

interests. To the extent IOFs enter the global marketplace, agricultural cooperatives may need to as well.However, this complicates member governance, notonly by adding to the complexity of the cooperativebureaucratically, but also by creating assets vastly sep-arated from members by physical distance. It also rais-es questions concerning membership in the coopera-tive by foreign customers. Seipel and Heffernan (1997)and others argue that cooperatives’ attempts to have apresence in a globalizing market place are character-ized by both constraints and unique opportunities.

Hassanein (1999), for instance, has argued for theimportance of developing local knowledge in responseto processes of globalization. She details the advan-tages that can be obtained by familiarity with a localeand its specificity. This can be a competitive advantagein the face of a globalization that tends to homogenizeregional differences, push products and servicestoward standardization, and eliminate unique localqualities. Hassanein shows that democratic forms oforganization are far more capable of producing andretaining local knowledge related to agricultural pro-duction than the bureaucratically organized, hierarchi-cal forms of knowledge production and exchangeemployed by large IOFs.

Under democratic principles, the cooperativewould be better able to facilitate the production andexchange of knowledge related to local productionconditions. Indeed, such a function would be anadvantage of the cooperative that would be difficultfor large IOFs to duplicate. Seipel and Heffernan(1997) recognize this possible cooperative advantage,but also warn that such innovation "may require flat-tening hierarchical managerial structures and return-ing more operational autonomy to localaffiliates...."They argue that, "the federated structure ofmany regional cooperatives offers a model whichcould facilitate such decentralization but it will take aconscious effort by the upper levels of management tomake it a reality. Relinquishing such control is difficultand often goes against the historical tendency towardcentralization of decision making in cooperatives."

Seipel and Heffernan contend this decentraliza-tion of control is predicated on high member involve-ment, i.e., the practice of democratic principles. It’spromise is high in terms of developing the "permanentinnovation," flexible specialization, and quality that"health-and food-safety-conscious consumers" areexpected to demand in the future. Cooperatives mayhave an advantage in the development of "new, cus-tomized products...marketed outside of traditionalchannels." Their suggestion that cooperatives seek out

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"new alliances with consumer groups" relates back tothe cooperative commonwealth vision of bridgingsocial relations of production and consumption, aswell as bringing together the local with the global.

Hassanein’s treatment of these forms of develop-ment of local knowledge is tied to issues raised by theliterature on what are often referred to as the "newsocial movements." This brings us to a consideration ofa fourth site of contradiction upon which cooperativesseem uniquely situated--the tension between the old ortraditional forms of social movements and the newones.

Traditional and New Social MovementsU.S. agricultural cooperatives have in part been

organized farmer reactions to changes in governmentpolicy or relations with large enterprises such as banksand processors [railroad companies, other agribusi-ness] that have affected them adversely (Mooney andMajka 1995).

They have been organized around productionand farmer issues to retain value on the farm andmaintain financial solvency. In these respects, agricul-tural cooperatives are fairly traditional in their pur-suits of particular class (farmer) interests. Like othertraditional movements, they have also tended to privi-lege bureaucratic forms of organization at the expenseof democratic aspects, frequently with reasoning thatpriviledges economic expediency.

Writings by Johnston, Larana and Gusfield (l994)and Beuchler (l995) suggest new social movements areoriented to "enlarging the systems of member partici-pation in decision making." They tend to give priorityto democratization generally, and are based in actionsand interests beyond those of simply class position.Beuchler (l995) refers to this broadening aspect of newsocial movements as a search for "other logics ofaction." They cut across several different groups andinterests, with democratization being of prime impor-tance.

Agricultural cooperatives contain characteristicsof new social movements or, at least, potential incuba-tors of new social movements. The basic cooperativeprinciples of user-ownership, user-control, and user-benefit and their ties to democratic relations opens thedoor to the "other logics of action" that characterize thenew social movements.

Following Castells (quoted in Beuchler 1995),democratic aspects provide the possibility of resisting"the standardization and homogenization associatedwith bureaucratic forms of organization." It allowsalternative values and interests and avoids reducing

the meaning and purpose of the organization, forexample, to only return on investment. It also createsthe potential for valuing cooperation for its own sake.

From a new social movement perspective, coop-eration is no longer seen as merely a means to a givenend (improving the financial solvency offarming/cooperative business). The means and ends ofcooperative are fused; i.e. there is a value inherent inthe very process of cooperating. This orientation isreflected in the comments of Elroy Webster, co-chair ofCenex Harvest States."Co-op members are rooted intradition and personal feelings of ownership." He alsoobserved that concentration of cooperatives can lead toa "perceived loss of an organization’s institutional his-tory and culture (Merlo 1998)."

Historically, and from an old social movementperspective, agricultural cooperatives have been orga-nized around issues of production and class (farm).However, Tourain (l988) has argued that the coopera-tive movement presents an antagonism that corre-sponds with the predominant conflict in contemporarysociety, i.e. the conflict between consumers/clients asthe popular class and managers/technocrats as thedominant class. In a broad societal sense this conflictgives focus to "a system seeking to maximize produc-tion, money, power and information, versus subjectsseeking to defend and expand their individuality."

A parallel expression of this conflict betweenprincipals (members) and agents (management) withincooperatives was described by Seipel and Heffernan(1997). Resistance to the concentration of decisionmaking and control in the hands of experts and admin-istrative apparatus would reflect this new social move-ment quality within the cooperative movement.

The dual objectives intrinsic to cooperatives sug-gest, however, that even with a strong emergence ofspecific member interests, they would need to existalongside a continued and important role of economicperformance. Both interests exist simultaneously. Thetension, itself, can provide a positive source of organi-zational development. Without this tension, an organi-zation would perhaps still exist, but not as a coopera-tive. It is only in the context of continued democraticgovernance (a new social movement perspective) thatthese tensions are maintained and can serve as asource of long-term cooperative adaptation.

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VII. Conclusions and Implications

The last decade saw the agricultural cooperative sectorrecover from the farm crisis of the 1980s and often inrestructured form. One form, the conversion of cooper-atives to IOFs attracted attention from cooperativeanalysts. Some viewed this outcome as a natural orinevitable consequence of cooperative "success."Research however, revealed very little conversion ofcooperatives to IOFs. Successful cooperatives are farmore likely to expand operations, merge with othercooperatives, or even to acquire IOFs.

The expected conversion is grounded more firm-ly in theory than practice. Cooperative theory hasincreasingly developed as a body of deductions from aset of assumptions that oversimplify actual humaneconomic behavior. A sociological approach was posit-ed that might complement the economic approachwith a multidimensional quality tied to a broader andmore inclusive range of values and interests, ratherthan the unidimensional analysis of neoclassical eco-nomics.

Thus, we laid the premises for the developmentof a theory that is grounded in, or deduced from, theactual conflicts and dilemmas or tensions that persistwithin cooperative organizations: 1) bureaucracy ver-sus democracy, 2) production versus consumption, 3)global versus local, and 4) traditional versus newsocial movements.

While these tensions may be defined as problemsby cooperative management and troublesome for thedevelopment of a deductive theory, these tensions mayalso provide the institutional friction that facilitates theinnovation and flexibility of the cooperative sector.These tensions, describe cooperative strengths as aunique form of economic democracy in an agriculturalsystem, ever more dominated by the bureaucraticcharacter of corporate organizational culture.

This analysis has been guided by an interest inthe process of institutional democratization and a fur-therance of democratic civil society (Cohen and Rogers1995). This interest has in part been stimulated by theeclipse of institutional economic (and sociologicalanalyses) of cooperatives by a neoclassical economicstradition of unidimensional analysis.

As an economic entity, cooperatives are amongthe few institutions in the late 20th century U.S. thatretain semblances of democratic governance. In thisway, they might constitute an important buildingblock of a more democratic society. Etzioni (1993)argues: that communities congeal around such institu-

tions. However, when these institutions are "consoli-dated" in the name of greater efficiency, communitiesare often undermined.

In the context of an increasingly global economy,cooperatives provide opportunities to participate inlocal economic life and can even function to lay thesort of moral claims upon members that Etzioni citesas fundamental to the construction of community.Such moral claims are, of course, excluded from thoseneoclassical models that are grounded in individualself-interests.

Even the business management literature reflectstrends moving in new directions. Seiling (1997), forinstance, argues that IOF employees should be direct-ed toward an organizational model in which they arereferred to as "members," and that the workplaceshould encourage them to "assume ownership of andresponsibility for the organization’s performance andsuccess." In this sense, cooperatives are already aheadof the game. For cooperatives, this is not just rhetoric.In fact, they have ownership, at least formally.Ironically, it may often be necessary for these mem-ber/owners to reassert this structural role in the face ofits eclipse by the managers, that are, in fact, the employ-ees of the cooperative.

Such movements demand adherence to the long-standing basic principles of the cooperative move-ment. Torgerson, Reynolds, and Gray (1997) contend,"Cooperatives are strategically adjusting and reposi-tioning their operations, but to maintain a role of act-ing in the interests of producers, they will need to usefundamental cooperative principles as their primarylogic and discipline of organization." The democraticaspect of cooperatives as a principle is fundamental totheir continued success, both internally regardingeffective management and externally about the rolevarious associations can play in revitalizing and sus-taining a democratic society and culture.

The authors highlighted the increasing difficultyof recognizing differences in cooperative and IOFbehavior. They note the trend toward bureaucratiza-tion, centralized decision making, and the predomi-nance of neoclassical economic theory over social (andinstitutional economic) theory as a development that"paradoxically" drives the cooperative "away fromcooperative logic form" in a process of "goal inver-sion."

Members may become merely "residualclaimants" in their own cooperative. This report callsfor a "more holistic and multi-disciplinary approach totheory" and research on cooperation in U.S. agricul-ture. As a movement toward a political economy of

15

cooperation, perhaps this can inspire further worktoward the development of an even more multidimen-sional theorization in the form of a sociology of coop-eration.

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U.S. Department of AgricultureRural Business–Cooperative ServiceStop 3250

Washington, D.C. 20250-3250

Rural Business–Cooperative Service (RBS) provides research,

management, and educational assistance to cooperatives to

strengthen the economic position of farmers and other rural

residents. It works directly with cooperative leaders and

Federal and State agencies to improve organization,

leadership, and operation of cooperatives and to give guidance

to further development.

The cooperative segment of RBS (1) helps farmers and other

rural residents develop cooperatives to obtain supplies and

services at lower cost and to get better prices for products they

sell; (2) advises rural residents on developing existing

resources through cooperative action to enhance rural living;

(3) helps cooperatives improve services and operating

efficiency; (4) informs members, directors, employees, and the

public on how cooperatives work and benefit their members

and their communities; and (5) encourages international

cooperative programs. RBS also publishes research and

educational materials and issues Rural Cooperatives magazine.

The U.S. Department of Agriculture (USDA) prohibits

discrimination in all its programs and activities on the basis of

race, color, national origin, gender, religion, age, disability,

political beliefs, sexual orientation, and marital or family

status. (Not all prohibited bases apply to all programs.)

Persons with disabilities who require alternative means for

communication of program information (braille, large print,

audiotape, etc.) should contact USDA’s TARGET Center at

(202) 720-2600 (voice and TDD).

To file a complaint of discrimination, write USDA, Director,

Office of Civil Rights, Room 326-W, Whitten Building, 14th and

Independence Avenue, SW, Washington, D.C. 20250-9410 or

call (202) 720-5964 (voice or TDD). USDA is an equal

opportunity provider and employer.