WHY A COOPERATIVE? mbla J.Tn Why do farmers choose to organize and patronize cooperatives, and why does the public the cooperative form of busin sanction or encourage In a sense, the cooperative form of business needs no more justificatior than do the proprietorship, partnership, or corporate forms of business enterprise The is: Why do persons or firms at one level interesting issue of a commodity system elect to extend their business into another level oi levels of that system via a cooperative? A commodity sector or system in cludes the whole set of activities or functions from input supply to fina users associated with the Production and rarketing of that commodity Both terms (''sector and "system") used in the literature on this topic are We use the term system. Figure 8.1 illustrates the movement of products and general levels of activity in the corn commodity system. Agricultural cooperatives usually extend farmers' businesses back ward into input supply or forward one or more levels into marketing. Fur ther, what is the impact of this integrative activity by farmers on others ir the food and fiber sector? Although there are other motivations for
P.123
Figure 8.1 Illustration of an agricultural system. cooperative activity, it is accepted that the primary motivation for farmer participation in a cooperative is to improve their well-being (usually in come). Rational persons or well-managed firms would not voluntarily engage in activities that would be expccted to leave them less well off Economic growth is generally associated with increasing specialization and trade among economic units. This usually implies larger firms operat ing at each level of an economic sector, not the integration of activities from several levels into a single firm. The existence of economies of size up to some size, which is often larger than a typical proprietorship, encourages firms to expand horizontally That is, if major economies of size exist, there is incentive to increase output of a given product or service rather than to expand by extending the firm into marketing or input production. Given this reasoning, one would expect a moderately sized farmer to invest avail able capital in expanding cotton production rather than in building a cot ton gin, whether alone or as part of a group. Thus the choice by a group of
relatively small farmers to in capital (as a cooperative) in an operation at another level in the system rather than investing in the expansion of their farms begs for an explanation If markets for goods and capital were perfect, there would be no reason to expect any particular form of business organization (cooperative or other). The result of would be a state in which prices perfect markets would reflect marginal costs (the additional cost of producing an addition- al unit) the system. Goods could not be reallocated to increase throughout distribution of in the satisfaction of market participants, given the existing come. Such is the end result of a competitive market system, but a state such a state If it existed, one could argue that there has never curred. would economic reason for the cooperative business form. In other be no words, cooperatives exist because markets have failed to attain the com petitive ideal. All reasons or justifications for speciai policies to promote cooperatives can be traced back to such failure. Markets faii fo a number of reasons
WHY A COOPERATIVE? mbla J.Tn Why do farmers choose to organize and patronize cooperatives, and why does the public the cooperative form of busin sanction or encourage In a sense, the cooperative form of business needs no more justificatior than do the proprietorship, partnership, or corporate forms of business enterprise The is: Why do persons or firms at one level interesting issue of a commodity system elect to extend their business into another level oi levels of that system via a cooperative? A commodity sector or system in cludes the whole set of activities or functions from input supply to fina users associated with the Production and rarketing of that commodity Both terms (''sector and "system") used in the literature on this topic are We use the term system. Figure 8.1 illustrates the movement of products and general levels of activity in the corn commodity system. Agricultural cooperatives usually extend farmers' businesses back ward into input supply or forward one or more levels into marketing. Fur ther, what is the impact of this integrative activity by farmers on others ir the food and fiber sector? Although there are other motivations for
P.123
Figure 8.1 Illustration of an agricultural system. cooperative activity, it is accepted that the primary motivation for farmer participation in a cooperative is to improve their well-being (usually in come). Rational persons or well-managed firms would not voluntarily engage in activities that would be expccted to leave them less well off Economic growth is generally associated with increasing specialization and trade among economic units. This usually implies larger firms operat ing at each level of an economic sector, not the integration of activities from several levels into a single firm. The existence of economies of size up to some size, which is often larger than a typical proprietorship, encourages firms to expand horizontally That is, if major economies of size exist, there is incentive to increase output of a given product or service rather than to expand by extending the firm into marketing or input production. Given this reasoning, one would expect a moderately sized farmer to invest avail able capital in expanding cotton production rather than in building a cot ton gin, whether alone or as part of a group. Thus the choice by a group of
relatively small farmers to in capital (as a cooperative) in an operation at another level in the system rather than investing in the expansion of their farms begs for an explanation If markets for goods and capital were perfect, there would be no reason to expect any particular form of business organization (cooperative or other). The result of would be a state in which prices perfect markets would reflect marginal costs (the additional cost of producing an addition- al unit) the system. Goods could not be reallocated to increase throughout distribution of in the satisfaction of market participants, given the existing come. Such is the end result of a competitive market system, but a state such a state If it existed, one could argue that there has never curred. would economic reason for the cooperative business form. In other be no words, cooperatives exist because markets have failed to attain the com petitive ideal. All reasons or justifications for speciai policies to promote cooperatives can be traced back to such failure. Markets faii fo a number of reasons
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