Cooperative and Marketing Orders Daniel Gregory Cody Eakin

Cooperatives and Marketing Orders Marketing institutions designed to increase farmers bargaining power Also to reduce the role of middlemen in the marketing of products

Marketing and Supply Cooperatives Group of farmers banded together to buy inputs or market products Basic objective: to increase member profits by lowering the price they pay for inputs and increase price received for products Owned and controlled by member patrons Nonprofit group

Marketing and Supply Cooperatives Capper-Volstead Act of 1922: – Established conditions under which an organization can be defined as a co-op – Protects co-ops from anti trust provisions of the Sherman and Clayton acts Resulting in increased bargaining power

Incentive Problems In a co-op, management does not gain or lose depending on the firm’s success – Residual Claimants: those that benefit or lose due to management decisions Co-ops do not have these – Can lead management to act in a way that does not maximize the present value of the co-ops stream of future residual returns More incentive to favor investments with short payoff horizons With these problems, how do co-ops survive?

Tax Treatment of Cooperatives Patronage refunds are counted as personal income to members, not to the co-op – Leads to the refunds only being taxed once

Marketing Orders Government-enforced regulations that allow producers to work together, to increase prices by limiting competition Defines the commodity and the market area to be regulated Initiated under the federal Agricultural Marketing Agreement of 1937

Marketing Orders Also referred to as “Self-Help” programs Free-rider problem – In voluntary programs, there is an incentive to produce more and still receive the same price as others, leading to increased competition – A federal marketing order allows producers to use the police power of the government to regulate restrictions on competition Two commodities with Marketing Orders – Milk – Certain fruits and vegetables

Milk Marketing Two government programs involved: – Marketing orders – Price supports

Milk Marketing Classified Pricing – System in which different prices are charged depending on what the milk is used for Two Grades of milk: – A: meets sanitation requirements for fluid milk 95% of milk produced/ greatly exceeds current demand – Excess is used manufacturing – Handlers pay different prices depending upon the use – B: mostly used for manufacturing purposes

Milk Marketing Classes of milk – Class I: for fluid consumption/ highest price – Class II & III: Both used for manufacturing but class II receives higher price Price discrimination – Allows opportunity to increase profits, depending on the elasticity of the use of milk

Milk Marketing Federal Marketing Order – System used to set minimum prices of milk used for different purposes Prices set according to formulas by a marketing administrator Blend Price – Weighted average of the fluid and manufacturing prices – Found in typical pooling arrangement/ Price each farmer receives

Milk Marketing Price-support Program – Sets floor under the market price of manufacturing milk products Indirectly supports the price of class I State Orders – ¼ of products are delivered under state orders – Uses a quota system Determines how much of the milk sold is eligible to share in class I

EFFECTS OF THE DAIRY PROGRAM Effects of the dairy program – First, it’s caused overproduction of milk. – Second, high prices has caused a substantial cost on consumers. – Third, the price of fluid has been increased relative to prices of manufacture dairy products – Fourth, the program creates a misallocation of resources, resulting in too many resources. – Fifth, restricted trade with other nations.

Persistence of the Dairy Program Persistence from political support for the program. – Due to the loses that would be incurred by those who support it.

Milk Marketing Recent changes in the program – Consolidation of the milk marketing orders Reduced the number of federal milk marketing orders from 31 to 11. Changing the price differentials for class I milk Creating a new class IV milk New methods for computing class prices – Dairy Compacts Establish minimum prices for class I milk that is usually higher than the on in effect under Federal Milk Marketing Orders.

Marketing orders for Fruit and Vegetables These orders typically affect the quality and quantity of product marketed. Half of the federal marketing orders contain quantity control that permit limitation of sales.

Marketing orders for Fruit and Vegetables Total- Quantity Regulations – Market allocation is quantity instead of price is set in the primary market for a number of products. – Producer allotments is marketing quotas or allotments are assigned to the individual producer.

Marketing orders for Fruit and Vegetables Rate-of-Flow Regulations – Based on the fact that demand is elastic in the primary market. – Reserve pool schemes, producers are required to place a specified portion of their crop into storage that may or may not be sold later. – Shipping holidays, a minor form of volume control that prohibits further commercial shipments. – Prorate program determines how much each shipper can ship during a particular time period.

Marketing orders for Fruit and Vegetables Grade, Size, and Maturity Regulations – By eliminating small-sized produce increase the demand for the remaining portion of the crop. Advertising, Promotion, and Research – It has become more important in the past decade due to the assumption either that consumer information is incomplete or that consumer demand can be shifted through persuasion.

Effects of Marketing Orders Consumers – They face higher prices. Handlers and Processors – It limits how much they receive and how much they sale. Producers – Yields higher produce prices which can lead to overproduction the if entry is limited.

Marketing orders for Fruit and Vegetables Orderly Marketing – Deals with reducing marketing risk associated with price change. – Purpose of marketing orders is to increase price and profits, not to stabilize them.