According to USDA statistics, there were 133 dairy cooperatives in the U.S. in 2012. These 133 cooperatives had 45,100 members. Based on this number, it is estimated that more than 80 percent of the nation’s dairy farmers market their milk through a cooperative.
These 45,100 dairy farmers depend upon a cooperative to find a market for their milk production and then pay them for that production. Dairy farmers put much confidence and responsibility in their cooperatives – and rightly so because the cooperative is the source of almost all of a dairy farm’s income.
Just as dairy farmers are knowledgeable of and active in their farm’s operations, dairy farmers also need to be knowledgeable about their cooperative. Such knowledge helps dairy farmers better understand their cooperative, measure its performance and help ensure the cooperative is best serving its dairy farmer owners.
As we start a new year, let me offer four resolutions for cooperative members to help them become more knowledgeable about their cooperative.
The first resolution is to understand the basic cooperative principles. Dairy cooperatives in the U.S. go back over two centuries. Historians report the first dairy cooperative started in 1810. It was a creamery located in Goshen, Connecticut.
Unfortunately, because cooperatives have a long history, it is easy to forget what a cooperative is all about. The USDA’s Rural Business Cooperative Service simplifies the cooperative principles into three words: ownership, control and beneficiary.
A cooperative is owned by the people who use it. A cooperative is controlled by the people who use it. The benefits generated by the cooperative go to its users on the basis of each member’s use.
A successful dairy cooperative adheres to these basic principles. If a cooperative strays from these principles, it is not looking out for the best interest of its members. Knowing the cooperative principles helps dairy farmers better understand the governance and operation of their cooperative and why cooperatives take certain actions.
In addition, speaking as a former cooperative CEO, it does not hurt to remind cooperative management that cooperatives are owned, controlled and supposed to benefit their members.
The second resolution is to understand the responsibilities of a cooperative director. Then see that those most qualified to carry out those responsibilities are elected to the board of directors.
Board of director responsibilities include establishing policy and seeing that policies are followed, hiring and monitoring the performance of the chief executive officer, adopting an annual financial budget, seeing that the cooperative remains financially sound, hiring an independent auditor, understanding the annual auditor’s report and planning for the future.
Good cooperative directors make decisions based on sound economics and what is good for the cooperative as a whole. They do not make decisions based on their individual farm or what is popular.
Qualified directors ask management pertinent and probing questions, and they professionally challenge – not rubber stamp – management recommendations. A good director comes prepared for board meetings by studying background material. Directors leave differences of opinion in the board room and support final decisions outside the board room.
As a member, do not let your only association with your director be the election process. If you have questions about your cooperative’s policy decisions, future direction, governance, etc., ask your director. It is a director’s responsibility to communicate with the dairy farmers they represent and be a link between you, the member, and management.
The third resolution on my list is to attend and participate in your cooperative’s membership meetings. Depending upon the size of and how your cooperative is organized, the cooperative may hold annual local, district or cooperative-wide membership meetings.
Every cooperative member needs to attend at least one of these meetings each year. Attending meetings needs to be more than just going to get a free meal or cap. Go with the goal of learning about the performance, policies, finances and direction of your cooperative. Make sure those topics are covered.
Do not hesitate to ask questions if you do not get the information you are seeking. Ask questions about the markets for your milk, how your pay price compares to a benchmark such as your area’s federal order blend price or what it costs to market your milk.
When I was a CEO, I participated in many of these meetings. The best meetings were those with many questions, and the poorest were those without questions. Again, it is your cooperative; do not be embarrassed to ask questions.
The fourth resolution is to study your cooperative’s annual audited financial report. If your cooperative does not automatically mail an audited financial statement to you, or distribute them at membership meetings, request a copy.
Yes, there are more enjoyable and pressing things to occupy your time than looking at financial reports, but remember the financial performance of your cooperative significantly influences the size of your milk check.
Review your cooperative’s finances just as your banker reviews your farm’s financial reports. In fact, you may find it helpful to have your banker or accountant assist you in the review.
As you review your cooperative’s annual financial report, let me share with you a few items to look for. A long-time dairy farmer and cooperative leader told me the most important part of the annual audited financial report is the first page, which is a letter from the cooperative’s independent auditor. This letter tells you if your cooperative received a “clean” opinion.
A clean opinion means the financial information presented is a fair representation of your cooperative’s financial position and is in accordance with generally accepted accounting principles. If your cooperative does not receive a “clean” opinion, you need to find out why.
Most dairy farmers look at their farm’s key financial indicators on a per-hundredweight (cwt) basis. Likewise, as you study your cooperative’s financial audit, you may find it helpful to convert key financial numbers to a value per cwt of milk.
Converting the numbers to per-cwt values makes the numbers easier to understand and relate to. This is especially helpful when most dairy cooperatives handle millions of dollars.
For example, assume your cooperative marketed five billion pounds of milk and reported a net income of $5 million during the past year. A $5 million net income is impressive, but on a cwt basis, it is only $0.10 per cwt.
Look at your cooperative’s debt, members’ equity, return on equity, cost of sales and operations on a cwt basis as well. Then ask yourself, am I comfortable with the numbers? If my dairy farm had similar financial performance, would I be pleased or displeased?
Compare the numbers to previous years to see if your cooperative is reducing or increasing debt, increasing the equity in the cooperative and the return on that equity, and whether it is costing more or less to operate the cooperative.
Again, your accountant or banker may be helpful in the analysis. Finally, take time to read the footnotes to the auditor’s report. The footnotes provide valuable insights into your cooperative. Remember the financial performance of your cooperative impacts your milk checks.
If dairy cooperative members follow through on these resolutions, they will better understand their cooperative and help ensure the cooperative is maximizing returns to members – the ones who own, control and benefit from the cooperative. PD
Calvin Covington is a retired dairy cooperative CEO and now does some farming, consulting, writing and public speaking.
Calvin Covington
Retired Dairy Co-op Executive
