United StatesDepartment ofAgriculture

Rural Business-CooperativeService

RBS ResearchReport 166

Pooling is a marketing practice distinct to cooperatives and refers to a particularmethod by which a cooperative markets the crops of its producer-members.Commodity pools are most prevalent in the fruit, vegetable, nut, rice, and dairy indus-tries. This report will discuss the pooling practices of fruit and vegetable cooperativesas a marketing alternative for their producer-members. The intent of this report is toclarify cooperative pooling practices and to present the structural, managerial, finan-cial, and coordination aspects of a successful commodity pooling program.

Keywords: Cooperative, pooling, fruit, vegetables, marketing

Cooperative Pooling Operations

Andrew A. JermolowiczRural Business-Cooperative Service

RBS Research Report 168

May 1999

Price: Domestic-$5; Foreign-f550

Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TypesofMarketPools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

AdvantagesofPooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

RiskSharing.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Improved Marketing .......................................... .3

Increased Market Power ....................................... .3

Quality Control .............................................. .3

EconomiesofScale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Potential Barriers to Successful Pooling ............................... .3

Delayed Payments ............................................3

Loss of Individuality ...........................................4

Less Flexibility ...............................................4

ManagerialExpertise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Marketing Agreements .............................................4

Pooling Illustration ................................................5

Pooling Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Determining Market Value .......................................

Determining Costs and Returns ................................. .6

Sample Pool Calculations .......................................6

Single Versus Multiple Product Pool .................................. .8

The Question of Subsidization ......................................11

Cooperative Examples ............................................12

Ocean Spray Cranberries, Inc.: ................................ .13

National Grape Co-operative Association, Inc. /WelchFoods Inc., A Cooperative: .....................................13

Citrus Marketing: ............................................14

Summary.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..15

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..16

i

Cooperative Pooling Operations

Andrew A. Jermolowicz

Pooling is a marketing practice distinctive tocooperatives and refers to a particular method bywhich a cooperative markets the crops of its producer-members. Commodity pools are most prevalent in thefruit, vegetable, nut, rice, and dairy industries and to alesser extent, cotton and grain industries. This reportfocuses on the pooling practices of fruit and vegetablecooperatives as a marketing alternative for producer-members. Cooperative pooling practices are discussedalong with structural, managerial, financial, and coor-dination aspects of a successful commodity poolingprogram.

Introduction

Pooling is a unique business agreement andrefers to the combination of production from manyproducers under the marketing skills of a specializedstaff. Cooperative marketing pools use variable pay-ment schedules and marketing agreements. Successfulpooling operations require considerable coordinationbetween the cooperative and producers regarding theproduction, harvesting, and delivery of commodities.

Each producer-participant is paid the averageprice received for all product of like quality deliveredduring the duration of the pool. A member’s share ofthe pool proceeds is determined by the volume ofproduct contributed and may be adjusted for eitherpremiums or discounts related to quality differences.Pool operating costs are allocated among producersand deducted from their returns prior to settlement.The typical pool: provides an advance payment at, ornear, the time of product delivery; makes progresspayments as pool contents are sold; and-makes a finalpayment to participants once the pool is liquidatedand all costs are reconciled.

Pooling is a distinct cooperative method of mar-keting with one major difference from either outrightpurchase or selling on individual accounts where theidentity of each individual grower is preserved andthe grower is paid exactly what was received in themarket. In a pool, the producer turns over decision-making authority to the cooperative and no longercontrols when or for what price the crop is sold.However, the increased volume of member productfrom commingling production increases the coopera-tive’s leverage and impact in the market and mitigatesrisk.

A cooperative operating a commodity pool for itsmembers must address a number of rather complexissues. For example, when developing a pooling plan,the cooperative must decide on the number of pools touse and how each will be separated regarding com-modity type and grade, the production areas to beincluded,, and how long it will remain open. Carefulconsideration must be given to each of these factorsand analyzed for their effect on the operation of thecooperative. The pooling program must be fair to allmembers by providing the appropriate differentials forvariations in product quality or timing of delivery,ensuring equitable distribution of marketing risks, andassigning equitable allocation of expenses. To somedegree, the success of a pooling program depends onhow effective the cooperative communicates theimportance of forgoing short-term gains for long-termstability to its members.

vpes of Market PoolsAlthough a number of alternative structures exist

within each, there are basically two classes of marketpools, seasonal and contract. With the more commonseasonal pool, the cooperative’s management staff isresponsible for all marketing decisions. Member pro-

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duction is commingled and marketed. Producersreceive payment based on the average price the coop-erative obtains from joint marketing. Althoughreferred to as seasonal, there is no set length of timethis class of pools can remain open. Given the widearray of horticultural crops marketed by cooperativesand the fact that no two associations face exactly thesame circumstances, the length of time a pool remainsopen varies from one cooperative to another. Twofactors that may influence the duration of a seasonalpool are the type of commodity being marketed andthe geographic area being served. Certain high-value,highly perishable, or commodities subject to extremeprice variability may require daily or weekly pools inorder to efficiently and equitably market a crop.Commodities capable of being stored, processed, oravailable in ample supply throughout the year usuallyrequire longer pooling periods, some up to a year oreven longer.

Geographic differences among producer-mem-bers also affects how a pooling program is structured.For example, a cooperative may have producers in twoor more distinct producing regions of the country. Inthis case, there will likely be differences in crop vari-eties being produced, yields, grading standards, orother quality related factors. Consequently, the cooper-ative may operate separate pools to capture these dif-ferences among members.

Contract pools are quite different because theproducer retains some control over when and for howmuch his produce is sold. Contract pools can bedefined as either a call or purchase pool. In a call pool,the cooperative serves as a broker. The producer ineffect has final authority for when his produce is soldby setting a minimum or target price level. In the pur-chase pool, the return a producer receives for his cropis determined by when he delivers to the cooperative.Typically, a purchase pool will pay the member theprevailing cash market price on the day the producewas delivered. Producers participating in a contractpool retain some control over the marketing of theirproduce, but do not benefit from the cooperative’smarketing expertise or the risk-sharing aspect foundwith the seasonal pool.

Commodity pools may cover single or multiplecommodities. The single product pool deals with eachcommodity or grade separately such as used in a citrusmarketing cooperative. Participants in this pool arepaid the average price received for their specific com-modity during the marketing period. A multiproductpool uses a single accounting system to manage allcommodities and grades delivered to the cooperative.

In this case, producers are paid the average pricereceived for all products marketed during the poolperiod. Multiproduct pools are more common withcooperatives serving vegetable producers becausethere is a much greater likelihood that the associationwill be handling a mix of products.

Occasionally, a cooperative may be required toestablish a special pool to deal with abnormal market-ing situations. For example, in the case of severe freezeor hail damage, the cooperative may establish a newpool to handle these affected commodities. A specialpool would be necessary if the damage to the producewas significant enough that it would not qualify forinclusion in any existing pool. Consequently, this pro-duce would be commingled and marketed separatelyto avoid reducing the average earnings of the regularpool.

Advantages of Pooling

R/Sk Sh8f\ng: One of the key advantages ofparticipating in a commodity pool is sharing of risk.Fruit and vegetable crops are very weather-sensitivecommodities and prone to wide swings in suppliesand prices. Income from these crops can vary widelyfrom year to year. Producers deliver product over aspecified period of time and receive an average price,so many of the cyclical fluctuations in price or changesin consumer demand will be spread, and thusminimized, among all producers in the pool.

This is especially true for crops destined for thefresh market. Prices for many fresh market commodi-ties tend to be higher during the early and later stagesof the marketing season when product supply is light.With pooling, higher-than-average returns offsetlower-than-average returns. As a result, producerscontributing products to a pool are not necessarilypenalized merely for the timing of their deliveries.Participants in a multiproduct pool are likely toreceive additional risk sharing since although theymay specialize in a particular crop, they benefit fromthe overall diversification of the cooperative’s market-ing plan.

Members who produce high-value crops, or con-sistently deliver product of above average quality, mayfeel that they are subsidizing marginal producers.However, producers must realize that in any givenyear a particular crop could have either a good or badfinancial performance. When costs and returns areallocated over a number of commodities, those per-

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forming well will support those doing less favorably.Over time, the averaging of costs levelsthe periodicups and downs in the market.

/mpfowed Marketing: In a market pool thecooperative maintains a staff of marketing specialiststo handle the sale of member produce. The primaryobjective of the cooperative’s sales staff is to maximizethe returns to the producer. By having someknowledge of the quantity and timing of memberdeliveries, the cooperative gains considerableflexibility in planning. The cooperative can alsoexercise some control over when harvesting anddelivery occur.

This control enables the cooperative to maintain aconsistent supply. Many produce buyers emphasizethe importance of working with a reliable, consistentsupplier. Having knowledge of the needs of bothbuyer and seller enables the cooperative to coordinatea more orderly flow of product to the market and buildrelationships with buyers. Also, by having the timeand resources to constantly monitor the market, thecooperative can capitalize on any new market oppor-tunities.

increased Market Power: Many fruit andvegetable markets are characterized by a large numberof small (volume) producers selling to a small numberof large buyers. It is unlikely a single producer wouldhave enough volume to take advantage of marketopportunities available to large-scale sellers.

However, by pooling, the volume of producemarketed can be significant enough to enhance bar-gaining position and possibly result in improvedprices. Pooling allows the cooperative to approach themarket as a single seller of a large quantity of product.Buyers are frequently more willing to negotiate with asingle seller than with a large number of relativelysmall sellers, especially when the buyer is seeking aparticular type or quality of product. Commingling acommodity under a single seller may also increasecompetition among buyers needing the raw product ifthe pool can amass enough volume to become a prima-ry supplier.

QU8/iry control: Producing and marketing aquality product is essential to compete in fruit andvegetable markets. Being able to consistently provide aproduct with the size, color, or taste characteristicsdemanded by buyers greatly enhances a seller’s abilityto market a crop. A pooling program enables thecooperative to become involved in the production

process at an early stage and address product qualityissues before they become a problem. Cooperatives canuse marketing agreements to establish qualitystandards.

Typically, a marketing agreement between theproducer and the cooperative will outline specifica-tions for plant varieties, fertilizer and agriculturalchemical applications, irrigation, or other production-related activities. By having some control over the pro-duction, harvesting, and handling of a crop, the coop-erative can minimize costly errors. Further, by havingmembers deliver produce to a central source for grad-ing, sorting, and sizing, the cooperative can developand maintain a standard pack that appeals to prospec-tive buyers. A cooperative pool that outlines andenforces strict quality standards discourages producer-members from delivering inferior quality produce.Establishing a reputation for quality and consistencygreatly enhances the cooperative’s ability to competein the marketplace.

Econom/es Of &&3/e: Frequently, individualgrowers lack sufficient physical volume to efficientlyoperate a grading or packing facility, a processingoperation, or distribution system. Marketing through acooperative pooling program lowers the per-unit costof most post-harvest activities because certainexpenses can be spread out over a greater volume ofproduct. Larger scale operations may also draw morefavorable prices when purchasing supplies ornegotiating harvesting, hauling, or othertransportation rates.

Most individual producers cannot economicallyjustify investing in state-of-the-art technology. Forexample, the cost of controlled atmosphere storage isprohibitive for an individual apple grower, but can beobtained when the investment cost is allocated amongproducer-members of a cooperative. Marketingthrough a cooperative pool may enable producers tobecome involved in certain value-added processingactivities.

Potential Barriers to Successful Pooling

Delayed Payments: By design, members ofa marketing pool do not receive full payment for theircrop until that pool is closed. Depending on the lengthof the pool and the size of the advance and progresspayments, some producers may encounter temporarycash-flow problems. However, pool managers investconsiderable time in establishing a base price andpayment schedule that is sufficient for most producers.

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LOSS of Individuality: Producersparticipating in a marketing pool must relinquishcontrol over the marketing decisions associated withtheir crop. Producers who enjoy negotiating deals,have good marketing skills, or enjoy taking risks mayfind this component of pooling restrictive. Given thedynamic nature of most produce markets, producersmay at times earn a higher price than the pool price byselling on an individual basis. But, by relinquishingindividual marketing decisions to the cooperative,marketing pools become financially beneficial toproducers over the long term.

L&?S F/eXibi//ty: Most pooling programsfocus on long-term versus short-term marketingstrategies. A cooperative having knowledge of thetiming, quantity, and quality of a crop will likelybenefit from the ability to negotiate early or long-termsales agreements with buyers. Although an earlycommitment will promote stable prices and productmovement, the association may no longer be able toreact to sudden market changes. However, the benefitsto producers from long-term market stability generallyoutweigh any sacrifice of short-term profiteering.

Manager-la/ Expertise: Cooperative poolingis an effective marketing method for manycommodities, but it can also be a complicated programto establish and maintain. A successful poolingprogram requires a knowledgeable and skilledmanagement team as well as the willingness of boththe association and the producer-members to investthe time and money necessary to develop an effectivemarketing plan. Clear communication between thecooperative and its members regarding the marketingphilosophy of the pool must be maintained. Some ofthe elements inherent with pooling such as long-termcommitments, delayed payment schedules, and capitalretains could lead to discontented members. Thecooperative must be ready to address the inevitableconflict between individual members and the long-term stability of the association’s marketing program.The key is a well-conceived cooperative membereducation program.

Marketing AgreementsFor an effective marketing program, the coopera-

tive needs to have long-term support and commitmentfrom the membership. Knowing it has a long-termcommitment from its members to deliver high-qualityproducts, the cooperative realizes a much stronger

sales and bargaining position in the marketplace. Thisimproved marketing position allows the cooperative toprovide a greater degree of market stability.

Consequently, the use of marketing agreementsor contracts becomes a critical component of any effec-tive pooling program. A marketing agreement is awritten, legal document between the cooperative andthe producer-member. The agreement states the rights,duties, and responsibilities of both parties regardingthe sale of produce through the cooperative. Growersagree to deliver all or part of their production to thecooperative. In turn, the cooperative agrees to sell themember’s produce for the best price possible and toreturn payment to the grower. Marketing agreementsare used to ensure that both the member and the coop-erative comply with their obligations.

A marketing agreement is a planning tool thatallows the cooperative to coordinate the activitiesinvolved in producing and marketing a crop. Controlover the quantity and timing of delivery enables thecooperative to precisely schedule processing or mar-keting operations. Further, control over productionand harvesting allows for more efficient use of packingand processing capacity which, in turn, generally low-ers operating costs.

The marketing agreement also provides a legalbasis for penalizing nonperformance. For example, arecurring problem for many marketing associations isthat producers abandon the cooperative during yearswhen production is short and prices are high. If thepercentage of members who bypass the cooperative ishigh enough, the cooperative may have difficultymeeting market commitments or covering operatingcosts. The agreement clearly states contractually thatmembers are expected to abide by terms and condi-tions set forth in the agreement and that disciplinarymeasures (i.e., penalties, such as liquidated damagesor expulsion from the association) will be takenagainst offending parties.

Some of the more common provisions containedin a marketing contract between the grower memberand the cooperative include:

l the amount of product a member must marketthrough the cooperative,

l acknowledgment of the grower-members oblig-ation to deliver to the cooperative and thecooperative’s obligation to market and/orprocess the crop,

l the length of time the contract is in force,l authorizing capital retains (equity capital),l defining the penalties for noncompliance,l quality and quantity standards, and

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l payment methods including a description ofpool operations.

Pooling IllustrationGiven the variety of commodities produced, their

use, and where they are produced, it is neither possiblenor practical to have one standard pooling policy forevery cooperative. Cooperative pooling programsmeet specific needs of producer-members. However, intheory, and in practice, cooperative pooling programswill share certain common elements, albeit to varyingdegrees. The following section will present a general-ized overview of a cooperative pooling program.

Poo/lng Po//cY: A cooperative’s poolingpolicy is typically outlined in the association’sgoverning documents. In general, the board ofdirectors establishes the pooling period(s) and the typeof pool (duration) appropriate for a particularcommodity. The board also establishes a measure forcrediting deliveries such as the number of units (boxes,bushels, etc.) or weight (physical volume).

In most cases, payment to members is based onthe number of units of like quality produce deliveredto the same pool, less all charges and expenses associ-ated with operating the pool. In the event of a naturaldisaster, the board may authorize closing a pool ofproduct already delivered and establish a new pool forthe remainder of the delivery season. An examplewould be a citrus marketing cooperative having to pre-maturely close a pool due to a major freeze.

Although pool accounting can become quite com-plex, it basically requires that a separate account beestablished for each commodity pool the associationoperates. Records indicate the amount of produce eachmember delivers to the pool. Direct and indirect costsassociated with operating the pool are allocated andthen collected from sale proceeds of that pool. Theboard establishes and approves the charges associatedwith operating the pool. Revenues from the sale ofproduct are credited to a pool as they are received bythe cooperative. After deducting assessments, net poolreturns are credited to each member’s account on thebasis of how many units they delivered to the pool.

Determining Market Value: One of themost important and sometimes difficult aspect ofoperating a commodity pool is determining the valueof the raw products delivered. Establishing a realisticraw product price, or economic value, is importantbecause the initial payments (advances) to growers areoften based on this estimate. Furthermore, if the raw

product is further processed or becomes a componentof a product mix, the cooperative needs to have anaccurate estimate of the raw product’s value relative tothe value of the final product. In this case, having anestimate of the raw product’s final value will enablethe cooperative to maintain an equitable paymentschedule in cases where there are significantdifferences in the quality of products delivered.

The calculation of an economic value for manyfruit and vegetable commodities has become increas-ingly difficult due to the rise in concentration amongbuyers. Establishing an accurate value for memberproduce is an integral component of the cooperative’ssales, pricing, inventory, and accounting programs.Mergers and consolidations among industry partici-pants, particularly in the processed products sector,have resulted in fewer buyers and transactions, and inmany cases, smaller cash markets. Consequently, reli-able market and price information may be scarce ornonexistent.

In cases where a cooperative handles a singlecommodity and no established raw product value (i.e.cash market) is available, proceeds to growers are cal-culated by subtracting marketing and operating costsfrom the gross revenue generated from selling mem-ber’s products. Under these circumstances, the cooper-ative’s costs are the determinant of the value of theraw product. This valuation is sufficient only as longas the value of the raw product is greater than, orequal to, any available alternative. If the cooperative’sprice was consistently lower than a competitor’s, pro-ducer-members may not remain loyal very long.

Consequently, using an established raw productvalue to compare performance relative to alternativemarkets is a common practice. When available, a cashmarket price is often used as the basis for measuring acooperative’s performance. For example, if the returnto growers marketing through the cooperative was$lO/unit, and the cash market price was known to be$9/unit, the cooperative would have returned 111 per-cent of market value (lo/9 x 100) or 11 percent morethan the alternative market. The ability to measureperformance against the market or a competitor ismost beneficial to the cooperative that consistentlyobtains a better-than-average return for its members.

Cooperative pools do not typically pay the entireraw product value to growers at the time of delivery,so having an established value at the time membersdeliver product enables the cooperative to determinean advance payment level that is consistent with theprevailing market conditions. The level of the advancepayment compared with the final price varies among

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cooperatives. Most try to make an advance paymentsufficiently large enough to help Rroducer-membersavoid cash-flow problems. The amount of the advancepayment is usually set by the board of directors. Thepayment can be either a fixed-dollar amount or a pre-determined percentage of the raw product value.There are a number of ways for the cooperative toestablish a raw product value.

If a cooperative has extensive experience with aparticular crop and market, and has maintaineddetailed records, it may rely on its own historical aver-age for setting the raw product price. An alternativewould be to use commodity exchange prices.

In many case the negotiated prices that resultfrom collective bargaining between producers andprocessors serve as the established market value. Inthe fruit and vegetable industry, a number of coopera-tive bargaining associations represent producer inter-ests during negotiations with processors. Bargainingnegotiations are conducted before the production sea-son begins. Typically, the negotiated contract willdefine the price level for various product grades inaddition to specifying any adjustments for quality-related factors or timing of delivery.

The negotiated price reflects the anticipated sup-ply and demand conditions as well as current invento-ries. When both parties negotiate in good faith, theirefforts generally result in an accurate and equitableraw product price. Consequently, a number of poolingcooperatives use this negotiated price as their base, ormarket value, when determining the level of initialpayments to members.

In markets characterized by the presence of adominant firm, the price it quotes often becomes theindustry price. The dominant firm announces a pricethat it is willing to pay at the beginning of the season,and given its status in the marketplace, the remainingfirms generally accept this price rather than enter apotentially costly bidding war. Although the dominantfirm’s price may be arrived at in less than competitivefashion, it may reflect what the market is willing topay for a particular commodity within the dominantfirm’s area of operation.

The commercial market value (CMV) refers to thebase price used to value commodities delivered byproducer-members. Many cooperatives appoint a com-mittee of either directors or producer-members todetermine the CMV. The commodity committeeattempts to establish a CMV competitive with pricespaid by other commercial processors handling similarcrops in the same production area. Frequently, theCMV is represented as a weighted average. If the

cooperative is handling multiple commodities, it ismost likely that it will establish a separate CMV foreach crop.

In practice, a cooperative using the CMV usuallyadvances 50 percent of the CMV when the raw productis delivered. An interim payment of about 25 percentwill be made some time after delivery, but before theend of the pooling season. The timing and size of theinterim payment will vary and will most likely berelated to the pool’s duration and the cooperative’s liq-uidity. A final payment is made when the pool isclosed or the fiscal year ends.

Determining Costs and Returns:Regardless of the type or duration of commodity poolbeing operated, a cooperative must develop anaccounting system that accurately allocates theexpenses associated with marketing a particular crop.The cooperative must record the direct and indirectcosts of operating the marketing pool and determine ifcosts should be allocated on a flat per-unit basis or inproportion to the crops value or volume. Directexpenses such as labor, materials, transportation,storage, and financing are assigned to each particularpool. Indirect, or overhead, costs typically includegeneral expenses, taxes, insurance, and administrativeexpenses and are similarly allocated. The methods ofdetermining and allocating costs will vary from onecooperative to another and will be heavily influencedby the nature of the commodity being delivered and itsintended final use.

sampie POOi Caicuiations: This exampleshows how a cooperative may operate a poolingprogram. In this case, deliveries of three appleproducers (A, B, and Cl will be used to illustrate howpool payments are calculated and distributed.

Each grower produces the same (one) variety ofapples which are then sorted into three separategrades. For this example, the highest quality produceis designated Grade 1. Apples not meeting that specifi-cation are designated either Grade 2 or Grade 3depending on the degree to which they differ from theGrade 1 standard. The cooperative operates a separatepool for each grade delivered by members eventhough only one commodity is being marketed.

Consequently, this case can be viewed as anexample of a multi-product pool because each grade ofapples will be earning proceeds independently. Thisexample also assumes that the cooperative will operatea seasonal pool, and that the entire crop will be sold

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during the current production season ,fi.e., no invento-ry is carried over to the following year).

Tables 1 and 2 show how the cooperative wouldaccount for raw product deliveries from members inaddition to how returns to growers would be calculat-ed. In this example, the cooperative has establishedseparate accounts for each producer and, after the pro-duce has been sorted and graded, recorded the appro-priate number of bushels of each particular gradedelivered. Next, the cooperative combines or poolsthe individual quantities of like-grade produce. In thiscase, the cooperative’s three commodity pools arecomprised of a total of 17,000 bushels, 14,000 bushels,and 13,000 bushels of Grades 1,2, and 3, respectively(Table 1).

In this example, member produce was marketed(sold) at an average price of !§8/bushel for Grade 1,$7/bushel for Grade 2, and $6/bushel for Grade 3.

Multiplying the average price received by the totalnumber of bushels of each particular grade deliveredyields the cooperative’s gross revenue from apple sales.

Historical data and pre-season evaluations ofmarket conditions by the cooperative’s commoditycommittee resulted in the establishment of raw prod-uct values (costs) of !&BO/bu. for Grade 1, !$4.55/bu.for Grade 2, and !§3.60/bu. for Grade 3 apples. As pre-viously noted, the value or cost of the raw product isan essential component of a pooling program and isfrequently used as the basis for making initial pay-ments to growers for the commodities delivered.

Additionally, the cooperative has determined theper bushel direct costs associated with the specificlabor, handling, and packaging for each grade. In thisexample, per bushel direct costs were established at $1for Grade 1, $0.90 for Grade 2, and $0.75 for Grade 3.Differences in the amount of direct costs being charged

Table I- Example of pool cakuiatlons

Raw Product Receipts From Members (bu.)

Grade 1 Grade 2 Grade 3 Total

Producer A 2,000 4,000 8,000 14,000Producer 6 9,000 3,000 1,000 13,000Producer C 6,000 7,000 4,000 17,000

Total 17,000 14,000 13,000 44,000

Cooperative Sales 17,000@$s

Gross Revenue $136,000

Cost/Value of Raw Product $31,600Per Unit $4.80Direct Costs (labor, packing, etc.) $17,000

Per Unit $1 .oo

Gross Margin $37,400Overhead and Administrative Costs $5,000Pool Proceeds $32,400

Per Unit $1.91

Return to Growers $114,000Per Unit $6.71Percent of Proceeds 140

14,000@$7

$98,000

$63,700

$4.55

$12,600

$0.90

$21,700

$5,000

$16,700

$1.19

$80,400

$5.74

126

13,000@6$78,000$46,800

33.60$9,750

$0.75$21,450

$5,000$16,450

$1.27$63,250

$4.87135

!$312,000$192,100

$39,350

$80,550$15,000$65,550

$257,650

Retain ( $0.2O/bu.) $3,400 $2,800 $2,600 $8,800

Cash DistributionPer Unit

$110,600$6.51

$77,600

$5.54

$60,65034.67

$248,850

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to the different grades of product reflect the additionalexpenses incurred in preparing higher grade fruit forsale. Subtracting the cost of the raw product anddirect costs from the gross revenue figure yields thegross margin from apple sales.

A fixed overhead and administrative cost of$5,000 is assessed to each of the three pools.Subtracting these cost from the gross revenue figureresults in the proceeds or profit earned by the pool. Inthis example, fruit in the Grade 1 pool earned $32,400($1.91/bu.), Grade 2 fruit earned $16,700 ($l.l9/bu.),and the Grade 3 pool earned $16,450 ($1.27/bu.).

Total returns to growers are calculated by addingpool proceeds and the value of the raw product. Table1 shows returns to growers to be $6.71/bu. for Grade 1fruit, $5.74/bu. for Grade 2, and !$4.87/bu. for Grade 3.A measure of how a cooperative pool participant faredcompared with the market can be determined bydividing the grower return by the value of the rawproduct. Again, this is a reasonable measure of perfor-mance because the value of the raw product shouldreflect what the cash market would have paid for theproduce. In this example, each of the three poolsreturned earnings above the cash market value.Cooperative members received returns that were 40,26, and 35 percent higher for Grade 1,2, and 3 fruit,respectively.

The final stage of the pools accounting process isdeducting retained earnings. Earnings retained fromgrower returns (profits) are used to finance the cooper-ative and ensure its ability to continue to function as aviable market outlet for member-growers. The cooper-ative’s retain policy will be outlined in the associa-tion’s governing documents. The amount of earningsretained by the cooperative is determined by the boardand will vary depending on the size and nature of thecooperative’s business . In this example, the coopera-tive retains SO.20 for each bushel of apples marketed.Subtracting the retain from the grower’s return resultsin the total cash distribution that will be made to thegrower for the product delivered.

Table 2 extends the current example by illustrat-ing a payment schedule the cooperative might use todistribute crop payments and pool earnings to grower-members. Again, individual grower accounts havebeen maintained to accurately record the volume ofeach particular grade delivered by each member.

A cooperative commodity pool typically usessome form of delayed schedule to allocate returns backto growers. Generally, producers receive an advancepayment at the time they deliver their produce to thecooperative. The advance payment is often a percentage

of the raw product value established by the cooperative.In this case, producers receive 50 percent of the rawproduct value for each particular grade they deliver.

As sales of product are completed and manage-ment can better assess market conditions, the coopera-tive generally authorizes an interim payment to pro-ducers. Size of the payment generally reflects thesuccess of sales. In this example, the cooperative paysthe remaining 50 percent of the raw product value.After all produce in the pool has been sold and allcosts have been accounted for and allocated, the poolis considered closed. The cooperative calculates pro-ceeds (profit) earned by each individual pool.

Each of the three pools in this example earnedpositive proceeds. After deducting $0.20/bu. forretained earnings, the cooperative can make a finalpayment to producers. In this example, producersreceived a final payment of $1.71/bu., $0.99/bt.r., and$l.O7/bu. for Grade 1,2, and 3 apples, respectively.

Although in this simplified example, all threepools yielded a profit, a pool could show a loss. Thatpotential reenforces the need for the cooperative toestablish an accurate raw product value. It becomes anintegral component of the pooling program used toaccount for a crop’s percentage (value) of the finishedproduct and to establish the grower payment schedule.Although the cooperative has issued an initial pay-ment at the time of delivery, it retains some discretionon the timing and amount of interim payments. In ayear when market prices do not meet pre-seasonexpectations, the cooperative’s marketing staff mayconsider this when determining the amount of the nextpayment to growers. Interim payment decisions mustconsider the cash-flow needs of the producer-memberas well as the cooperative. Consequently, it may be inthe best interests of both that no, or smaller, interimpayments be made.

Single Pool Versus Multiple Product PoolThe pooling and marketing of a single commodi-

ty is a relatively straight-forward operation. Althoughmany producers and cooperatives specialize in theproduction and marketing of one particular commodi-ty, many other associations handle a variety of differ-ent crops grown by producer-members.

There are obvious economic incentives (scaleeconomies, risk reduction, etc.) for a cooperative tomarket or process an array of crops. This is especiallytrue in California where it is quite common for a farm-ing operation to be producing several fruit and veg-etable crops. However, handling a broad product mix

8

Tab@ 2- ~rowef pSyNWnt schedule

Product Receipts From Members by Quantity (bushels) and Grade

Grade 1 Grade 2 Grade 3 Total

Producer A 2,000 4,000Producer B 9,000 3,000Producer C 8,000 7,000

Total 17,000 14,000

Payment Schedule by GW (per bushel)Advance Paymentinterim PaymentFinal Payment

Average Pool Price

Individual Member PaymentaProducer A Advance Payments

interim Payments

Final Payments

Producer BCapital RetainAdvance Payments

interim Payments

Final Payments

Producer CCapital RetainAdvance Payments

interim Payments

Final Payments

Capital Retain

$2.40 $2.30 $1.80

2.40 2.25 1.80

1.71 .99 1.07

$8.51 $5.54 $4.87

2,000@$2.40 + 4,000@$2.30 + 8,000@$1.80$4,800 + $9,200 + $14,4002,000@$2.40 + 4,000@$2.25 + 8,000@$1.80$4,800 + $9,000 + $14,4002,000@$1.71 + 4,000@$0.99 + 8,008@$1.0793,412 + 93,972 + $8,520

Total Cash Payments

14,000 Q 90.209,000@$2.40 + 3,000@$2.30 + 1 ,000@$1.80$21,800 + 98,900 + $1,8009,000@$2.40 + 3,000@$2.25 + 1 ,000@$1.80$21,800 + $8,750 + $1,8009,000@$1.71 + 3,000@$0.99 + 1 ,000@$1.07$15,354 + 92,979 + $1,085

Total Cash Payments

13,000 Q 80.208,000@$2.40 + 7,000@$2.30 + 4,000@$1.80$14,400 + $18,100 + $7,2008,000@$2.40 + 7,000@!$2.25 + 4,000@$1.80$14,400 + $15,750 + $7,2008,000@$1.71 + 7,000@$0.99 + 4,000@$1.07$10,238 + $8,951 + $4,280

Total Cash Payments

17,000 @ $0.20

8,000 14,0001,000 13,0004,000 17,000

13,000 44,000

$28,400

328,200

$15.904

$72,504

9 2,800

$30,300

$30,150

$19,398

$79,648

$ 2,800

$37,770

337,350

$21,447

$98,497

$3,400

9

raises the question as to whether the cooperativeshould operate a separate pool for each commodity ora pool for diverse products.

One primary benefit from handling a mix of com-modities is that it enables the cooperative to representa greater volume of product, thereby gaining greaterinfluence in the marketplace. Further, diversificationallows the cooperative to minimize the impacts ofcyclical or seasonal fluctuations in price or demand ina single crop. The increased physical volume likely toresult from marketing multiple crops may also lead tomore efficient use of plant facilities and lower per-unitoverhead costs which would be allocated among eithera greater number of producers or different crops.

The synergistic effects from marketing a broadermix of commodities enable the cooperative to offer itsmember-growers a more stable market for their pro-duce because pool proceeds are not limited to the per-formance of a single crop. Pooling multiple cropsenables commodities receiving more favorable returnsto support those confronting poor market conditions.This mutual support of commodities in a pool can ben-efit both the producer and cooperative.

In a multiple pool, each commodity is accountedfor separately and earns proceeds independently.Again, although only one commodity was considered,the example in Table 1 would be considered to be amultiple pool because each of the three grades ofapples earned proceeds independently. General over-head, sales, and administrative costs are shared amongeach commodity. However, direct costs for items suchas labor, processing, and packaging materials areassigned proportionately to each commodity. A multi-ple pool may be appropriate for a cooperative withmembers who produce widely diverse crops. Forexample, a highly seasonal and perishable specialitycommodity that requires specialized handling mayneed separable accounting, especially if the commodi-ty is also considered high risk/high return comparedwith other crops being marketed. A downside to oper-ating separate pools is that the benefits associated withmarket stability through mutual support are lost.

Critical to the success of this type of poolingarrangement will be the cooperative’s ability to accu-rately identify and assign overhead and direct costs toeach commodity. Further complicating the procedureare the potential challenges in identifying raw productvalue. Because variations in volume of a commoditydelivered, the value of finished products, and differ-ences in processing costs each affect-the raw productvalue, the process of valuing each individual commod-ity can become arbitrary. Determining these values

will be less of a challenge to the cooperative’s manage-ment if a cash market or other form of price discoveryexists for the commodity.

Regardless of which source of market informa-tion is used to value raw products, a well-defined anddocumented method for allocating both commodityvalues and costs is essential. Arbitrary assignment ofraw product values and costs must be avoided toensure that no real or perceived issues regarding equi-table treatment arise among pool participants.

In the single pool, commodities are accounted foras a whole and earn proceeds mutually versus inde-pendently in a multiple pool program. Just like themultiple pool example, general overhead, sales, andadministrative costs are shared among each commodi-ty marketed in the single pool structure. Direct costs,although accounted for on an individual crop basis,are aggregated for the group of commodities in thepool.

Pool proceeds are calculated by subtracting totaldirect costs, total overhead costs, and the total cost(value) of the raw products from the revenue generat-ed from the sale of finished products. Proceeds areallocated to grower accounts in proportion to the per-centage of raw product value. A common example of asingle pool would be vegetable producers deliveringcorn, green beans, peas, and carrots that will be com-bined to produce a vegetable blend. Instead of operat-ing four individual pools, it is more efficient for thecooperative to operate one pool and treat each individ-ual crop as an input in the production of the finalproduct.

One advantage of the single versus multiple poolis that difficulty in assigning costs or problems associ-ated with arbitrarily assigning costs are lessened.Further, the single pool allows both the cooperativeand member-grower to capitalize on the efficienciesfrom allocating market risk among multiple commodi-ties.

Table 3 presents a modification of the apple pro-ducer example in Table 1. All product volumes, marketprices, and costs are assumed to remain the same.Direct costs are also calculated and assigned in thesame manner. However, indirect costs are no longerassigned to individual pools but are deducted in totalfrom the gross margin on aggregated sales.

Proceeds are distributed based on the relativevalue of individual commodities in the pool. In thisexample, the value of Grade 1 apples represent 42.5 ofgross revenue ($312,000/$136,000) and Grades 2 and 3represent 33.1 ($312,000/$98,000) and 24.4($312,000/$78,000), respectively. Pool proceeds are cal-

10

Table 3- Example of single pool calculations

Grade 1

Raw Product Receipts From Members (bu.)

Grade 2 Grade 3 Total

Producer A 2,000 4 ,000 8,000 14,000

Producer B 9,000 3 ,000 1,000 13,000

Producer C 6,000 7 ,000 4,000 17,000

Total 17,000 14,000 13,000 44 ,000

Cooperative Sales

Gross Revenue

Cost/Value of Raw Product

Per Unit

Direct Costs (labor, packing, etc.)

Per Unit

Gross Margin

Overhead and Administrative Costs

Pool Proceeds

Return to Growers

Per Unit

Percent of Proceeds

17,000@$8

$136 ,000

$ 8 1 , 6 0 0

$4 .80

$ 1 7 , 0 0 0

$1 .oo

$ 3 7 , 4 0 0

$ 1 5 , 0 0 0

14,000@$7

$98 ,000

$63,700

$4.55

$12,600

$0.90

$21,700

13,000@$6

$78,000

$46,800

$3.60

$9,750

$0.75

$21,450

$312,000

$192,100

$ 3 9 , 3 5 0

$ 8 0 , 5 5 0

$109,459

$ 6 . 4 4

134

$85,397

$6.10

134

$62,794

$4.83

134

$ 6 5 , 5 5 0

$257,650

culated and allocated among each individual grade bymultiplying pool proceeds by the percentage value ofthe crop. In this example, a pool proceeds allocation of$1.64/bu. (e.g. ($65,550 x .425 I/17,000), $1.55/bu., and$1.23/bu. is made to Grade 1,2, and 3 apples, respec-tively. These results differ slightly from the multi-product pool example.

In the single pool case, Grade 1 and Grade 3 fruitearn $0.27/bu. and $O.O4/bu. less and Grade 2 applesearned !$0.36/bu. more. Because pool proceeds are cal-culated on aggregate rather than individual pool sales,the percent of proceeds relative to the value of the rawproduct is also affected. As with the multi-productcase, each crop in the single pool returned earningsabove the cash market value. However, because pro-ceeds are determined collectively rather than individu-ally, the average earnings for each of the three gradesis the same 34.

This result reflects a slight reduction in the per-centage return for Grade 1 and Grade 3 fruit and amoderate improvement in the percentage return forGrade 2 apples. This comparison also illustrates howcommodities marketed through a single pool can sup-port and complement each other. In this example,

although the average prices paid for Grade 1 andGrade 3 fruit were somewhat lower than they were inthe multi-product pool, there was an improvement inaverage price received for Grade 2 apples. Conse-quently, producers delivering Grade 2 apples benefit-ted from pooling their fruit with Grades 1 and 3.

It,is important to realize that this example onlyconsiders the marketing and pooling activities for agiven year. Over time it is most likely that each of thethree grades will experience cyclical fluctuations inprices received. Therefore, although Grade 1 andGrade 3 fruit yielded higher returns this year, the con-verse could also occur. Further, if this example werecarried out over a number of years, it is expected thatthe average pool would provide a more stable andconsistent return to the grower.

The Question of SubsidizingThe number of pools a cooperative may operate

can vary considerably. In the most simplistic case, thecooperative wouId operate a single pool for all prod-ucts. On the other hand, the cooperative may choose tooperate separate pools for each variety and/or gradeof product it receives.

11

For a cooperative handling multiple commoditiesor varieties, the effect of not operating separate poolsis an increase in the average number of products, aswell as greater diversity, in the pool or pools operated.Operating fewer, but broader, pools should reduceaccounting costs because there is no longer a need toseparate products or for allocating costs among a larg-er number of pools. Further, averaging the combinedreturns of a number of heterogenous products shouldreduce the yearly variation in grower payments.

One problem with operating a broad productpool is that the potential for some members to subsi-dize others is increased. Subsidization is possiblewhen commodities generating high net returns arecombined with products yielding lower returns andproducers of the higher valued products do not receiveproportionately higher payments. Consequently, pro-ducers who feel they are not receiving adequate com-pensation are likely to be less than enthusiastic aboutpooling to market their produce. Further, given thepotentially complex relationships between commodi-ties in a marketing pool, it can become increasinglydifficult to ensure that equitable payments are beingmade to all producers. Consequently, there is potentialfor dissatisfaction with the pooling program and theaverage price paid.

This situation can also lead to apathy amonggrowers who may feel that there is no incentive to pro-duce and deliver high-value or high-quality crops tothe cooperative. This particular issue is sometimescited as a drawback of a pooling operation. The chal-lenge to the cooperative is to operate a commoditypool that accurately values raw products according totheir future profitability.

Buccola, et al, addressed the issue of subsidiza-tion in their examination of flexible grower paymentformulas. The cooperative principle of service-at-costimplies that producer-members should receive thefinal product value of products delivered less any pro-cessing and handling costs. A cooperative can easilyapply the service-at-cost principle if it separates mem-ber products and maintains individual accounts.However, this is often a highly inefficient and costlymethod of accounting. Pooling can offer greater mar-keting flexibility and an increased ability to diversifyand reduce member income risk. The issue that certainproducts in a pool subsidize others arises from theargument that by returning an average price, the poolviolates the service-at-cost principle.

In their research, they examined alternative poolpayment formulae with an objective to address thesubsidy problem. The study reviewed the structure of

pool payments and alternative ways of valuing rawproducts in addition to outlining conditions underwhich the service-at-cost principle is or is not violated.Through simulations, the research tested several alter-native methods of determining per-unit returns: mov-ing average; exponential smoothing; econometricmodel; and raw product market price.

Results of the simulations indicated that weight-ing raw product deliveries with simple 3-year aver-ages of their previous returns resulted in lower meansubsidies and more equitable income allocation thanany of the other three methods. The simpler methods,moving averages and exponential smoothing, outper-formed the more complicated models as well as thestandard practice of weighting patronage by raw prod-uct market prices.

The research concluded that a product should,over a reasonable period of time, be paid its long-runcontribution to pool net returns. Further, any randomdeviations between payment and contribution must besmall enough to be acceptable. Recognizing that rawproduct weights act as relative forecasts of per unitreturns, if the quantity of products delivered areuncorrelated with per unit returns and all products perunit returns are biased in the same proportion, noproduct can subsidize another in the long run(Buccola).

Competitive market prices provide considerableinformation about future market prices and are fre-quently a good predictor of future net returns.Consequently, the raw product prices obtained in acompetitive market are frequently used as the basis forestablishing patronage weights. However, if a coopera-tive is operating in a market where trading is thin andinformation is either inconsistent or unavailable, esti-mates are likely to be unreliable and the cooperativemust evaluate alternative payment plans to ensureequitable treatment of members.

Cooperative ExamplesSeveral examples of pooling programs are cur-

rently being employed by several different fruit andvegetable cooperatives. This section illustrates how acooperative pooling program is structured in practice.These examples are not a comprehensive summary ofall existing pooling programs, but rather, present actu-al applications of many of the components of a poolingprogram previously discussed.

Ocean Sprsy Cranbetrles, Inc.: It isheadquartered in Lakeville-Middleboro, MA, andoccupies a leadership position in the cranberry

12

industry. Ocean Spray’s marketing of member productaccounts for about 80 to 85 percent ofthe NorthAmerican production of cranberries. The cooperativebuys product from members farming inMassachusetts, Wisconsin, New Jersey, Oregon,Washington, Florida, and Canada. The cooperative’sproduct line includes fresh cranberries, freshgrapefruit, processed products, juices, and dried fruit.Ocean Spray also operates several bottling plantsthroughout the United States.

This centralized cooperative organization forcranberry growers aids in efficient marketing, newproduct development, enhancing demand, and plan-ning the necessary production required to meet thatdemand in a way that is most advantageous to itsmembers. The cooperative provides numerous market-ing and processing alternatives for its members plusmany production-related services. Members share pestmanagement and water nutrient expertise provided bythe cooperative, as well as the use of harvesting con-tainers. Each member bears the shipping costs to thenearest receiving station, but remote shipping is oftensubsidized. Specific regional delivery requirementsand fruit standards are itemized in a grower code bookprovided annually.

Ocean Spray uses marketing contracts with mem-bers. Current marketing agreements are 3-year con-tracts. Production is carefully planned by the member-ship through the cooperative. All bogs are mappedand production is planned well into the future. Thegrower must communicate how delivery will be made,provide a reasonable crop estimate, and report anychanges in Ocean Spray contracted acreage everygrowing season. A pesticide plan and report must alsobe submitted by each grower for review and approvaleach season. Random samples are taken from everydelivery to the receiving station to test for excessivepesticide residues.

Ocean Spray operates a single commodity poolthat includes cranberries for both fresh and processeduse. The board determines how much fruit can be soldfresh and the number of barrels needed to meet thisprojection. There are very different cultural practicesbetween fresh and processed bogs, and fresh fruitmust possess a “keeping” quality. Typically, fresh salesaccount for 10 percent of the crop while processedproducts represent the remaining 90 percent.

Various premiums are offered to growers deliver-ing product that meets certain quality parameters,such as cranberries with high sugar solids that are suit-ed to blending for juices. Discounts are imposed forany trash, defective fruit, and poor color. Incentives

are provided for production and harvesting for thefresh market and for producing for export overseas.Fresh fruit production must be pm-qualified and meetan additional delivery qualification to earn a premium.

All revenues received from the sale of cranberriesthrough the cooperative are pooled. Member growersreceive advances upon crop delivery and final com-pensation shortly after the completion of harvest fromthis pool, based on the quantity and quality of thecranberries they have delivered to the cooperative (Itgenerally takes 18 months to pay out on a particularcrop. The fiscal year is September 1 to August 30.) Thecosts of the marketing services the cooperative pro-vides and the related operating expenses are also takenfrom this pool.

Each grower must obtain common shares of stockin the cooperative. The amount of stock that must beheld depends on the grower’s recent production 1eveIsand the pre-determined common stock equity quota.There is usually a period of time over which the grow-er can accumulate the necessary number of shares, butarrangements with the cooperative to acquire themvary.

This becomes a significant capital expense for thegrower because the shares must be held until termina-tion of the contract, when they are then redeemed ortransferred. Changes in the member firm’s legal struc-ture must be communicated to the cooperative.Transferral of ownership or leasing with controllinginterest in the cooperative must be approved by thecooperative. The agreements between the growers andthe cooperative are renewed every 3 years, but subjectto termination by an advanced written notice.

N8tionai Gr8pe C&opemtiveASsod8tiOn, inc. / Welch Foods inc.: Welch s isthe processing and marketing affiliated cooperative ofNational Grape Co-operative Association, Inc., whose1,500 patrons supply its principal raw products,Concord and Niagara grapes from more than 41,000acres of vineyards in Michigan, New York, Ohio,Pennsylvania, Washington, and Ontario, Canada.Welch’s manufactures and markets fruit juices,blended fruit juice and cocktails, frozen concentratedfruit juices and cocktails, jams, jellies, preserves andspreads, fruit juice bars and fruit-flavored carbonatedbeverages. The cooperative operates plants in Lawton,MI; North East, PA; Grandview, WA; Westfield, NY;and Kennewick, WA.

The cooperative operates two commodity poolsfor members grapes. Deliveries to the Eastern Pool

13

consist of Concord and Niagara grapes produced inNew York, Pennsylvania, Ohio, Michigan, andOntario, Canada. Western Pool deliveries come fromthe State of Washington. Both pools are operated on acrop-year basis, but due to the storability of theprocessed products manufactured, it may actuallytake up to 2 years for the pool to be closed.

Pool payments are structured to emphasizegrapes with higher sugar solids. The economic motiva-tion behind this premium is that deliveries of rawproducts with high sugar content enables the coopera-tive to produce sweetened fruit products without hav-ing to add other sweeteners. Below standard grapesmay either be rejected or received under a low solidsprogram, and at a lower value.

Prior to 1992, National Grape allocated net pro-ceeds from pooling operations on a direct accountingbasis. However, this method was found to produceincreasingly artificial results. Consequently, the coop-erative developed a new method of valuing memberproduce which measured the value of the coopera-tive’s crops relative to cash market purchases in eachlocal production area. These values are weighted bythe respective volumes of each processor to produce acommercial market value (CMV) for the cooperative’scrop in each area. Proceeds are distributed to each poolon a proportionate basis.

Since its inception of the CMV pool program,National Grape has evaluated and assessed whetherthis methodology resulted in improved allocationsbetween the Eastern and Western pools. The coopera-tive’s board of directors began evaluating viableoptions to resolve the allocation issue after a season inwhich the spread in proceeds between the two poolswas significantly larger than normal.

After evaluating the existing method of allocatingproceeds, and the impacts of various options, thecooperative formulated a new method that wouldimprove equitability for all members. The new systemis known as the modified CMV method (MCMV).Under this plan, net proceeds are distributed (andequity inputs required) on the same number of dollarsper ton in both pools. Producers share net proceedsabove CMV on an equal basis regardless of the pool towhich they deliver. Equity requirements are alsorequired on an equal, rather than proportional basis.

MCMV program advantages include: dampensthe volatility of the current CMV method; avoids thecomplications and disadvantages of the former directaccounting method; sends a strong value signal topatrons whenever production falls short of, or exceeds,

market requirements; pool results average out close toboth previous methods used; and is relatively easy toexplain and comprehend.

The change from CMV to MCMV is not dramatic.MCMV should prevent the spread from widening fur-ther when the difference between the CMV in the Eastand West is abnormally large and when Welch s is veryprofitable relative to CMV. Pool program changes willbe reflected in new membership and marketing agree-ments.

Citrus Marketing: Cooperatives havetraditionally played an important role in handling andmarketing fresh and processed citrus products.Further, the marketing method most often used by acitrus packinghouse is pooling. Although eachcooperative is unique in its application of pooling,there are enough similarities to offer a generalizedoverview of how a marketing pool is used in thisindustry.

These cooperatives receive and market memberproduce for either fresh or processed use. Given thenature of the product, the cooperative is typicallyactive in both markets. All like-variety products aregenerally combined in a seasonal pool. Citrus poolsare further separated by grade, variety, and use (freshor processed).

Appearance factors are important in citrus prod-ucts going to the fresh market, and the cooperativewill operate individual pools to reflect differences insize, color, or other physical characteristics. Fresh cit-rus is accounted for on a per-box basis. This unit ofmeasure is a legally defined term indicating the aver-age weight by variety in a given box. Physical appear-ance is not an issue for processed citrus products. Theindustry standard for valuing processed citrus ispounds of solids.

The variety of citrus produced and contracted tothe cooperative generally determines in which pool thegrower will participate (i.e., fresh or processed).However, once the crop has been harvested and deliv-ered to the cooperative for grading, the cooperativemakes the final determination on which pool a grow-er’s fruit will be assigned to. Produce not meetingfresh market standards is sent to processing outletswhere it is graded and allocated to a pool.

Most citrus cooperatives calculate returns tomember-growers on a per-box basis and use somevariation of a delayed payment schedule. Handling,packing, capital retains, and other pool operating costsare deducted from the grower s account.

14

Summary

This report defines and discusses the structuralaspects of commodity pooling programs as used byfruit and vegetable marketing cooperatives. Thehomogenous nature of many fruit and vegetable com-modities has made pooling a common method of mar-keting by agricultural cooperatives. The ability to com-mingle grower-members production gives anassociation considerable influence or control over thetiming, quantity, and quality of produce marketed. Theability to consistently deliver both product volumeand quality will assist a marketing association in estab-lishing itself as a reputable supplier which will in turnenhance its ability to cultivate working relationshipswith other market participants.

The benefits of cooperative pooling of produceinclude risk sharing, improved marketing, increasedmarket power, quality control, and economies of scale.Pooling can also be an effective way to insulate pro-ducers from periodic or seasonal price swings thatcommonly characterize the marketplace. To ensureequitable treatment, responsibilities and benefits areshared proportionally by all pool members.

Marketing agreements are a critical component ina cooperative pooling program because these contractsensure that the association has the long-term supportand commitment of its members. Marketing agree-ments provide the cooperative with information thatwill assist in coordinating supply with demand andprovide an improved sales and bargaining position inthe market.

The objective of a commodity pool is to consis-tently return an average price higher than thatreceived by non-pool producers. Aggregating produc-er-member output gives the cooperative access to alarge quantity of product and enhances the associa-tion’s competitive position in the market. Further, allo-cating operating costs among a greater volume ofproduct generally results in a lower per unit handlingcost and more efficient use of plant or packing shedcapacity. The cooperative pool also benefits from anexperienced management team that generally hasaccess to market information and other expertise notavailable to individual producers.

Successful cooperative pooling programs hingeon their ability to provide excellent service and resultswhile ensuring that all producer-members are treatedequitably. Successful pooling programs require com-mitment from members. It will be difficult to preserveloyalty if there is a perception that high-profit prod-

ucts being delivered to the pool are subsidizing lowermargin products. The cooperative must maintain har-mony between small and large producers. The lattermay be more demanding in what they expect from thecooperative.

A cooperative pooling program that rewards pro-ducers who meet or exceed minimum delivery stan-dards will realize the benefits of greater marketingflexibility while also assuring that all participants aretreated equitably All producer-members must under-stand the philosophy and mechanics of how theircooperative and its pooling program work.

No singular pooling plan applies universally toall fruit and vegetable marketing cooperatives. Toachieve the economic efficiencies and cost savingsassociated with pooled marketing, a program must betailored to meet the individual characteristics of thecommodity being produced, the membership of thecooperative, and the market being served. As the foodindustry continues to become increasingly competi-tive, concentrated, and global, the advantages of com-modity pooling become a more important aspect ofsuccessful produce marketing program.

15

References

Buccola, Steven T., James C. Cornelius, and Ron R.Meyersick, Pool Payment Equity in AgriculturalMarketing Cooperatives, Journal of AgriculturalCoupmtion, Volume 4,1989.

Dunn, John R. And Stanley K. Thurston, and WilliamS. Farris, Some Answers to Questions AboutCommodity Market Pools, United StatesDepartment of Agriculture, Economics, Statistics,and Cooperative Service, EC-509,198O.

Jacobs, James A., Cooperatives in the U.S. CitrusIndustry, United States Department ofAgriculture, Rural Business and CooperativeDevelopment Service, Research Report 137,1994.

Jacobs, James A., Fruit and Vegetable Cooperatives,United States Department of Agriculture,Agricultural Cooperative Service, CooperativeInformation Report 1, Section 13,199O (revised).

Reilley, John D., Cooperative Marketing Agreements,United States Department of Agriculture,Agricultural Cooperative Service, ResearchReport 106,1992.

Stewart, Bob and Michael A. Mazzocco, Investment inPro-Fat Cooperative, The Food and AgribusinessManagement Program, Case Study Series, CaseNo. 931102, University of Illinois.

16

U.S. Department of Agriculture

Rural Business-Cooperative ServiceStop 3260Washington, D.C. 20260-3260

Rural Business-Cooperative Service (RBS) provides research,management, and educational assistance to cooperatives tostrengthen the economic position of farmers and other ruralresidents. It works directly with cooperative leaders andFederal and State agencies to improve organization,leadership, and operation of cooperatives and to give guidanceto further development.

The cooperative segment of RBS (1) helps farmers and otherrural residents develop cooperatives to obtain supplies andservices at lower cost and to get better prices for products theysell; (21 advises rural residents on developing existingresources through cooperative action to enhance rural living;(3) helps cooperatives improve services and operatingefficiency; (41 informs members, directors, employees, and thepublic on how cooperatives work and benefit their membersand their communities; and (6) encourages internationalcooperative programs. RBS also publishes research andeducational materials and issues Rural Cooperatives magazine.

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discrimination in all its programs and activities on the basis ofrace, color, national origin, gender, religion, age, disability,political beliefs, sexual orientation, and marital or familystatus. (Not all prohibited bases apply to all programs.)Persons with disabilities who require alternative means forcommunication of program information (braille, large print,audiotape, etc.) should contact USDA’s TARGET Center at(202) 720-2600 (voice and TDD).

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