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 food products. But unfortunately, they have not exploited the potential for gain from coordination of farmers’ and cooperatives’ actions. Instead, the pattern of coordination between the member and the member’s cooperative is generally similar to that of IOFs. For example, grain marketing cooperatives typically operate on a buy-sell basis similar to that of other types of grain marketing firms.
Gains in efficiency through cooperative coordination can be accomplished only with some decrease in the scope of decision making by the member. If the match between production and processing is to be enhanced, some direction from the the processing level must be accepted by farmers. The member must be willing to commit a product to the cooperative and forego the option to pick the high day in the market or shop for the high bid at the last minute. The high value farmers place on independence has limited the limited the extent to which cooperative coordination has been exploited. It may also be that a market failure is perceived where none exists.
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 food products. But unfortunately, they have not exploited the potential for gain from coordination of farmers’ and cooperatives’ actions. Instead, the pattern of coordination between the member and the member’s cooperative is generally similar to that of IOFs. For example, grain marketing cooperatives typically operate on a buy-sell basis similar to that of other types of grain marketing firms.
Gains in efficiency through cooperative coordination can be accomplished only with some decrease in the scope of decision making by the member. If the match between production and processing is to be enhanced, some direction from the the processing level must be accepted by farmers. The member must be willing to commit a product to the cooperative and forego the option to pick the high day in the market or shop for the high bid at the last minute. The high value farmers place on independence has limited the limited the extent to which cooperative coordination has been exploited. It may also be that a market failure is perceived where none exists.
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