[Scpg] The Hidden Power of Cooperatives Michael Shuman

[Wesley Roe and Santa Barbara Permaculture Network]

The Hidden Power of Cooperatives michael Shuman

A $3 Trillion Gold Mine

http://stirtoaction.com/?p=1483
A group of scholars at the University of Wisconsin recently counted 
nearly 30,000 cooperatives in the United States operating at 73,000 
locations. The vast majority are consumer cooperatives, with 343 million 
memberships (many people belong to multiple co-ops, hence the number of 
memberships exceeds the U.S. population). Another 7 million memberships 
can be found in producer and purchasing cooperatives. Credit unions, 
which are essentially banking cooperatives, have 92 million members. 
Electrical utility co-ops reach 42 million Americans. Agricultural 
cooperatives have three million members.

The cooperative sector owns $3 trillion in assets, generates half a 
trillion dollars a year in revenue, and pays 856,000 people $25 billion 
in annual wages. Their multiplier impact on the economy supports more 
than two million jobs nationally. In Minnesota, which is not only the 
Land of 10,000 Lakes but also the state with 1,000 co-ops, another 
survey of just a third of them found they were contributing seventy-nine 
thousand jobs in the state and more than $600 million in state and local 
tax revenues.

Cooperatives can now be found in business services, child care, 
hardware, telecommunications, and insurance. In 2009, as Congress was 
debating whether to include a “public option” in health-care reform 
legislation, a compromise was seriously considered that would have 
prioritized the creation of state-based health-care 
cooperatives—underscoring the increasing importance and bipartisan 
appeal of these models. More recently Congress has been considering 
transforming the two home-mortgage giants, Fannie Mae and Freddie Mac, 
into a nationwide securitization cooperative owned by member banks and 
credit unions.
An underappreciated characteristic of co-ops is that nearly all of them 
fit our definition of locally owned—that is, probably 99.9 percent are 
connected to a particular place and owned by geographically proximate 
members. Even large co-ops that sprawl across the country have many of 
the characteristics of local businesses. National producers co-ops, like 
Land O’Lakes and Organic Valley, represent small farmers around the 
country who are eager to sell, process, and distribute their products 
regionally. Adam Schwartz, vice president for public affairs and member 
services for the National Cooperative Business Association (NCBA), says, 
“No matter how large a cooperative is, because it is owned by the 
individual farmers or individual consumers or small businesses, I feel 
very comfortable making a case that co-ops in any form support local 
business.”

David Thompson, a cooperative innovator based in Northern California, 
contends that cooperatives are critically important builders of 
community economies. “I’ve often thought about how my local Davis Food 
Co-op employs about 160 people. At the co-op they have their own 
accounting, marketing, membership, and personnel department, all of the 
management is local, buyers are local, the monthly newsletter is printed 
locally, we advertise in the local paper (Trader Joe’s doesn’t), the 
books are done by a regional accounting firm, the lawyers are a regional 
firm. The two Safeways in town each employ about fifty workers, have no 
buyers on the spot, the administration, advertising and accounting are 
all done from Oakland, and all of its money at the end of the day is 
funneled off to Oakland, where the administrative expenses occur. 
There’s another side of it, too, which is that cooperatives will never 
move to another town, state, or country because it’s cheaper. Their 
owners wouldn’t allow it.”

The structure of co-ops can vary widely. Most are built around 
consumers. But some are structured around purchasing and producer 
members (themselves typically local businesses), some around workers, 
and some around combinations of all these categories. What they have in 
common is adherence to principles enunciated in England in 1844 by the 
Rochdale Equitable Pioneers Society, which was put together by a group 
of unemployed weavers who had lost their jobs because of the 
industrialization of the textile industry. Among the key tenets: Anyone 
who wishes to join a consumer cooperative can. Profits must be split 
among members according to their “patronage,” which refers to their use 
of the cooperative, not the amount of their investment in it. Members 
elect a board that oversees the management. Unlike most U.S. companies, 
where voting power is based on the principle of “one dollar, one vote,” 
cooperatives are based on the principle of “one person, one vote.”
Co-ops are deeply democratic. And while many are committed to pleasing 
as many members as possible, few rigidly adhere to the consensus 
practices that made my experience in Stanford’s co-ops so exasperating. 
If anything, co-ops transcend political ideology. As Schwartz observes, 
“For conservatives, cooperatives mean self-help, people doing for 
themselves what needs to be done. For liberals and progressives, it’s 
social progress, people doing what the community needs.”
Even though most cooperatives start very modestly, some have grown 
spectacularly. Familiar co-op brands include Nationwide (a mutual 
insurance cooperative), AgriBank (a Minnesota-based farm-credit 
cooperative with $36.6 billion in assets), Recreational Equipment Inc. 
(better known as REI, the Seattle-based sporting goods company), and the 
Associated Press (a newspaper cooperative). Some cooperatives have 
scaled up to become significant engines of economic development within 
their communities. The Hanover Consumer Cooperative Society, based in 
New Hampshire and Vermont, has twenty-eight thousand members. According 
to its treasurer, Donald Kreis: “We have a vibrant local ag sector, and 
one of the reasons is that it’s anchored by our big co-op. Our co-op is 
a $70-million-a-year business, and it buys a ton of locally produced 
products. Our co-op offers these vendors favorable payment terms. In 
doing that, the co-op makes sacrifices, which make it less profitable. 
The theory is that we can go to the twenty-eight thousand households 
that own the business and say, you know what, we are going to return a 
little less to you, because we know we all want to have a vibrant local 
ag sector.”

Another Rochdale principle is to assist other co-ops or groups who wish 
to start their own co-ops. Kreis tells the story of a small town north 
of Hanover called Littleton, an hour-plus drive away: “They came to us 
at one point and said, ‘We love your co-op, we’re members of it, and 
we’d like you to open a branch store in Littleton.’ Well, Littleton is 
really a little too far away for our co-op, but we said to them that 
we’ll help you start your own co-op. You guys can raise money in your 
community, and we’ll assist you. The people in Littleton didn’t get it 
at first that we were serious about totally cooperating with them and 
not treating them as a rival or competitor in any way. Every shred of 
expertise we had we were willing to share with them: Our merchandising 
people went up there and helped them start the store; we gave them one 
of our store managers who was retiring and he became their founding 
manager; we even subsidized his salary for a while. What was really cool 
was that we didn’t just help this community start a co-op, we helped 
educate and raise the consciousness of people in the community about 
what cooperation really means.”

The Littleton story illustrates that the capital that members put into a 
co-op not only supports that co-op itself but also the proliferation of 
other cooperatives and other local businesses. The National Cooperative 
Business Association is also facilitating the creation of a patient 
capital fund. (The term patient capital generally means that investors 
are expected to keep their money in the fund for a long time.) Co-ops 
like Kreis’s lend their surplus capital to NCBA, and NCBA in turn lends 
it out to new or expanding co-ops. The Cooperative Fund of New England, 
another lender to start-up co-ops, gets its capital from socially 
responsible institutions like the Episcopal Diocese of Hartford, 
Connecticut.

There’s a tendency for those unfamiliar with cooperatives to look down 
on them as the leftovers of the mainstream economy, implying that if 
these ideologically driven people simply reorganized themselves into 
“normal” private companies, they would be more efficient and productive. 
In fact, just the opposite is true: Cooperatives often enter into 
economic activities that private businesses will not take on. The most 
fertile period of cooperative growth was during the Great Depression. 
Rural electric cooperatives spread across the American plains when it 
became clear that other investor-owned and municipally owned utilities 
were uninterested in wiring up sparsely populated regions. Credit 
unions, as we’ll soon explore, have seen an upsurge during the recent 
financial crisis.

One economic argument, for consumer cooperatives especially, is that 
putting consumers in the driver’s seat helps to keep prices low. The 
information flow from consumers to producers is direct and immediate. 
Outrageous executive compensation, debt-inducing acquisitions, 
unjustifiable dividends to lure weary shareholders, irrational price 
inflation and discrimination—all the crazy behavior of conventional 
corporations—can effectively be banned by mindful consumers in co-ops. 
“Members naturally have trust and confidence in a co-op,” argues Kreis, 
“because they own it. And that has both social capital and real capital 
bound up in it. There’s real business value in being able to look your 
customers in the eye and say, You can trust us, because you own us, and 
we’re in business to do nothing other than act in your best interest.”
Funerals may seem like an odd place to see the competitive advantage of 
co-ops, but wherever there are stratospheric profits and monopolistic 
practices, consumer cooperatives can bring prices back to Earth. “Pomp 
and circumstance are for royalty,” jokes John Eric Rolfstad, executive 
director of the People’s Memorial funeral cooperative in Seattle, 
“[whereas] Baby Boomers want good value, simplicity, and convenience.” 
His cooperative has eighty thousand members and performs more than a 
thousand funerals per year. The cost of an open-casket burial is 
$3,299—less than half of what the average American pays. Mindful of the 
huge environmental footprint of cemeteries, People’s Memorial encourages 
members to choose cremation for $649. “Simple final arrangements focus 
more on the spiritual and existential aspects of life and death, rather 
than on ostentatious materialism,” says the co-op’s website. In 2009 it 
issued $164,000 in dividends to its members, partially through patronage 
payments and partially through price cuts.

A second economic argument for cooperatives is that worker participation 
in running the business (which is certainly the case for worker 
cooperatives but also is a common feature of consumer cooperatives) 
increases labor productivity. One study comparing plywood companies in 
the Pacific Northwest found that cooperatives were 13.5 percent more 
productive than equivalent unionized plants, noting that cooperative 
workers could have gone on vacation an extra seven weeks and produced as 
much as their private-sector counterparts. The efficiencies occurred 
because management, by involving workers, made smarter decisions about 
raw materials, machinery, and production methods. Another study of the 
Mondragon Cooperatives in Spain (elaborated below), by Henry Levin of 
Columbia University, showed that with only 25 percent of the capital per 
worker as the nation’s largest five hundred private firms, they were 
able to add 88 percent to the value of products per worker. That’s 
triple the productivity!

A third economic argument is especially important for local living 
economies: Cooperatives can help local businesses compete more 
effectively. An inefficient small business can team up with others 
through a purchasing or producer cooperative to achieve economies of 
scale. To put it another way, there is no economy of scale local 
businesses cannot achieve as long as they are willing to work together 
through a cooperative. Sunkist, a co-op of citrus growers, enables 
member growers to deploy a common brand and undertake first-class, 
well-financed marketing campaigns. Furniture First, headquartered in 
Harrisburg, Pennsylvania, undertakes collective purchasing on behalf of 
the small furniture dealers it represents around the country, delivering 
bulk discounts and volume savings that would not be possible without the 
collaborative platform. In rural Wisconsin, a purchasing cooperative has 
boosted the local food movement.

“Local food is good medicine for everyone,” says Stephen Ronstrom, CEO 
of Sacred Heart Hospital in Eau Claire, Wisconsin. “It preserves and 
expands family farms, provides jobs in production and processing, and 
keeps money in our community.” To bring local food cost-effectively into 
the nonprofit hospital, Ronstrom’s staff teamed up with local farmers to 
create the Producers and Buyers Cooperative. No one farmer can provide 
the volume needed for the twenty-six hundred meals a day the hospital 
must serve. But by putting together dozens of farmers, processors, 
distributors, and institutional purchasers into a single cooperative, 
the entire system performs like an exquisite ballet. Other hospitals 
have since joined, and the cooperative anticipates attracting more 
institutions in the region like public schools, universities, nursing 
homes, and business commissaries.

The savings from collaboration are apparent in the bulk purchasing done 
by the Lakes Country Service Cooperative (LCSC) in Minnesota. In 1976, 
the state created eight regional purchasing cooperatives to provide 
affordable health insurance to its school districts. These have since 
expanded their memberships to include local governments and nonprofits 
and are now bulk-purchasing everything from paper to cars. Mark Sievert, 
city administrator for Fergus Falls, a fourteen-thousand-person town 
that belongs to the co-op, says the city’s $250 annual membership has 
led to hundreds of thousands of dollars of savings. In 2009 the co-op 
purchased $25 million of goods and services for its members, saving them 
$3.5 million.

For communities struggling to create jobs, cooperatives offer an 
affordable way to pool capital and to start up new businesses. In most 
states, co-op memberships are exempt from securities registration 
requirements. And under federal law, cooperative memberships generally 
are not considered securities. Therefore, all the expensive federal and 
state registration requirements necessary for unaccredited investors to 
launch, say, a private grocery store can often be dispensed with if the 
store is a consumer cooperative soliciting members.

But how exactly can a cooperative become an investment vehicle? In a 
typical consumer cooperative, a new member invests in, say, a $100 
share, and then gets discounts on goods and services, and perhaps a 
patronage refund at the end of the year. If you become a member of 
dozens of co-ops, covering each of your basic needs like banking, 
insurance, energy, food, and health care, your capital investment may 
add up to several thousand dollars. Usually when members leave a 
cooperative, they can get back their member capital. If that $100 
invested in the co-op allows a member to enjoy $10 of discounts or 
patronage benefits each year, the rate of return is 10 percent—more than 
double what a typical stock fund will deliver.

In the 1975 case of United Housing Foundation v. Forman, the U.S. 
Supreme Court established that memberships in a co-op, when purchased 
primarily for the benefits of membership and not primarily for a 
financial return, are not securities under federal law. Moreover, 
patronage distributions from co-ops that provide personal, living, or 
family items are exempt from federal taxation. But state law is more 
complicated. Whether your specific cooperative membership is or isn’t a 
security, whether it’s exempt from state blue-sky filings, how it is 
taxed, how much of a financial return members can realize—everything 
turns on your state’s exact co-op statutes and tax and other securities 
laws. And the rules are inconsistent across the country. Every state has 
at least one co-op statute, and many states have different statutes 
governing different types of co-ops. Minnesota has seven!

But if a cooperative keeps its members and business within a state, then 
at least all it needs to worry about is state law. Jenny Kassan, my 
colleague in Cutting Edge Capital, explains: “The minute you cross state 
lines, if you solicit investors in more than one state, federal law 
comes into play . . . In Colorado, Washington, Massachusetts, and 
several other states, cooperative memberships are exempt from the state 
securities law registration requirements. They can go out, solicit the 
public to buy memberships in their co-op, and not have to worry about 
the usual requirement to file a registration with the state regulators.” 
Cooperative memberships then can open a spigot to other local-investment 
opportunities.
  ______
Michael H. Shuman is an economist, attorney, author, and entrepreneur, 
and Director of Research and Marketing for Cutting Edge Capital. He has 
authored, coauthored, or edited eight books. He helped co-found BALLE, 
which represents 22,000 local businesses in North America in 80 
communities, and is now a Fellow there.
This excerpt is from the book Local Dollars, Local Sense: How to Move 
Your Money from Wall Street to Main Street and Achieve Real Prosperity. 
It is reprinted here with permission by Chelsea Green Publishing. For 
more information about this book, visit www.chelseagreen.com.