Organizing a Cooperative Cotton Gin SEVE By OTIS T. WEAVER, Agricultural Economist, and C. H. PRICKETT, Marketing Specialist EVERAL important preliminary steps must be taken before a cooperative association is incorporated. Frequently the underlying principles of a cooperative organization must be explained to prospective members. Local conditions also must be analyzed to determine the need for a cooperative gin and to consider the possibilities of its success. The idea of starting a local cooperative gin usually originates with one individual. The responsibility for completing the organization, in most cases, must be assumed either by him or by a small group of producers who have become interested. The general purpose of this publication is to provide information and suggestions that will help this group to decide whether or not a cooperative gin is needed in their community and, if it is needed, to assist them in completing the organization. The specific purposes of this circular are: (1) To enumerate some desirable features of a cooperative gin; (2) to discuss factors that are important in determining whether or not a cooperative is needed; (3) to recommend a financial structure and dividend policy; (4) to outline the steps of organization procedure; and (5) to suggest some general forms as a guide in preparing the organization papers. CHARACTERISTICS OF COOPERATIVE GINS THE HE characteristics of a cooperative gin are similar to those of a gin owned by an individual cotton producer and used to gin his own cotton exclusively. In both cases ginning may be considered a part of the production of cotton. Although the practices of cooperative cotton gins are necessarily modified by the local conditions under which they operate, some features which have been found NOTE.-Acknowledgment is made of the assistance of L. S. Hulbert, Assistant General Counsel, and E. Marks, Assistant Attorney, Farm Credit Administration, in drafting the suggested organization forms included in this publication. 1 desirable may be stated as follows: (1) Ownership by producerpatrons; (2) control by member-patrons; (3) adequate charges and conservative prices maintained; (4) capital dividends limited; and (5) patronage dividends distributed. The cooperative marketing statutes of the various States provide the legal basis for the realization of these cooperative characteristics. OWNERSHIP BY PRODUCER-PATRONS Ownership of a gin plant requires an investment of capital. Practically all the capital of a cooperative gin should be supplied in time by the members and patrons if it is to continue to operate successfully. Although a part of the original capital requirements may be borrowed, the initial investment of the members should be sufficiently large to enable the cooperative to assume normal business risks. Since the financial risk which an individual member has under the cooperative statutes generally does not exceed the amount of his paid-in and subscribed capital, the combined investment of all the members should be sufficiently large to give the association a sound financial structure. From the standpoint of the members themselves, a substantial investment of capital indicates interest in the undertaking and tends to insure loyalty. The amount of capital originally supplied by each member should be as nearly in proportion to his anticipated patronage as possible. Since the benefits of cooperative ginning are in proportion to the use made of the services of the association, the same rule should be applied to the invested capital. A long-time financial program, such as a revolving capital plan, will tend to maintain this relationship. CONTROL BY MEMBER-PATRONS Democratic control by members who are also patrons is a recognized principle of cooperative gins. Regardless of how much or how little a member has invested in the capital of the association, he has— with a few exceptions-only one vote. Under some cooperative statutes such a practice is mandatory. In the States which permit other bases of voting, most cooperative gins follow the one-man onevote principle. Under some conditions, however, voting on the basis of patronage may be preferable. Membership in a cooperative gin is personal rather than financial. The investments of members are made, not to realize a return on capital as such, but to obtain efficient ginning service at minimum cost. Members of a cooperative gin receive benefits primarily as patrons, 1 Christensen, C. L.; Hobson, Asher; Bakken, H. H.; Froker, R. K.; and Schaars, M. A. COOPERATION, PRINCIPLES AND PRACTICES. Wis. Univ. Extension Service Spec. Circ. 128 pp., illus. 1936. not as investors, and therefore, should control the gin because they are patrons.2 Control of the business operations of a cooperative gin is necessarily indirect. Members determine the general policies of the association by adopting and amending the bylaws. They also elect the board of directors. Since the members elect all or part of the directors each year and are also in frequent contact with them, the directors usually are responsive to the views of the members. ADEQUATE CHARGES AND CONSERVATIVE PRICES MAINTAINED As a rule cooperative gins charge the same rate for ginning and wrapping and pay the same prices for cottonseed and other products that prevail at nearby commercial gins. In numerous instances, however, cooperative gins have refused to become involved in rate cutting and price wars. They charged a higher rate for ginning and paid a lower initial price for cottonseed and other products than competing commercial gins. A cooperative gin whose capital and patronage are derived from its members cannot do more or less than render ginning services at actual cost, and pay the resale price less handling costs for cottonseed and other products handled.3 When the initial charges for ginning and wrapping are higher than the cost of providing these services, and the prices paid or advanced for ccttonseed and cotton are below the prices received for these products, a net income will result. If this income is then distributed in proportion to the business contributed, the member will pay the actual cost of ginning and wrapping and receive the resale price less handling costs for cottonseed and cotton. 2 Robotka, F., and Laughlin, G. C. COOPERATIVE ORGANIZATION OF IOWA FARMERS' CREAMERIES. F. C. A. Bull. No. 14, 92 pp., illus. 1937. 3 Paulson, W. E. SOME PROBLEMS IN THE SUCCESSFUL OPERATION OF COOPERATIVE COTTON GINS. western Social Science Quarterly. v. 28. June 1937. South Limitation of fitteds a trested capital is coe of the basie przépies of scpentives. I has stood the test of time and expertence since it was first adopted by the original Roebdale pioneers nearly The legal basis for limiting resume on capital is definitely established. The cooperative statutes generally place a limit of S perent or less on expital dividends. In order to obtain the benefits of the CapperVolstead Art. a Federal statute applicable to cooperatives ibai do interstate or foreign business, farmers cooperatives must either limit drcenés e capital to & perrent, or restrict voting to one vote per member. Likewise, one of the primary requirements for exemption from Federal income taxes is that dividends on capital stock shall not exceed & percent per an State and Federal laws specify only the maximum return that may be paid on invested capital, but cooperative associations may set a lower rate. The tendency during recent years among cooperative gins has been to lower materially the returns on capital. Many associations have limited dividends on capital to 6 percent: others to 4 percent; and still others have eliminated dividends on invested capital. PATRONAGE DIVIDENDS DISTRIBUTED Patronage dividends are the tangible evidence of the financial benefits of a cooperative gin to its patrons. They are the means by which the initial charges for ginning and wrapping are reduced to cost, and the initial prices paid for cottonseed and other products are adjusted to the final sales price less handling costs. Since dividends on stock are limited, capital is hired in somewhat the same way as labor and receives its fixed return before patronage dividends. Any |