cooperative and marketing orders daniel gregory cody eakin
TRANSCRIPT
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.