AGRICULTURAL PRICES AND MARKETS
Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,
Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest
Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest
2
Author: Imre Fertő Supervised by Imre Fertő
June 2011
Week 12
Cooperatives in agri-food chain Literature
• Staatz, J. M. (1989): Farmer Cooperative Theory: Recent Developments. ACS Research Report No. 84, June 1989, US Departmnet of Agriculture
• Royer JS (1999): Cooperative organizational strategies: A neo-institutional digest.
Journal of Cooperatives 14:44–67.
Cooperatives in agri-food chain
• What is a cooperative?
• How important are co-ops in the food system?
• Do co-ops perform differently than investor owned firms?
– Theoretical perspectives – Empirical perspectives
• Challenges facing cooperatives and their responses
3
What is a cooperative?
• International Co-operative Alliance (ICA): a cooperative as “an autonomous association of persons united voluntarily to meet their common economic, social and cultural need and aspiration through a jointly-owned and democratically–
controlled enterprise”
• USDA: “A co-operative is a user-owned and user-controlled business that distributes benefits on the basis of use”
• A special type of business (usually corporate) owned and controlled by its member patrons. This is in contrast to ordinary corporations that are investor-owned firms (IOFs).
Basic Philosophy of Cooperatives
• Through joint effort and collective action (cooperation) on the part of individuals with mutual interests, these individuals will be better off
Why Study Co-op Principles?
• To understand unique or fundamental aspects of co-ops.
• To guide the operation of a co-op.
• To understand the basis for many co-op laws.
4
Cooperative principles 1
• ICA
– Open and voluntary membership – Democratic membership control – Member economic participation – Autonomy and independence – Education, training and information – Co-operation among co-operatives – Concern for community
Cooperative principles 2
• USDA
– The user-owner principle
• Persons who own and finance the co-operative are those which use it – The user-control principle
• Control of the co-operatives by those who use the cooperatives
– User-benefit principle
• Benefits of the co-operative are distributed to its users on the basis of their use
5
Cooperative principles 3
• The traditional hard-core principles
• Democratic control;
– Voting is by members on one member, one-voice basis
• Return of surplus to members;
– Net income is distributed to members/patrons as patronage refunds on a cost basis, or in proportion to use
• Limited interest on shares;
– Dividend on equity capital is limited
Requirements for Being a Member Owner of an Ag Co-op
• Be an agricultural producer or other co-op
• Provide equity capital (equity => from owners)
• Be a customer (active)
Member Responsibilities/Obligations
• Patronize Co-op
• Provide Equity Capital
• Keep Informed
• Accept Risks of Being a Member
6
Dual Objectives of Co-ops
Serving Dual Interests of Owners as:
• Investors (return on investment)
• Patrons (services and return on use)
Types of Co-ops 1
• Based on Function Performed – Marketing
– Supply – Service
• Based on Area Served
– Local – local community to multiple counties – Regional – multiple states
– National – International
7
Types of Co-ops 2
• Based on Organizational Features – Interregional
• members = other regionals – Federated
• Farmers = members of locals
• Locals = members of regionals – Centralized
• Farmers = members of regional
• Local businesses run by regional
8
9
Co-op Justification?
• Economic needs
• More Dependable Market (for outputs or inputs)
• Better Price (level or risk) by –
– Increasing competition (or offsetting mkt power)
– Developing own product (or capturing other-level profits) – Taking advantage of economies of size
• Better Services
10
Do co-ops perform differently than investor- owned firms?
• Theoretical perspectives – Residual claimancy and:
• Pro-competitive effects
• Management control
• Raising capital and the “horizon problem”
– Can cooperatives “unduly enhance” prices?
• Empirical perspectives
– Why Co-ops May Have Earnings
• Overcharges or underpayments because costs are unknown initially
• Co-ops charge going market prices which are above costs
New Generation Cooperatives
• Focus on value-added marketing
• Appreciable and transferable delivery rights
• Up-front equity capital investment requirement
• Defined (closed) memberships
• Pooling and marketing agreements with strong penalties for non-compliance
11
12
Conclusions
• Co-ops are hybrid institutions- difference from investor-owned firms
• Co-ops still play important role in agri-food sector
• Challenges for co-ops – Barriers to growth – Internationalisations – New generation co-ops
