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How Farmers’ Cooperatives 
 vise TERMINAL 
 FRUIT AUCTIONS 
 
 
 
 In New York, auction sales disposed 
 of 83 percent of the carlot un- 
 loads of citrus and the princtpal 
 deciduous fruits. 
 
 method of selling in terminal markets. Almost one-half of all 
 fruit and vegetables sold through the auctions, exclusive of 
 bananas, is handled for cooperatives. 
 
 The auctions themselves are important parts of the distribution 
 machinery in large markets. In 1937 their sales in 12 markets, exclu- 
 sive of bananas, totaled 102,128 cars with a value of more than $150,- 
 000,000. ‘These sales included about four-fifths of the citrus unloaded 
 at those markets, and 48 percent of the deciduous fruit. The auction 
 method of selling fruits and produce is thus well established, and in 
 New York City dates back as early as 1827. It is a method of sale 
 which in no way infers either forced sale, low prices, or infertor goods. 
 
 (rete of associations are important users of the auction 
 
 248102°—40 
 
Terminal auction companies are essentially service organizations, and 
 their use by the cooperatives is to gain the benefit of the services ren- 
 dered. One of their primary services is the extension of credit to 
 buyers, the auction companies being in a peculiarly strong position to 
 hold credit losses to a minimum. Their principal service, however, is 
 in providing a marketing medium which concentrates through one 
 channel a large percentage of the entire demand of their market areas, 
 and which furnishes a means of rapid and efficient selling from the 
 standpoints of both prices obtained and cost to the shipper. 
 
 Auctions Important as Distributing A genctes 
 
 Auctions are a magnet to the buying trade through their handling 
 of substantial proportions of the total market offerings of various com- 
 modities. The extent to which they offer this concentration of volume 
 is indicated by a recent study by the cooperative research and service 
 division of the Farm Credit Administration. The figures show that in 
 Boston auction sales accounted for 60 percent of the total carlot unloads 
 of citrus and the principal deciduous fruits. In Chicago the proportion 
 was 55 percent; in New York, 83 percent; and in Philadelphia, 80 per- 
 cent. The terminal auctions also served as important sources of supply 
 for out-of-town buyers, according to the same study. In three of the 
 larger auctions the proportion of total sales billed direct to out-of-town 
 customers 25 miles or more distant from the auction market ranged 
 from 4.5 to 18.5 percent. A similar figure for one of the smaller matr- 
 kets was over 30 percent. 
 
 Auctions are a magnet to 
 the buying trade through 
 their concentration of large 
 volume. 
 
 
 
 [2] 
 
 
 

 
 SS 
 » In New York carloads of commodities 
 
 
 
 are ferried from New Jersey rail termi- 
 nals to Manhattan Island piers. 
 
 The importance and value of the auctions as distributing agencies 
 can be judged further by the answering of three specific questions: 
 (1) What is the relative importance of the different classes of put- 
 chasers? (2) How many of the commodities sold at auction do indi- 
 vidual purchasers buy? (3) What amounts do they buy? 
 
 To the first question it may be said that the buyers are for the most 
 part jobbers, with whom 70 percent of the business of auction companies 
 is done. Auction billings direct to chain stores are about 10 percent 
 and to brokers who buy for others about 8 percent. The remaining 12 
 percent are divided among the motortruck jobbers, specialty fruit and 
 vegetable stores, independent retail stores, and others. 
 
 As to commodities purchased, the majority of auction buyers take 
 full advantage of the time and effort required to inspect auction offer- 
 ings and to attend sales by buying a number of items. During a 1-week 
 period, 60 percent of the dollar sales of 5 different commodities handled 
 by 10 auction companies were made to purchasers who bought all 5 
 commodities. These 5 commodities, in turn, made up over 91 percent 
 of the total sales of the auction companies during the week. 
 
 As for volume, most auction buyers do not purchase the equivalent 
 of a carload, if each buyer’s weekly purchases of important commodities 
 are considered separately. Each purchaser at auction, for the most 
 part, buys a limited number of sizes of oranges and apples to meet the 
 requirements of his particular trade. For example, according to the 
 study previously referred to, 65 percent of the buyers of California 
 Navel oranges each bought four sizes or less. From the standpoint of 
 the shipping organization, cooperative or private, it 1s apparent that the 
 
 [3] 
 
auction outlet makes it possible to reach a group of buyers who could 
 not be served directly if the sales unit were the carload, and to meet 
 their individual grade and size requirement. 
 
 Auctions Also Serve as Price Indicators 
 
 Aside from the services of the auctions in providing important mar- 
 keting channels, and in extending credit to buyers, they have a 
 generally recognized function in serving as price indicators. Because 
 of their importance from a volume standpoint and because of the pub- 
 licity given to results of sales at auction, auction prices are used by 
 sales managements of cooperative associations and private shippers as 
 a basis for price quotations in private-sale transactions in markets 
 where auctions are located and in markets both near to and at a distance 
 from auction centers. 
 
 On the basis of studies restricted to one important commodity— 
 California Valencia oranges—the conclusion was reached that monthly 
 and weekly auction prices were reasonably satisfactory measures of 
 price both at auction and at private sale. They are not, however, final 
 and complete indicators of the price at which total offerings of a com- 
 modity can be sold in all markets. Competent sales managements, in 
 determining price quotations in private-sale transactions, must take into 
 account variations in demand-and-supply conditions in individual mar- 
 kets, differentials in price for various brands, grades, and sizes, the 
 
 
 
 
 Samples are sorted and ar- 
 vanged in orderly “lines” 
 according to variety, brand 
 or grade, and size. 
 
 [4] 
 
 
 
 
 

 
 Rey 25/ Y//)/ Volume of the different 
 
 fruits and vegetables 
 handled varies accord- 
 ing to season. This 
 chart shows the percent- | 
 ages by months for 
 seven auction companies 
 in 1935. 
 
 
 
 OuN FEB MAR APR MAY JUNE JULY AUG SEPT OCT NOV vec 
 
 condition and quality of the commodity, and the effect at times upon 
 auction average prices of off-condition shipments diverted to auction 
 from other markets. 
 
 In using the auction, control of supplies to be sold at auction is nec- 
 essary if price fluctuations are to be held within reasonable limits. The 
 necessity for this control of supply in both auction and private-sale 
 markets is recognized and exercised by capable sales managers insofar 
 as practicable in order that violent price fluctuations may be avoided. 
 The necessity for control is particularly important in the case of auc- 
 tions because of the extent to which auction prices are employed as a 
 basis for price quotations in private-sale transactions. Sales manage- 
 ments charged with the responsibility of selling large volumes have 
 found it necessary in order to obtain the highest possible returns to 
 keep all markets, both auction and nonauction, on as nearly a uniform 
 price level as practicable. This policy implies that supplies will be 
 placed on the various markets in a manner which will result in the 
 maintenance of the same price level in all markets. Practical market- 
 ing considerations require at present that this procedure be followed 
 insofar as possible. 
 
 Successful Use Depends on Certain Requirements 
 
 As in any other method of marketing, the most successful use of the 
 auctions depends upon meeting certain requirements. Important re- 
 quirements for successful selling of a commodity at auction are uniform 
 grading and packing in standardized containers, regularity of offerings 
 during the shipping season, and an adequate supply of the commodity. 
 
 {5} 
 
Some shippers in position to meet these requirements have made exten- 
 sive use of terminal auctions. 
 
 Cooperatives and other shippers using the auction forward their prod- 
 ucts to their own representatives, known as receivers. These may be 
 salaried employees of the shipping organization or may be agents re- 
 tained on a commission or unit-charge basis. The shipper’s representa- 
 tive makes sales arrangements with the auction company and acts for ¢ 
 the shipper at the sale. 
 
 Goods usually arrive by rail at a warehouse owned by the railroad 
 company. In New York, carloads of commodities to be sold at auction 
 on Manhattan Island are ferried on car floats from the New Jersey rail 
 terminals to the piers where sale takes place. For commodities arriving 
 by boat, samples are taken and arranged for inspection on the piers 
 where rail receipts are unloaded. 
 
 Packages are sorted and arranged in orderly rows and tiers known 
 as ‘‘lines’” according to variety, brand or grade, and size. Samples are 
 opened for inspection by buyers. 
 
 Printed catalogs are prepared for each sale and are available to buyers 
 when they come to examine the auction offerings. These catalogs list 
 the receiver's name, variety of fruit, brands, individual lines, and number 
 of packages in each line. Each buyer notes in his catalog the lines in 
 which he is interested on the basis of his inspection, and carries it to the 
 auction room where the auctioneer uses a similar catalog as a program 
 for selling. 
 
 Fairness Maintained to Shippers and Buyers 
 
 Sale at auction does not imply a warranty that all of a single line is 
 the same as the open sample. Sale is on an “as is” basis. Buyers ordi- 
 narily may open other packages, but if they avail themselves of this 
 privilege the packages must be restored to their original condition after _ 
 inspection. Although there are occasional complaints concerning re- 
 ceivers who “dress samples” by removing decayed or otherwise unattrac- 
 tive fruit, it is the aim of the auction companies to prevent this practice. 
 It is discouraged by the active efforts of the auction company through 
 close supervision, and by the fact that buyers may offer lower prices for 
 fruit handled by the receivers known to engage in it. 
 
 
 
 [6] 
 
Selling of commodities is at open sale where each line goes to the 
 highest bidder. Selling is subject to definite regulations and practices 
 as to: minimum quantities. There are systematic and carefully worked 
 out rotations of the order in which offerings of the various receivers 
 are placed on sale. ‘There are limitations as to the division of a buyer’s 
 purchases with other buyers, and numerous regulations designed to 
 maintain competition between buyers and general fairness to shippers 
 and buyers. Selling proceeds at a rapid rate, necessary if large volumes 
 of products are to be moved fast enough to conserve buyers’ time and to 
 maintain their interest. 
 
 The usual auction selling charges range between 114 and 2 percent 
 of the sales value. There are usually additional charges by carriers or 
 auction companies for unloading and other physical handling charges 
 incurred during the movement of commodities through the auction shed. 
 
 Exclusive Use of Auctions a Question 
 
 The larger cooperative associations which market through terminal 
 auctions use for the most part no other method of sale at those markets. 
 There are, however, some exceptions because cooperative sales manage- 
 ments are not in agreement as to whether it is the better procedure to 
 restrict sales operations on a single market to a single method of sale. 
 
 One of the unanswered problems, therefore, is whether cooperatives 
 should sell at private sale to large-scale purchasers in markets where 
 
 
 
 
 
 
 
 Into the auction room the 
 buyers carry their catalogs in 
 which each has noted, from 
 his examinations of samples, 
 the particular lines in which 
 he is interested. 
 
 
 
 [7] 
 
ro 
 
 
 
 
 
 
 
 
 
 
 
 
 
 UNIVERSITY OF ii ii | 
 a 
 other buyers must obtain their supplies trom the same associations 
 through the auction or from a carlot buyer. There are several points 
 which have a bearing on this question. 
 
 The withdrawal of large-scale purchasers from the auctions probably 
 would have an undesirable effect upon the auctions as indicators of 
 price, as the adjustment of supplies to the reduced proportion of de- 
 mand at auction would be made more difficult. Furthermore, with 
 increased quantities moving at private sale, assembling of price infor- 
 mation by sellers would be increasingly difficult and the value of the 
 auction price as a basis for other prices would be materially reduced. 
 
 If increased quantities of any commodity now sold at auction are to 
 be diverted through private sale, sellers also must be prepared to assume 
 increased credit risks. 
 
 The trend of auction company ownership is toward trade control. 
 Cooperatives have not become owners of stock in auction companies, 
 and there are important reasons why cooperatives perhaps should not 
 embark on such a program. Management of jointly controlled enter- 
 prises in terminal markets would involve important and difficult prob- 
 lems of cooperative business administration; problems in the fields of 
 extending and supervising credit would be involved, and the extent to 
 which private or nonstockholding shippers would support a coopera- 
 tively owned or controlled auction would be a problem of first 
 significance. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 This leaflet is condensed from Bulletin 29, 
 “Terminal Fruit Auctions as Marketing Agen- 
 cies for Farmers’ Cooperatives,” by Kelsey B. 
 Gardner, principal agricultural economist. 
 Copies of this larger publication with more 
 detailed information may be obtained, while 
 available, from— 
 
 Information and Extension Division 
 Farm Credit Administration 
 
 
 
 United States Department of Agriculture 
 Washington, D. C. 
 
 
 
 L-9 U.S, GOVERNMENT PRINTING OFFICE: 1940 June 1940 
 
 [8] 
 

 
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 Petroleum products make up one- 
 third of the business of Indiana 
 farm supply cooperatives. 
 
 creasing number of their farm-supply items through their local 
 cooperatives. Although petroleum products account for about 
 one-third of the cooperative volume, the purchasing associations are 
 now equipped to meet the patrons’ needs for almost all of their produc- 
 tion requirements. 
 Aside from better meeting the farmers’ needs and demands for serv- 
 ice, this policy of handling a wider variety of supplies has had a second 
 ) important result. It has increased the average earnings of the coopera- 
 tives above what otherwise would have been possible. This is simply 
 another way of saying that the policy of expansion has enabled the 
 associations to counteract somewhat the declines in their gross margins 
 on petroleum products. 
 
 De recent years Indiana farmers have been buying an in- 
 
 248100°—40 {1} 
 
AS SOHN 
 Between 1934 and 1937 the average gross margin on petroleum 
 
 products declined from 26.4 to 22.2 cents per dollar of sales. The 
 average gross margin on general supplies increased from 13.7 to 14.2 
 percent. The greater volume of general supplies handled, however, 
 largely offset the effects of smaller margins realized on petroleum 
 products. 
 
 Smaller gross margins; of course, are a logical result of successful 
 cooperative effort. In order to meet the pace set by the cooperatives, & 
 private trade tends to reduce its retail prices nearer to actual costs. As 
 this occurs the cooperatives (operating on the same reduced margins 
 which they helped to bring about) often have less net income from 
 which to pay patronage dividends. 
 
 In Indiana almost all of the associations have earned lower average 
 gross margins on a larger total business volume in recent years than in 
 previous periods. A more important fact, however, is that they are 
 providing a much wider supply service to their patrons at ptices which 
 in part reflect the economies of cooperative methods of handling. 
 
 Range of Service Determined by Members 
 
 Today there are some 80-odd county farm-supply cooperatives in the 
 State. Although they have been built largely by efforts of farmer- 
 members of the Indiana Farm Bureau and its county units, each is sep- 
 arately incorporated and independent of any organization. Membership 
 is open to agricultural producers or associations of such producers, with 
 the requirement that each own one or more shares of stock. 
 
 In 1940 the associations 
 operated for the fst time 
 their plants for fertilizer 
 mixing and petroleum 
 
 refining. 
 
 
 
 [2] 
 

 
 Return this book on or before the 
 Latest Date stamped below. 
 
 
 
 
 
 
 
 
 
 he costs of 
 is in de- 
 These associ n almost 
 equal number | nembers 
 through the cr share of 
 stock. Thus, t lemands 
 of at least half | 
 In extending low the 
 desires of its ov nich are 
 made available | lities of 
 the Indiana Far; federa- 
 tion owned and of the 
 locals render mz cent of 
 the volume of erative 
 hatcheries and tl \ssOcia- 
 tions undertook ; ; estab- 
 lished by their st 
 Of the total | Hiemedae oducts 
 accounted for 31/2 peneenh, Win aueen nese wu auuuer ZU.6 percent, 
 
 and marketing sales 17.3 percent. Other supplies made up 31 percent 
 of sales, with the following individual percentages: 
 
 Percentage that sales 
 of each item were 
 
 Supply item: of total 1937 sales 
 Bertilizer ans cece o's o's + ote eerie «ee SS sce «ee Bis pci 8.4 
 Patra MACUIiNer ye. ve. « sre a\+ o.eaheie nema. « mus dew singe Bie eae eottn Shabaetete te bps 
 SECC ere ee Sethe oe: sacs so MMSE ehetens siete ane Rte ois atc sear scotia, © 4.6 
 Goal Peers Me oo 2 ocgcie ss aheteshere seen tnss she alee sem, eretatere ois 0 « 3.8 
 Bitslding SuUpplicsnMr cious << « 2+ odes oleh. « ROMER. ths © Sie a 2.8 
 ONCE sours crepe eharos versie oie eicla et slovemberptecmatenate'. shtetiete a's oie ae 6 oa b's' 2, 
 Muscéllaneotsen: on atc cttc.ctercc sccm wipe WTR ie nate) we secrete ey isTh ahelaian a ae (6 ehy) 
 
 [3] 
 
Between 1934 and 1937 the average gross margin on petroleum 
 products declined from 26.4 to 22.2 cents per dollar of sales. The 
 avetage gross margin on general supplies increased from 13.7 to 14.2 
 percent. The greater volume of general supplies handled, however, 
 largely offset the effects of smaller margins realized on petroleum 
 products. 
 
 Smaller gross margins; of course, are a logical result of successful 
 cooperative effort. In order to meet the pace set by the cooperatives, 
 private trade tends to reduce its retail prices nearer to actual costs. As 
 this occurs the cooperatives (operating on the same reduced margins 
 which they helped to bring about) often have less net income from 
 which to pay patronage dividends. 
 
 In Indiana almost all of the associations have earned lower average 
 gross margins on a larger total business volume in recent years than in 
 previous periods. A more important fact, however, is that they are 
 providing a much wider supply service to their patrons at ptices which 
 in part reflect the economies of cooperative methods of handling. 
 
 Range of Service Determined by Members 
 
 Today there are some 80-odd county farm-supply cooperatives in the 
 State. Although they have been built largely by efforts of farmer- 
 members of the Indiana Farm Bureau and its county units, each is sep- 
 arately incorporated and independent of any organization. Membership 
 is open to agricultural producers or associations of such producers, with 
 the requirement that each own one or more shares of stock. 
 
 In 1940 the associations 
 operated for the fst time 
 their plants for fertilizer 
 mixing and petroleum 
 
 refining. 
 
 mj ee nyse ROSS 
 
 iy ves f 
 fk EE i 
 G 5 “3 
 uo SS, 
 Cae f 7 
 
 
 
 {2} 
 
 C| 
 

 
 
 A high percentage of the costs of 
 petroleum associations is in de- 
 livery costs. 
 
 ¢ 
 
 These associations in 1937 had a membership of 60,000. An almost 
 equal number of patrons were in the process of becoming members 
 through the crediting of their refunds to the purchase of a share of 
 stock. Thus, the organizations’ activities reflect the needs and demands 
 of at least half of the 200,000 Indiana farmers. 
 
 In extending its supply services, each association seeks to follow the 
 desires of its own members. Many of the services are those which are 
 made available by the wholesale purchasing and processing facilities of 
 the Indiana Farm Bureau Cooperative Association, a state-wide federa- 
 tion owned and controlled by its member units. About a third of the 
 locals render marketing services which account for about 17 percent of 
 the volume of all associations. Other services include cooperative 
 hatcheries and the grinding and mixing of feeds. In 1940 the associa- 
 tions undertook fertilizer mixing and petroleum refining in plants estab- 
 lished by their state wholesale association. 
 
 Of the total business of $14,500,000 in 1937, petroleum products 
 accounted for 31.1 percent, while feed represented another 20.6 percent, 
 and marketing sales 17.3 percent. Other supplies made up 31 percent 
 of sales, with the following individual percentages: 
 
 Percentage that sales 
 of each item were 
 
 Supply item: of total 1937 sales 
 Bertilizer oo. as. stp ss sss «ERs ee le «eee es ee 8.4 
 Batis MACDINETY: 6 soso ses. oils «Meee eeints « louse areePn ea pire oth « chabetaegeeee 5.2 
 SECT 4 eta ene the ons Sue an OOM stius valerie nels ote) + aero smeaMess ¢ 4.6 
 Goal) Rs. PRR. ooo a Wo regnsete o surge tye, Cements antes aerate aca: « 3.8 
 Budding supplies hws «os elec tae 0 a's ee rete « «MEESTER s Tie 6 4, 6 00): 2.8 
 BODO | 5, his. cate Gaesruegs vo os ithe e Os. 5 REE R RS 6 MET E ata che olive oie. ooo a 
 Mscellaneci Sees cer ope cores ire ote te aces Ree east OSe en no ates ga eT! 
 
 [3] 
 
Ex pense and Volume Are Factors Considered 
 
 In determining the supplies which they handle and the extent of their 
 services, the county purchasing associations in Indiana weigh and con- 
 sider a number of factors. Two of these already have been mentioned: 
 the needs and desires of the patrons, and the gross margins which are 
 obtainable. Two other factors are also important: the expenses in 
 handling the items, and the volume of sales. 
 
 The expenses of doing a farm supply business vary to some extent 
 with the kinds of commodities handled. Associations whose principal 
 business is in petroleum products which are delivered directly to the 
 farms necessarily have a much higher cost for delivery service than those 
 which handle a large proportion of general supplies which farmers 
 generally haul home themselves. 
 
 When the associations began operating they distributed mainly sup- 
 plies such as fertilizer, twine, and fencing, for which there was a known 
 demand. Selling and servicing expenses consequently were low. With 
 growth of a wider variety of supply services—including commodities 
 such as machinery and equipment and building supplies—a larger ex- 
 pense overhead is usually necessary in order to build sales volume and 
 to provide the kind of selling service required by more competitive lines. 
 
 Many of these competitive supplies, therefore, can be justified as 
 special services only if farmers provide the cooperatives with sufficient 
 volume of business to produce a net income from the activity. A recog- 
 nized principle of merchandising is that increased volume of sales con- 
 tributes to increased net returns per dollar of sales provided past oper- 
 
 One avenue of growth is 
 expansion in volume of 
 sales in supplies which 
 already are handled coop- 
 eratively. 
 
 
 
 [4] 
 
Supplies should be limited to those 
 which the patron can obtain at a 
 saving through cooperative pur- 
 chasing. 
 
 
 
 
 ating efficiency is maintained. In the interest of keeping their associa- 
 tions on the most efficient expense basis, therefore, Indiana farmers 
 have an obligation to give them their full patronage in the commodities 
 and services which have been initiated at request of members. 
 
 Both volume and expenses have a direct relationship to the earnings 
 of the cooperative and the savings it is therefore able to accomplish for 
 its members. It should be emphasized again, however, that its earnings 
 are also affected by the general gross margins which are in effect on 
 each particular item; and that to the extent that high retail prices are 
 generally reduced, the gross margins earned by the cooperatives also 
 decline. 
 
 Two Distinct Avenues for Future Growth 
 
 The recent growth of the purchasing associations, and their expansion 
 in the point of services rendered, is shown by comparative figures for 
 1934 and 1937. These figures show that the average volume of sales 
 by 80 representative cooperatives, including their sale of farm products, 
 increased about 89 percent in this 3-year period. They also show that 
 
 Average sales per | Percentage of 
 
 al sal iati 
 Total sales association total sales 
 
 1934 1937 1934 1937 1934 | 1937 
 Petroleum supplies. . its... 2e05- $2,977,875 | $4,488,484 | $37,223 | $54,738 | 36.4 | 31.1 
 General farm supplies!,.. os 4.0 3,788,356 | 7,458,097 | 47,355 | 90,952 | 46.2] 51.6 
 Farm products marketed......... 1,427,120 }) 2,503,982: 1.) 175839 y) -305536.1,17.4 |..17.3 
 Totals) a? at. 8,193,351 | 14,450,563 | 102,417 | 176,226 | 100.0 | 100.0 
 
the sales of general supplies other than petroleum products increased 
 faster than either the petroleum business or the marketing of farm 
 supplies. 
 
 Even with the commendable growth in their volume of sales, the 
 associations do not handle more than 20 to 25 percent of Indiana farm 
 purchases of such basic requirements as fertilizer, petroleum supplies, 
 and feed. For the wider range of commodities bought by farmers, 
 such as implements and tractors, fencing, feeders, sprays and spray 
 equipment, seed, twine, building supplies, and coal, the cooperatives 
 do not handle more than 10 to 15 percent of total purchases. It is prob- 
 able that the $12,000,000 spent cooperatively for farm supplies in 
 Indiana in 1937 represented not more than 26 percent of all farm supply 
 purchases. 
 
 It is obvious therefore that each association has two avenues for con- 
 tinued growth: the expansion of its volume of sales in supplies already 
 handled, and the addition to its line of other commodities. Before 
 increasing the number of supplies handled there are three questions 
 which deserve consideration by the members and directors, each of 
 which has a direct bearing on the matter of gross margins to the asso- 
 ciation and the savings to the members. 
 
 First, how efficiently and completely has the association been able to 
 develop sales in the commodity fields already entered? Attention 
 should be given to developing density of sales in all sections of the coun- 
 ties in both number of patrons served and number of farm supplies sold. 
 Since associations are already located over most of the State, intensifying 
 of sales efforts in the counties offers the associations their greatest oppor- 
 tunity for growth. 
 
 A second question is how well are the employees equipped to provide 
 effective service in the new fields? For example, efficient business serv- 
 ice in farm machinery usually requires a small beginning with special- 
 ized training of employees in the problems of these commodities. The 
 character of the employees of a cooperative association is vital to its 
 successful operation. Although some of the cooperatives have accom- 
 plished more than others in training their employees in cooperative 
 principles and in acceptable methods of meeting customers and com- 
 pleting sales transactions, there is still much opportunity for improving 
 their efficiency in these respects. On the whole, the county associa- 
 tions have employed young rural people with some previous business 
 
 [6] 
 
training and experience. However, the county associations may still 
 expect marked gains in their service to farmers when their employees, 
 especially those engaged in sales and distribution work, have more 
 complete knowledge of commodities handled and effective methods of 
 presenting cooperative opportunities to patrons. 
 
 The third question is whether the association is in a position to 
 finance new commodity departments. Here it would be well to empha- 
 size that cooperatives should enter new supply fields advisedly, and only 
 when they have enough capital to provide the basic financing of the 
 undertaking. 
 
 The Member’s Interest in His Cooperative 
 
 As for the individual member of a farm supply cooperative, his prin- 
 cipal interest is likely to be in the services which his organization pro- 
 vides him. His chief responsibility in this direction is in helping to 
 maintain an adequate volume of business. 
 
 The services which he demands should be only those he is willing to 
 support. They should be confined to the commodities which he and 
 his fellow members can obtain at a saving through cooperative pur- 
 chasing. They should include only those items which the association 
 can handle in sufficient quantity and at low enough cost to assure a 
 gross margin earning. 
 
 The services which the member demands should be limited to those 
 which make for efficient operation. They should exclude activities 
 
 
 
 Other supplies usually require a larger 
 overhead expense to build sales volume 
 and provide the selling service necessary 
 to meet competition. 
 
 {7} 
 

 
 
 
 
 
 UNIVERSITY OF Wi | 
 UT 
 which add excessively to the costs of doing business. They should not 
 include the extensive granting of credit, because farmers do not get 
 their supplies at the lowest cost when credit expenses must be added. 
 
 The interest and attention that a farmer gives to his purchasing asso- 
 ciation is properly the same kind of interest that he gives to his farming 
 or to any of his other business enterprises. It is a personal interest 
 because he personally benefits from its success. He has a dollars-and- 
 cents reason for knowing “what makes it click,’ and for helping it 
 operate effectively. 
 
 That is why, in the end, the expanding of farm supply purchasing is 
 up to the members. It gets back to a consideration of the several fac- 
 tors which have been mentioned, and a business-like recognition of the 
 problems involved in producing maximum savings for patrons. 
 
 
 
 
 
 
 
 This leaflet is condensed from Bulletin 38, 
 “Cooperative Purchasing by Indiana Farmers,” 
 by Gerald M. Francis, associate agricultural 
 economist. Copies of this larger publication 
 with more detailed information may be ob- 
 
 tained, while available, from— 
 
 Information and Extension Division 
 Farm Credit Administration 
 United States Department of Agriculture 
 Washington, D. C. 
 
 
 
 L-7 June 1940 
 
 {8} 
 
ae iy) 
 Prone ig Or ot 
 
 5 Cincinnati 
 
 Cooperative Terminal 
 
 LIVESTOCK MARKETING 
 
 ~erraren 
 
 
 
 Cooperative ship pers have “their 
 own men” on the job. 
 
 WENTY thousand stockmen—approximately one out of every 
 three who sell livestock at Cincinnati—market through the Pro- 
 ducers Cooperative Commission Association. The reasons they 
 use this sales agency are many and varied, but among them is a desire 
 for three services usual in terminal livestock cooperatives: 
 1. Able and experienced salesmen employed to serve the shippers’ 
 interests. 
 2. Savings in marketing costs. 
 3. A cooperative set-up through which stockmen have been and may 
 be an important influence in improving marketing conditions. 
 E The first point—that of securing expert services in marketing, and 
 3 having “their own men” do the job—is one of the principal reasons for 
 farmers forming cooperatives. Savings in costs are a second objective. 
 The third point—that of improving marketing conditions—is one of 
 
the broadest bases for cooperative activity. What has been done and 
 what may be done in this direction measures the scope of the coopera- 
 tive possibilities, and its relative degree of success. 
 
 Cooperative Formed to Meet Definite Needs 
 
 When Cincinnati Producers was organized in 1925 stockmen saw 
 definite needs for a cooperative. Marketing costs were rising, sales 
 services were unsatisfactory, and market practices in many instances 
 appeared to be unfair and discriminatory. There had been a boost in 
 freight rates, and a generally unhappy situation had been climaxed by 
 a serious decline in livestock prices. 
 
 To tackle the problems which were involved called for organized 
 effort. Through an organization, stockmen could more effectively 
 present their case for a reduction in transportation charges, and they 
 were confident they could improve sales services and cut marketing costs 
 by operating their own associations. Many producers believed the matr- 
 keting information they recetved was inaccurate and that they were 
 being kept in the dark relative to true market conditions. Some felt 
 that the existing sales agencies were not operated in the producers’ 
 interests. The answer was to go into business for themselves. 
 
 Thus from the start the Cincinnati group has directed its efforts 
 toward doing a good sales job for its patrons, and at the same time 
 improving conditions for stockmen as a whole. The association pio- 
 neered many changes on the market. | 
 
 There was the matter, for example, of the unsatisfactory market for 
 veal calves. Speculators were active and had things much their own 
 
 
 
 Each producer's livestock is 
 handled separately and sold 
 individually. 
 
 [2] 
 
») 
 
 
 
 More than 90 percent of all live- 
 stock is delivered in Cincinnati by 
 truck. | 
 
 way. Prices were erratic and fluctuated as much as $3 to $4 a hundred 
 pounds during 1 day, and were often lower than at nearby markets. 
 The association met the situation by developing local and eastern order- 
 buying outlets, and calf prices have in recent years compared favorably 
 with those in other sections. 
 
 Somewhat similar was the hog marketing situation at Dayton where, 
 prior to 1935, prices ranged from 35 to 50 cents lower than Cincinnati. 
 A branch of the association was established, and quotations subsequently 
 have been more in line with those in other markets. Receipts also have 
 been materially increased since producers’ confidence in the market has 
 been restored. | 
 
 Accomplishments such as these—in fact any general improvements 
 brought about by any cooperative association—reflect to the benefit of 
 all the producers on the market, whether patrons of the organization 
 or not. No single agency can regularly expect to obtain prices con- 
 sistently higher than any other agency on the market for livestock of 
 similar grade. Once market prices are established all agencies sell at 
 substantially the same price. 
 
 This merely emphasizes the fact that one of the most valuable func- 
 tions of a cooperative is in setting the pace for the market. The coop- 
 erative is a tool which producers may use to correct unsatisfactory 
 situations, or to change methods and procedures to meet the changing 
 conditions of the times. The success of the cooperative in doing these 
 jobs depends upon the backing, energy and enthusiasm of its members 
 
 and its personnel. 
 
 {3} 
 
Marketing Changes Result From Joint Effort 
 
 Cooperative livestock producers have brought about, through their 
 united efforts, a good many changes in livestock marketing. They 
 probably will assist in creating many more changes in the future—par- 
 ticularly in the direction of meeting adverse factors as they arise. Pro- 
 ducers have tested and proven the effectiveness of cooperation, and as 
 they come to agree upon desirable changes, they have their organizations 
 to use toward those ends. 
 
 One of the goals which has been suggested for cooperative attention 
 is a program under which livestock will be quoted and sold on the basis 
 of recognized grades and weights. As it is now, livestock may be 
 closely sorted, or it may be sold on the basis of a very liberal sort. 
 Grades are flexible and may be shifted up and down from week to week 
 and season to season to more or less meet the variations in market 
 demand. ‘This lack of constant and fixed grades is felt by some to be an 
 undermining factor in terminal marketing, and also a weak link in the 
 effectiveness of cooperative marketing. 
 
 Another situation which holds some hope of cooperative solution is 
 the unorganized and unregulated business arising from livestock truck- 
 ing. Desirable as trucking may be to an individual producer, the 
 development of this form of transportation has had a back-wash of 
 loose and unsound business methods, cut-throat competition, and a 
 costly turn-over among truckmen. Organization of local truck trans- 
 portation facilities, however, offers prospect of economies in operation; 
 
 
 
 Smaller but more fre- 
 quent consignments 
 25 a current marketing 
 trend. 
 
 [4] 
 
y) 
 
 
 
 
 
 
 
 
 
 SAVINGS, PATRONAGE DIVIDEND AND RESERVE RECORD 1939 
 
 EAS OER S| 
 P| mo cn | | 
 (aI tien imeem) 
 Wiwararaes 16.f0| 5&8\ 420) 1.68 
 | > | bz] | 2220] 7.77| 555] 2.22 
 ia 5.29 
 
 15.10 B77 eee 
 ae 
 
 Record is kept of each shipper’s savings, reserves, 
 and patronage dividends. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 SZ 
 
 
 
 
 
 and the formation of local cooperative trucking units should insure 
 tegular dependable service at reasonable hauling rates to all producers. 
 
 Whether livestock cooperatives move in this direction, or in some 
 other direction, depends in the end upon what the members want. 
 Veteran cooperators have seen their earlier goals won and maintained, 
 but new days bring new goals and new directions for cooperative effort. 
 
 Patrons Have Stake in their Own Enterprise 
 
 Cincinnati Producers charges for its sales services the same commis- 
 sion as other agencies on the market—a schedule approved by the United 
 States Department of Agriculture and amounting to about 2 percent of 
 the gross sales proceeds. From this income the association meets all 
 expenses, establishes reserves, and pays patronage dividends which 
 represent to the shipper a saving in marketing cost. In 14 years patron- 
 age dividends have averaged more than 25 percent of total yearly com- 
 missions, and have totaled more than half a million dollars. 
 
 In addition to his patronage dividend, every farmer patronizing 
 Cincinnati Producers has a further stake in the business in the form of 
 a reserve credit set up on the books to his individual account. These 
 reserves represent cash which is accumulated, from the income over 
 expenses, and which is set aside to assure the financial strength and 
 stability of the organization. They now amount to nearly $200,000, 
 and the reserves which were retained in the earlier years have now been 
 returned to the members to whom they were credited. Under this 
 “revolving plan” of financing the present patrons contribute a reserve 
 each year, which may be paid back to them in a subsequent year. 
 
 Many a patron of Producers perhaps has failed to realize the part 
 he has played in building up the cooperative, and the savings he has 
 gained—because the association has never followed the practice of 
 
 [5] 
 
mailing statements showing the individual’s volume of shipments and 
 his share in savings, reserves, and patronage dividends. He may there- 
 fore fail to appreciate the ownership and responsibility which he shares. 
 
 The association’s field service work is of course designed to keep 
 patrons informed on this and other cooperative affairs. At the same 
 time this work has necessarily been spread over a wide territory—and 
 in common with most cooperatives, Cincinnati Producers has not 
 exhausted the full possibilities of a broad, definite, and clearly defined 
 informational program. The need for fuller information on the part 
 of cooperative members and patrons is an almost universal need of all 
 cooperatives. 
 
 In this connection the utilization of local groups and the organization 
 of marketing tours points a direction by which cooperatives can accom- 
 plish the double purpose of informing farmers on the cooperative pro- 
 gram, and aiding producers in better supplying the market demands. 
 
 Local meetings afford opportunities for producers to talk over mar- 
 keting problems and determine courses of action. They furnish impor- 
 tant contacts between producer members and their association, and are 
 frequently the impetus for starting the ball rolling on jobs which can be 
 accomplished only through cooperation. 
 
 The object of market tours is to give producers a better acquaintance 
 with marketing conditions. By getting a first-hand picture of demand 
 requirements, selling methods, trading policies, and weighing practices, 
 they are better able to gage their production and shipping to net them- 
 selves the best returns. Through grading demonstrations they are able 
 to spot the desirable and undesirable animal characteristics from the 
 
 Grading demonstra- 
 tions acquaint farmers 
 with the grades of live- 
 stock the markets want 
 or do not want. 
 
 
 
 LO] 
 
)) 
 
 standpoint of market value, and to learn what livestock will sell to best 
 advantage. Finally, they gain a better idea of how their cooperative 
 operates. 
 
 Patrons Represent Community Cross-Section 
 
 Included among the members of Cincinnati Producers are cattlemen, 
 dairymen, hogmen, and sheepmen. ‘They are a representative cross 
 section of the rank and file of farmers in southwestern Ohio, south- 
 eastern Indiana, north central Kentucky, and as far away as Illinois on 
 the west and Tennessee on the south. Some are large operators feeding 
 several cars of cattle and raising hundreds of head of hogs and lambs 
 a year. Others are extremely small producers, living on the edge of 
 towns, farming only a few acres, and raising only five or six hogs and a 
 veal calf a year. 
 
 Numerically the smaller producers predominate among the associa- 
 tions’s 20,000 patrons. Among the smaller producers are most of the 
 “in-and-outers’-—the farmers who may consign to the cooperative one 
 year and to another agency the next. The backbone of the organization 
 is comprised of the 45 percent of the membership that furnishes 74 per- 
 cent of the volume. Among them are the larger producers who ship 
 through the cooperative year in and year out—who probably have more 
 at stake in their livestock production and are keenly aware of the value 
 and potential importance of a cooperative set-up. 
 
 This again points a direction for the concentration of association 
 activities in the matter of membership contacts and information. The 
 needs and desires of the smaller shippers are essentially the same as 
 those of the larger shippers, but since the latter have most at stake they 
 are perhaps in better position to appraise the results and formulate the 
 objectives of the cooperative’s services. 
 
 Membership zs Not Restrictive 
 
 Membership in Cincinnati Producers is open to all producers. There 
 is no membership fee and no contract which obligates members to com- 
 pulsory patronage. Members are free to ship to the association or not 
 as they choose. 
 
 All livestock sold is received on consignment and each consignment 
 is sold on its merits. Risks involved in market fluctuation are stood by 
 the producer. 
 
 17] 
 

 
 
 
 
 
 MN na 
 
 The association is governed by a board of nine AEDS elected by 
 members in the respective districts for terms of 3 years. Directors 
 receive no salary but are paid a per diem plus actual expenses incurred 
 in attending meetings. Among the sound business principles adhered 
 to in the conduct of the cooperative’s affairs is a rule providing a roll-call 
 vote on all motions carrying an appropriation of funds; a provision that 
 no director shall serve as manager, salesman, or employee of the asso- 
 ciation; and a provision against speculation of any kind in the associa- . 
 tion’s business. 
 
 Service is Chief Claim to Patronage 
 
 In common with cooperatives generally, Cincinnati Producers prin- 
 cipal claim to patronage lies in the quality of the sales service it renders 
 members and patrons. The theory is that if the cooperative delivers 
 a superior sales service the producer will use it. If it fails to do a satis- 
 factory job, it has little claim to membership support. On this basis it 
 has sold some $100,000,000 worth of livestock. 
 
 Aside from sales service, however, cooperators get several ‘‘plus 
 values” from their organization. They receive, individually, whatever 
 savings are made possible by cooperative selling. They share with their 
 fellow members in the equity they help build in a farmer-owned busi- 
 ness. And they divide, with all the producers, the benefits that are 
 gained by cooperative effort in improved marketing conditions. 
 
 
 
 This leaflet is condensed from Bulletin 34, 
 
 “Cooperative Marketing of Livestock at Cin- 
 cinnati,” by H. H. Hulbert, senior agricultural 
 economist. Copies of this larger publication 
 with more detailed information may be 
 
 obtained, while available, from— 
 
 Information and Extension Division 
 Farm Credit Administration 
 
 United States Department of Agriculture 
 Washington, D. C. 
 
 
 
 
 
 
 
 L-1 GPO ‘May 1940 
 
 [8] 
 
B34 
 ungpak 
 
 no 
 PoLsfic Northwest 
 
 
 
 Cooperative Posstbilities in 
 ? IMPROVING APPLE 
 SALES 
 
 eek 
 revo SA hs 
 
 
 
 Retailers hold a key position in the move- 
 ment of apples into consumption. 
 
 HE WAY in which a product is merchandised is one of several 
 
 factors which affects its consumption. An energetic program 
 
 of sales promotion can counteract to a considerable extent some 
 a the unfavorable influences tending to retard consumer buying. 
 
 Sales promotion in its broadest sense is any effort directed toward a 
 sale. It may be an extensive advertising campaign, or it may simply 
 involve the manner in which merchandise is displayed. It may be 
 nothing more than personal solicitation by a sales clerk. Sales promo- 
 tion may thus call for a considerable expenditure, or it-may cost rela- 
 
 ) tively little. The extent to which it can be used most profitably is a 
 ~ question closely related to the marketing of almost every product. 
 
 In the cooperative marketing of apples the matter of sales promotion 
 also raises the questions “by whom?” and “how?”. Some basis for 
 answering these questions is contained in a recent study of retail outlets 
 
 248101°—40 
 
for apples and other fruits in New York City including all the large 
 chain-store systems and 1,790 independent retail dealers. 
 
 Trade Gives Apples But Little Sales Effort 
 
 The three markets, Los Angeles, Chicago, and New York, unloaded 
 
 in 1938-39 some 5,600 cars of Washington and Oregon apples, or 18.5 
 percent of the shipments from the two States. This compares with over 
 8,700 cars or 23.8 percent of the 1931-32 shipments. The channel 
 by which most of the apples move into consumption in these markets is 
 through brokers, carlot buyers and job-lot buyers, and thence to retail 
 
 stores, restaurants, and other outlets. It is these handlers, therefore, 
 who ate now depended upon for any direct sales effort in selling apples. 
 
 As the study discloses, the wholesale and jobber firms handle a va- 
 riety of commodities and therefore do not give special attention to any 
 one commodity. Their services have been, and probably must con- 
 tinue to be, primarily mechanical and confined chiefly to getting their 
 respective share of whatever. business comes along. To put it another 
 way, their activities are mainly in competing with each other. They 
 attempt to have on hand such kinds and quantities of apples as are 
 readily asked for by their customers, but there has been little or no 
 effort in trying to develop new or more ample outlets. If supplies 
 accumulate and there is need of greater sales volume, competitive 
 price cutting is usually resorted to in order to move stocks. Demand 
 is left to take care of itself. 
 
 In New York the push cart or wagon 
 huckster who handles apples sells 
 more of them than any other frutt. 
 
 
 
 
 [2] 
 
The wholesalers’ service 
 1s largely confined to hav- 
 ing on hand the kinds 
 and quantities of apples 
 that are readily called for 
 by the retailers. 
 
 
 
 Further along the distributive channel, the study showed that re- 
 tailers generally contribute no special sales effort. Retailers, as would 
 be expected, are primarily concerned with learning and satisfying ex- 
 isting consumer desires in hundreds of foods. They are interested only 
 slightly, if at all, in promoting the sale of merchandise which their 
 customers have not already decided to buy or readily consider buying. 
 Their energies are pointed in the direction of handling those things that 
 have a good consumer demand. When it comes to deciding what foods 
 to have in stock, they are influenced primarily (1) by their own sales 
 experience and (2) by what their competitors are doing. It is in this 
 direction that their profits lie. 
 
 Looking at it from the viewpoint of the retailer, his attitude is en- 
 titely logical. If he happens to be operating an independent grocery 
 store in New York he will stock between 400 and 800 individual food 
 items. The delicatessens will average about 800, while fruit and vege- 
 table stands will stock about 60 items. Such large numbers of com- 
 modities, sold for the most part in small units, seriously restrict the 
 amount of personal attention a retailer can profitably devote to an 
 individual item. Apple growers therefore cannot expect the retailer 
 to be familiar with the virtues of their particular fruit, or to give apples 
 any special sales attention on his own initiative. 
 
 Retailers Can Be Induced To Promote Sales 
 
 There are certain conditions, however, under which retailers are gen- 
 erally willing to expend a somewhat greater sales effort, and thereby 
 
 [3] 
 
contribute toward increasing sales. The first of these conditions is an 
 attractive gross margin or ‘‘profit.” 
 
 It is an often-repeated theory among growers and shippers that one 
 of the stumbling blocks to increased apple sales is a too-wide margin 
 taken by retailers between their cost price and their selling price. The 
 New York survey furnished some facts concerning this question. For 
 example, it showed that there apparently is a direct relationship be- 
 tween more profitable margins and higher apple sales. This relation- 
 ship held generally true in fruit and vegetable stores, in grocery stores, 
 and with push-cart or wagon hucksters. 3 
 
 In other words, the economic interests of apple growers in gross retail 
 margins would seem to require, for one thing, that such margins be re- 
 munerative enough to encourage retailers to handle their apples and 
 make them available to consumers. The dealers’ interest in apples ob- 
 viously is influenced by whether they are an item which is financially 
 interesting. If they are, there exists an incentive for sales effort. 
 
 Another incentive for sales effort is sales help. It is a matter of com- 
 mon observation that when dealers consider a commodity reasonably 
 profitable, they will “push” that commodity if they are given sales helps 
 to do so. It follows that if retailers and their clerks are to become 
 enthusiastic and well-informed apple salesmen, it is important that 
 some interested group prepare attractive sales programs and display 
 material, and induce retailers to use them. 
 
 Jobbers and wholesalers, as has been pointed out, both have wide 
 lines of produce to merchandise. They cannot be expected to initiate 
 
 Family income is an important factor determin- 
 ing the consumption of fruit, but sales-promo- 
 tion activities also have an effect. 
 
 
 
 | ; 
 j 
 
 [4] 
 
Care in growing, harvesting, pack- 
 ing, and handling is essential to 
 minimize spoilage—and anticipated 
 spoilage may cut down the retailers’ 
 orders. 
 
 
 
 
 << 
 
 such a sales effort on a single product, and particularly not upon a 
 single brand. If the task is to be done it probably will have to be con- 
 ceived and carried out by groups of growers through cooperative organi- 
 zation. The aim and direction must be primarily at the consumers’ 
 main source of supplies—the retailer. In the final analysis, it is what 
 the retailer does that largely determines the volume of apple sales. 
 What the retailer does, in turn, is affected by his gross margin and the 
 amount of assistance he is given in sales promotion efforts. 
 
 Other Factors Also Affect Volume of Sales 
 
 What the dealer does in sales promotion has a good deal to do with 
 the volume of apples he sells, but there are other factors which also have 
 a bearing. One of these is price. Price is made up, in part, by the 
 retailer's margin. Thus it is that while the retailer's margin must be 
 large enough to encourage him to handle apples, it must also be small 
 enough to permit prices which will move the necessary volume in com- 
 petition with other items. 
 
 The margins which will meet these two conditions differ among 
 retailers. How wide the margins must be to encourage dealers to 
 handle apples depends in part on ease of selling, value per sales unit, 
 credit and delivery, the comparative margins on other items, and the 
 spoilage rate. 
 
 Spoilage, for example, seems an unavoidable phase of the fruit and 
 vegetable business. Consequently, the retailing of such produce is 
 
 15) 
 
more exacting and hazardous than the retailing of staples. The rela- 
 tive extent of spoilage or waste which the retailer normally incurs in 
 handling a given fruit may affect his merchandising of such fruit, as well 
 as his profits. Anticipated spoilage may determine whether or not a 
 retailer stocks a fruit at all, how he selects the fruit, and how he 
 prices it. 
 
 Care in growing, harvesting, packaging, packing, and handling, up 
 to the time the retailer takes delivery, is essential to minimize spoilage. 
 Retailers cannot improve the condition of the fruit after they get it. 
 They can merely try to keep their own spoilage from being excessive as 
 compared with other retailers by exercising care in selecting and han- 
 dling the fruit, combined with a rapid turn-over. 
 
 Keeping Apples in Stock Is Important Point 
 
 Aside from sales promotion and price, some of the other factors 
 which influence apple sales include consumer likes and dislikes, con- 
 sumer purchasing power, and the period of time during which apples 
 are kept in stock. The effects of these other factors, it will be noted, 
 may be modified by sales promotion. 
 
 Thus it is that consumer likes and dislikes have in many instances 
 been influenced by advertising and sales promotion. Even limited 
 consumer purchasing power may adjust itself, to some extent, to the 
 purchase of a commodity it is persuaded to buy. 
 
 The period of time during which a commodity is kept in stock is also 
 important in affecting total volume of sales. Certain fruits are at a 
 distinct disadvantage because they have relatively short seasons. The 
 housewife can hardly be expected to know when the season for a certain 
 fruit begins each year, and a fruit may be on the market several weeks 
 before many consumers are aware of the fact, unless retailers in their 
 neighborhood are handling that particular fruit. : 
 
 It is also evident that the longer the season a given fruit has, the 
 mote likely it is to become a permanent part of the family diet and to 
 establish a regular demand. It follows, therefore, that annual sales 
 of some fruits may be low because they are not available throughout 
 the year, or because their season is too short to interest many retailers 
 in pushing them to any appreciable extent. 
 
 The survey previously referred to showed a wide variation in the 
 number of weeks each fruit was kept in stock by different stores. In 
 
 [6] 
 
the case of fruit and vegetable stands, 96 percent had oranges, 84 per- 
 cent bananas, and 71 percent had grapefruit on sale every week of the 
 year. On the other hand, only 13 percent had western apples, and 
 less than half had eastern apples on sale every week in the year. 
 
 How much the consumption of apples can be increased by extending 
 the period during which the leading retail outlets keep them in stock 
 can be determined only by actual experiment. It is obvious, however, 
 that it is easier to form the habit of buying a given fruit if it is constantly 
 available, as oranges seem to have been, rather than on hand irregu- 
 larly as were both eastern and western apples. It seems likely that 
 favorable results might accrue from efforts on the part of the growers’ 
 cooperative associations and others to induce a larger number of retailers 
 to stock apples for more weeks in the year. 
 
 Effective Sales Promotion Must be Keyed 
 
 Effective sales promotion requires a program that is keyed to all of 
 the other factors which affect sales. Since each large market differs 
 in important respects, no one plan will fit them all. Furthermore the 
 tonnage available for sale, the marketable quality of the tonnage, and 
 
 The volume of Washing- 
 ton and Oregon apples 
 going to Los Angeles, 
 Chicago, and New York 
 has dropped in recent 
 years. 
 
 
 
 
 
 ES ION 
 oo s\n 13 
 
 [7] 
 

 
 
 
 
 
 Ti i i 
 
 the retail and other outlets that can be aorer most advantageously 
 are determining factors as to what a cooperative can do for the advan- 
 tage of its members in this direction. 
 
 It is obvious, also, that supplies must be coordinated with promotional 
 plans if the latter are to be effective. And finally, it is apparent that 
 satisfactory sales promotional results in large cities are possible of 
 achievement only if direct contact is established with the outlets that 
 serve consumers, such as retailers and restaurants. 
 
 Duplication of sales efforts and competitive price cutting by shippers 
 are important problems because they directly affect grower returns. 
 They are also important because they seriously interfere with the sales 
 promotional work which is needed. Further, they seriously interfere 
 with getting the best possible results from promotional work that is 
 done. Cooperative officials working closely together should be able 
 to meet these situations as far as the cooperatives themselves are 
 CONCErcdsnmees 
 
 Sales promotion comes Sect in the list of cooperative activities. 
 It is a type of effort that can be applied in small, moderate, or large 
 doses—to whatever degree proves practical and profitable. It should 
 be recognized, however, that no amount of sales promotion on the part 
 of cooperatives or others can eliminate for the growers the low prices 
 reflected by duplication of sales efforts and competitive price cutting 
 by shippers. 
 
 
 
 
 
 This leaflet is condensed from Miscella- 
 neous Report 19, “Some Facts Concerning 
 Competition Between Apples and Other 
 Fruits at Retail, New York City”, by Marius 
 P. Rasmussen and Ford A. Quitslund. Copies 
 of this larger publication with more detailed 
 information may be obtained while available 
 from— 
 
 Information and Extension Division 
 
 Farm Credit Administration 
 United States Department of Agriculture 
 Washington, D. C. 
 
 
 
 L-8 U.S. GOVERNMENT PRINTING OFFICE: 1940 June 1940 
 
 [8] 
 
 C 
 
Volume as a key 
 
 to Successful 
 J COOPERATIVE GINS 
 
 
 
 “Talking it over” is usually a pre- 
 liminary step to cooperative suc- 
 CeSS. 
 
 LTHOUGH a cooperative cotton gin usually charges the same 
 ginning rate as other gins in the neighborhood, the cooperative 
 expects to save for its members a part of this charge. If the 
 
 initial ginning rate itself were the only thing to be considered, there 
 would be little difference between the cooperative gin and other gins. 
 In the cooperative, however, the initial ginning rate is not the impor- 
 tant thing. This is true even when the cooperative rate is higher. The 
 important point, under any circumstances, is the amount of money which 
 . the cooperative saves the member. If it can gin his cotton at a lower 
 a operating cost than the “‘going rate,” the difference is a saving which 
 belongs to the grower. | 
 “But if the cooperative can save its members money,” it may be asked, 
 “why doesn’t it charge a lower ginning rate to begin with?” 
 
There are several reasons why this usually is not done. 
 
 In the first place there is no way of knowing until the end of the sea- 
 son just how much its per-bale expense will be. No gin operator can 
 guess this figure in advance. The practice, therefore, is to set a ginning 
 rate which will cover the probable expense and—in the case of pri- 
 vately owned commercial gins—leave some money over for profits to 
 the owner. In the case of a cooperative gin, any money left over above 
 the operating costs also belongs to the owners. The distinction is that 
 in the cooperative the farmers themselves are the owners, and the earn- 
 ings represent the savings they gain from operating their own gin— 
 savings in proportion to the amount of business handled for each one. 
 
 These savings may be returned to the members as cash patronage div- 
 idends or retained by the cooperative to increase its capital. The sav- 
 ings which are not paid in cash should be distributed in shares of stocks, 
 other certificates, individual book credits, or by some other recognition 
 of individual equities. 
 
 Efficiency Is the Measure of Value 
 
 A cooperative gin is similar to any other piece of machinery that a 
 farmer may own for his own use. _If it is used efficiently it should save 
 him money. If it is not used efficiently it will run up his expense. 
 
 The ginning rate which he pays, of course, has nothing whatever to 
 do with whether the gin 1s operated efficiently or inefficiently. In other 
 words, it has nothing to do with whether the gin saves him money or 
 runs up his costs. No matter what rate he pays, he gains all the savings 
 
 
 
 
 In a cooperative gin the farmers 
 themselves are the owners. If 
 used efficiently it should save 
 them money. 
 
 [2] 
 
“All machinery is on an irresistable march 
 to the junk heap, and its progress, while 
 it may be delayed, cannot be prevented by 
 repairs.’—Hat field. 
 
 
 
 
 
 from efficient operations—and he will fail to get the savings if the sav- 
 ings are not earned. The same is true with respect to the handling of 
 bagging and ties, cottonseed, or other products. 
 
 The matter of efficient operations, therefore, is the most important 
 concern of the cooperative gin member. Efficient operations, in turn, 
 depend largely upon the volume of business which a gin handles. 
 
 Nearly everyone has some knowledge of the effect of volume on the 
 per-bale expense of running a cotton gin. They know that the bigger 
 the volume, the lower the cost per bale—at least up to a certain point. 
 Not everyone, however, has definite information on the differences in 
 costs at different volumes. These differences are clearly shown in the 
 table on page 4 which is made up from 669 annual expense records 
 from 231 gin associations in Oklahoma and Texas during one or more of 
 four seasons. 
 
 These figures emphasize the importance of volume for the coopera- 
 tive gin—if it is going to accomplish its purpose of saving money for 
 its patrons. Cooperatives that averaged 500 bales had a per-bale cost 
 of $11.21. Those that ginned an average of 1,000 bales had a cost of 
 $6.66; those that ginned 1,500 bales, $5.15. Additional volume low- 
 ered the costs still farther until the average cost for gins with a volume 
 of 6,000 bales was down to $2.86 per bale. 
 
 It will be noticed, also, that while the cost per bale declines as the 
 volume increases, the amount of the decline grows less and less. The 
 gin with only a 500 bale volume, for example, could cut its costs accord- 
 ing to this table by about $4.55 per bale by adding another 500 bales to 
 
 [3] 
 
Average ginning expense per bale of 5-80 gin plants by volume ginned. Odfla- 
 homa and Texas Cooperative Gins Seasons 1932-33 to 1935-36 
 
 
 
 
 
 
 
 
 
 AVERAGE TOTAL EXPENSES PER— 
 
 
 
 INNUMBER OF BALES 
 
 
 
 BSED 100 Pounds of Seed Cotton Bale oh epee of 
 (in cents) (in dollars ) . 
 DOO)... Ge Laing 62.3 1B bead! 4 
 L000 828 Bi eae 37.0 6.66 
 1,500 i 5274 ae 28.6 Bysi Es 
 2,000% a:2te eee 24.4 4,39 
 233005 Sakegh 7 eee 2429 3.94 
 3,000: s,s 20.2 3.64 
 45 O0s1 5 1p eae ee ee 19.0 3.42 
 A OOOTE Soares. 18.1 2,20 
 A500 wie nee de 17.4 3.13 
 5;000 beets he Weer a: 16.8 MAO2 
 DFR) 8 Ue tic ily Ah See we 16.3 2292 
 6:000 9) ACRE 15:9 2.86 
 
 
 
 
 
 NoTE.—Depreciation on machinery and equipment is included as an item of expense. 
 Interest on borrowed capital, dividends on invested capital, loss on bad debts, and income 
 taxes are not included as expenses. 
 
 its volume. When it came to adding still another 500 bales, the addi- 
 tional saving would be $1.51 per bale. 
 
 On the other hand, according to the figures, the cooperative with a 
 5,500 bale volume gains a saving of only 7 cents a bale by increas- 
 ing its volume to 6,000 bales. It is obvious that when no appreciable 
 
 One. of the member's chief interests 
 is to see that his gin obtains sufficient 
 volume to assure savings. 
 
 
 
 [4] 
 
> jen fa 
 
 EXPENSES 
 Dollars 
 
 
 
 per Bale 
 
 ihe) 
 
 
 
 : Cost per bale grows 
 
 é ie less as volume is in- 
 creased, until at the 
 higher volumes the 
 costs tend to level off. 
 
 
 
 500 1000 1500 2000 2500 3000 3500 4000 aie! 5000 5500 6000 
 BALES GINNED PER 5-80 PLANT 
 
 decline in per-bale costs results from adding more volume, the coopera- 
 tive has all the volume it needs. The most efficient volume for a five- 
 stand plant appears to be somewhere between 4,000 and 5,000 bales. 
 
 Ginning Rates Should Be Above Costs 
 
 Even though the cost of ginning depends largely on volume and has 
 nothing to do with the rate paid for ginning, it is possible that a coop- 
 erative gin may charge an initial rate which is below its cost. 
 
 The table of figures shows, for example, that the gin with a volume 
 of 1,500 bales has an average cost of 28.6 cents per hundredweight. 
 If this gin’s rate were 25 cents a hundred pounds, its charge would be 
 3.6 cents per 100 pounds of seed cotton, or about 65 cents per bale less 
 than its cost. Similarly, at a 30 cent per hundred rate the 1,000-bale 
 gin with a cost of 37 cents would lack 7 cents per 100 pounds of seed 
 cotton, or about $1.25 a bale of collecting enough to cover its costs. 
 
 In a case of this sort the cooperative would be in the red on its gin- 
 ning operation. Its owners, who are the farmer-members, would either 
 have to make up the difference in cash or their equity in their plant 3 
 would be reduced just that much. This is just another way of saying 
 that the ginning rate itself is not the important thing—because if the 
 ginning rate is higher than the costs, the members receive this difference 
 and if the ginning rate is lower than costs, they must make up the: 
 difference. 
 
 As for the gin itself, the object is not simply to collect enough in 
 ginning charges to equal its cost. Its object should be to get the per- 
 bale cost of operating down as low as possible consistent with a good 
 
 [5] 
 
job of ginning. As indicated by the chart, a five-stand plant should 
 have a minimum of 2,500 bales to operate at comparatively low cost. 
 
 With a smaller three- or four-stand plant it is of course not necessary 
 to have as much cotton to operate the plant at maximum efficiency, and 
 with a double plant it is necessary to have more. In other words it will 
 cost somewhat less per bale to gin 2,500 bales in a three- or four-stand 
 plant than in a five-stand plant, and somewhat more to gin the same 
 volume in a double plant. Any plant, large or small, operates at lower 
 per-unit cost when it is handling its full capacity. 
 
 When the same volume of cotton is to be ginned, the per-bale cost 
 tends to vary with the number of stands and saws in the plant. The 
 number of bales which a plant of any size can gin in a given period is 
 a measure of its capacity. The capacity of a gin is largely determined 
 by the number of gin stands and saws per stand. 
 
 Benefits Not Confined to Savings 
 
 Benefits from a cooperative gin are by no means confined to the direct 
 savings which it earns for its patrons. Improved ginning services which 
 it helps to bring about may be equally important to the community. 
 
 A cotton producer is interested in the net value of the lint and the 
 seed above the cost of ginning. If the existing ginning facilities in a 
 community are such that the value of the lint is reduced by improper 
 ginning, a well-equipped cooperatively owned gin plant may pay sub- 
 stantial returns in quality of service, even though its rates are higher 
 than those of other gins. Apart from that, a cooperative gin may set 
 the pace for better services through all the gins in its locality. 
 
 
 
 
 A member's investment should be 
 somewhat in. proportion to the 
 number of bales he gins. 
 
 [6] 
 
For this reason the benefits of a cooperative cannot be measured on a 
 temporary basis. After a cooperative gin is established, consideration 
 should be given to the ginning conditions that might exist in its absence. 
 Competing gins may for a time charge ginning rates that are below cost 
 or pay excess prices for cottonseed and cotton. The purpose of such 
 practices may be an attempt to force the cooperative to do likewise, or 
 to attract members from the cooperative. In either case, if the coop- 
 erative fails, there is likely to be a reestablishment of charges and prices 
 that are profitable to the commercial gins. 
 
 The Member’s Interest In Hi7s Cooperative 
 
 From what has been said it is obvious that one of the member's chief 
 interests and responsibilities in his cooperative is to see that it has 
 sufficient volume to enable it to operate at a saving. A second point 
 is to see that it is adequately financed. 
 
 In the matter of increasing volume the solution is additional members. 
 In any cooperative that is operating below the capacity of its plant, every 
 member owes it to his own best interests to make himself a membership 
 committee of one. At the same time, and in the same connection, a 
 member may sometimes do his cooperative a favor by fighting against 
 enlarging the plant or buying an additional plant, unless the volume at 
 hand is considerably larger than the existing plant’s normal capacity. 
 
 In financing the gin the amount of capital furnished by each member 
 should be somewhat in proportion to the number of bales he gins. 
 Although a cooperative usually can borrow some of the money to finance 
 its plant and operations, practically all of the capital eventually should 
 be contributed by the members. 7 
 
 The “revolving” plan of financing is gaining in popularity with coop- 
 erative gins as well as with other kinds of cooperatives. Under this 
 plan some additional capital is obtained from the active members each 
 year. Two methods are used to obtain additional capital from mem- 
 bers after the gin is started. 
 
 The first and most desirable method is for each member to make a 
 small capital investment of another dollar or two each time he gins a 
 bale of cotton. This amount can either be deducted from the seed 
 rebate check or added to the amount charged for ginning. This is not 
 an expense or cost to the member but an investment. The second 
 method of raising additional capital is for the association to keep all 
 
 [7] 
 

 
 
 
 
 
 
 
 Ty 
 
 2 127784863 
 or part of the earnings or savings for capital purposes. Just as a part 
 
 of the earnings of a farm may be used to cut down its debt and build 
 
 up its capital, a part of the earnings of a cooperative gin is in this way © 
 
 used to increase the members’ equity in their gin property. 
 
 When enough capital has been accumulated by either or both of these 
 methods to pay off the money originally borrowed to buy the gin plant, 
 the cooperative begins to pay back the capital investment of members 
 in the order in which it was invested. Thus the members are continu- 
 ally buying their gin plant from themselves. This automatically keeps 
 the investment of each member in proportion to his volume. New 
 members have to furnish their share of the capital and withdrawing 
 members finally get back all of their investment. The ownership of the 
 association is always in the hands of its active members and continually 
 revolving. 
 
 
 
 
 
 
 
 
 
 | 
 
 This leaflet is based on studies by Otis T. 
 Weaver, Omer W. Herrmann, John S. Burgess, 
 Jr., and U. H. Prickett. Further details are 
 contained in Circular C-109, “Organizing a 
 Cooperative Cotton Gin’; Bulletin 12, “Analy- 
 sis of the Business Operations of Cooperative 
 Cotton Gins in Oklahoma”; and Circular 
 C-112, “Development of Cooperative Cotton 
 Ginning,” copies of which may be obtained, 
 while available, from— 
 
 Information and Extension Division 
 
 Farm Credit Administration 
 United States Department of Agriculture 
 Washington, D. C. 
 
 
 
 L-3 GPO May 1940 
 
 [8] 
 
 © 
 

 
 Jit 
 
 ww U ie 
 date UNIVERS!T 
 
 
 
 Topography had its part in focusing 
 
 the direction of cooperative activities. 
 
 OOPERATIVE grain elevators and warehouses are established 
 institutions in Washington, Oregon, and Idaho. In the Pacific 
 Northwest more than 50 percent of the grain farmers are coop- 
 
 erative members. Their organizations handle a large volume—in 
 recent years well over half of the grain delivered at the shipping points 
 where they operate. 
 
 These local cooperatives are the outgrowth of early trial and error. 
 They represent a development in services and Operations to meet specific 
 needs and conditions. Many are effective and efficient to a marked 
 degree. Their future course is to maintain and to strengthen their 
 effectiveness. 
 
 Warehousing was the first service which these cooperatives were 
 formed to provide. Climatic conditions and the character of the land 
 make winter hauling of grain difficult, and storage at shipping points 
 therefore was found desirable. To meet this need farmers banded 
 
together and built centrally located warehouses to store their grain until 
 they were ready to sell it. ‘‘Flathouses’” were used instead of elevators 
 because the general practice of the locality (still followed to a con- 
 siderable extent) was to sack grain instead of handling it in bulk. The 
 income of these cooperatives was derived from the fixed charges for 
 handling and storing. 
 
 Range of Services Gradually Increased 
 
 As time went on need for other services developed. When farmers 
 provided their own storage space at shipping points, private firms began 
 to pay more for grain already in their own warehouses than for that 
 stored in the farmers’ houses. To meet this competition farmers began 
 to merchandise grain as well as to store it cooperatively, a practice 
 which has been generally followed ever since. The merchandising 
 Operations remain distinct from the handling and storage function, 
 however—which is in contrast to the Middle West, where the income 
 to cover operating expenses is derived from the margin between the 
 purchase and sale prices of the grain and sidelines. 
 
 Other services which were added include assistance to members in 
 meeting their current financial needs. This is done by granting loans, 
 prior to harvest in some instances, and by making advances on grain 
 in storage. 
 
 Sacks and twine are handled for those farmers who sack at harvest, 
 and other farm supplies such as feeds and petroleum products recently 
 
 
 
 Members contribute to the success of 
 a cooperative by furnishing volume. 
 
 [2 } 
 

 
 
 The use made of warehouses 
 has a direct bearing upon 
 
 Wi costs of operation. 
 
 have been made available by some of the organizations. Sideline 
 activities, however, are not as important as with grain cooperatives in 
 other sections of the country. 
 
 Maintaining Producer-Control Presents Problem 
 
 That this range of cooperative services meets to a, satisfactory degree 
 the present requirements of patrons is confirmed by figures showing that 
 about three-fourths of all members patronize their associations regularly. 
 Of the 25 percent who were not regular patrons, more than one-third 
 had become nonproducers in 1937. This raises the widespread problem 
 among older cooperatives of keeping the stock of the association and 
 its control in the hands of active producers. 
 
 The solution for this is a provision in the bylaws restricting common 
 stock ownership to actual producers. To become members in the first 
 place, most associations require that the farmer be a producer; that he 
 purchase at least one share of stock; and in some associations, that he 
 sign a standard marketing agreement. If he ceases to be a producer, 
 he is no longer interested in the association from the standpoint of the 
 services it may render him. If at the same time he retains his stock in 
 the cooperative, he will be inclined to measure its value in terms of 
 returns on his stock investment rather than by services rendered for the 
 
 farmers as a whole. 
 The number of members in Pacific Northwest grain associations varies 
 
 greatly, as some associations operate at only one shipping point or cover 
 a small territory, while others operate at several stations and cover a 
 wide area or may have an extensive territory contributary to a single 
 
 [3] 
 
station. The number of members per station ranged from 21 to 73 in 
 1937, while the number of members per association varied from 73 to 
 476. The association with the largest membership operated at 12 
 stations. 
 
 Measuring the Cooperative’s Effectiveness 
 
 Regardless of the size of a cooperative its purpose is to furnish serv- 
 ices at savings to the members. The extent to which this can be done is 
 largely determined by the volume of business which the members supply, 
 and the financial support which they lend to their own enterprise. This 
 all adds up to financial soundness—and financial soundness in a business 
 organization 1s somewhat similar to physical soundness in an individual. 
 Both of them are partly the result of a “build up” in the past. Both of 
 them are an indication of preparedness for the future. 
 
 Financial soundness gets down to such everyday fundamentals as 
 the ability of the association to pay its bills without interfering with its 
 operating position; its ability to borrow more money for working capital 
 if necessary; and the proportion of total investment in the business 
 which is actually owned by the members. 
 
 As for the tests of financial soundness, there are certain earmarks of 
 health and certain danger signals of ailment that past experience in 
 grain elevators and similar business enterprises have taught the observer 
 to watch for. 
 
 A healthy organization, for example, must be able to meet its current 
 obligations and remain in a satisfactory operating position, just as a 
 healthy individual must be able to do his everyday job without exhaust- 
 ing his strength. In the case of a grain elevator, if it has $2 of current 
 assets for each dollar of current liabilities, it is ordinarily considered 
 
 Grain is now handled both 
 in sacks—as in the fore- 
 ground—and in bulk. A 
 modern type elevator for 
 bulk storage is in the back- 
 
 ground. 
 
 [4 
 
 
 
 
 
 
 
strong enough to meet its current obligations as they come due without 
 -unduly depleting operating capital. 
 
 At the close of the 1936-37 operating season only 10 percent of the 
 associations in the Pacific Northwest had current assets which were less 
 than current liabilities. At the same time one-half of the associations 
 had current assets at least equal to but less than twice as large as current 
 liabilities, leaving 40 percent that had $2 or more of current assets for 
 each dollar of current indebtedness. 
 
 A healthy business, like a healthy individual, also should be able to 
 look beyond its day-to-day needs and abilities. It should have not only 
 the strength to meet its current obligations, but the potential strength 
 to take care of its long-term indebtedness as well. When its fixed 
 assets—which include buildings and equipment—are worth twice as 
 much at their depreciated value as its long-term mortgages or other 
 liabilities, its position in this respect is satisfactory. In other words an 
 association with a mortgage and other fixed indebtedness amounting to 
 $40,000 should have facilities and equipment that are worth at least 
 $80,000. For the Pacific Northwest associations included in the study 
 the ratio was slightly less. This indicates that as a group the long- 
 term indebtedness was a little too high, and a real problem for indi- 
 vidual associations that had much less than $2 invested in fixed assets 
 for each dollar of long-term indebtedness. 
 
 Cash position is another indication of financial strength, and in this 
 the Pacific Northwest grain cooperatives showed up well at the time of 
 the study. A satisfactory cash position in a business organization is 
 ordinarily 20 cents in cash for each dollar of current liabilities. The 
 
 associations as a group had nearly 55 cents. 
 
 
 
 [5] 
 
GRAIN VOLUME Cae 
 PER STATIONG 
 Thousands of Bu 
 
 
 
 i) 
 Less than100 
 
 Per bushel han- 
 100 - 149 Gece dling expenses 
 are generally 
 lower as elevator 
 
 1 ee 
 500 - 249 ieee 1935-36 volume increases. 
 
 ' 
 250 - 299 mw Rea ASSOCIATIONS OPERATING 
 aa: one station only 
 
 At more than one station 
 
 
 
 Larger Member Investment Desirable 
 
 “Net worth” is as important in the diagnosis of financial condition 
 as blood pressure is in appraising a man’s physical condition. Net 
 worth is simply the difference between what the business organization 
 has and what it owes. It is the dollar value of what its members own— 
 their equity. 
 
 If this net worth totals up to $1.50 or more for every dollar’s worth 
 of plant, equipment, and other fixed assets at their depreciated value, 
 the grain association is usually considered to be in a safe position. In 
 the Pacific Northwest at the close of the 1936-37 season, the grain coop- 
 eratives averaged only $1.03 in net worth to $1 of fixed assets, and 
 three-fourths of the associations had less than $1.50 of net worth for 
 each $1 of fixed assets. This low ratio is explainable with some asso- 
 ciations because of the comparatively short time they have been in exist- 
 ance, and because of the pressure they have been under to convert their 
 facilities from sack to bulk storage. Nevertheless such associations 
 have the problem of increasing their net worth. 
 
 On a percentage basis, the members’ equity is the net worth in pro- 
 portion to all assets. This is the extent to which they own their own 
 organizations. The members of Pacific Northwest grain cooperatives 
 as a group, had an equity of about 50 percent in their associations, which 
 is less than desirable. Associations with a low equity position should 
 attempt at all times to increase the equity of their members, especially 
 during years of substantial net gains. 
 
 It is a widely accepted rule by grain cooperatives that members’ equity 
 in their association should become at least large enoygh to furnish 
 capital needed for plant and equipment, plus half of the average operat- 
 ing capital. Ordinarily this should enable the members to have finan- 
 
 L6] 
 
> 
 
 cial control of their business and enable the association to better survive 
 years of low volume. It also gives members greater confidence in their 
 organization. Such an organization can effect greater savings by taking 
 advantage of cash discounts on supplies purchased and paying interest 
 on less borrowed capital. 
 
 Aside from adequate financial support, the chief contribution to coop- 
 erative success which the member can help supply is an adequate volume 
 of business. Operating results are dependent upon volume and the 
 consequent cost of operation, as well as on the efficient use of labor 
 and facilities. 
 
 Volume per individual association is large in the Pacific Northwest. 
 Of 60 associations furnishing volume data in 1936-37, a year of above- 
 normal production, none warehoused less than 100,000 bushels and 
 17 warehoused more than 600,000 bushels each. A few associations 
 warehoused more than 114, million bushels. 
 
 If an association handled less than 150,000 bushels of grain, chances 
 that it would operate at a loss during the 3-year period studied were 
 42 out of 100. The associations in this low-volume group which did 
 not show losses had such small savings that paying dividends on capital 
 stock and increasing members’ equity in the business by additions to 
 reserves, or the payment of patronage dividends, were made difficult. 
 Associations handling more than 150,000 bushels of grain found it 
 much easier to show gains over operating expenses. To assure an 
 association an adequate volume of grain, 100 or more member-patrons 
 were needed. 
 
 Other Factors Affect Expenses 
 
 The direct warehouse expense per bushel for warehousing grain was 
 about 2 cents when more than 150,000 bushels were warehoused. ‘The 
 expense per bushel was considerably higher when a smaller volume was 
 warehoused and higher for associations operating at only one station, 
 than for those operating at more than one station. This suggests that 
 associations operating at more than one station are in a better position 
 to adjust operations to volume. 
 
 Inasmuch as wages for labor make up a large part of direct warehouse 
 expense, the efficiency with which labor is used has considerable influ- 
 ence on direct warehouse expense per bushel. During the crop year of 
 "1935-36, those associations that warehoused less than 50,000 bushels 
 
 17] 
 

 
 IT Hh I 
 
 of grain per man-year of warehouse labor ae a direct warehouse 
 expense per bushel of a little more than 4 cents. When the volume 
 per man-year of labor was between 50,000 and 100,000 bushels, direct 
 expense dropped to less than 214 cents per bushel. There was no 
 apparent influence on direct warehouse expense per bushel beyond 
 100,000 bushels for each man-year of labor employed. 
 
 The use made of warehouse facilities also has a direct bearing on the 
 direct warehouse expense per bushel. A measure of the use made of 
 facilities is capacity turnover, which means the number of times the 
 available capacity is filled and refilled during a crop year. Since there 
 is little farm storage of grain, storage facilities at local shipping points 
 must be large in proportion to the year’s production of grain so a large 
 capacity turnover is not to be expected. Nevertheless, it is necessary 
 that an association keep the capacity of its facilities in line with prob- 
 able volume. 
 
 
 
 
 
 
 
 
 
 
 
 In general cooperative elevator and warehouse associations in the 
 Pacific Northwest have placed themselves in a position to handle grain 
 efficiently and to be of real service to farmers. It is a position that can 
 be maintained by recognition and correction of possible weaknesses; by 
 keeping abreast of changes that are continually occurring; and by mak- 
 ing necessary adjustments to meet these changes. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 This circular is condensed from Bulletin 40 
 “Cooperative Grain Marketing by Local 
 Warehouses and Elevators in the Pacific 
 Northwest,” by Harry E. Ratcliffe, and based 
 on a 3-year study from 1934-35 to 1936-37. 
 Copies of this larger publication with more 
 detailed information may be obtained, while 
 
 available, from— 
 Information and Extension Division 
 
 Farm Credit Administration 
 
 United States Department of Agriculture 
 Washington, D. C. 
 
 [E-2 GPO May 1940 
 
 [8] 
 
B34 
 UnmpHak 
 
 No.) 
 
 _ How COOPERATIVE 
 
 y AUCTIONS it the 
 Poultrymen’s Needs 
 
 
 
 In 1940 there were 29 country-point ae >. 
 auctions in operation, all but 2 of them 
 producer-owned. 
 
 HETHER a farmer buys a bag of feed, a tractor, or a piece 
 
 \ \ | of clothing, he buys it for a specific need. He wants it to 
 
 be formulated, designed, or tailored for its particular use. 
 Similarly, a cooperative marketing association should be “tailor-made” 
 to fit its purpose and locality. A pattern which has proved entirely 
 satisfactory in some areas or under certain circumstances may be entirely 
 wrong for others. 
 
 In many instances this has been true in respect to cooperative associa- 
 tions organized to market eggs and poultry. A number of ill-advised, 
 large-scale cooperative egg and poultry associations failed in the early 
 1920’s, and there followed a period when discouragement and disap-  — 
 pointment slowed down the development of cooperative marketing in — 
 this field. 
 
 At that time the outlook for cooperative marketing of poultry prod- 
 ucts did not look bright in comparison with the success attained with 
 
 248098°—40 
 
many other farm products. This was true especially in the Northeast- 
 ern States where some of the failures had occurred and where there 
 seemed to be some natural obstacles to success. 
 
 Recent study and experience, however, has shown that the chief cause 
 for the earlier lack of success in the Midwest, and in the Northeast in 
 particular, was in failure to ‘‘tailor’” the associations to fit local condi- 
 tions. In too many instances the large pool type of association was e 
 copied without any important alterations or adjustments. This type of 
 association had been developed-in the Pacific coast and Western States 
 through years of experience, trial and error, and evolution. It was 
 adapted to the area in which it was developed, but it resulted in some 
 disastrous ill-fits when transplanted farther east. 
 
 The Northeastern folks refused, however, to remain discouraged. 
 Instead they set about to devise some new cooperative marketing ma- 
 chinery which would work in their locality, next door to the world’s 
 largest city. The result was the New Jersey plan—the selling of eggs 
 and poultry at auction near the point of production. 
 
 fs Cooperative Auctions Apparently “Fill the Bill” 
 
 That cooperative auctions filled the bill to a considerable extent is 
 indicated by their rapid growth and their present importance. The first 
 cooperative egg auction started to operate at Toms River, N. J., on 
 June 2, 1930. In less than 31/4 years there were 5 auctions in operation 
 in the State. At present, practically the entire State is served by these 5 
 auctions. In the meantime, the news of the success of the New Jersey 
 
 wwe 
 
 
 
 
 Auction selling app 
 particularly to buyer 
 who sell directly to th 
 ultimate consumer. 
 
Cooperative auc- 
 tions tend toward a 
 minimum of services, 
 leaving the producers 
 themselves to per- 
 form as many of the 
 marketing functions 
 as possible. 
 
 
 
 auctions spread to other States. Similar auction associations were or- 
 ganized in other Northeastern and in some Midwestern States until there 
 are now 29 of these country-point auctions in operation, all except 2 of 
 which are producer-owned. They operate in 11 States, from New 
 Hampshire, Massachusetts, and Rhode Island in the East, to Hlinois in 
 the Middle West. | 
 
 Of the 27 cooperative auctions, 16 sell both eggs and poultry, 9 sell 
 only eggs, and 2 sell only poultry. 
 
 The total volume of eggs and poultry handled by the auctions also 
 has shown a constant and rapid growth. In 1939, 1,200,000 cases of 
 eggs and 250,000 crates of live poultry were sold at these auction asso- 
 ciations. The sales value of these products was approximately 11 
 million dollars. More than 17,000 poultry producers utilized their 
 facilities. 
 
 What is it the Auctions Have? 
 
 Auction associations are by no means the only type of egg and poultry 
 cooperative operating in the Northeast. There are at least five other 
 types which market eggs or poultry or both. None of the others, how- 
 ever, has shown the same expansion or vigorous growth. The question 
 naturally arises: ‘“Why have the auction associations proved so success- 
 ful when other types of cooperatives have found the going relatively 
 difficult ?”” - 
 
 The simple and all-inclusive answer is that the auction associations 
 were patterned to meet production and marketing conditions as they 
 exist in the area in which they operate. Instead of copying types, pol- 
 
 13] 
 

 
 
 
 
 Locarion of 27 Cooperative EG ann Pouctry Auction AssociaTions, te 
 Area of Receipts, AND Tyre oF Pouttey Peooucts HanoLed, 
 January, 1940 
 
 
 
 
 
 
 
 
 
 AUCTION 7 ae ATiONS 
 @eE 
 @Ess3 ond pty 
 
 ¢ , we. srs 0 or acca prs 
 AY He pain L cine 
 
 icies, methods, and practices from other sections of the country, the 
 sponsors of the auctions devised a specialized form of association. In 
 so doing they simply recognized and followed the cardinal principle of 
 a successful cooperative—that it must supply essential services which 
 are desired by its members. 
 
 To be more specific, the cooperative auctions provide a type of mar- 
 keting service which fits the patrons’ needs and desires in at least four 
 important ways. 
 
 The first of these is that the auction associations (with only one excep- 
 tion) do not require the member to deliver all of his market eggs or 
 poultry to the cooperative. This is a departure from the policy of the 
 Far West organizations in which a rather strict marketing agreement is 
 the rule. The marketing agreements with the producer are considered 
 necessary by the western associations as an assurance of volume to oper- 
 ate efficiently, to ship the products economically to eastern or other mar- 
 kets in large quantities, and to furnish their customers with adequate 
 and constant supplies of products at all times. It is on this basis that the 
 western associations have built their business and been able to serve their 
 members well. The producers’ marketing agreement is a part of their 
 cooperative mechanism. 
 
 Producers farther east, however, live close to large consuming centers. 
 They have many available buyers and markets and they do not need the 
 same type of marketing service as the more distant producers. Many of 
 the eastern and mid-western producers object to any compulsion to sell 
 their product to only one outlet, cooperative or otherwise. The fact 
 that the auctions insist on no such agreement therefore appeals to them. 
 
 The second way, closely tied in with the first, is the objection by many 
 producers to having their products pooled. With numerous buyers and 
 with outlets many and close, quality is a virtue which has direct rewards. 
 
 [4] 
 
 a? 
 
 P 
 
Practically every producer has pride 1n his products, and probably feels 
 that his commodities are above the average. He therefore likes to have 
 them sold individually and separately. 
 
 In this respect the auction also meets with his approval. Each pro- 
 ducer’s eggs and poultry are sold separately and by grade, weight, and 
 producer number to the highest bidder. There is practically no co- 
 mingling or pooling of products in auction selling. 
 
 A third way in which the cooperative auctions fit local customs and 
 conditions is that they permit price comparisons. Eastern producers, 
 as has been said, insist on being free to “shop around.” This means 
 that they can and will make careful and first-hand comparisons of the 
 prices received by themselves through the different outlets. The auc- 
 tion has to meet actual competition. It can meet this competition only 
 by giving the producer equal or higher net returns—by selling his eggs 
 and poultry effectively and by keeping costs low. 
 
 This leads to the fourth point in which auctions score in popularity— 
 low costs and a minimum of services. A minimum of services means 
 that producers are required to perform as many of the marketing func- 
 tions themselves as possible. To do so means more work but higher 
 net returns to them. Due to this policy of minimum service for mini- 
 mum marketing cost, for 18 auctions in 1937 the average operating cost 
 was 37.6 cents per case of eggs. This was 4.4 percent of the gross sales 
 value. For other types of cooperative associations operating in the 
 
 
 
 
 
 
 iis aces ee a) Gi 
 E G G iA Wa 
 
 2 tim 
 ae es = = - se od ay Sia he 
 = 4 “4 > &s : Ke 
 yy, “ p lige 
 ¥ 
 : 2 
 1 
 ‘ 
 
 
 
 Transportation is a relatively small 
 item of expense in the territories in 
 which the poultry and egg auctions 
 operate. 
 
 [5} 
 
same area the average cost was from 44.8 to 90.2 cents per case. This 
 was from 5.4 to 9.8 percent of the gross sales value. 
 
 Auction selling is open, competitive selling. It tends to obtain all 
 that the product is worth. It appeals especially to buyers who sell 
 directly to the ultimate consumer, and it therefore can well net the pro- 
 ducer locally more than the wholesale price of the produce delivered at 
 the terminal market. 
 
 Auctions Can Be Started in a Small Way 
 
 Aside from fitting the producers’ needs, another factor which has 
 helped to speed the development of the auctions is that they can be 
 started in a small way. They do not require the large volume that is 
 necessary for success in the far western egg and poultry associations. 
 
 In order to obtain economical transportation from distant production 
 areas carlot shipments are necessary. This means that in order to be 
 effective and efficient, an association should not be too small. For the 
 producers living closer to the points of consumption, however, large 
 volume for economical transportation is not so important. Transporta- 
 tion there is a relatively small item of expense. It is so unimportant, in 
 fact, that many of the buyers of nearby eggs anticipate bearing it either 
 by paying for the hauling or by doing their own hauling. Consequently, 
 the auctions may be successful even if very small in volume and local in 
 area served, as long as their volume is sufficient to keep the per unit 
 operating costs low. 
 
 None of the auctions at first operated over areas larger than an aver- 
 age county. None owned buildings or other costly facilities or equip- 
 ment. The average original membership was only 44 producers. Such 
 small associations were comparatively easy to organize, and their organ- 
 
 ization and operation did not create much antagonism or have exacting, 
 
 requirements. To have formed associations requiring a large number 
 of producers, considerable capital, and operating from the beginning 
 over a large area would have been much more difficult. 
 
 For a number of other reasons the auctions have been successful— 
 though not successful in all instances. The first auction ceased to oper- 
 ate after about 9 months during which much valuable experience was 
 
 [6] 
 
 e 
 
Most of the cooperative auc- 
 tions sell both poultry and 
 eggs; two are confined ex- 
 clusively to poultry. 
 
 
 
 obtained to the benefit of the auctions following. Seven associations 
 which attempted to sell by the auction method either ceased to operate 
 in this way or now limit the auction selling to poultry and sell eggs on 
 some other basis. These associations fortunately were set up on a flex- 
 ible basis so that when auction selling did not work they quickly swung 
 over to another and more suitable selling method. 
 
 Auctions Are Not the Universal Answer 
 
 Despite the splendid success of auction associations the fact should 
 be emphasized that this type of association probably will operate suc- 
 cessfully in only a small part of the country. As a matter of fact 
 auctions do not fit all of the conditions in the areas in which they now 
 operate, as is indicated by the associations which have changed from 
 the auction plan, and also by the existence of various other types 
 of cooperatives side-by-side with the auctions. 
 
 Among the other types is the pooling association, operating under 
 producers’ marketing agreements essentially the same as those in the 
 west coast cooperatives. There also is the bargaining association in 
 which the cooperative does not handle the eggs but merely negotiates 
 prices. There is a commission type of cooperative which is similar in 
 every respect to the auction type except that sales are not made over the 
 auction block. There is the outright purchase cooperative, which ac- 
 
 [7] 
 

 
 ~A 
 
 iii 
 tually buys the products from the producers and sells them, just as the 
 private handlers do. Finally there is the sideline cooperative which 
 simply handles poultry products incidental to its other products and 
 services. 
 
 Each of these types of associations—as well as the auction type 
 itself—emphasizes the need for setting up associations which will fit 
 specific conditions. No two communities, sections, or areas are iden- 
 tical. Therefore the type of cooperative association which is set up 
 probably should not be an exact duplicate of those operating elsewhere. 
 This does not mean that other successful associations should not be 
 copied as models and then tailored or adjusted to the conditions. On 
 the contrary, it indicates that foundations of new cooperatives should 
 be built upon the experience of others, but the finished structure closely 
 fitted to the immediate situation and conditions. 
 
 
 
 
 
 
 
 This leaflet is condensed from Bulletin 37, 
 “Cooperative Egg and Poultry Auction Asso- 
 ciations,” by John J. Scanlan, senior agricul- 
 tural economist, and Roy W. Lennartson, 
 associate agricultural economist. Copies of 
 this bulletin, containing more detailed in- 
 formation, may be obtained, while available, 
 from— 
 
 Information and Extension Division 
 Farm Credit Administration 
 
 United States Department of Agriculture 
 Washington, D. C. 
 
 
 
 L-6 U.S. GOVERNME'NT PRINTING OFFICE: 1940 June 1940 
 
 [8] 
 
 
 
Dao4 
 
 ope a4Q 
 
 No-4 
 
 » 
 
 Cooperative technique 
 
 ind WEST COAST 
 DAIRY REGIONAL 
 
 
 
 Through cooperative research 
 Challenge has developed its 
 
 own type of metal churn. 
 
 IKE each of the eight regional cooperatives in the United 
 
 dis States engaged in handling dairy products, the Challenge 
 
 Cream & Butter Association of Los Angeles has devel- 
 
 oped a number of distinct features of its own. Some of these 
 
 have to do with its marketing program; others with its co- 
 
 Operative procedure. Many of them are influenced to some 
 extent by its geographic location. 
 
 Although its marketing program may not be adaptable in 
 all its details for use in other parts of the country, much of its 
 cooperative procedure 1s distinctly so. Challenge has raised 
 many cooperative practices almost to the wth power. The 
 extent to which it applies fundamental principles is in many 
 instances exemplary. 
 
 In its marketing program, Challenge is distinguished by the 
 fact that it is the only one of the regionals carrying a complete 
 

 
 A typical butter route in Los Angeles is 
 serviced 2 or 3 times a week; averages 
 about 70 stops. 
 
 line of dairy products as far toward the consumer as the retail 
 store. This does not suggest that a similar plan of distribu- 
 tion is in order for all other dairy co-ops—but rather that the 
 particular marketing needs of the farmers in the Challenge 
 territory call for this type of operation. 
 
 California is a deficit State for manufactured dairy products, 
 especially butter. For this reason supplies from the Mountain 
 and Pacific Slope States naturally find their way to its markets. 
 Before cooperative organization, however, dairymen found 
 themselves competing with each other and taking a loss in 
 net returns through wasteful marketing methods. 
 
 The organization and growth of Challenge has been the 
 result of deliberate cooperative action to overcome this handi- 
 cap. The small local group in Tulare County from which it 
 grew temporarily solved the problem 30 years ago when it 
 developed an outlet which netted fully 5 cents more per pound 
 of butter than had previously been received in relation to the 
 Los Angeles market. “ 
 
 The solution was short-lived. Within 6 months its outlet 
 was shut off. 
 
 No new satisfactory outlets could be found. The one road 
 remaining open was to market the butter directly to retail 
 stores. A l-horse delivery wagon and 4 employees was the 
 Challenge of its day—the forerunner of the present fleet of 
 
 [2] 
 
more than 200 streamlined trucks and a dozen modern ware- 
 houses that supply nearly 20 million dollars’ worth of dairy 
 products annually, direct to the retail trade. 
 
 Thus it is that direct distribution is a feature of Challenge’s 
 marketing program. ‘Tied in with this is its policy of handling 
 all types of dairy products. This is considered desirable in 
 order to furnish market outlets for all of the products its mem- 
 bers have to sell; to make the most efficient use of its facilities 
 and personnel; and to encourage the sale of butter by being 
 able to furnish customers with all of their other diary products 
 as well. 
 
 Underlying these policies, and the basic rule of all its oper- 
 ation, is the policy of quality. Quality butter was its entering 
 wedge in first finding a market, and quality still is considered 
 its chief asset in acquiring and maintaining outlets. 
 
 Cooperative Procedure Laid on Sound Lines 
 
 In its general set-up, Challenge can perhaps be described as 
 a Simon-pure cooperative. It adheres to the principle of 
 democratic control; it limits the interest paid on invested 
 capital; it confines operations almost exclusively to member 
 volume. The cooperative rule that members should furnish 
 capital in direct proportion to the extent they use the associa- 
 tion, and that savings be distributed on the basis of patronage, 
 is followed almost to the last decimal point. 
 
 No milk is sold retail to 
 homes; in 1939, 48 milk 
 trucks served some 1,900 
 Los Angeles wholesale 
 
 customers . 
 
 
 
 13] 
 
Nearly all member cream- 
 eries Ship their butter in bulk 
 to the Challenge plants, 
 where large-scale operations 
 permit economies in printing 
 
 and wrapping 
 
 
 
 At the same time it is notable that the cooperative pattern 
 of Challenge itself is not always so closely followed by its 
 member associations. Furthermore, many of the 33,000 dairy- 
 men who use Challenge do not fully understand it. They 
 are relatively unfamiliar with their responsibilities to and their 
 benefits through their cooperative enterprise. 
 
 This is explained to some extent by the inherent difficulties 
 
 in maintaining a close-knit organization over far-flung terri- 
 tory. It is explained further by the fact that in hewing so 
 closely to the cooperative line of procedure, Challenge has 
 developed accounting details and terminology that are not 
 always easily understood. 
 ' Challenge 1s controlled by its 37 member associations in 
 California, Idaho, Oregon, Colorado, Wyoming, Utah, Wash- 
 ington, and Nevada. Each of them is a self-governing local 
 cooperative. Each of them has equal representation on the 
 board of directors of the federation. The members and the 
 patrons are identical. Thus those who control the operating 
 policies are those whom the association is intended to benefit 
 and no others. | 
 
 Those who control the association, moreover, do not control 
 because they have contributed capital, but because they are its 
 patrons—another important cooperative principle. The mem- 
 bership fee in this nonstock set-up is $1,000, a mere “‘drop in 
 the bucket”’ in the financing of a 3-million-dollar organization. 
 
 In its financing, Challenge very carefully follows a univer- 
 sally accepted fundamental of sound cooperative business. This 
 
 [4] 
 
 ~ 
 
principle, already referred to, demands that members assume a 
 financial responsibility for their organization in direct pro- 
 portion to their use and benefits of the services. This applies 
 both to the capital required to finance its facilities and to the 
 funds needed for day-to-day operations. 
 
 In the case of the capital structure, the financing is through 
 retains made on each unit of product handled, plus undistrib- 
 uted balances accumulated through the year. The members, 
 or local associations, are credited with the amounts retained 
 and are issued a certificate of interest each year representing 
 their respective contributions to the total capital. Every 
 dollar of Challenge’s net worth is allocated to members on a 
 patronage basis. 
 
 The capital fund represented by the certificates is subject to 
 distribution at the discretion of the board of directors. The 
 directors may, but are not obligated to, authorize the payment 
 of interest at a rate not to exceed 8 percent. The policy has 
 been to pay one-half percent a month. 
 
 Since 1923 the total additions to capital have aggregated 
 $2,508,008. The capital account began to revolve in 1927 
 when the oldest certificates were retired, and by the end of 
 1939, $1,188,008 had been refunded to the locals, leaving 
 $1,319,999 outstanding. This revolving capital system, based 
 on a combination of per-unit deductions and retained patronage 
 dividends, not only provides adequate capital but assures that 
 
 A fleet of 225 streamlined silver-grey 
 motortrucks is perhaps Challenge's 
 best single advertising medium. 
 
 
 
 pence 
 phe betion 
 Z)\ BUTTER 
 
 
 
 
 
 
 
 
the financial support of Challenge falls squarely on the shoul- 
 ders of those who actually use its facilities. 
 
 Every patron of Challenge also provides operating capital 
 and assumes the risks of the business in direct proportion to 
 patronage. This is logical inasmuch as those who supply 
 patronage receive the benefits from the operation. The pro- 
 cedure is simple to state, but rather complicated in its detail. 
 
 Every Product Pays Its Way 
 
 It is accomplished by letting each product pay its own way. 
 It pays its own way literally; not figuratively. Each pound of 
 butter and every unit of the 17 other dairy products goes into 
 a monthly pool of its own. Each pound of butter and every 
 other unit bears all of its handling costs and an exact proportion 
 of each item that makes up overhead expense. The pools are 
 clear cut and stand on their own. No product subsidizes or is 
 subsidized by another product. 
 
 When the books of a pool are closed, it is to find out what 
 the members have due them, not to find out what the business 
 gained or lost. There is no question of under- or over-payment; 
 no board meeting to consider pay-out prices, and no setting 
 of prices to meet competition. The pool prices are purely the 
 results obtained by adquate accounting for the proceeds from 
 sale. : 
 
 The method by which Challenge members provide it with 
 Operating capital is through delayed settlements on the pools. 
 This is a customary procedure in dairy cooperatives, most of 
 which settle for all of the butterfat delivered during a calendar 
 period on a certain set date after the close of the period. This 
 means that deliveries made during the early days of a pool 
 period wait longer for settlement advances than those delivered 
 toward the end of the period. Challenge, however, has, 
 adopted a uniformly delayed settlement plan under which its 
 trade acceptances are payable 18 days after delivery. 
 
 As far as Challenge is concerned, this procedure leaves in its 
 hands the members’ products or the returns therefrom for 18 
 days after delivery, and thus furnishes operating capital. As 
 far as the member units are concerned, they hold acceptances in 
 
 16] 
 
direct proportion to the value of the products marketed, and 
 the responsibility of furnishing the operating capital is there- 
 fore distributed equitably. 
 
 Accurate Accounting Assures Equitable Returns 
 
 Settlements on each pool are made in two parts. The first 
 part is the advance, made with the trade acceptances which are 
 payable in 18 days. The advances are set according to a specific 
 schedule which is based on market prices and quality. 
 
 The second part of the settlement, which is called the ‘‘addi- 
 tional,’’ is the difference between the first amount advanced 
 and the gross sales value. The two items together represent 
 the total sales value of a product, say butter. From the total 
 sales value, credited to the member, there must be deducted 
 the total expenses of operation before the net pool returns are 
 arrived at. 
 
 To take butter as an illustration, two expense items are 
 charged against each local’s account—budget and advertising. 
 
 The budget is used in lieu of actual expenses to permit closing 
 the books for each pool earlier than the exact expenses can be 
 known. Differences between actual and estimated expenses 
 are adjusted monthly, and on December 31 any net under or 
 over charge in the budget is adjusted into the locals’ accounts. 
 The advertising fund is based on specific per unit deductions in 
 the same manner as revolving capital and is handled in a 
 separate and distinct account. 
 
 In order to maintain equity among the affliated locals and 
 among the products handled, all expenses are allocated pre- 
 
 Since 1934 cheese volume has 
 averaged around 4 million 
 pounds annually; 5- and 2- 
 pound loaves in special wrap- 
 pers are big selling items. 
 
 
 

 
 
 
 
 
 
 
 TNT 
 
 } | 0112 127784897 
 cisely. To begin with, all the direct eae ate charged to 
 
 the products or pools directly affected. The real problem is in 
 allocating in an equitable manner the many items which make 
 up overhead expenses. For this purpose, Challenge has 
 adopted a ‘‘unit’’ system of expense allocation. 
 
 The number of units of each product sold during the month 
 are converted to standard or accounting units by a schedule of 
 ratios. For example, 1 pound of butter is 1 unit, 5 pounds of 
 cheese is 3 units, andsoon. ‘The standard units of each product 
 are then expressed as a percentage of the total standard units. 
 This percentage thus becomes that product’s share in the 
 overhead. For example, butter may bear 75 percent, whey 
 powder less than 1 percent. 
 
 In this as in other details, Challenge follows not only the 
 letter but the spirit of cooperative dealing. It shares equitably 
 between its members the economies of large-scale operations 
 and the advantages of concentrated volume. 
 
 The member associations of Challenge recognize their re- 
 sponsibility in controlling, financing, and providing volume 
 for their business enterprise. The farmers who make up 
 these local units have a similar responsibility to their locals. 
 The extent to which these responsibilities are recognized is a 
 measure of the cooperative strength of the entire organization 
 ‘from the grass roots up.”’ 
 
 
 
 
 
 
 
 
 
 This leaflet is condensed from Circular C-119, 
 “Operating Methods of Challenge Cream & 
 Butter Association,’’ by Paul E. Quintus, 
 agricultural economist. Copies of this larger 
 publication with more detailed information 
 may be obtained, while available, from— 
 
 Information and Extension Division 
 
 Farm Credit Administration 
 United States Department of Agriculture 
 Washington, D. C. 
 
 
 
 5 238692° U.S. GOVERNMENT PRINTING OFFICE: 1940 June 1940 
 
 [8] 
 
 C 
 
ae 
 hie 
 
 NO,Y 
 
 Cooperative Possibuiltties 
 
 in COTTONSEED 
 OIL MILLS 
 
 
 
 be 
 
 
 
 One of the newest developments i” 
 agricultural cooperation. 
 
 OOPERATIVE cottonseed oil milling—one of the newest devel- 
 
 opments in agricultural cooperation—has proved a practical 
 
 means by which thousands of cotton farmers have increased the 
 returns from their farming operations. In the 4 years 1934-37 the 
 cooperative mills realized savings of $1,200,000 on 225,000 tons of 
 seed; savings which were considerably greater than the combined cost 
 of the plants. 
 
 Impressive as this figure may be, it does not however give an unqual- 
 ified “go” signal for the organization of this type of cooperative. There 
 are certain conditions which contribute to success and without which 
 
 Sir venture probably would fail. 
 
 Prior to 1934 there was only one farmers’ cooperative oil mill, the 
 Minter County Oil Mill at Minter City, Miss. Since that time six more 
 associations have been organized. Four of these associations are 
 located in Texas, one in Arkansas, and one in California. With the 
 
exception of the California association all of them now own mills and 
 will be actively engaged in crushing of seed during the 1940—41 season. 
 The California association has thus far operated only as a bargaining 
 agency in the marketing of its members’ seed, but with good success. 
 The names, the locations, and dates of organization of these associa- 
 tions are: 
 
 Year 
 
 Association Organized 
 Minter City.OUugMill Minter City) Miss memes 2 ee 1922 
 Farmers’ Cooperative Oil Mill’ Eb Paso, lex 3 es eee 1934 
 Tornillo Cotton Oil Co., Vornillo; Tex: =) ee 1934 
 Plains Cooperative Oil Mill, Lubbocle,." ex: tween sg ert 1937 
 Delta Products @o,, Wilson) Atk aie en eee 1937 
 Acala Gooperative O1l MilksIne se ulate,Calitiaeg sae eee ee 1938 
 Netex:Coopermttive Ginsi@on Greenville) Lc xem ame cee 1939 
 
 Average Returns Higher Through Cooperatives 
 
 Compared with prevailing local prices received by farmers who were 
 not members of a cooperative, the returns or final prices for cottonseed 
 crushed by the associations averaged $6.50 per ton higher in 1934; $5.40 
 higher in 1935; $8.50 higher in 1936; and $3.35 higher in 1937. 
 
 Available information indicates that other farmers, at least in some 
 areas, may similarly increase their returns by organizing and efficiently 
 operating a cooperative mill. Figures published by the United States 
 Bureau of the Census show that in the country as a whole the average 
 spread between the value of products from a ton of seed (oil, cake or 
 
 The first step in cottonseed proc- 
 essing 15 the removal of all foreign 
 materials. After cleaning, the 
 lint 1s removed, and the hulls are 
 cracked and separated from the 
 meats. 
 
 [2] 
 
 = 
 Nemagt® 
 
 
 
After cooking, the meats are 
 put into molds and placed in a 
 hydraulic press, as here illus- 
 trated. This removes the oil and 
 leaves the cottonseed cake which 
 is then ground into meal. 
 
 
 
 meal, hulls, and linters) and the price received for the seed by farmers 
 was $17.68 in 1936; $14.05 in 1937; and $12.46 in 1938. 
 
 But during each of these years the average expenses of the cooperative 
 cottonseed oil mills were only $8 per ton, including transportation 
 
 Average value of cottonseed products’ produced per ton of cottonseed, farm 
 price of cottonseed, and spread between farm price and total value of products, 
 by States, season 1938-39. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Value of cotton- Farm price Spread be- 
 
 State seed products per forcotton| farm 
 
 ton, crushed seed per ton - pers 
 Dollars Dollars Dollars 
 PAL ESCA C Semper ee 34.26 21.80 12.46 
 AUS IE s S ee 33.58 21.54 12.04 
 FA TZOlieeie ie gs ane 2 35.99 21.02 14.97 
 ieee 34.65 22.03 12.62 
 CHEE S RV Oe elie Gn ete a 38.33 22.65 15.68 
 Giea@tiChy Saar | ee ees 34.51 DD 11.79 
 Louisianasee ae te we ae : 33.43 20.58 12.85 
 Mississippitaeee ir ea! ae 33.49 23.31 10.18 
 Nocti: Garol iam tS 1 oe: 35.74 22.66 13.08 
 Ok laboniamhet cae pe ee 35.22 19.68 1554 
 Sotith, Cats hitvtee Webbe te ere 39.03 25:09 12.00 
 ‘Tenriessces. 12. Wee Oe We Roc. 34.32 22.80 L152 
 Texas he oe Gea foe 33:51. 20.96 12455 
 
 
 
 
 
 
 
 
 
 * Crude oil, cake and meal, hulls, and linters. 
 * Includes data for States other than those listed. 
 Source: United States Department of Commerce, Bureau of the Census, Bulletin 176. 
 
 [3] 
 
charges, interest on loans, all other costs, and dividends on invested 
 capital. On the basis of the spreads mentioned, and with costs no 
 greater than the $8 average, cooperative savings might have been made 
 to the extent of $9.65 per ton in 1936; $6 per ton in 1937; and $4.45 
 per ton in 1938. 
 
 ‘Too Many”’ Mills May Result in Excessive Cost 
 
 It should be recognized, of course, that comparisons for the Nation a 
 as a whole or for any individual State do not necessarily indicate either 
 that savings will be gained or that there is a need for a cooperative 
 within a given locality. Wuthin the same State, the average spread may 
 be considerably greater in one locality than in another. Consequently, 
 the need for a cooperative must be determined on the basis of conditions 
 existing within the territory in which the cooperative mill will operate. 
 
 The number of existing facilities also may have a bearing on the need 
 for a cooperative. However, it may be that farmers would benefit from 
 the operation of a cooperative oil mill in certain areas despite the fact 
 that there is already an excess mill capacity. Oil mill facilities in the 
 United States are frequently utilized less than one-half of the season. 
 Obviously, an industry which could operate practically the entire year 
 but uses its facilities only 50 percent of the time or less must have con- 
 siderably higher costs than it would if mills were operating nearer to 
 capacity. These higher costs necessarily result in relatively wide mar- 
 gins between prices of cottonseed to farmers and the value of the manu- 
 
 In this picture workers 
 ave shown loading cot- 
 tonseed cake for ship- 
 ment from the coop- 
 erative mill to a mixed 
 feed manufacturer. 
 
 
 
 [4] 
 
Feceas This chart shows 
 the average spread 
 between the value 
 
 - of the manufac- 
 
 tured cottonseed 
 
 products per ton, 
 and the price re- 
 ceived by growers 
 for cottonseed. 
 
 These spreads in- 
 
 clude all costs of 
 
 assembling, trans- 
 
 1935 1936 1937 1938 porting, process- 
 
 ing, together with 
 profits of ginners 
 and oil mills. 
 
 
 
 factured products. Wide margins mean lower returns to farmers for 
 cottonseed. Thus, even in communities where there are “too many’ 
 oil mill facilities, farmers may have an opportunity to relieve themselves 
 of the excess charges that result from heavy overhead costs by vol- 
 untarily consolidating their patronage through a cooperative oil mill 
 which will operate to capacity most of the year. 
 
 Need for a Cooperative Must Be Recognized 
 
 A need for a cooperative is the first prerequisite for a successful organ- 
 ization. Even if this need exists, however, and the value of a coopera- 
 tive mill to the farmers is a demonstrable fact, there is an even more 
 important essential to success. This essential is a thorough-going 
 realization of the need and value on the part of the farmers themselves. 
 
 In other words, there must be a determined demand for the mill, and 
 the demand must be backed up by a willingness to support it. Member- 
 ship support involves two very tangible items: (1) Patronage, or sup- 
 plying the mill with volume, and (2) financing. 
 
 It is obvious that sufficient volume is needed if a cooperative oil mill 
 is to be a successful business. Unless an association can be assured of 
 a volume adequate for an efficient and economical operation, no useful 
 purpose will be served in organizing it. The volume of seed necessary 
 for economical operation, of course, will depend on the size or capacity 
 of the mill. On the basis of available information, a mill equipped 
 with hydraulic or the newer type expeller presses, and manufacturing 
 high-protein cottonseed cake and other products, should have an annual 
 volume of 4,000 to 4,500 tons per press. An association operating a 
 
 [5] 
 
four-press mill would need, therefore, a volume of 16,000 to 18,000 
 tons. A mill equipped with the new type expeller presses manufactur- 
 ing whole pressed cottonseed or low-protein cake should have a seasonal 
 volume of 2,000 to 2,500 tons of seed per press. 
 
 Capital Requirements Relatively Large 
 
 Aside from this volume, as has been said, the patrons also must fur- 
 nish capital needed to establish and operate their own business. The 
 capital requirements of a cooperative oil mill are fairly large. 
 
 For example, the cost of a new four-press hydraulic mill including 
 land, buildings, and equipment is between $160,000 and $200,000. 
 Second-hand equipment may be bought for substantially less. On the 
 basis of an annual volume of 16,000 tons of seed, the cost of a new 
 four-press mill would mean a total investment of from $10 to $12.50 
 per ton crushed. If at all possible the members should furnish initially 
 about one-half of the cost of the mill. This would mean that members 
 would furnish $5 to $6.25 capital for each ton of seed. In addition to 
 capital for the purchase of facilities, money also must be available. for 
 making advances or partial payments to members for seed delivered and 
 for meeting current expenses. At lease a part of this capital should also 
 be furnished by members. 
 
 In addition to the original investment, members supply further 
 capital to their associations through deduction authorized from their 
 net returns. This means that instead of receiving all of the savings 
 earned through their cooperative in any one year, a part of these savings 
 is invested in the business. They may be used to reduce the amounts 
 which the cooperative has borrowed from outside sources, and eventu- 
 ally to repay the initial investments made by the members. When 
 
 Cottonseed oil is shipped 
 from the mill to refiners 
 in tank cars. 
 
 
 
 [6] 
 
earlier membership investments are paid back in order of their preced- 
 ence from earnings of each current year, the association is said to be 
 financed on the “revolving capital” plan. 
 
 Cooperative mills may be set up as centralized associations or as 
 federations of cooperative cotton gins. In the centralized type of asso- 
 ciation, farmers have membership in the cooperative mill and deal 
 directly with it. In the federated type, the membership of the coop- 
 erative mill is made up of local cooperative gins; the cooperative mill 
 deals with the local cooperative gin; and the local cooperative gin in 
 turn deals with its individual farmer-members. 
 
 In both the centralized and the federated organization set-up the 
 farmers own and control the cooperative mill either directly or indi- 
 rectly. In areas where the number of cooperative gins is large enough 
 to supply a cooperative mill with the volume of seed necessary for 
 efficient and economical operation, the federated type of organization 
 is perhaps desirable. The cooperative mills at Lubbock and Greenville, 
 Tex.—two areas having numerous cooperative gins—are federated 
 organizations. The other five associations are centralized. 
 
 The Cooperative Mill in Action 
 
 Farmers marketing seed through commercial agencies receive the 
 offered price, and the transaction is completed. In marketing through 
 the cooperative mill, the price received is the proceeds from the sale of 
 the cottonseed products minus the cost of processing and other necessary 
 expenses. Since the final price cannot be determined until the seed has 
 been crushed and the products sold, cooperative mills advance money to 
 the growers when they deliver the seed. This advance is below the 
 anticipated net sales value of the products, and may be followed by 
 additional advances prior to the final settlement. 
 
 To avoid counteracting the advantages gained from low operating 
 costs and mill efficiency, the cooperative must also market its cotton- 
 seed products advantageously. If it does not sell its products until 
 after they are manufactured, the mill is in a speculative position on the 
 cottonseed it accumulates in storage at ginning time. By selling a rela- 
 tively large proportion of the manufactured products for future delivery, 
 as the seed is received at the mill and before it is manufactured, the 
 cooperative mills are able to operate conservatively. 
 
 [7 } 
 
LO 
 
 Sales outlets of cooperatives are necessarily the same as those of com- 
 mercial mills. Crude cottonseed oil is sold to refiners; cottonseed cake, 
 meal, and hulls to farmers, ranchers, feed-mixing concerns, and dealers; 
 and linters to mattress, furniture, and cellulose manufacturers. All the 
 crude oil, most of the linters, and some of the meal, cake, and hulls are 
 sold through brokers. In addition to almost 500 brokers and dealers 
 in cottonseed products located in the Cotton Belt, there are several hun- 
 dred brokers and dealers in other sections of the country. 
 
 The mills sell direct to local customers the products that are not sold 
 through brokers. Most of the cooperative mills have been able to sell 
 relatively large quantities of cottonseed meal and hulls to farmers, 
 ranchers, and feed dealers located within short distances from the mill. 
 The relatively low value of hulls compared with their weight usually 
 makes it unprofitable to ship them any great distance. 
 
 Total sales of cottonseed products of the five cooperative mills 
 amounted to slightly more than $3,500,000 during the 1937-38 season. 
 The sales of crude oil accounted for almost 55 percent, cake and meal 
 sales slightly more than 30 percent, and linter and hull sales about 15 
 percent of the total sales proceeds of these associations. 
 
 
 
 
 
 
 
 
 
 
 
 
 This leaflet is condensed from Circular 
 No. C-114, “Crushing Cottonseed Coopera- 
 tively,’ by John S. Burgess, Jr. Copies of 
 this larger publication with more detailed 
 
 information may be obtained while available 
 
 
 
 from— 
 
 Information and Extension Division 
 
 
 
 Farm Credit Administration 
 United States Department of Agriculture 
 Washington, D. C. 
 
 
 
 L-4 GPO May 1940 
 
 [8] 
 

 

 

 

 
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