Organizing a Farmer Cooperative

LTHOUGH it is beyond the scope and character of this publication to consider in detail all the factors which should receive attention in the formation of a cooperative, in the discussion which follows an attempt is made to focus attention on the fundamental objectives.

There is no Federal statute for the incorporation of agricultural cooperative marketing and farm supply associations. However, there are special Federal statutes administered by the Farm Credit Administration for the incorporation of national farm loan associations,45 banks for cooperatives, and production credit associations, which may be regarded as farmer cooperatives. In 1940, Congress enacted for the District of Columbia a statute authorizing the incorporation of consumer cooperatives.48 There is a Federal statute under which credit unions may be incorporated,1o and one under which savings and loan associations 50 may be formed. All States have statutes adapted to the incorporation of agricultural associations. Incorporation of such an association must be done under an appropriate State statute.

When incorporating a cooperative, or any other corporation, it is necessary to ascertain and follow the requirements of the statute under which it is proposed to incorporate. Such statutes generally require that a certain number of individuals, usually three or more, must unite in articles of association. The term "articles of association" describes the paper or instrument which is filed for record in conformity with law, for the purpose of forming a corporation. Those whose names appear in the articles of association, or, as they are sometimes called, articles of incorporation, are known as the incorporators.

contract by cooperatives); Higgins v. California Prune & Apricot Growers, 16 F. 2d 190, certiorari dismissed, 273 U. S. 781, 47 S. Ct. 460, 71 L. Ed. 889 (breach of sales contract); Kansas Wheat Growers' Association v. Farmers' Elevator Company of Luray, 127 Kan. 27, 272 P. 181 (conversion); Farmers National Grain Corporation v. Kirkendall, 183 Okla. 17, 79 P. 2d 570 (conversion); Associated Seed Growers, Inc. v. South Carolina Packing Corporation, Coop., 186 S. C. 118, 195 S. E. 107 (cooperative liable on trade acceptances); Baker v. Farmers' Welfare Union, 3 S. W. 2d 155 (Tex. Civ. App.) (suit against former employer for recovery of furniture, etc.); Genco v. Union Berry & Truck Association, 167 So. 890 (La. App.) (suit for salary-defense that no salary was to be paid unless profits made); Gust v. Muskegon Cooperative Oil Company, 226 Mich. 532, 198 N. Ŵ. 175, 33 A. L. R. 772 (suit for personal injuries resulting from gasoline); Federal Reserve Bank of San Francisco v. Idaho Grimm Alfalfa Seed Growers' Association, 8 F. 2d 922, certiorari denied, 270 U. S. 646, 46 S. Ct. 347, 70 L. Ed. 778 (recovery allowed because taking of deposit by insolvent bank was a fraud on depositor); California Pear Growers Association v. Herspring, 60 Cal. App. 503, 213 P. 518 (sales-right of inspection); California Packing Corporation v. Sun-Maid Raisin Growers of California, 64 F. 2d 370 (trade-marks); California Packing Corporation v. Sun-Maid Raisin Growers of California, 81 F. 2d 674 (trade-marks); James v. Lake Wales Citrus Growers Association, 110 F. 2d 653 (who are necessary parties to an injunction suit involving Fair Labor Standards Act?); Grandin Farmers' Cooperative Elevator Company v. Langer, 5 F. Supp. 425 (Agricultural Products Embargo Statute of North Dakota); Sun-Maid Raisin Growers of California v. American Grocer Company, 40 F. 2d 116 (trade-marks); California_Fruit Growers Exchange v. Windsor Beverages, 118 F. 2d 149 (trade-marks); Pavilis v. Farmers Union Livestock Commission, 68 S. D. 96, 298 N. W. 732 (check signed in blank).

48 54 Stat. 480; District of Columbia Code (1951 Ed.), § 29-801 et seq.

49 12 U. S. C. A. 1751 et seq.

50 12 U. S. C. A. 1464, upheld in First Federal Savings and Loan Association v. Loomis, 97 F. 2d 831.

The statutes require that the objects and purposes for which the corporation or association is formed shall be clearly stated in the articles of association or incorporation; that the name by which the association or corporation is to be known shall be given; and that the amount of capital stock, if the association is to have capital stock, shall be stated. Some of the other usual statutory requirements are the length of time for which the association is to exist, its principal place of business, the number of directors, and the period for which the incorporating directors are to serve. The principal place of business specified in the articles of incorporation need not be the place where the major part of the business of an association is transacted.5 It merely fixes the legal residence of the association. Every provision included in the articles of incorporation of an association must be authorized by the law under which the association is formed; and if an unauthorized provision is included it is void.52

51

Application to be incorporated or for a charter is commonly made to an officer of the State, usually the secretary of state. The articles of association or incorporation or the certificate of incorporation as it is called in some States, which constitute such application, is submitted to this officer and, if he finds that the statute under which the incorporators are seeking to incorporate has been complied with and that the purpose of the association is one provided for in the statute, he approves the application.

The statutory requirements for incorporation should be followed strictly, and care should be taken to see that the State officials concerned with the formation of corporations function properly. In an Iowa case,53 it was held that a cooperative was not incorporated, although an attempt to incorporate had been made, because of defects in the filing, acceptance, and verification of the articles of incorporation by the secretary of state of Iowa; and hence a creditor of the association recovered from the stockholders as partners.

The amount of discretion which the secretary of state, or like officer, has with respect to the acceptance or rejection of an application for a charter is not the same in all States. 54 Upon the approval by the secretary of state of the application for a charter, the corporation, in most States, comes into existence. The procedure in the different States is not uniform, but this discussion may give a general idea of the steps involved. Some States require that the charter or the articles of association, or both, must be recorded in the county where the association is to have its principal place of business. In certain States, it is necessary to advertise for a given length of time that an application for a charter is being made. The exact moment when a corporation comes into existence varies in the different States and depends upon their statutes. It is believed that all States require the payment of certain fees as an incident to incorporation.

The actual work of organizing an association usually is carried on by an organization committee which may consist merely of a voluntary and informal group of farmers interested in forming an association, or may be composed of more formally chosen representatives of a larger group of interested farmers. From the start, the committee should have the advice of a competent attorney who, in addition to his legal qualifications, should have a clear understanding of the cardinal principles applicable to coop51 Dairymen's League Coop. Association, Inc., v. Brundo, 227 N. Y. S. 203, 131 Misc. 548.

52

People v. California Protective Corporation, 76 Cal. App. 354. 244 P. 1089.

53 Wilkin Grain Co. v. Monroe County Coop. Association, 208 Iowa 921, 223 N. W. 899, 225 N. W. 868.

54 Lloyd v. Ramsy, 192 Iowa 103, 183 N. W. 333.

erative organizations and their activities, and the economic and business. problems confronting the proposed association, so that he may be of maximum service to the committee.

55

Many of the cooperative marketing acts urge those contemplating the formation of an association to communicate with the college of agriculture of the State or some other State agency concerned with agriculture for advice as to what "a survey of the marketing conditions affecting the commodities proposed to be handled may indicate regarding probable success.' Advice concerning such matters may be obtained also from the Farmer Cooperative Service, United States Department of Agriculture, Washington 25, D. C.

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The organization committee should have ever in mind the things to be accomplished. If the members are to realize the maximum benefits from their association, the association must have (1) sufficient volume of business; (2) ample capital to conduct the business; (3) a flexible capital structure which will automatically provide additional capital for growth and expansion; (4) a sound plan of operations; (5) a representative board of directors; (6) able management.

First and foremost, it should be clearly established that there is a real, economic need for an association of the character proposed before reaching a decision to organize. This fact cannot be over-emphasized, since cooperative marketing and farm supply associations are necessarily middlemen whose expenses must be borne by the members. It should never be assumed that a cooperative is needed or that it would be successful if formed. Careful surveys and investigations should be made to determine if the facts justify organizing an association.5

56

Before forming an association, it should be ascertained that it will have a sufficient volume of business to enable it to operate efficiently and economically. Associations to operate creameries have been organized in sections where the amount of milk that was available was insufficient to permit of an economic operation. Under such circumstances, an association is doomed to fail. Perhaps the lack of sufficient volume accounts for more cooperative failures than any other single cause.

Associations have been formed and have begun operations under conditions which could not permit them to function in the black, but with the hope that, as time passed the volume would increase so that they might operate successfully. However, prospective members frequently are unwilling to join an association which is operating in the red, since they feel that they will be called upon to make up losses previously sustained. New members may always be obtained more readily by a successful organization than by one which is unsuccessful.

In addition to sufficient volume a new association must be assured sufficient initial capital to handle the business. Generally, the determination of whether sufficient volume and capital may be obtained to justify the organization of an association is made by soliciting the subscription of farmers to an organization agreement.

57

An organization agreement should be carefully prepared and carried out. in strict accordance with its terms. In an Arkansas case the subscription agreement for stock provided that a corporation was to be formed to 5 of Bingham Cooperative Marketing Act of Kentucky, p. 301 of 58 ORGANIZING A FARMER Cooperative. Cir. 18, 39 pp., Farmer Coop. Serv., U. S. D. A. Weaver, O. T., and Prickett, U. H. ORGANIZING A COOPERATIVE COTTON GIN. Cir. C-109, 66 pp., illus. See p. 24, Farmer Coop. Serv., U. S. D. A. 1939.

55 See sec. Appendix.

operate a cotton warehouse at a particular place but when the articles of incorporation were prepared they specified that the warehouse might be located at this place "or at such other place as the board of directors may select." This was held to be such a material departure from the original plan that it constituted a good defense to a suit on the subscription agreement of a subscriber for stock. 58

Commonly, the organization of an association is made contingent upon securing subscriptions assuring the minimum requirements in volume and capital by a stated time. Thus, the expenses incidental to incorporating an association will not be incurred unless it is found that the farmers will furnish the volume of products and the initial capital required for an economic operation. Usually, provision is made in the organization agreement for a committee authorized to have active charge of the organization of the association; and this committee will supersede the interested parties who, up to this point, have served as an informal committee. As illustrating the care with which an organization agreement should be prepared it has been held that, if those interested in forming a corporation have agreed to pay money to a committee to be selected to organize a corporation, only the committee could sue therefor.59

The committee should function carefully within the limits of its powers if its members are to avoid personal liability. Unless it is specifically required that all the members of such a committee must act, action taken by a quorum is sufficient.60

The committee will be confronted with economic and business problems of a wide variety. Thus, it may have to decide whether to buy, build or rent suitable facilities, or to take over an existing enterprise; and it may have occasion to negotiate with prospective marketing or purchasing agencies. It will be called upon to develop a plan of operation, and this will involve determining the particular functions that the association will perform.

Cooperative marketing and purchasing constitute the two major activities in which cooperatives engage, and not infrequently an association will engage in both activities. In each activity, there are certain functions that may be performed. In the case of marketing farm products, the problem consists of taking such products from the farm to the consumer. 61 This means that the products may have to be assembled, graded, processed, packed, warehoused, shipped, and sold. Just how many of these services the association should attempt to perform is a question which should be answered only after careful study and analysis. Some marketing associations perform all these functions. Others only assemble agricultural products and consign them to market for further handling and distribution.

It sometimes happens that a cooperative which is performing an assembling function only cannot compete successfully with a concern that may be engaged in performing additional functions, such as warehousing

58 El Dorado Farmers' Union Warehouse Company v. Eubanks, 94 Ark. 354, 126 S. W. 1075. See also Divine v. Western Slope Fruit Growers' Association, 27 Colo. App. 368, 149 P. 841.

59

Loutsenhizer v. Farmers & Merchants' Milling Company, 5 Colo. App. 479, 39 P. 66. See also Canyon Creek Elevator & Milling Company v. Allison, 53 Mont. 604, 165 P. 753.

60 Lennox v. Texas Farm Bureau Cotton Association, 16 S. W. 2d 413 (Tex. Civ. App.).

Elsworth, R. H., and Gatlin, G. O. Unpublished report "Analysis of Marketing Functions." U. S. Dept. Agr., Bureau of Markets and Crop Estimates, Division of Cooperative Relations, 19 pp., mimeographed, Washington, D. C. 1921.

of the commodities in question or in processing them, to a certain extent. Sometimes, an operator may be making virtually no money in the assembling of commodities, but at the same time he may be making good profits from one or more processing operations. It is therefore highly important for a group that plans on organizing or reorganizing a cooperative to determine how many marketing, distributing, or processing functions will be performed. Obviously, an association should not attempt to perform any function which may be more economically performed by others, unless the performance of the function in question is essential to the success of its operations as a whole. In the case of many associations that operate on a year-round basis, there is a growing tendency to diversify their operations if possible, so as to attempt to do sufficient business every month to meet current overhead and operating expenses. Thus, if the processing operations are carried on in only a few months of the year, it may be advisable to combine purchasing activities which continue throughout the year.

Insofar as a farm supply association is concerned, it may handle goods on a car-door delivery basis, or it may warehouse and retail farm supplies either with or without delivery service. In any event, it should endeavor to function in such a way as to make farm supplies available to its members at the lowest practicable net cost.

Since the volume of products and capital which an association will require for successful operations may depend, in large part, on the nature of services that it proposes to render, these services should be determined at least in part prior to the solicitation of subscriptions. Thus, a milk association which functions only as a bargaining agency will have less need for capital than an association which operates a wholesale processing plant.

We have heretofore mentioned the need for sufficient capital to finance the association. In soliciting the subscription of farmers for the formation of a cooperative, it should be thoroughly explained to them that they are going into business, and are simply setting out to perform for themselves certain functions previously performed by others. Naturally, it takes money to do this, and the capital furnished by farmers for a cooperative should be looked upon by them simply as an investment in their own business. Farm products have always paid their way to market; and the plants, packing houses, warehouses, and other facilities for processing and handling farm products have always been made possible by the profits from the handling of these products. If farmers desire to market their own products, they must furnish the capital that would otherwise be furnished in the usual commercial enterprise.

The initial financing of a cooperative should be done on as fair a basis as practicable. This means that theoretically, at least, a farmer who has twice as many products to market as his neighbor should furnish twice as much capital to the marketing association. This may be accomplished in the course of time by adopting a revolving-fund plan of financing, under which the patron contracts with the association that a flat rate per unit marketed, a percentage of the sales proceeds of all products marketed, or a percentage of all net operating margins to which he may be entitled as patronage refunds is to be invested in or loaned to the association for capital purposes.62 This method of financing, which is believed to be the fairest, is discussed later under the head "Revolving-Fund Plan of Financing," at page 223. Under this plan, the current patrons of an association furnish capital for its financing in proportion to their patronage, and the capital

62

Sanders, S. D. "RETAINS" THAT NOBODY FEELS. 3 News for Farmer Cooperatives 5-6. Farmer Coop. Serv., U. S. D. A. 1936.