A Value Culture for Agriculture: To Become High-Performing Businesses, Agricultural Co-Ops Must Move Away from Their Traditional Role as Service Providers
Dempsey, Jack J., Kumar, Ashish A., Loyd, Bernard, Merkel, Loula S., The McKinsey Quarterly
Despite the $1.5 trillion a year that agriculture and the activities associated with it bring to the US economy--fully 16 percent of GDP--much of the industry is destroying value. The problem is not only the agricultural boom-and-bust cycle and the vagaries of the weather but also the performance of one of the industry's traditional business models: agricultural cooperatives. Co-ops, a substantial part of the industry, handle $121 billion annually out of a total of $675 billion (Exhibit 1, on the next page). With a few notable exceptions, they destroy value--nearly $2 billion in 1999 and 2000--and the destruction continues through both the high and low phases of the agricultural cycle (Exhibit 2, on the next spread). (1)
Gone are the days when traditional family farms banded together in co-ops for increased market power in buying and selling a wide range of supplies and services. Farms then had similar and fairly basic needs, and co-ops offered their members a valuable service; indeed, they saw themselves as service providers, not as performance-oriented businesses. But while most co-ops have since changed, the world around them has changed even more: farms are bigger and more specialized, and globalization has encouraged many (and often larger) competitors to enter every part of the food industry. In such an environment, many co-ops are destined to fail. Unfocused and inefficient, these institutions ensure that costs are higher than they should be throughout the food chain and serve neither farmers nor food manufacturers at all well.
Yet a few co-ops in the United States and elsewhere have changed the way they operate--a development that could, if followed by other reforms, revitalize the US co-op system and its industry. To succeed, co-ops must mirror the changes that have taken place among their customers: farmers and food manufacturers. Besides a new emphasis on the performance of co-ops as businesses, reform will require consolidation and focus.
Down on the farm
The 1922 Capper-Volstead Act granted US farmers an antitrust exemption allowing them to pool their marketing activities in co-ops. Under the act, co-ops must be controlled by members who are agricultural producers. Income is distributed among them according to how much business they conduct through the co-op; those who sell more oranges to it, say, or buy more propane from it get a higher payout. Furthermore, in most co-ops each member has an equal vote in electing the board of directors, whose members are all farmer-owners.
By the late 1920s, modern agricultural co-ops, for marketing and for purchasing supplies, had become a part of the US agriculture industry. Some, such as Sunkist (oranges), Ocean Spray (cranberries), Land O'Lakes (dairy products), and Agway, went on to become well-known brand names (Exhibit 3, on the next spread).
Local supply co-ops have a proud tradition of providing farmers with a wide swath of offerings from seeds to crop-inspection services. Local marketing co-ops help farmers get the best price for their crops as well as provide services such as grain storage. Local co-ops have long combined in regional co-ops, which further pool these supply and marketing activities and make larger investments up- or downstream from farms--in fertilizer manufacture, say, or wheat milling. Since a wave of consolidation in the 1990s, most of the largest regionals have specialized in a broad area such as meat, feed, or energy; some have also created jointly owned interregional co-ops and limited-liability corporations (LLCs). (2) As a result, most farmers belong to several co-ops (Exhibit 4, on the next spread).
These attempts to increase scale and focus don't go nearly far enough. Although the number of US co-ops has fallen by half since 1970, to 3,500, most locals remain too small to be efficient. Supply chains are one good example of how inefficiency raises costs. …