WHY A COOPERATIVE?
Why do farmers choose to organize and patronize cooperatives, and why does the public sanction or encourage the cooperative form of business? In a sense, the cooperative form of business needs no more justification than do the proprietorship, partnership, or corporate forms of business enterprise. The interesting issue is: Why do persons or firms at one level of a commodity system elect to extend their business into another level or 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 final users associated with the Production and marketing of that commodity both terms (''sector and "system") are used in the literature on this topic 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. Further, what is the impact of this integrative activity by farmers on others in the food and fiber sector? Although there are other motivations for
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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 expected to leave them less well off. Economic growth is generally associated with increasing specialization and trade among economic units. This usually implies larger firms operating 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 available capital in expanding cotton production rather than in building a cotton 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 perfect markets would be a state in which prices would reflect marginal costs (the additional cost of producing an
Additional unit) throughout the system. Goods could not be reallocated to increase the satisfaction of market participants given the existing distribution of income. Such a state is the end result of competitive market system, but such a state has never occurred. If it existed, one could argue that there. Would be no economic reason for the cooperative business form. In other words, cooperatives exist because markets have failed to attain the competitive ideal. All reasons or justifications for special policies to promote cooperatives can be traced back to such failure. Markets fall for a number of reasons.