COOPERATIVES: The Farmer Takes a Town

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The 12,000 farmers who own the Fruit Growers Supply Co. of Los Angeles celebrated the 100th anniversary of the cooperative movement this week* by buying an entire town. For $10 million the cooperative got not only the jail, the city hall and the utilities of the company town of Westwood, Calif, (pop.: 3.500), but also a sawmill, a veneer plant, a box factory and the railroads—including locomotives and a 20-mile stretch of electrified line. But the Supply Co.'s most important reason for buying the town from the Red River Lumber Co. was to get 100,000 acres of timber for packing cases for their citrus fruits. It was one of the biggest lumber deals in U.S. history.

The Fruit Growers Supply Co., formed in 1907 by packing houses that were also members of the California Fruit Growers Exchange, is the oldest major farmers' purchasing cooperative in the U.S. The Exchange markets and promotes the growers' fruit; the Supply Co. was formed to sell the packing associations box parts, nails, tissue-paper wraps, etc., at cost — i.e., by giving purchasers a share of the "profits." By 1943 the company was manufacturing insecticides and fertilizer as well as selling, and ended the year with gross sales of $13,111,753. With some of their own cash and substantial loans from local banks, they made a $4-million down pay ment on Westwood.

Help the Farmer. This kind of buying by co-ops is a cause for alarm to many a businessman, who looks with suspicion on the rapid growth of U.S. cooperatives (they have increased their business eleven times in 25 years) and the tax advantages which are now accelerating their growth. No cooperative organization need pay an income tax so long as it allocates the profits from its sales to the members on a proportionate basis, and farm cooperatives receive even further advantages under Section 101 (12) of the Internal Revenue Code.

The intent of Section 101 (12) was to help the farmer, forced to sell his products at wholesale prices, but to buy what he needs at higher retail prices. Congress hoped to give farmers a bigger profit by helping them to sell at retail prices, i.e., eliminate the middleman through coops. This the co-ops have done well.

In the process the marketing and farm purchasing coops, unlike consumer coops, have become big business, but without big business' tax liabilities. The ''profits" of co-ops — i.e., moneys kept in the till for expansion instead of being returned to members — are taxfree. But repeal of Section 101 (12) would not stop co-op growth, because cash rebates to co op members, and "profits" withheld, if allocated proportionately on the books, would still be taxexempt. Partial relief for private business could be achieved by taxing co-op "profits" unless paid out in cash. But big cooperatives could find money for expansion in other ways.