Economic Justification
Farther, even if businesses are optimally located, the full benefits of their low costs are not always passed on to farmers, because the size of the market restricts the number of firms to one. These local monopolies or monopolies have an opportunity to maintain margins above costs For this reason, farmers may hesitate to encourage firms controlled by others to attain the least-cost organization if that leads to local monopolies. On the other hand, maintaining local competition might in higher-than-minimum costs and margins, so farmers need another alternative to achieve low costs. A cooperative might provide a method of capturing the benefits of the more efficient organization in a way that investor-oriented firms (IOFs) would not. Operated at cost and controlled by farmers, it could bring the benefit of an efficient plant size to farmers without the adverse effects resulting from a loss of competition. With sufficient support, a cooperative can put in place the most efficient system with benefits for both farmers and consumers.
capture profits from another level
Farmers may perceive that firms at another level in their commodity system are earning larger returns to capital invested than are being earned at the farm level. this implies that the capital market is not efficient or that the nonfarm firms are able to prevent entry of competitors and thereby earn extraordinary (monopolistic) returns. One alternative is for farmers to invest in an existing firm at that level of the system that yields the desired higher returns. This may not be possible, however; and if it is, the asset value might already be inflated to reflect the higher earning level.
A farmer might also add the profitable function to the farm firm. Usually, however, the volume used or produced on a single farm is too small to match an efficient input supply or product processing operation. For example, a large egg producer may have sufficient volume to add grading and packing within the firm, but a hog producer would be unlikely to consider hog slaughtering as a feasible extension of his production operation. Another alternative is for like-minded farmers to organize a cooperative to initiate operations at the level where the above-normal profits are being taken. Entry of a cooperative enterprise could result in higher returns to the organizers' capital, probably in the form of prices more favorable to farmers.
The opportunity for such a gain arises because because existing firms possess some market power and monopoly profits or because of differences in the opportunity cost of capital. Either market competition has failed to reduce profits of the higher earning firms or it indicates a failure of capital to leave production agriculture. In either case, entry of a cooperative enterprise may leave the system more efficient.
The capture of monopoly pro fits described in this section is closely related to the gain from economies of size discussed in the preceding section, in which it was implied that maintaining competition at a local level is likely to result in units that are below an efficient size. A gain from the capture of profits implies that margins may be high because of market power in the hands of firms serving farmers. These firms may be located and sized to be cost-efficient.
Provide missing services
A commonly stated reason for existence of cooperatives is that they provide services (input or marketing) that otherwise would not be available. A new cooperative could provide a new service or buy a business that was not serving farmers well. Such reasoning, however, demands careful examination. If a real need exists, the filling of that need should provide a reasonable return for resources devoted to it. The fact that an entrepreneur does not see the opportunity to get such returns may be a signal that the need for the service is not real. To be of benefit, the service provided must have value which justifies resource use regardless of whether the providing organization is a cooperative.
It may be argued that unless there are other reasons for the service or product to be provided by a cooperative, an activity that cannot afford the ordinary investor a normal return would also be a mistake for a cooperative. To argue otherwise is to argue market failure, that the farmers opportunity cost of capital is less than considered normal by other firms, or that being a cooperative confers some advantage, such as lower taxes.
In the early 1970s, sugar beet grower in the Red River Valley of Min-nesota and North Dakota formed a cooperative to acquire a sugar beet processing plant from an IOF corporation. The cooperative's organizers criticized the prior owners for being unwilling to expand, even though farmers wished to increase production of sugar beets because of their excellent return. Beet growers were represented by a bargaining cooperative which had some influence on the returns a vailable to the beet processor. Instead of forming a cooperative, the beet growers might have perhaps alowed the former a higher return in order to induce expansion. However, the cooperative turned out very well for the organizing farmers, in part because sugar prices increased dramatically for other reasons shortly after the conversion to a cooperative.
Assure supplies or markets
The assurance of a source of supplies or a market for products is another reason closely related to but slightly different from those already mentioned for forming a cooperative organization. The primary difference is the consideration of risk. The guestion is not whether the service or product is available from an IOF but whacther that source can be depended upon to place the needs of the farmer above those of all others. During the energy crisis of the early 1970s, domestic fertilizer prices were controlled at a level well under world prices. Much of the multinational IOFs' fertilizer output went to the high bidder, whereas farmer patrons had first call on the product of their cooperatives' output.
Access to a market is a major concern to farmers who produce perishable crops (such as fruits and vegetables) for processing. Farmers can lose their entire crop because of a loss of a market at a critical time. Therefore, membership in a cooperative may offer farmers more security than a year-to-year contract with an IOF processor.
The chance that a desired quality or quantity of service might not be available may also provide sufficient motivation for the cooperative patron to accept a lower rate of return on investment than that demanded by the outside entrepreneur. The degree of uncertainty is also related to the size and diversity of the firms involved. The small,limited-function, local firm probably has little alternative but to remain in business. On the other hand, the retail outlet owned by a large diversified firm may leave the farmer feeling much less secure about the continuity of the business segment he relies on. The element of control exercised by the user of a cooperative reduces this uncertainty.
Gain from coordination
The potential for gain from close coordination of inputs, Production , and marketing appears to be large but mostly unrealized by cooperatives. Knutson found that what he called a committed integrated cooperative had the greatest polential for solving producer marketing problems. The common failure of markets to bring about close coordination is shown clearly in the cycles of price and production typical of many agricultural commodities. Periodically idle processing capacity and a failure to convey accurately to producers the quality desires of end users provide further evidence of market failure in these dimensions. It is difficult for market price to provide a clear signal to producers, especially when the quality and time dimensions of the products are complex. Futures markets, where they exist, provide some help in the time dimension but have not dampened the hog cycle. Another example of coordination failure is consumers desiring lean meat while the market appears to encourage the production of fat hogs.
Coordination of production and processing by means other than market transactions alone offers the possibility of increasing the value of production resources in several ways. If producers are committed to a particular processing operation, the need for buyers and the cost of search for raw materials is reduced. In addition, if the schedule of product delivery to processing is prearranged, scheduling of processing operations can be more precise and can be accomplished at a cost lower than it is if raw material arrival is more nearly random. A relatively constant and reliable flow of product allows the design of processing facilities to operate at minimum cost. There is also potential gain from production of crop or live stock varieties and sizes that allow lower-cost methods of processing or production of higher valued products.
Theoretically, businesses might achieve all these gains from coordination by using contracts just as well as they can by integration (establishing common ownership of the vertically adjacent stages). Indeed, contract coordination is common in businesses that process chickens (broilers), Vegetables, and other products. But contract coordination can also be risky. Uncertainty regarding future events makes it very difficult to produce a long-term contract that will provide for all contingencies. Short-term contracts require frequent renegotiation and do not provide a firm basis for long-term investment. Also, since usually only a few processors deal with many producers, the fear of an imbalance of economic power may influence farmers to make decisions that achieve security for them.
Cooperatives have extended their operations backward into petroleum refining and fertilizer material production and forward from raw product processing in to the manufacture of textiles and the marketing of consumer.
Economic Justification
Farther, even if businesses are optimally located, the full benefits of their low costs are not always passed on to farmers, because the size of the market restricts the number of firms to one. These local monopolies or monopolies have an opportunity to maintain margins above costs For this reason, farmers may hesitate to encourage firms controlled by others to attain the least-cost organization if that leads to local monopolies. On the other hand, maintaining local competition might in higher-than-minimum costs and margins, so farmers need another alternative to achieve low costs. A cooperative might provide a method of capturing the benefits of the more efficient organization in a way that investor-oriented firms (IOFs) would not. Operated at cost and controlled by farmers, it could bring the benefit of an efficient plant size to farmers without the adverse effects resulting from a loss of competition. With sufficient support, a cooperative can put in place the most efficient system with benefits for both farmers and consumers.
capture profits from another level
Farmers may perceive that firms at another level in their commodity system are earning larger returns to capital invested than are being earned at the farm level. this implies that the capital market is not efficient or that the nonfarm firms are able to prevent entry of competitors and thereby earn extraordinary (monopolistic) returns. One alternative is for farmers to invest in an existing firm at that level of the system that yields the desired higher returns. This may not be possible, however; and if it is, the asset value might already be inflated to reflect the higher earning level.
A farmer might also add the profitable function to the farm firm. Usually, however, the volume used or produced on a single farm is too small to match an efficient input supply or product processing operation. For example, a large egg producer may have sufficient volume to add grading and packing within the firm, but a hog producer would be unlikely to consider hog slaughtering as a feasible extension of his production operation. Another alternative is for like-minded farmers to organize a cooperative to initiate operations at the level where the above-normal profits are being taken. Entry of a cooperative enterprise could result in higher returns to the organizers' capital, probably in the form of prices more favorable to farmers.
The opportunity for such a gain arises because because existing firms possess some market power and monopoly profits or because of differences in the opportunity cost of capital. Either market competition has failed to reduce profits of the higher earning firms or it indicates a failure of capital to leave production agriculture. In either case, entry of a cooperative enterprise may leave the system more efficient.
The capture of monopoly pro fits described in this section is closely related to the gain from economies of size discussed in the preceding section, in which it was implied that maintaining competition at a local level is likely to result in units that are below an efficient size. A gain from the capture of profits implies that margins may be high because of market power in the hands of firms serving farmers. These firms may be located and sized to be cost-efficient.
Provide missing services
A commonly stated reason for existence of cooperatives is that they provide services (input or marketing) that otherwise would not be available. A new cooperative could provide a new service or buy a business that was not serving farmers well. Such reasoning, however, demands careful examination. If a real need exists, the filling of that need should provide a reasonable return for resources devoted to it. The fact that an entrepreneur does not see the opportunity to get such returns may be a signal that the need for the service is not real. To be of benefit, the service provided must have value which justifies resource use regardless of whether the providing organization is a cooperative.
It may be argued that unless there are other reasons for the service or product to be provided by a cooperative, an activity that cannot afford the ordinary investor a normal return would also be a mistake for a cooperative. To argue otherwise is to argue market failure, that the farmers opportunity cost of capital is less than considered normal by other firms, or that being a cooperative confers some advantage, such as lower taxes.
In the early 1970s, sugar beet grower in the Red River Valley of Min-nesota and North Dakota formed a cooperative to acquire a sugar beet processing plant from an IOF corporation. The cooperative's organizers criticized the prior owners for being unwilling to expand, even though farmers wished to increase production of sugar beets because of their excellent return. Beet growers were represented by a bargaining cooperative which had some influence on the returns a vailable to the beet processor. Instead of forming a cooperative, the beet growers might have perhaps alowed the former a higher return in order to induce expansion. However, the cooperative turned out very well for the organizing farmers, in part because sugar prices increased dramatically for other reasons shortly after the conversion to a cooperative.
Assure supplies or markets
The assurance of a source of supplies or a market for products is another reason closely related to but slightly different from those already mentioned for forming a cooperative organization. The primary difference is the consideration of risk. The guestion is not whether the service or product is available from an IOF but whacther that source can be depended upon to place the needs of the farmer above those of all others. During the energy crisis of the early 1970s, domestic fertilizer prices were controlled at a level well under world prices. Much of the multinational IOFs' fertilizer output went to the high bidder, whereas farmer patrons had first call on the product of their cooperatives' output.
Access to a market is a major concern to farmers who produce perishable crops (such as fruits and vegetables) for processing. Farmers can lose their entire crop because of a loss of a market at a critical time. Therefore, membership in a cooperative may offer farmers more security than a year-to-year contract with an IOF processor.
The chance that a desired quality or quantity of service might not be available may also provide sufficient motivation for the cooperative patron to accept a lower rate of return on investment than that demanded by the outside entrepreneur. The degree of uncertainty is also related to the size and diversity of the firms involved. The small,limited-function, local firm probably has little alternative but to remain in business. On the other hand, the retail outlet owned by a large diversified firm may leave the farmer feeling much less secure about the continuity of the business segment he relies on. The element of control exercised by the user of a cooperative reduces this uncertainty.
Gain from coordination
The potential for gain from close coordination of inputs, Production , and marketing appears to be large but mostly unrealized by cooperatives. Knutson found that what he called a committed integrated cooperative had the greatest polential for solving producer marketing problems. The common failure of markets to bring about close coordination is shown clearly in the cycles of price and production typical of many agricultural commodities. Periodically idle processing capacity and a failure to convey accurately to producers the quality desires of end users provide further evidence of market failure in these dimensions. It is difficult for market price to provide a clear signal to producers, especially when the quality and time dimensions of the products are complex. Futures markets, where they exist, provide some help in the time dimension but have not dampened the hog cycle. Another example of coordination failure is consumers desiring lean meat while the market appears to encourage the production of fat hogs.
Coordination of production and processing by means other than market transactions alone offers the possibility of increasing the value of production resources in several ways. If producers are committed to a particular processing operation, the need for buyers and the cost of search for raw materials is reduced. In addition, if the schedule of product delivery to processing is prearranged, scheduling of processing operations can be more precise and can be accomplished at a cost lower than it is if raw material arrival is more nearly random. A relatively constant and reliable flow of product allows the design of processing facilities to operate at minimum cost. There is also potential gain from production of crop or live stock varieties and sizes that allow lower-cost methods of processing or production of higher valued products.
Theoretically, businesses might achieve all these gains from coordination by using contracts just as well as they can by integration (establishing common ownership of the vertically adjacent stages). Indeed, contract coordination is common in businesses that process chickens (broilers), Vegetables, and other products. But contract coordination can also be risky. Uncertainty regarding future events makes it very difficult to produce a long-term contract that will provide for all contingencies. Short-term contracts require frequent renegotiation and do not provide a firm basis for long-term investment. Also, since usually only a few processors deal with many producers, the fear of an imbalance of economic power may influence farmers to make decisions that achieve security for them.
Cooperatives have extended their operations backward into petroleum refining and fertilizer material production and forward from raw product processing in to the manufacture of textiles and the marketing of consumer.
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