How To Set Up A Direct-Charge Co-op

How to set up a direct-charge co-op to purchase groceries from wholesalers or other sources at the lowest possible cost.
By R.S. Staples
July/August 1970
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In case you haven't noticed, there's a small revolution taking place in food distribution. All over this continent, groups of folks are setting up co-operatives, bypassing the local supermarket and dealing direct with wholesalers, farmers and food processing plants.

Why? Well, Gordon Inkeles, who helped set up the original San Francisco coop, once gave this comparison: When Safeway was selling oranges for 15¢ each, the co-op was offering the same oranges for 3 to 5 cents a throw.

The average U.S. co-op, so far, has been rather free-form (a few are described in this issue) but, in Canada, some really business-like co-operatives have been organized. This article gives all the specifics:

After two years of study, the first direct-charge co-operative in Canada, Co-operative Supplies Depot of Ottawa Limited, was incorporated in June of 1968. Growth was rapid and - by January, 1969 (when the report was written from which the following information is taken) - CSD had 970 members and was on the verge of setting up a second depot. At that time the success of CSD in Ottawa had already inspired the establishment of 13 other such Canadian co-ops. We do not have any recent figures but we understand that the direct-charge co-operative idea has continued to mushroom at an increasing pace in Canada.

What

In briefest terms a direct-charge (d-c) co-operative is an organization established by a group of people to purchase groceries from wholesalers or other sources at the lowest possible cost.

A direct-charge co-operative is not a business in any ordinary sense of the term. It does not buy at one price and obtain its income by selling at a higher price. A direct-charge co-operative provides a service, a purchasing service, and the members pay the cost of that service by dividing it among themselves. (Incidentally, no direct-charge co-operative should be required to pay business tax because of its operating methods.)

In most respects, a direct-charge co-operative is not different from a conventional co-operative. It follows democratic principles by limiting each member to one vote. It eliminates profiteering by paying no dividend on the share capital contributed by the member.

When a direct-charge co-operative incorporates it does so under the usual legislation in its province thus becoming subject to the rules and regulations which govern all co-operatives. Under the legislation the co-operative establishes its by-laws, arranges its financing and holds its annual meetings of members. The annual meeting elects the board of directors. The board engages a manager and guides the organization throughout the year.

But the direct-charge co-operative has added two principles which are very basic to its function. The first concerns its policy on pricing and is often stated thus: There are no hidden charges. This means (a) there is no markup on merchandise; the price for an article is established when the co-operative makes the purchase and it turns over to the member the merchandise at that price; and (b) pricing does not include provision for accumulation of capital. This is in contrast to private-profit business and many conventional co-operatives which accumulate capital from the gross margin.

The second basic principle which distinguishes a direct-charge co-operative concerns operating revenue. In a direct-charge co-operative expenses are collected directly from the member; that is, each member undertakes to pay his portion of operating expenses as long as he is a member. There is no relationship between the operating charge he pays and the amount of merchandise he buys. Indeed he pays his operating charge even in weeks he buys nothing on the grounds that the expense has continued.

There are other important points. Value to the members is the prime consideration in the selection of merchandise and not profitability from a merchandising standpoint. Since a member must pay his portion of operating costs he is involved in all decisions which affect those costs as far as possible. Voluntary work is encouraged on a well-organized basis to provide members with opportunities to learn more about the co-operative and to reduce costs.

In a direct-charge co-operative members also undertake to make investment in share capital at a stated rate in order that the co-operative may have a fund to equip the depot and acquire inventory. Steady accumulation of capital will free the co-operative in time from the necessity for borrowing money and provide funds for expansion.

In summary then if you find an organization established under co-operative legislation to procure merchandise for its members, each member having undertaken to pay his portion of operating expenses as a direct charge rather than in the form of a markup you will have come upon a direct-charge co-operative, for this is its distinguishing feature. 

Why

General Conditions

In general there are two sets of reasons for the move toward direct-charge co-operatives. One is found in the general conditions faced by consumers in Canada, the other lies in the history of the co-operative movement itself.

It took the women's protest movement of 1966 to demonstrate clearly that many Canadians are seriously concerned about the high cost of things that their families need. The expensive methods used to persuade us all to buy more and the bad taste and questionable morality of much of the advertising to which they are exposed is resented by many.

One of the best ways for conscientious consumers to control the highly questionable influence of advertising is to take control at the source. A direct-charge co-operative does not have to advertise its products to maximize income because its income does not depend on an increased volume of sales. Indeed this is one of its great strengths as compared with private-profit business. A typical chain store for example, is caught up in a bad situation which it is powerless to change. Real money must be spent in efforts aimed at persuading consumers to come to its stores and not to patronize other stores. At the same time the other chains are doing the same thing, resorting to all kinds of advertising, gimmicks, specials, stamps, contests, games. From the standpoint of any particular chain this seems to make sense, from the standpoint of consumers it definitely does not make sense, it is mainly waste. A consumer-oriented distribution industry with direct-charge co-operatives as its base could bring great simplification and distinctly lower costs of distribution.

Furthermore the consumer has a basic right to know what he is paying for. At present he has no idea what the costs of manufacture and of distribution are. How can he make an intelligent choice if he does not have access to such basic information? Why all the mystery? Isn't freedom to know what they are paying for one of the freedoms consumers should insist upon having? Wouldn't this one step clear away much of the present consumer unrest? Consumers have to buy, just as they have to breathe. At present price is the big factor in decisions about the purchases they choose to make. But though price is a main consideration in determining value it may include charges for unnecessary costs. In a direct-charge co-operative every feature of financial transactions is known to the members. And as the principle of direct-charge extends farther and farther back toward production the area of mystery will diminish.

There is another point. If present trends continue the food industry in Canada will be dominated by a very few very large firms. Already the combination of a large food manufacturer and a large advertising agency is almost irresistibly powerful. A new product can be conceived, produced and marketed successfully without much reference to its value from the consumers' standpoint.

It doesn't have to be that way. There is no reason why consumers have to spend their money the way they are spending it now. The co-operative approach has been available. People can have their own stores, their own purchasing service and eventually the products they want. The money consumers are spending for food and other necessities creates the huge and powerful industrial complexes which confront the consumer. He can, if he wishes, use his own money to create his own system. The ultimate power is his.

Co-operation

Co-operation is such a beautiful and sensible idea that it is pertinent to ask why it has not gone further. Consumer co-operatives have been known in Canada for 60 years or more and there are quite successful co-operative stores in most parts of Canada. But in the total picture, consumer co-operatives could only be described as insignificant. Value of merchandise handled is around 2% of the Canadian total. Surely it is not unreasonable to conclude that generally speaking the present operating methods of consumer co-operatives, with their roots in Europe in the previous century, are not being accepted by Canadians under present-day conditions.

The reason is that, typically, the successful consumer co-operatives of the conventional type find it necessary to operate in a manner calculated to attract people in off the street as it were. Some are building strong institutions and saving money for the members too, but since orthodox methods of merchandising are being used costs of operation are much the same as in other stores.

It becomes apparent that the weakness in consumer co-operatives lies mainly in the connection between the co-operative and the member; obviously consumer co-operatives are not capitalizing on their one great potential strength-membership. To remedy this situation the direct-charge co-operative has appeared. It provides its members with merchandise at cost and expects these members to pay the operating expenses, whatever those expenses may be.

This means that there has been a rather clean break with the inadequate operating methods used in the past. Those methods were based on the theory that returns paid out of hoped-for surpluses were the main advantage for the members, and assumed that most of the necessary equity capital could be collected by adding to the price of the merchandise. The necessary volume of business was to be achieved through orthodox sales promotion.

In summary then here are some of the advantages of the direct-charge method of organization.

1) It is not necessary to attract customers through advertising, stamps, specials, loss leaders, contests, games or gimmicks, so costs are less and annoyance reduced.

2) The requirement that each member must pay his portion of operating costs is understandable and acceptable.

3) Since the co-operative adds no markup, prices can be much below prices in other retail stores.

4) High financial reserves will not be necessary; reliance is placed on share capital as equity financing. Capital is provided by all members at the same rate.

5) Purchases per average member will be relatively large because prices are so low.

6) Because of the more rapid turnover, inventory will be relatively low reducing the need for capital and floor space.

7) Operation is simpler. For example, pricing is merely a mathematical calculation, records of purchases by individual members will not be necessary.

8) Because members will be anxious to keep costs within reasonable limits the number of brands and lines can be reduced and shopping times spread throughout the week.

9) Each member assumes his fair share of financial responsibility but with a maximum of freedom; as he is paying his portion of operating costs weekly he is under no moral obligation to buy from the co-operative.

10) Management is under pressure to get prices to members lower, not higher.

11) "Service-at-cost" is not just a watch word; it is applied literally and openly.

12) Since the direct-charge co-operative is not dependent on gross margin for its revenue the risk of loss or failure is greatly reduced, provided, of course, that budgeting is sound.

13) The direct-charge co-operative is a simple and direct plan of organized purchasing which represents purely the consumer interest.

Where

It is sometimes said that before a certain type of co-operative is organized the need for it must be ascertained. This is no problem in connection with consumer co-operatives for there is always need. The need finds expression in different ways.

In the first place distribution costs are high, there is convincing evidence that if consumers will organize their purchasing along direct-charge co-operative lines they can save more than 10% of what they are spending for groceries as compared with ordinary retail stores. As growth occurs and they reach back through production to the sources of supply it is likely that costs can be reduced by considerably more. It is the paradox of our economy that production can be so efficient and distribution so costly; it is quite common for consumers to be paying a price which is double the cost of manufacture.

But in the long run the social aspects of this question are even more significant. Alienation is the curse of our age. The modern little man and his little family finds himself lost in the forest of big governments and monstrous corporations. His only hope of staying sane is to organize; so he has the church or his fraternal society or his professional association or his labour union. He should also organize as a consumer; the power of consumers is potentially by far the greatest of all.

Social needs may be more compelling than appears at first glance. We find many of our well-placed and well-educated young people who are not satisfied to be lost in the forest and they would like to cut it down. One family of Canadians in four lives under conditions of poverty by any reasonable definition of that word, with many of the Indians and the city slum dwellers at the bottom of the scale. The direct-charge approach to consumer organization is so simple and effective that perhaps at long last even poor people can begin to get value for the money they spend.

But to say that there is always a need is to beg the question to some extent about exactly where a direct-charge co-operative should be started. After all, people are everywhere and they are all consumers. The first requirement as we shall examine more closely in the succeeding chapter is a few people in the community who will give the necessary leadership. Because of its nature a direct-charge co-operative can only be undertaken by the people themselves; the idea can come from outside, outsiders can provide assistance, but the drive must come from within.

One of the most important points has been left until the last. Some direct-charge co-operatives have found it very difficult indeed to find space for a depot which is consistent in size and in cost with the number of members likely to be involved at an early stage. This possible difficulty has to be taken into account when a decision is being reached as to where a direct-charge co-operative should be situated.

To summarize this section briefly here are the main considerations when deciding where a start should be made.

1) Leadership, both locally and regionally.

2) Members. It is necessary to know at the beginning how many members will be actually involved in the early stage. You can't set up a direct-charge co-operative which is capable of serving 300 members and expect the expense to be carried by an initial group of only 50.

3) There must be appropriate space in a suitable building, and in most cases parking will be necessary.

4) Financing is an important consideration. It is not likely that the members can provide the necessary investment capital from the start. In most cases a small loan is necessary and security is not usually too good.

5) There must be a source of supplies at fair prices, so far this has not presented any great problem.

How

Organizing
If a person wishes to explore the possibility of organizing a direct-charge co-operative the steps to be taken are clear enough. The objective has to be to find a basic group of interested people. The group does not have to be large, but it must be well-informed, enthusiastic and broadly representative of the community as a whole. It will be necessary to distribute written material and carry on discussions until the members of the group have a clear understanding of direct-charge co-operative principles and their implications. Each member of the group should be able to describe how a direct-charge co-operative operates and to defend its methods.

If it is the intention to organize a direct-charge co-operative to serve the interested citizens of an entire city or town, care must be taken to ensure that the organizing group represents informally the various social organizations which are active in the community. To a greater extent than one might expect, the makeup of the basic group determines the makeup of the membership in the early years. If the citizens in general get the idea that, for example, the new co-operative is of interest only to labour union members there is evidence that it is not easy to interest the community as a whole at a later stage. On the other hand, if the leadership is made up mainly of professional people it may not be as easy as one would suppose to interest the wage earner. A few key people from all community groups should be involved in the early meetings.

As far as techniques are concerned, there is no good substitute for informal and friendly discussions over a cup of coffee in the home of an interested family. These small exploratory discussions could spread through the territory. It is not usually difficult to find a few interested women, each of whom would be quite prepared to invite a few of her neighbors in for an interesting evening to talk about what might be done through co-operative organization. A very brief description of the basic characteristics of a direct-charge co-operative should be distributed at these meetings as a basis for discussion. In this way a desirable level of uniformity in the presentation of the idea can be achieved even though different leaders attend the meetings throughout the community.

Publicity

At about this stage it would be a good idea to give general publicity to the proposal under discussion as a newsworthy development. People are likely to take more interest in such a move if they have encountered references to the idea through the usual sources of information. A reporter could be invited to a meeting or two. Radio discussions in the hours when women are likely to be listening have proven to be a very effective means of communication.

The start is the difficult time and this of course is the reason why a basic group of enthusiastic leaders is indispensable.

How Large?

Since in most cases the board of directors will wish to engage some person as manager who will be responsible, at least on a part-time basis, for certain aspects of the operation, perhaps 50 members could be regarded as the practical minimum with 100 members a more viable objective.

In some cases the problem has been tackled from the other end. That is, conveniently located store space has been found at a reasonable rental. A monthly budget of expenditures was prepared. That total was divided by four to obtain weekly costs and the result again divided by an acceptable weekly operating charge (usually in the $1.75 to $2.00 range). The number of members which it is necessary to have at the start thus became apparent.

Basic groups which are organizing direct-charge co-operatives at present have one advantage. Though the trail is still rather uncertain some pitfalls can be avoided on the basis of the experience of the earlier groups and every effort should be made to obtain the benefit of this experience. There is plenty of indication that a group will find it advantageous to get in touch with other direct-charge co-operatives.

There is no reason why a small group cannot commence operations informally, that is without a charter, but before too long it is desirable that incorporation be applied for. Only through incorporation can the financial liability of the directors and members be limited and full authority be extended to officers to enter into arrangements for renting property, borrowing money and the like on behalf of the co-operative.

The group will seek to incorporate under the appropriate legislation in its province of course. The cost varies from province to province but is not prohibitive.

Financing

When a new direct-charge co-operative is being incorporated the authorized capital will likely be the minimum provided for in the provincial legislation. But in the case of direct-charge co-operatives starting on a large scale, care should be taken to ensure that capitalization is adequate.

A careful study of financing methods in use by direct-charge co-operatives indicates that the following plan is best. When a person applies for membership he is required to purchase two shares of $5 each (installment payment of the $10 may be arranged if necessary), and at the same time the member undertakes to buy an additional $5 share each quarter after the first. That is, the member invests $25 in share capital of the co-operative in his first year of membership and $20 in each succeeding year. There should be no limit mentioned in the by-laws or in the undertaking given by the member. A limit can be established based on the needs of the organization by a recommendation of the board, endorsed by resolution of a meeting of the members. This method provides for a desirable level of flexibility because no one can foresee the capital needs of the organization through the years to come. The required investment in share capital can be adjusted from time to time as the years pass, if necessary. A copy of the membership application form in use by CSD Ottawa is attached as Exhibit "A". Improvements may have been made by others.

The by-laws should provide that no interest or dividend is paid on share capital. This is justifiable because members are investing in share capital at the same rate. To pay a dividend on shares would only raise operating costs and mean that the members were taking money out of one pocket and putting it in the other.

It seems equitable to permit a member to withdraw from membership and to recover the investment in shares if he is moving away from the area which the co-operative can serve or on proper notice, say two months. Legislation regarding the purchase of shares from a member by a co-operative is not the same in all provinces. As an example in Ontario a co-operative can use only surplus funds to purchase shares from members; so, since a direct-charge co-operative will not have surplus it cannot redeem shares. However, a direct-charge co-operative should undertake to assist the retiring member by transferring his shares to another member thus ensuring that he gets his money back.

Perhaps without realizing it at first direct-charge co-operatives appear to have solved the problem of equity financing. Though a co-operative requiring the investment of only $10 at the start will be very short of money to cover the cost of equipment and inventory, the steady inflow of new capital will correct that situation before too long.

It is a simple matter to spread the operating costs among the members. In a very small operation with the depot open only, say, a couple of days a week, an inventory of merchandise carried over can be taken at the close of every weekly operation and the financial position readily ascertained. In a larger operation it may be sufficient if a budget is prepared based on an inventory taken at the end of each three-month period. (Operating statements will need to be prepared much more frequently of course.) On the basis of the expenses in the previous quarter the board will prepare a budget for consideration of the membership in meeting. The budget of expenditure should include all possible expenses including provision for expenses like insurance, auditor's fees, and taxes which may occur only once a year and for an allowance to cover inevitable breakage and loss in merchandise.

Once the budget of expenditure is established for the succeeding quarter the total is divided by 13 weeks and by the anticipated number of members; the result is the weekly operating charge. This is the sum which each member must pay weekly. A specimen calculation for a hypothetical co-operative which has achieved 300 members is appended as Exhibit "B".

There are several operational methods which need to be watched very carefully from the very beginning. We will deal with these only briefly.

Buying

A direct-charge co-operative is an organization which purchases merchandise on behalf of the member. It is when the merchandise is coming into the store that the effective purchase is made. Once it is in the store it is owned by the membership as a group and must be paid for by them. The selection of lines to be handled and brands to be stocked involves numerous difficult decisions. If the co-operative is going to stock all the brands found in a large supermarket it will need a relatively large store, relatively high capitalization and its costs will be higher than necessary. Careful consideration must be given to the brands which are to be purchased. Committees of members should be involved in these decisions.

Controls

An inexperienced group which is opening up a direct-charge co-operative may not understand the necessity for carefully controlling delivery of merchandise. As the operation grows there are rather sophisticated procedures for this, but here it is enough to say that no merchandise should be paid for until the bill has been endorsed by a representative of the co-operative after an actual count of the delivery has been made. Similarly, merchandise which is being returned, e.g. stale bread, must not be removed from the co-operative until it has been checked by staff.

Historically one of the most neglected areas of operation in a new co-operative, whether conventional or direct-charge, is in the field of accounting. The organizing group may not appreciate the importance of good records (many small business men have the same attitude) and the result is that the co-operative is in financial difficulty before anyone knows. Accounting is one thing that cannot be improvised. The group simply must find a person who can and will make certain that there are adequate records from the very first day. Furthermore, it is not enough that the information be recorded, there must be provision for making up statements at the end of accounting periods very promptly. Obviously a board of directors cannot intelligently prepare a budget for a month or a quarter unless it knows with reasonable accuracy what the costs were in the previous period. Some of the provincial central co-operatives operate bookkeeping services which should be considered by any direct-charge co-operative in the area.

Management

It is imperative that adequate provision for competent management be made from the very start. Even in a very small direct-charge co-operative operating on a part-time basis, someone must be responsible. It is one function of the board of directors to name such a person and clearly outline his duties and provide him with clear policies under which to operate. Such policies will concern accounting, purchasing, receiving, displaying and necessary controls of cash and merchandise. As the co-operative grows its success will depend on employees to a very large extent. The board must develop progressive policies on employee development and benefits.

Co-op Pricing

Establishing the prices which appear on the merchandise in direct-charge co-operatives is a crucial area of decision which has received a great deal of thought. The principle is that the co-operative sells at cost without markup and this is widely accepted. One of the great strengths in a direct-charge is its ability to say honestly to the members, "this merchandise is being turned over to you at the price which was paid for it." Never should a direct-charge co-operative get into the position where it cannot make that statement without qualification. If members ever have reason to think they are being charged two ways, paying both a weekly fee and a hidden markup, they are likely to lose confidence in the operation.

But what is meant by the phrase "at cost"? The following are suggested as acceptable and perhaps necessary modifications.

a) When the case-lot price divided by the number of units in the case results in a fraction the unit is to be priced at the next higher one cent point. Thus a case of 24 tins, costing $5.40 would result in a price of 23 cents on each tin. (In some instances low-cost items could be grouped in multiples, e.g. 2 for 15 cents).

b) Fresh fruit and vegetables may be sold at a price increased to include truly unavoidable spoilage as a part of cost, but the increase should be no more than a small and stated percentage of the original cost of any item, e.g. 2%.

c) Fresh meat presents a special problem because when a co-operative is cutting its own meat the purchase price will be based on the cost of the carcass. The various cuts of meat would be priced at a level which recovers the original cost but no more.

d) The "at cost" price is usually interpreted to be cost at the co-operative door; that is including any delivery charges. Pricing policies are crucial indeed and in no other area is the distinct outline of the direct-charge approach so clearly demonstrated. For example, there is always a temptation to add a small markup in order to recover some of the operating cost. No doubt faced with the necessity for greater revenue as services broaden out some co-operatives will make this move, but if they do so they will cease to be direct-charge co-operatives under our definition. The reason is clear. The distinctive feature of the direct-charge co-operative is the undertaking which each member makes to pay his portion of operating expenses. If those expenses are to be recovered through adding a percentage to the price of merchandise purchased by the member there would be no basis for this undertaking unless the member were required to buy from the co-operative. Such a requirement would likely be quite unacceptable.

Conclusion

Towards Economic Democracy
The direct-charge approach to consumer purchasing is potentially a very powerful tool. If, as now seems likely, increasing numbers of Canadian citizens will agree voluntarily to cover the cost of the services they want to have they can save themselves a lot of money and they can assert a measure of effective control over the economic processes on which their lives depend. If, following direct-charge principles, they insist that each member contributes towards the capital fund as long as necessary, that there are to be no hidden charges and that each member must pay his equitable portion of operating costs the influence of the consumer can be felt throughout the whole economy in a very fundamental way.

At the same time insistence on the same fundamentals will ensure that control and direction of the co-operative will remain with the members. The direct-charge co-operative holds its members in a highly responsible relationship for it will always be directly dependent on the members for the money with which to operate. Economic democracy is difficult to create, but it can be done this way.


EXHIBIT "A" FORM

CO-OPERATIVE SUPPLIES DEPOT OF OTTAWA LIMITED
1383 Clyde Avenue, Ottawa 5

APPLICATION FOR MEMBERSHIP

I hereby subscribe for two shares of $5.00 each in Co operative Supplies Depot. A remittance in the amount of $ accompanies this application. I will pay the balance of the $10.00 owing within one month. I understand that no interest or dividend will be paid on shares.

If this application is accepted, I will comply with the By-laws of the Depot as may be properly enacted from time to time.

I realize that the following are among the requirements of membership:

(a) I am required to pay $5.00 for one additional share in each quarter year, not including the current quarter.

(b) I am to pay a service fee each week to cover my portion of the operating costs in an amount to be established from time to time; this fee is to be paid throughout my membership regardless of the extent of my patronage.

(c) Because the Depot serves only member-families I am to take no merchandise from the Depot for others unless they are members of my household.

This application is tendered on condition that the Depot will purchase for me selected items of merchandise and turn these over to me at the price which it paid for the same; and on the further condition that I may resign from membership if 1 move away from the Ottawa-Hull area, or at any time on two months notice.

Date ........................................ Phone.....................................
Name ........................................................................................
Address ..................................................... Zone...................
Signature .................................................................................
Membership Number assigned ............................................

As revised in April, 1967


 


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