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.