A shared harvest: machinery co-ops could help small, Upper Midwest dairy farms

As farm size significantly increased in the late 20th century, so did the size of farm machinery required to operate those farms. With limited acreage and significantly higher associated operating cost per acre, many small-and medium-sized farms could not justify buying a full set of machinery. Consequently, many farmers have turned to working with custom operators to plant and harvest their crops.

But working with custom operators has been a problem for many farmers due to timeliness issues when planting and harvesting. For example, there is about a ten-day window in which the best quality forage can be harvested. This challenges custom operators trying to harvest several farms during this same window of time. Many farmers are looking for a solution to their equipment needs for planting and harvesting.

The article, "Shared Machinery Old Idea, Still Good One," discusses the joint purchase of machinery by farmers as a way to reduce individual cost, noting that sharing machinery in the Midwest "is an old practice that still makes good sense today" (Fykson, p11). Organizing a machinery cooperative is one alternative to consider for sharing expensive machinery costs.

A major advantage of a machinery cooperative is that it addresses and controls the timeliness issue. "This could occur by coming to a consensus among the members to limit the number of acres that the machinery can be used on within a year. This is different from working with a custom operator since, in that arrangement, the custom operator decides how many acres that he or she commits to during the year" (Drye and Cropp, p.2).

Another advantage is the reduction in capital individual farmers must invest in machinery. A group of farmers can spread the cost of machinery over several farms and acres. Further advantages include economies of scale applied to equipment purchased or leased, savings in operating costs (such as fuel and insurance) and addressing labor short ages during planting and harvesting.

Cost sharing in a machinery cooperative highlights the greater capacity equipment, labor time reduction, better access to new technology, lower risk burden and increased social opportunities. But risks associated with a machinery-sharing cooperative should also be considered prior to coop formation. Timeliness issues are not completely dissolved with a machinery cooperative. More than one farmer-member may still want to use a piece of equipment during the same time. A solution might be a policy in which a harvesting schedule prioritizes which farmers need to use equipment when.

Another challenge involves the establishment and maintenance of good working relationships among members. If members have major differences in how the cooperative ought to operate, then the benefits of working together may diminish and the cooperative may not be successful. While there are opportunities and limitations for machinery cooperatives for small Wisconsin dairy farmers, it is important to remember that irrespective of what decision farmers make (custom operation, individual ownership or organizing a machinery cooperative), the decision should be compared with other alternatives.

Canadian machinery co-ops

Farm machinery cooperatives in France developed after World War II "to encourage the collective purchase and use of scarce farm equipment" (Harris and Fulton (CUMA ...) p 14). In Canada, several types of machinery cooperatives have recently developed, based, in part, on the French system as well as to move away from machinery syndicate pools, which had no legal stares and thus could not take action when members broke an agreement.

While virtually all machinery cooperatives provide equipment rental and use, there are a number of variants, including piece sharing, whole-set sharing, production pooling and labor sharing. Following are examples of machinery-sharing co-ops in Canada.

* Piece-by-piece machinery sharing can be illustrated with the CUMA system in Quebec. CUMA owns all of the machinery and equipment and members are legally bound by contracts, "thereby eliminating the difficulty of having members break the informal syndicate agreements. Second, the liability of members of a CUMA is limited to their initial share investment; personal guarantees are not required" (Harris and Fulton (CUMA ...) p 14). CUMg2s structure allows sharing individual machines among sub-sets of members through an activity branch, which corresponds to a different farm operation or machine. These activity branches are developed following the identification of machinery and equipment needs; each branch member then provides a time and/or unit commitment for that piece of machinery for the duration of the contract.

* Sharing of complete farm machinery sets occurs in cooperatives in Saskatchewan. Within these shared machinery-set cooperatives, production may or may not be pooled. However, both types pool labor. "Sharing labor enables members to take advantage of, or develop, expertise in particular areas. For example, one member may be in charge of machine repairs and maintenance, while another maintains the financial records for the coop. Sharing labor can also allow some members to work either more or less, depending on their needs. For example, one member may wish to exploit off-farm employment opportunities, while another may be interested in farming fulltime but does not have enough land to do so (Harris and Fulton (Farm ...) p 7)."

* Pooled Production is a system where the cooperative's members assign their land to the cooperatives' production decisions, which decides how, what and when to produce what crop(s) on each member's land(s). Lakeside Farm Machinery Cooperative pools production. The members retain ownership of the land. However, seed or grain produced becomes part of the cooperatives' overall pool.

* Non-pooled production is illustrated by the Kipling Agricultural Machinery Co-op. Members make production decisions independently. However a group strategy is formed "to complete key farm operations, such as seeding and harvesting (Harris and Fulton (Farm ...) p 10)."This strategy helps to coordinate the production and harvesting among the individual members.

* Sharing labor occurs in the shared machinery set cooperatives in Saskatchewan as well as some of the CUMA in Quebec. Farm labor activity branches within the CUMA takes charge of "paying the laborers and undertaking associated administrative duties, including providing technical support and training" (Harris and Fulton (CUMA) p. 20). In the Leclercville CUMA cooperative, replacement employees are hired when a member needs to leave his/her operation. This greater supply of skilled labor enables Leclercville member producers to leave the farm for longer periods of time.

Strengths and weaknesses of Canadian machinery co-ops

Strengths of machinery cooperatives in Canada include:

* Cost savings and access to newer, more efficient equipment;

* "Access to a greater pool of knowledge and resources ... such as labor, experience, and ideas" (Harris and Fulton, (An Idea ... p. 2);

* Price discounts on inputs due to the greater volume of business; this can improve farmers' buying power from input suppliers. (Harris and Fulton, (Farm ... p. 3);

* Shared financial risk and minimized individual investments ensure the most efficient use of invested capital and reduce operational costs, which allows for the purchase of more efficient and powerful machinery;

* More rapid equipment turnover to obtain a higher resale value;

* A positive social experience from working together and sharing experience and skills; "re-instill basic rural values with their neighbors, such as co-operation and helping one another"(Harris and Fulton (CUMA ... p. 19)";

* Training--sharing experiences and skills especially with respect to new technologies;

* Economies of scale in machinery purchased or leased (larger equipment size);

* Share labor and enable a younger generation of people to get involved in farming without a large debt burden.

Co-op weaknesses include:

* Conflicting time requirements. "The fear that two or more members might have to use a particular machine at the same time is one of the biggest reasons why many Saskatchewan farmers are reluctant to share farm machinery, especially seasonal equipment such as seeders and combines";

* "Potential loss in income from not being able to use a machine at the most optimal time";

* Carelessness: "The risk of sharing equipment with a member who is inexperienced or careless, and the associated increased maintenance and repair costs, can quickly turn people off the idea of sharing farm machinery."

Survey of Wisconsin custom operators

Custom operators surveyed in Wisconsin indicated what kind of custom work they provide for dairy farmers and the different types of machinery they use. They were also asked about the financing methods they select for each type of equipment.

The survey sought to discover the different types of machinery required for custom operations and the different means of financing, turnover rates and problems encountered. Twenty custom operators were contacted by mail and asked to complete a confidential survey. Only five responded. Nevertheless, the responses provide some insight about the equipment and operations of custom operators. This information has application to organizing a machinery cooperative. Table 2 shows the different acreage sizes for different types of custom work. These are the averages for individual farmers served by custom operators

Purchasing equipment appears to be more prevalent than leasing, irrespective of equipment type. However, leasing was more prevalent with the more expensive equipment, such as a grain combine.

Machinery co-ops for small dairy farmers

A set of assumptions were made for a potential machinery cooperative organized by relatively small Wisconsin dairy farmers. It was assumed that 10 dairy farmers would organize the cooperative. Each farm would have 500 acres of cropland comprised of 250 acres of hay or haylage and 250 acres of corn, of which 150 acres would be harvested for corn silage and 100 acres for grain. In total, equipment would be required for 5,000 acres: 2,500 for haylage and 2,500 acres for corn (1,500 for corn silage and 1,000 for grain). In order to obtain recommendations on the type and size of equipment required, a machinery dealer was contacted who provided recommendations as to whether it was more feasible to purchase or lease the equipment. The results of these recommendations are provided in table 3.

If all the equipment were purchased, between $740,000 and $760,000 of capital would be required. Depending on the lender's equity requirement, between $380,000 to as much as $600,000 would be required as equity capital for equipment purchased. On a per-farm basis (10 farms), this is very feasible, at $38,000 to $60,000 per farm as compared to the alternative of farmers purchasing their own equipment.

The leasing alternative releases the capital requirement for purchase, but farmer members in the cooperative would incur annual lease payments. But again, these lease payments would be lower per individual farmer member than if they leased the equipment independently.

For purchased equipment, it is recommended that new, rather than used, equipment be purchased. Individual farmers often purchase used equipment to reduce costs. But, for an organized machinery cooperative, new equipment enhances the reliability of the equipment. There are less chances of down time for repairs and, therefore, a greater probability of staying on the harvesting schedule.

Guidelines to organizing a machinery cooperative

Numerous issues must be addressed by dairy farmers seeking to organize a machinery cooperative. Some of the more important issues include: articles and bylaws, organizational structure, initial equity investment, how to handle operating capital and more specific operating polices. In considering each item, perspective members should:

1. Discuss all factors regarding the cooperative structure and operating procedure thoroughly.

2. Prepare a detailed written membership agreement.

3. Choose cooperative members with similar attitudes and values regarding farming practices.

Organizational structure

Wisconsin state statutes require that a co-op have at least five members. A minimum of three board members must be elected, assuming there are fewer than 50 members. Depending on the size, the cooperative could be managed by consensus of the members or with a general manager who is not a member. In addition, support staff (such as mechanics, bookkeepers and machinery operators) may be hired.

Articles, bylaws and policies

Articles provide the overall purpose and broad organizational structure of the cooperative. Bylaws provide more specific operating guidelines, including the number of board members, membership qualifications, distribution of any net revenue, redemption of equity when a member leaves the co-op, how the cooperative would be dissolved, etc. Both articles and bylaws require approval by a two-thirds of members voting. The board establishes more specific operating policies, including specific information regarding the daily operations of the cooperative, such as:

1. Equipment Rates or User Fees--This is based on an analysis of operational costs, and may be completed with consolation with a third party, such as university extension.

2. Equipment Depreciation--There are various options for determining depreciation rates. They all have different impacts on taxes and financial reporting of the cooperative.

3. Equipment Storage--Should the equipment be stored on the property of the members or should an alternative location be secured? If stored by members, how should they be reimbursed.

4. Equipment Insurance--How much and what type of insurance should be carried on the equipment?

5. Equipment Maintenance and Repairs--How should maintenance and repairs be charged to members? This may be a part of the equipment rates or user fees.

6. Equipment Retirement--When should the equipment be replaced?

7. Fuel Purchasing and Storage--How should the cooperative purchase and store fuel for the equipment?

8. Source of Labor--Should the members supply labor or should the cooperative hire employees?

9. Schedule of Usage--Who has priority of usage?

10. Rules of Conduct Regarding Usage--What condition should the machinery be in when the user member returns it?

11. Operational Downtime--How should this be handled?

Initial equity investment

The establishment of the cooperative requires an upfront equity investment by those who wish to join the cooperative. The numerous options may include a flat fee and/or a fee based on participating acreage. The logic behind the participating acreage fee is to create ownership of the cooperative based on percentage of usage of the equipment. Members may have concerns about this requirement if they have proportional ownership without proportional voting power. But most state cooperative laws allow for only one vote per member regardless of investment or patronage of the cooperative.

The initial capital investment required from each member would be based on the desired equity level, for example, 50 percent equity and 50 percent debt. Further, equipment may be leased rather than purchased, thus reducing the amount of initial equity capital required.

Operating capital

Operating capital for fuel, repairs, maintenance and lease payments would be generated from fees charged to individual members for use of the equipment. An appropriate fee structure for the use of each type of equipment would most likely be established by the board of directors or by the general manager with guiding polices established by the board.

Summary

Many benefits can be derived from a machinery cooperative, but two are significant: 1. Reduction of individual farmers' machinery costs; 2. Mediating the timeliness issue related to custom operators. Smaller farmers do not have the acreage to justify the cost of a full line of modern farm equipment. Sharing machinery costs via cooperatives addresses this issue. Relying on a custom operator for forage and grain harvesting is also a viable alternative.

But small farmers are not necessarily given priority by custom operators for work. Small operations, therefore, may be at a disadvantage in completing harvest during the ideal time window for haylage or corn silage. A machinery cooperative offers these smaller farmers the opportunity to better control the scheduling of harvesting.

There are many factors to consider prior to forming a successful machinery cooperative. The guidelines presented here outline a few of the issues to be addressed. Ultimately, communication is the key. It is crucial to the success of a machinery co-op that needs and goals be communicated between members and their elected board of directors.

Machinery cooperatives provide a very viable option for smaller dairy farms to address the challenges of access to modern equipment, limited available farm labor and harvesting risk associated with bad weather. In addition, they provide social opportunities to share both farm and non-farm business-related information.

Table 1--Cost-benefit analysis of shared machinery in Canada

Piece-by-Piece                     Pooled Production

* Greater degree of                * Avoids scheduling
independence involved in           conflicts and ensures that
production when individual         operating costs and revenues
machines are shared,               are divided in a fair
as opposed to entire sets;         and equitable manner;

* Greater freedom in               * New members gradually
production decisions for           build equity in the1
members who have dissimilar        operation; a member can
production practices               join the cooperative with
and/or do not want                 a land base and can
to change production               build equity by having
practices;                         income deducted until
                                   the land base and equity
                                   contributions are in
                                   equal proportions;

                                   * Encourages members
                                   to test new options
                                   (crops, farm techniques,
                                   and equipment) since
                                   there is a reduced risk to
                                   individual members.

                                   * Loss of independence:
                                   members make
                                   their production decisions
                                   together and must unanimously
                                   decide how, what,
                                   and where to produce;

Piece-by-Piece                     Shared Labor

* Greater degree of                * Labor sharing has
independence involved in           alleviated the problem of
production when individual         getting reliable replacement
machines are shared,               help
as opposed to entire sets;

* Greater freedom in               * "Time savings is
production decisions for           another important benefit
members who have dissimilar        Since joining the co-op,
production practices               for example, one
and/or do not want                 member's land was
to change production               seeded in four and a half
practices;                         days and harvested in
                                   three. When farming
                                   independently, the same
                                   member required twenty-one
                                   days of labor to
                                   seed and fifteen days to
                                   harvest."

Table 2--Reasons custom operators leased or purchased different
types of machinery

                        Reasons to Purchase

In general              * Equity accumulation

Haybine                 * Don't need to replace
                        machine as frequently

Hay Rake                * Lease provided no benefits;
                        it is preferred that you
                        purchase the item

Forage chopper          * At the time, a purchase was
                        more efficient,

Grain combine

Forage wagon            * Based on need ownership is
                        much cleaner than leasing this
                        equipment; damage occurs
                        and wear;

                        * No fear of broken leases

Trucks for forage       * Not very expensive;

                        Reasons to Lease

In general              * Leases can work for new pieces
                        but usually converted to purchase

Haybine

Hay Rake

Forage chopper          * 3-year lease and then purchase it;
                        it helps with cash flow since
                           it's too expensive to start with

Grain combine           * Too costly for my operation
                        to have sitting seasonal;
                        leasing makes more sense

Forage wagon

Trucks for forage

Table 3--Recommendations for equipment purchase or lease by a typical
machinery cooperative of small dairy farmers.

Machinery Type       Size and style             Cost to buyer/lessee

                                                Purchase
                                                Price

Haybine              18' self-propelled         $70K

Hay Rake             High capacity              $8,500
                     wheel rake

Forage Chopper       Self propelled, 12'        $225K
                     hay head,
                     6 row corn head

Grain Combine        Class 5 machine            $160K
                     with 6 row corn
                     head and 18-20'
                     platform, may be
                     able to handle
                     beans, other small
                     crops

Grain Cart           500-600 bushel             $11K
                     grain cart

Forage Wagon         4-5 combination            $15K per unit
                     boxes for front and        ($60K-$75K)
                     rear unload

Forage Truck         Tandem or tri-axle         New boxes
                     with 20' boxes             ($35K-40 K) with
                                                used truck, don't buy
                                                new trucks often,
                                                with new truck, $75K

Windrow Merger       Double windrow             $38K-39K
                     merger

Packing Tractor      125-150 horsepower         $70K-85K
                     mechanical,
                     front-wheel drive
                     with loader or tractor
                     style or blade;
                     Recommend only
                     front wheel, rather
                     than 4-wheel-drive
                     due to the small
                     size

Machinery Type       Cost to buyer/lessee       Purchase or
                                                Lease? Why?
                     Leasing
                     Rate

Haybine              $15K-20K                   Buy the machine
                                                because of the high
                                                lease price

Hay Rake                                        Normally, don't
                                                lease this because
                                                of the high wear

Forage Chopper       $60K-70K                   Lease rates are
                                                very high, recommend
                                                that people
                                                buy new

Grain Combine        $20K                       For this size of
                                                operation, 1,000
                                                acres, would recommend
                                                leasing or
                                                custom operation,
                                                but if the acreage
                                                went up to 2,000,
                                                then it might be
                                                worth it to buy

Grain Cart           $2,000-$2,500              Leasing is common
                                                since it is only used
                                                for a few weeks
                                                each year. In order
                                                to deal with high
                                                demand, lease contracts
                                                are for 3
                                                years, lease-to-pur-
                                                chase

Forage Wagon         Not much leasing           Not much leasin
                                                since it has high
                                                depreciation rate,
                                                high level ow wear

Forage Truck                                    Common to hire
                                                truck owners,

Windrow Merger       $10K                       Very high wear, so
                                                it's preferable to
                                                purchase; lease is
                                                very high rate,
                                                close to 30%

Packing Tractor      $12K-15K                   Consider leasing,
                                                since it's only used
                                                for seasonal appli-
                                                cation.

Machinery Type                   Turnover Rate

                     Purchased                  Leased

Haybine              3-4 years                  Contract for 2-3
                                                years, normally

Hay Rake             3-4 years                  Lease for 3 years

Forage Chopper       4-5 years, depending
                     on how heavy
                     it's used

Grain Combine        3-4 years

Grain Cart           Lasts 6-10 years           Leasing agreement
                     without problems           is for 3 years, with
                                                option to buy

Forage Wagon         5 years or until it
                     dies

Forage Truck         Lasts about 10             3-4 years
                     years

Windrow Merger       3-4 years                  3-4 years

Packing Tractor      8-10 years

Sources

* Drye, Pat and Cropp, Bob. "Machinery Cooperatives in Production Agriculture." Unpublished paper, UW Center for Co-ops, Madison, WI, June, 2002.

* Fyksen, Jane. "`Shared Machinery Old Idea, Still Good One". Agri-View, page D-1, July 16, 2002.

* Harris, Andrea & Murray Fulton. The CUMA Farm Machinery Cooperatives, Canada: Center for the Study of Co-operatives, University of Saskatchewan, 2000.

* Harris, Andrea & Murray Fulton. Farm Machinery Co-operatives in Saskatchewan and Quebec, Canada: Center for the Study of Co-operatives, University of Saskatchewan, 2000.

Editor's Note: Cropp is professor emeritus in the Department of Agricultural and Applied Economics and recent director of the Center for Cooperatives, both at the University of Wisconsin-Madison. Ford is a research assistant in the Department of Agricultural and Applied Economics.

Catherine Ford and Robert
Cropp
University of Wisconsin Center for

Cooperatives

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