This article addresses a fundamental issue challenging agricultural cooperatives: farm- ers who are members of cooperatives are doubly exposed to economic losses due to catastrophic events. With a regional crop fail- ure, farmers may lose a portion of their prof- its from lower sales as well as a portion of their patronage refunds, since the co-op may also experience economic losses due to de- creased throughput. This issue, which is most significant for value-added processing co- operatives, has largely been ignored, in part because solutions to the problem have pre- viously 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 mar- kets where and when prices are less vari- able-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-gen- eration cooperatives (NGCs), closed-mem- bership cooperatives that typically require a substantial initial equity investment from farmer members.

Published by: Blackwell Publishing on behalf of the Agricultural & Applied Economics Association