New Risk‐Management Strategies for Agricultural Cooperatives

Abstract

challenging agricultural cooperatives: farmers who are members of cooperatives are doubly exposed to economic losses due to catastrophic events. With a regional crop failure, farmers may lose a portion of their profits from lower sales as well as a portion of their patronage refunds, since the co-op may also experience economic losses due to decreased throughput. This issue, which is most significant for value-added processing cooperatives, has largely been ignored, in part because solutions to the problem have previously not been feasible. Ironically, a primary incentive for farmers to invest in and supply to a cooperative is the co-op's ability to mitigate some of the farmers' risk (Sporleder and Goldsmith). The cooperative helps mitigate farm price risk by selling either raw farm products-into markets where and when prices are less variable-or processed products characterized by market prices more stable than commodity prices. However, farm members often fail to recognize the substantial risks to which their cooperative, and thus their invested equity, may be exposed. This has become more of a salient issue with the creation of new-generation cooperatives (NGCs), closed-membership cooperatives that typically require a substantial initial equity investment from farmer members.'