The business of agriculture is changing rapidly in a process that many are referring to as the “industrialization of agriculture.” This is creating numerous challenges for locally owned farm supply and grain marketing cooperative and in many cases threatening their very survival. As local cooperatives struggle, so do the rural communities that they are a part of because these businesses represent a significant part of the local economy. This article reports on how local cooperatives in eastern Colorado are using joint venture and strategic alliance business agreements to deal with the challenges resulting from the industrialization of agriculture and to maintain viable businesses in their respective rural communities.

Challenges for Locally Owned Cooperatives

The challenges that local cooperatives face as a result of the industrialization of agriculture can be categorized into the following areas.

Economies of Scale: Scale economies in virtually all areas of agri-business are creating a distinct competitive disadvantage for local cooperatives. The nature of agribusiness is changing so that efficiency requires a large-size operation in order to achieve a low-average cost of production.

Changing Government Regulation: Many farm supply firms are having to make substantial capital investments to construct new storage facilities for fertilizers and pesticides to meet changing Environmental Protection Agency standards.

Inventory Management: As agriculture becomes more industrialized there is increased pressure to achieve maximum efficiency at all stages in the agribusiness system, including inventory management. The challenge for grain marketing and farm supply cooperatives is how to serve the needs of their member-ship while controlling the costs associated with maintaining inventory and storage facilities.

Investment Portfolio: Many local cooperatives are finding it necessary to follow a portfolio investment approach and expand beyond their traditional business. The advantage of this approach is to provide diversity for the business as well as an income flow from other sources.

Technical Expertise: The industrialization of agriculture is creating a much more complex environment for all agribusinesses, and technical expertise is becoming more important for business survival.

Merger: The pressures noted above are leading to consolidation of our cooperative sector. In the decade from 1986 to 1996 the number of marketing and farm supply cooperatives in the United States decreased from 4237 to 3415, or about 20%. Locally owned cooperatives are sim-ply finding it impossible to maintain a viable business entity and are being forced to close or to merge with another business. These mergers and consolidations are in turn placing pressure on rural communities across the country.

Opportunities from Joint Venture and Strategic Alliance Agreements In response to the challenges of today’s marketplace, many businesses, including locally owned grain marketing and farm supply cooperatives, are utilizing joint venture and strategic alliance business agreements. For purposes of clarification the distinction between a joint venture and a strategic alliance is the degree of formality associated with the agreement. Strategic alliances are more informal agreements, while joint ventures are more formal and often involve the creation of a new business entity (e.g., a new cooperative, a partnership, ora limited liability corporation).

In the remainder of this article I report on the results of a research project, funded by Rural Business, Cooperative Service, USDA, where managers of 20 locally owned cooperatives involved in grain marketing and farm supply were interviewed with respect to their involvement in joint venture and strategic alliance agreements. The cooperatives were all located in the high plains region of Colorado east of the Rocky Mountains, and the interviews took place in January 1995. All 20 cooperative managers reported at least some use of joint venture or strategic alliance business agreements. The extent of usage varied from some managers reporting one or two informal agreements that they had with neighboring cooperatives to others who administered several formal business agreements with other cooperatives. The types of business agreements that the managers reported are discussed below according to the six challenges identified in the previous section. Although the research involved local cooperatives in Colorado, the research conclusions concerning opportunities from these business arrangements hold for cooperatives in any region.

Economies of Scale

Farm supply businesses can often obtain volume discounts on input purchases if they are large enough. Many local farm supply cooperatives, however, are not large enough to take advantage of these volume dis-counts. Managers reported working together to solve this size problem. By purchasing inputs, such as fertilizer, diesel, petroleum and fence posts, jointly with neighboring cooperatives they were able to obtain the volume discounts and lower their input costs.

Grain marketing cooperatives often rely on rail transportation to move the grain from the elevator to the next stage in the supply chain. Given the lack of competition that is an inherent feature of the rail industry, small cooperatives are at a dis-advantage when it comes to negotiating rail rates. Several grain cooperatives in northeastern Colorado that were adjacent to one another along the same rail line found a way to at least partially overcome the imbalance of market power that the railway held. By forming a joint venture marketing agreement through which they agreed to ship 100 cars of their main commodity, they improved their bar-gaining position and were able to negotiate substantially better transportation rates.

Business size is also important in the efficient processing of grain into feed. Cooperatives reported that through strategic alliances they were able to obtain the necessary volume to lower unit production costs and thus provide the associated goods and services to their members.

Several of the cooperatives reported involvement in a joint venture agreement that involved joint ownership of petroleum storage facilities at the pipeline. The managers identified that their business was not large enough to justify the investment on its own—but together with the other cooperatives they achieved the critical size.

Changing Regulations

Some services that have traditionally been offered by farm supply cooperatives, such as fertilizer sales and customer application, and liquid propane, are becoming increasingly expensive for small businesses to offer. This is, in part, due to changing government regulations aimed at environmental protection. Several of the cooperatives reported that when they formed a strategic alliance and worked together they had a large enough customer base to offer the services.

Inventory Management

Effective inventory management is important in controlling costs for all businesses, including local cooperatives. Cooperative managers identified that informal strategic alliances with neighboring cooperatives, allowing them to exchange products at cost, was an effective way of dealing with the challenge of keeping inventory costs low while also satisfying member needs. An example that one manager gave us was finding a specific size of tire for a farmer so that he/she could get back to field work as quickly as possible.

Investment Portfolio

As cooperatives looked to outside investments to expand their portfolio, they often found that joint ventures involving ownership of businesses such as convenience stores, tire centers, and integrated hog operations was the way to make the project feasible.

Technical Expertise

 

 

Technical expertise is vital to the success of any business and is becoming more important as the business of agriculture increases in complexity. Several of the local cooperatives in this study overcame the problem of not being large enough to afford to hire an individual with expertise on Occupational Safety and Health Administration (OSHA) and Environmental Protection Agency one employee. Another example of sharing an employee with specific technical expertise was in grain merchandising education. In addition, several of the cooperatives reported taking advantage of technical expertise offered by the regional cooperative, including arranging for transportation of grain with the railway and market surveys to evaluate the feasibility of new investments.

Mergers

Many of the managers commented on the merger pressures that local cooperatives are facing today. There was universal agreement that mergers of local cooperatives have negative effects due to direct loss of business to the local community. In addition, mergers often result in members of one community feeling like they “lost” their cooperative to the other community. The managers repeatedly reported that the joint venture and strategic alliances had allowed them to remain independent local cooperatives and avoid mergers. Some of the managers indicated that a merger with another local cooperative would most likely be inevitable. They were quick to point out, how-ever, that the problems noted above would be greatly reduced because the joint venture and strategic alliance agreements that the businesses are currently involved in were really a stepping stone to a formal merger.

Factors Contributing to the Success of Joint Venture/Strategic Alliance Agreements

Given that joint venture and strategic alliance business agreements can be beneficial for both the cooperatives involved and for the rural communities that they belong to, it is important to identify the factors that make the agreements successful. The determination of these factors was a major component of the research project described earlier. The first com-ponent of the research involved developing hypotheses concerning the success factors from the theory of behavior and strategy. Then the hypotheses were tested with the information obtained from the inter-views. The managers were asked to identify the factors that lead to the success or failure of the joint venture and strategic alliance agreements. The managers’ responses corresponded directly with and confirmed all of the original hypotheses. From the hypotheses and empirical evidence it can be concluded that a joint venture or strategic alliance will be more successful when the following factors exist.

➤        The cooperatives that are involved are committed for the long run.

➤        The agreement includes some punishment for defection by cooperatives.

➤        All of the cooperatives are financially sound.

➤        The benefits and costs of the agreements are known and advantageous.

➤        There is a small number of homogeneous cooperatives.

➤        There is open communication among the managers.

➤        There is mutual respect and trust among the managers.

The managers also identified some factors important to successful agreements that did not directly correspond with the original hypotheses. They noted that joint venture and strategic alliance business agreements will be more successful when they involve:

➤        People who work well together,

➤        Business partners who do not intrude on the business territory of other partners,

➤        Business partners who stay involved in the business agreement,

➤        Managers who delegate decisions to those in charge of operations,

➤        Business partners who are able to keep their egos in check,

➤        Business partners who take the time and effort to educate new managers and new board members about the value of the agreement,

➤        Contracts that delineate the details and enforce obligation by the business partners, and

➤        Good feasibility studies so the business partners know what to expect.

Conclusions

 

Joint venture and strategic alliance business arrangements have a number of positive effects. They allow the business to remain alive, provide an effective transition if mergers are the end result, and keep the rural com-munity viable.

 

 * An earlier version of this article was entitled “As Agricultural Industrializes, Local Supply and

Grain Coops in Colorado Remain Profitable Through Joint Ventures and Alliances” published in Rural Cooperatives, Vol. 65, #3,

May/June 1998 at page 19.