food processing business and agriculture

Asian Economic Journal 2008, Vol. 22 No. 1, 83–107

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© 2008 The AuthorsJournal compilation © 2008 East Asian Economic Association and Blackwell Publishing Ltd.

Food Processing Business and Agriculture Cooperatives in Japan: Market Power and Asymmetric Information*

Kazuhiko Mikami and

Satoru Tanaka

Received 19 April 2007; accepted 8 November 2007

Food processing businesses run by agriculture cooperatives (in this paperreferred to as food processing cooperatives) are basically firms that are owned bythe suppliers of raw materials. Typically, in this type of firm, corporate decision-making is the responsibility of member farmers through the one member one–vote rule, and the surplus of the business is divided among them according to theamount of raw agricultural products they have supplied to the firm. This is incontrast to a conventional capitalistic firm, in which corporate decision-makingis ultimately made by the stockholders through the one share–one vote rule, andthe profit is divided among them according to the amount of financial capitalthey have supplied to the firm. Based upon statistical data and case studies, thepresent paper considers some economic factors that might influence the estab-lishment of food processing cooperatives.

Keywords

: food processing business, agriculture cooperative, market power,asymmetric information.

JEL classification codes

: P13, Q13.

doi

:

10.1111/j.1467-8381.2008.00270.x

I. Introduction

There are various types of firms in the market economy. Capitalistic firms, suchas stock companies, are firms owned by the suppliers of capital. They areclearly the dominant form of enterprise in most industrial areas.

1

Worker-ownedfirms are firms that are owned by the suppliers of labor. They are much lesscommon than capitalistic firms, but are seen in such industrial areas as profes-sional services (e.g. law, accounting, management consulting, architecture and

* Mikami (corresponding author): Department of Applied Economics, University of Hyogo, NishiWard, Kobe, Hyogo 651-2197, Japan. Email: [email protected]. Tanaka: Kobe City Universityof Foreign Studies, Nishi Ward, Kobe, Hyogo 651-2187, Japan. Email: [email protected] authors thank Yasuhide Teramoto and the participants of the seminar at Kobe City Universityof Foreign Studies for helpful comments. They are also grateful to an anonymous referee for aconstructive critique. An interview with Ichiro Ozaki and Osamu Kotera at the Hyogo PrefecturalCentral Union of Agriculture Cooperatives was very helpful and is gratefully acknowledged.1. Ownership of the firm consists of the rights to control the firm and to claim the residual earningsof the firm. This concept must be distinguished from ownership of the physical assets of the firm,which plays the central role in Hart and Moore (1990).

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medicine), road transport (e.g. taxicabs and truck transportation) and plywoodmanufacturing (Bonin

et al.

, 1993; Hansmann, 1996). Consumer cooperatives,which are firms owned by their customers, are most common in food retailing.They are also seen in finance, insurance, medical care and housing. Most cor-porations in the private sector of our economy can be classified as one of thesethree types of firm, or as a mixture of these. Other types of firms are not verycommon.

Food manufacturing firms run by agriculture cooperatives (henceforth referredto as food processing cooperatives) are classified as a fourth type of firm, whichare formally owned by the suppliers of raw materials.

2

That is, food processingcooperatives are owned by farmers, the suppliers of raw agricultural products(Figure 1). Typically, in this type of firm, corporate decision-making is made by

2. Agriculture cooperatives form the largest cooperative organizations in Japan. There are 886agriculture cooperatives with a membership of 5 million nationwide. Local agriculture cooperativesare hierarchically organized under a prefectural central union, and prefectural central unions arefurther hierarchically organized under the national central union. Therefore, the whole agriculturecooperative is a three-tier organization. Business activities of agriculture cooperatives includecredit, insurance, collective purchasing of production materials and livelihood necessities, collec-tive marketing of agricultural products, agricultural warehousing, processing of agricultural prod-ucts, and supplying of housing lots. Total business surplus from these activities amounts to 2 trillionyen. Data based on Ministry of Agriculture, Forestry and Fisheries (2005).

Figure 1 Transactions of goods and services under a food processing cooperative. Raw agricultural products are supplied to the firm through ownership (self-procurement).

Labor, capital and the products are traded in the market

FOOD PROCESSING AND AGRICULTURE COOPERATIVE IN JAPAN

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member farmers through the one member–one vote rule, and the surplus of thebusiness is divided among them according to the amount of raw agriculturalproducts that they have supplied to the firm. This is in contrast to capitalisticfirms, in which corporate decision-making is ultimately made by the stockhold-ers through the one share–one vote rule, and the profits are divided among themaccording to the amount of financial capital that they have supplied to the firm.Therefore, food processing cooperatives may well have advantages and disad-vantages that are di

ff

erent from food manufacturing companies.

3

In reality, the comparative e

ffi

ciency of food processing cooperatives isconsidered to be determined by both institutional and economic factors.

Clearly, the institutional framework is influential in the formation of foodprocessing cooperatives. Because agriculture cooperatives are not allowed toissue bonds under present laws, their external financing methods are restrictedto borrowing from financial institutions. In addition, agriculture cooperativesare legally prohibited from borrowing a large sum of money for investment.These restrictions make it di

ffi

cult for farmers to start a food processingbusiness that requires large, capital-intensive production facilities. Also, thescope of undertakings and the area of business are restricted for agriculturecooperatives. These restrictions keep their businesses from growing in varietyand geographically. However, corporate income tax rates are set lower for agri-culture cooperatives than for companies. Furthermore, under certain conditions,agriculture cooperatives are exempted from the application of the anti-trust law.These favorable treatments for agriculture cooperatives can promote the estab-lishment of food processing cooperatives.

In this paper, based on statistical data and case studies, we examine theimplications of certain economic factors for the comparative e

ffi

ciency of foodprocessing cooperatives. We mainly focus on monopsony power that is exercisedby major food manufacturing companies in the market for raw agriculturalproducts, as well as asymmetric information on the quality of farm products.Through the inquiry, we reach a conclusion that both of these factors are influ-ential in the formation of food processing cooperatives.

The next section describes the analytical framework. Section III takes fiveindustry groups that have been important for Japanese agriculture cooperatives,and examines the comparative e

ffi

ciency of food processing cooperatives inthese industrial areas from the viewpoint of market power and asymmetric

3. Manufacturing industries operate under quite weak governmental regulations compared withother industries. According to the Economic Planning Agency (1994), the share of regulatedindustries in manufacturing is 14.1 percent. The share of regulated industries in other sectors is87.1 percent for agriculture, forestry and fisheries, 100 percent for mining, 100 percent for construc-tion, 100 percent for electricity, gas, heat supply and water, 97.3 percent for transport and communica-tions, 100 percent for finance and insurance, 7.5 percent for real estate, 55.6 percent for services,and 0 percent for government. (The share for wholesale and retail trade, eating and drinking placesis not available in the report.) The low level of regulation in manufacturing industries implies that theobserved distribution of firm types is the result of spontaneous choice of the enterprise form by firms.


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information. Section IV considers the implications of other economic factors forthe formation of food processing cooperatives. Section V concludes the paper.

II. Analytical Framework

Under farmers’ ownership of a food manufacturing firm, raw agriculturalproducts are provided to the firm in a self-su

ffi

cient manner, whereas physicalcapital, labor and the processed food as the product are traded in the market(Figure 1). This contrasts with food manufacturing companies, in which physi-cal capital is provided to the firm in a self-su

ffi

cient manner. Raw agriculturalproducts, labor and the processed food are traded in the market. Therefore, foodprocessing cooperatives will have a comparative advantage over food manufac-turing companies when the market for raw agricultural products fails to worke

ffi

ciently.In this paper, among the major causes for market failure, we focus on market

power and asymmetric information in the market for raw agricultural products.We then examine their implications for the formation of food processing co-operatives in the real economy.

II.1 Market power

Farms are numerous and mostly small in Japan. In contrast, food manufacturingcompanies are much fewer in number and larger. Under these circumstances,monopsony is a natural consequence if agricultural products are traded in themarket between farmers and food manufacturing companies. Under monop-sony, prices for agricultural products are distorted downward, and the marketfails to achieve an e

ffi

cient allocation of resources. Such ine

ffi

ciency can beprevented if farmers who supply raw agricultural products own and manage thefood manufacturing firm themselves.

4

II.2 Asymmetric information

In general, the quality of raw agricultural products is better known to the farm-ers who grow them in the field than those who buy them in the market. Forexample, the safety of vegetables depends upon how they were grown in thefield: either by organic farming or by standard farming with chemical fertiliz-ers, pesticides and herbicides. Such information is known to the farmers forobvious reasons but not to the third parties, because the method of farmingcannot be determined simply by looking at the final product. If safety informa-tion of this kind is distributed asymmetrically between the farmers and thebuyers, the market for agricultural products may fail to achieve an e

ffi

cient

4. See Mikami (2003) for a formal argument on the implications of market power for the enter-prise form.


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resource allocation because of moral hazard or adverse selection. These infor-mational problems can be avoided if farmers as the suppliers of raw agriculturalproducts own and manage the food manufacturing firm themselves.

5

III. Empirical Observations

In this paper, the food manufacturing industry is defined to include 12 small(three-digit) industry groups in the Standard Industrial Classification for Japan(SIC), which include: (1) livestock products, (2) seafood products, (3) cannedand preserved fruit and vegetable products, (4) seasonings, (5) sugar process-ing, (6) flour and grain mill products, (7) bakery and confectionery products,(8) animal and vegetable oils and fats, (9) miscellaneous foods and relatedproducts, (10) soft drinks and carbonated water, (11) alcoholic beverages and(12) tea and co

ff

ee (see the industry classification in Table 4). In these foodcategories, we take five detailed (four-digit) industry groups of the SIC thathave been important for agriculture cooperatives, which are: (1) meat products,(2) dairy products, (3) fruit and vegetable products except pickles, (4) starchand (5) tea (Table 1).

6

In this section, we examine the implications of marketpower and asymmetric information for the formation of food processing coop-eratives in these industrial areas.

III.1 Meat products and dairy products

7

The sales of meat products and milk products by agriculture cooperativesamount to 18.5 yen and 13.6b yen, respectively, which constitute 16.6 and12.1 percent, respectively, of the total revenue from their food processing busi-nesses (2005, Table 1). Forty-three (3.6 percent) agriculture cooperatives and63 (16.1 percent) stock companies run by agriculture cooperatives are engaged inmanufacturing of meat products, whereas 35 (2.9 percent) agriculture cooperativesand 65 (16.9 percent) stock companies run by agriculture cooperatives are engagedin the production of milk (Table 2).

8

The employee ratio of cooperatives and

5. See Mikami (2007) for a formal discussion of the implications of asymmetric information forthe enterprise form.6. Production and distribution of rice and wheat have been under strict governmental regulations,and they are considered to be influenced more by legislation than by economic factors. For this rea-son, we exclude rice and barley polishing from the subjects of study in this paper.7. The business categories of meat processing and milk processing in the Ministry of Agriculture,Forestry and Fisheries (2005) correspond to the divisions of meat products [0911] and dairy prod-ucts [0912], respectively, in the SIC.8. Firms in stock company form that are capitalized and run by agriculture cooperatives are calledcooperative companies. Legally speaking, these firms are companies. Practically speaking, however,they are identified with cooperative firms in most cases for the following reasons. In many cooper-ative companies: (i) a substantial equity share is owned by the parent agriculture cooperative, andthe stock is not traded in an open market; (ii) there are no dividends for the shareholders; and (iii)managers often come from the parent agriculture cooperative.

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© 2008 T

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Table 1 Sales (thousand yen) and the ratio (%) in parenthesis of processed foods produced by agriculture cooperatives

Ministry of Agriculture, Forestry and Fisheries,

Statistics on Agricultural Cooperatives

, 1980, 1985, 1990, 1995, 2000, 2005.

Food category 1980 1985 1990 1995 2000 2005

Rice and barley polishing 561 947 1 607 962 3 787 538 7 730 998 13 271 113 16 393 333 (0.95) (1.33) (2.93) (5.30) (8.99) (14.64)

Milling 55 947 571 304 116 142 3 793 150 3 515 707 326 122 (0.09) (0.47) (0.09) (2.60) (2.38) (0.29)

Starch and potato processing 14 775 463 22 815 079 27 160 637 37 990 171 34 543 867 29 075 996 (24.86) (18.84) (21.00) (26.06) (23.40) (25.97)

Pickles 3 621 234 5 443 134 8 567 068 12 498 083 13 121 068 8 293 190 (6.09) (4.49) (6.62) (8.57) (8.89) (7.41)

Soy bean paste and sauce 1 265 988 1 327 760 1 692 062 2 229 093 1 666 000 1 696 535 (2.13) (1.10) (1.31) (1.53) (1.13) (1.52)

Bottling and canning of fruit and vegetables

16 581 141 50 571 990 37 872 860 29 936 240 11 535 444 6 425 202 (27.89) (41.75) (29.28) (20.54) (7.81) (5.74)

Meat processing 3 678 874 10 543 627 16 947 699 21 611 305 29 055 070 18 537 252 (6.19) (8.70) (13.10) (14.83) (19.68) (16.56)

Milk processing 7 716 849 6 680 039 8 680 642 8 312 048 20 664 031 13 591 175 (12.98) (5.51) (6.71) (5.70) (14.00) (12.14)

Tea refining 11 188 116 21 570 164 24 531 023 21 658 950 20 242 762 17 634 615 (18.82) (17.81) (18.96) (14.86) (13.71) (15.75)

Total 59 445 559 121 131 059 129 355 671 145 760 038 147 615 062 111 973 420 (100.00) (100.00) (100.00) (100.00) (100.00) (100.00)


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other types of noncapitalistic firms is approximately 4.4 to 6.6 percent in live-stock products in general (2001, Table 3; 2003, Table 4). The ratio is 4.9 percentin meat products, and 6.8 percent in dairy products (2003, Table 4).

Substantial monopsonistic power seems to exist in the market for raw meat.There are 6 meat product companies that list their stocks on the first section ofthe Tokyo Stock Exchange Market.

9

The CR3 (sum of the market shares of thetop three firms) is 48.8 percent for ham, 60.6 percent for sausages, and 97.1percent for corned beef (2004, Table 5). It is also reported in case studies thatagriculture cooperatives started meat processing businesses in order to contend

9. The 6 meat product manufacturers are Itoham Foods, Nippon Meat Packers, Prima Meat Pack-ers, Marudai Food, Hayashikane Sangyo, and Yonekyu.

Table 2 The number of food processing businesses run by agriculture cooperatives

Food category Agriculture cooperative

Joint stock company

Women’s section

Voluntary group

Number % Number % Number % Number %

Starch 67 5.6 22 5.6 5 0.7 19 1.4Pickled vegetables 395 32.8 128 32.7 341 49.1 550 39.9Soft drinks 151 12.6 49 12.5 57 8.2 108 7.8Jam 69 5.7 28 7.1 118 17 188 13.6Noodles 52 4.3 72 18.4 22 3.2 177 12.8Rice products 125 10.4 35 8.9 63 9.1 135 9.8Confectioneries 26 2.2 74 18.9 50 7.2 204 14.8Canned and preserved food 140 11.6 72 18.4 74 10.6 172 12.5Alcoholic beverages 31 2.6 99 25.3 2 0.3 103 7.5Soy bean paste 484 40.2 86 21.9 435 62.6 508 36.9Soy bean sauce 76 6.3 74 18.9 25 3.6 117 8.5Seasonings except soy bean paste and sauce

35 2.9 14 3.6 21 3 43 3.1

Bean curd 89 7.4 126 32.1 84 12.1 490 35.6Meat products 43 3.6 63 16.1 8 1.2 90 6.5Milk 35 2.9 65 16.6 5 0.7 70 5.1Dairy products except milk 11 0.9 32 8.2 9 1.3 21 1.5Green tea (crude) 159 13.2 39 9.9 1 0.1 186 13.5Green tea (refined) 134 11.1 26 6.6 1 0.1 174 12.6Tea except green tea 67 5.6 18 4.6 5 0.7 107 7.8Food boiled down in soy sauce

39 3.2 37 9.4 48 6.9 98 7.1

Others 279 23.2 49 12.5 57 8.2 166 12Total 1203 392 695 1378

Source: National Central Union of Agricultural Cooperatives, National Survey on Activities ofAgriculture Cooperatives (1991).


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with the domination of the market by downstream firms such as manufacturers,wholesalers and retailers (Shiraishi, 1985a).

Potential monopsonistic power also appears quite intensive in the market forraw milk. Three giant dairy product manufacturers list their stocks in the firstsection of the Tokyo Stock Exchange Market.

10

The CR3 is 45.6 percent formilk, 78.6 percent for powdered milk, 73.2 percent for butter, and 45.0 percentfor cheese (2004, Table 5). Raw milk is perishable and must be processed soonafter extraction. It is difficult to store it for future shipment. For this reason,supply of raw milk is necessarily inelastic, and dairy farmers are quite vulner-able to the monopsonistic behavior of dairy product manufacturers.

11

Indeed,dairy farmers have struggled with low and unstable milk prices offered by dairyproduct manufacturers. For instance, it is reported that dairy farmers’ dissatis-faction with low milk prices was the principal motive for the establishment ofYotsuba Milk Products, a major milk processing firm in joint stock companyform run by several agriculture cooperatives in the prefecture of Hokkaido(Higurashi, 1985a).

10. The three dairy product manufacturers are Meiji Dairies, Morinaga Milk Industry, and NipponMilk Community.11. In Suzuki (2002), the price elasticity of supply of raw milk is estimated to be 0

.

22–0

.

31.

Table 3 The ratio of non-company corporations and unincorporated associations in the number of employees (%)

Note: NA, not applicable.Source: Ministry of Internal Affairs and Communications, Establisment and Enterprise Census of

Japan, 1981, 1986, 1991, 1996, 2001.

Code Industry 1981 1986 1991 1996 2001

091 Livestock products 6.68 6.88 6.20 6.10 4.42092 Seafood products 3.08 3.23 2.71 2.52 2.43093 Canned and preserved fruit

and vegetable products7.24 7.10 7.26 6.88 6.17

094 Seasonings 1.79 2.32 3.45 2.46 2.55095 Sugar processing 5.46 5.77 4.90 4.24 3.27096 Flour and grain mill products 7.47 8.41 8.52 6.95 4.86097 Bakery and confectionery products 0.77 0.64 0.61 0.64 0.72098 Animal and vegetable oils and fats 0.86 1.47 1.07 1.12 1.49099 Miscellaneous foods and related products 4.22 1.76 2.23 1.81 1.53101 Soft drinks and carbonated water 7.55 9.61 9.36 7.86 6.54102 Alcoholic beverages 0.22 0.75 0.76 1.01 0.98103 Tea and coffee NA 23.59 27.37 19.88 17.61

Food manufacturing industry average NA 3.56 3.60 3.11 2.67Manufaturing industry average 0.82 0.81 0.79 0.76 0.70


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Table 4 The ratio of cooperatives and other types of noncapitalistic firms in the number of employees (%)

Code Industry 1980 1985 1990 1995 2000 2003

091 Livestock products 7.31 7.40 7.58 7.14 6.76 6.60 0911 Meat products 4.00 5.16 5.95 4.28 5.28 4.93 0912 Dairy products 8.94 9.68 9.47 9.49 7.49 6.84 0919 Miscellaneous livestock products 9.26 7.57 7.71 8.89 8.56 9.20 092 Seafood products 3.36 3.42 2.82 2.80 2.67 2.41 0921 Canned seafood and seaweed 1.92 1.41 2.72 2.46 2.73 0.64 0922 Seaweed products, except canned 1.67 2.41 2.25 2.06 1.62 1.64 0923 Fish paste products 2.11 1.66 1.18 1.03 1.03 0.82 0924 Salted-dried and salted products NA NA NA NA NA 2.57 0925 Frozen seafood products

(unprocessed and packaged)12.67 10.90 7.22 9.23 5.69 4.75

0926 Frozen seafood products (processed and packaged)

NA 6.78 5.33 3.66 4.84 4.92

0929 Miscellaneous seafood products NA 2.35 NA NA NA 1.92 093 Canned and preserved fruit and

vegetable products8.33 7.92 7.25 6.41 5.91 5.12

0931 Canned and preserved fruit and vegetable products, except vegetables pickled or in brine

14.47 13.24 15.06 10.25 9.07 7.31

0932 Vegetables pickled or in brine, not in air-tight containers

3.25 3.97 3.68 3.78 3.88 3.74

094 Seasonings 2.19 2.39 2.64 2.58 2.65 2.83 0941 ‘Miso’ (fermented soybean paste) 1.77 2.78 4.79 4.18 8.28 7.39 0942 ‘Shoyu’ (soy sauce), and edible

amino acids4.27 4.93 5.89 6.19 6.69 6.80

0943 ‘Umami’ seasoning NA NA NA NA NA 0.00 0944 Sauces NA NA NA 0.67 0.50 0.71 0945 Vinegar NA 2.23 1.62 2.28 3.07 3.40 0949 Miscellaneous seasonings NA NA NA 0.44 0.76 0.56 095 Sugar processing 7.91 7.80 6.55 NA NA 5.63 0951 Sugar, except refined sugar 15.33 16.96 NA NA NA 15.89 0952 Refined sugar products 0.00 0.00 NA NA NA 0.00 0953 Glucose, starch syrup and

high-fructose corn syrup0.00 0.00 NA NA NA 0.00

096 Flour and grain mill products 10.98 11.41 10.79 10.16 6.03 5.22 0961 Rice cleaning and polishing 41.04 36.55 NA NA NA 12.12 0962 Wheat and barley cleaning

and polishingNA 0.00 0.00 0.00 0.00 0.00

0963 Wheat flour milling 0.00 0.00 0.00 0.00 0.00 0.00 0969 Miscellaneous flour and

grain mill productsNA 2.19 NA NA NA 0.76

097 Bakery and confectionery products 0.87 0.72 0.81 0.88 0.79 0.97 0971 Bread 1.56 1.02 1.51 1.20 0.96 1.36 0972 Pastries and cakes 0.27 0.26 0.23 0.34 0.35 0.48 0973 Biscuits, crackers and other

dry bakery products0.70 0.86 0.93 1.22 1.18 1.00

0974 Baked rice confections 0.19 NA NA NA 0.16 0.10


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Note: NA, not applicable; n.e.c., not elsewhere classified.Source: Ministry of Economy, Trade and Industry,

Census of Manufacturers

, 1980, 1985, 1990,1995, 2000, 2003.

Code Industry 1980 1985 1990 1995 2000 2003

0979 Miscellaneous bakery and confectionery products

0.91 NA NA NA 1.43 1.42

098 Animal and vegetable oils and fats

NA NA 1.83 1.85 2.61 2.70

0981 Vegetable oils and fats 0.00 0.00 NA 0.46 0.39 0.10 0982 Animal oils and fats NA NA NA 9.24 11.21 13.94 0983 Edible oils and fats 0.00 0.00 0.00 0.00 0.00 0.00 099 Miscellaneous foods

and related products3.87 2.16 1.96 1.70 1.88 1.56

0991 Starch 25.42 24.61 28.23 24.37 18.86 17.67 0992 Noodles, macaroni

and spaghetti1.56 1.21 0.89 0.70 0.82 0.91

0993 ‘Tofu’ (bean curd) and ‘aburage’ (fried bean curd)

5.98 5.36 3.58 3.12 3.64 2.02

0994 ‘Anko’ (sweet bean paste) and other related products

2.74 2.59 2.79 3.07 2.52 2.27

0995 Precooked frozen packed foods 0.62 1.76 2.55 3.21 2.48 2.45 0996 ‘Sozai’ (side-dish) foods NA 0.27 1.08 0.82 1.80 1.25 0999 Food and related products, n.e.c. NA 1.28 1.54 1.25 NA 1.44 101 Soft drinks and carbonated water 11.76 15.09 13.00 12.32 12.77 4.96 1011 Soft drinks and carbonated water 11.76 15.09 13.00 12.32 12.77 4.96 102 Alcoholic beverages NA 0.76 0.87 1.01 1.02 1.25 1021 Wine, except ‘sake’

(Japanese rice wine)9.04 13.64 12.23 9.10 6.06 6.60

1022 Malt liquors 0.00 0.00 0.00 0.00 NA 0.34 1023 ‘Sake’ (Japanese rice wine) 0.34 0.33 0.28 0.31 NA 0.29 1024 Distilled, rectified and

blended liquors1.24 1.84 2.40 3.32 NA 2.91

103 Tea and coffee NA 13.12 10.06 11.46 NA 11.01 1031 Tea 19.74 16.71 13.50 14.77 NA 13.82 1032 Coffee 0.00 0.00 0.00 0.00 0.00 0.00

Food manufacturing industry average NA NA 3.26 NA NA 2.65 Manufacuring industry average 0.90 0.85 0.78 0.78 0.80 0.76

Table 4 (

continued

)

Naturally, meat producers and dairy farmers have detailed information aboutthe quality of their livestock products that is difficult to observe from the outside.Knowledge of the quality of raw meat and milk might help meat producers anddairy farmers to develop differentiated products. That is, private information onthe quality might make it possible for them to set up production lines that aresuitable for their raw livestock products. Conversely, they might produce rawmeat and milk that match their processing technologies. Informational advantages


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can thus give meat producers and dairy farmers an incentive to start processingbusinesses.

12

In fact, meat processing cooperatives often use a strategy to vertically dif-ferentiate their products from those produced by large meat processing com-panies. For instance, the Tohaku-cho Agriculture Cooperative in the prefectureof Tottori has a policy of using raw meat that they produce in their farmsfor processing, and of adding as little as possible salt and food additives totheir products. By doing so, they intend to have their products gain prestigevalue as being healthy and of high quality (Shiraishi, 1985b). This is in sharpcontrast to the production method adopted by large meat processing companies.Typically, they use imported meat to produce standardized products in large,highly automated plants. This helps them reduce production costs.

13

They also preferto use food additives, such as preservatives and colorants, to reduce distribu-tion costs and to enhance acceptability and attractiveness of their products.

12. If consumers can observe the quality of the products

ex ante

(search goods) or

ex post

(experi-ence goods), the firm with private information has an incentive to produce high-quality products,regardless of the enterprise form. If consumers cannot observe the quality of the products even afterpurchasing and consuming the goods (credence goods), the firm may be motivated to produce low-quality products on purpose. However, if consumers can infer the quality of the products by somemeans, the firm may want to produce high-quality products and try to let the consumers know thetrue quality of the products by sending them a signal through advertising or the price. In this case,the enterprise form may a

ff

ect the firm’s ability to send an e

ff

ective signal. See Tirole (1988) andMikami (2007) for the details of this argument.13. In Japan, approximately 70 percent of all raw meat that is used for processing is importedfrom overseas. See

Japan Food Journal

(2003).

Table 5 The CR3 for processed foods (%)

Nikkan Keizai Tsushinsha, Production and Sales Shares in Alcoholic Beverage and Food Industries,1983, 1985, 1987, 1991, 1997, 2005.

Food category 1980 1985 1990 1995 2000 2004

Meat productsHam 44.2 45.2 42.3 46.0 45.9 48.8Sausages 67.8 59.7 58.9 58.9 59.8 60.6Corned beef 70.0 67.4 75.8 80.0 85.9 97.1

Dairy productsMilk 44.9 44.8 45.7 48.3 41.8 45.6Powdered milk 73.3 67.1 67.8 69.7 70.6 78.6Butter 69.1 60.7 68.2 68.8 78.6 73.2Cheese 65.5 58.4 51.6 49.4 39.7 45.0

Fruit and vegetable productsCanned fruit 37.3 32.7 28.7 25.6 29.6 27.4Canned vegetables 29.9 35.9 39.7 34.2 43.2 40.9

TeaAll green tea NA NA NA 13.2 13.8 16.0Packed green tea 5.5 6.2 6.9 32.8 33.8 NA


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Such differences in the style of production between meat processing co-operatives and companies can also be seen in the manufacturing of dairyproducts. Typically, major dairy food companies collect raw milk from manydifferent areas and mix them to produce standardized milk. On the contrary,agriculture cooperatives use raw milk that they extract in their farms to producetheir own brand of milk in small quantities. Examples include the Hiruzen Ranchers’Cooperative in the prefecture of Okayama, which produces pure Jersey milk byusing only the raw milk extracted from their Jersey cows (Takenaka, 1985a).

A series of polluted milk cases that were caused by major dairy food com-panies may have boosted the competitiveness of milk made by agriculture co-operatives in the market.

14

It seems convincing to consumers that by using rawmilk that they produce on their farms and being equipped with small productionfacilities, agriculture cooperatives can secure the safety of their dairy productsbetter than large dairy food companies.

III.2 Fruit and vegetable products except pickles

15

Fruit and vegetable products have been a primary processed food item for Japaneseagriculture cooperatives. The employee ratio of cooperatives and other types ofnoncapitalistic firms has declined over the past two decades, but still remains ata nonnegligible level of 7.3 percent (2003, Table 1).

Generally speaking, potential monopsonistic power does not appear to bevery strong in the market for raw fruit and vegetables. Over the past few decades,the CR3 has been around 25–35 percent for canned fruit and 30–40 percentfor canned vegetables (Table 5). We also do not find many reports of fruitand vegetable farmers suffering from low market prices offered by large foodmanufacturers. Presumably, with a variety of substitutes, a single company or asmall group of companies cannot exercise a strong influence upon the marketfor raw fruit and vegetables. Therefore, monopsony power is not considered aprincipal incentive for agriculture cooperatives to engage in fruit and vegetableprocessing businesses.

Rather, informational advantages seem more important for the formation offruit and vegetable processing cooperatives. As a matter of course, fruit andvegetable farmers are better informed of the characteristics of their farm productsthan outside traders. By processing their fruit and vegetables in a small, labor-intensive factory, an agriculture cooperative can produce a wide variety of fruit

14. The most serious case in the history of polluted milk is the Morinaga Arsenic-contaminatedMilk Case, which occurred in 1955. Sodium secondary phosphate for industrial use was used bymistake as a food additive in the production of powdered milk for babies in a factory of MorinagaMilk Industry. The powdered milk was contaminated with arsenic acid that was contained in thesodium secondary phosphate. As a result, 130 babies were killed and more than 12 000 babies wereseriously injured. See Kawana (1989) for the details of this case.15. The business category of bottling and canning of fruit and vegetables in the Ministry of Agri-culture, Forestry and Fisheries (2004) roughly corresponds to the division of canned and preservedfruit and vegetable products except pickled vegetables or those in brine [0931] in the SIC.


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and vegetable products in small quantities that are vertically differentiated fromstandardized products made by major food manufacturing companies.

For instance, the Oita Oyama-machi Agriculture Cooperative in the prefec-ture of Oita has a policy of using their own fruit and vegetables as the rawmaterials, of refraining from making a large investment in production facilities,and of relying mostly on human hands to produce homemade-like products.Despite its small membership of 690 farmers, the cooperative produces over 40kinds of fruit and vegetable products, such as strawberry jam, plum jam, plumjelly and marmalade. To maintain their brand name recognition for high-qualityproducts, the cooperative has a sales strategy of not supplying their products tosupermarkets and discount stores but shipping them only to department storesand prestigious consumer cooperatives (Masui, 1985). The better the producersare informed of the characteristics of their raw agricultural products, the moreeffectively strategies of this kind seem to work in the market for food.

III.3 Starch

[1292]

16

Potato processing is one of the most important food processing businesses forJapanese agriculture cooperatives. Sales of starch and other potato productshave constituted approximately 20–25 percent of the total revenue from theirfood processing businesses (Table 1). Sixty-seven (5.6 percent) agriculturecooperatives and 22 (5.6 percent) stock companies run by agriculture coopera-tives are engaged in the production of starch (Table 2). Over 90 percent of allstarch and other potato products made by agriculture cooperatives is producedby those in the prefecture of Hokkaido. Agriculture cooperatives have a sub-stantial market share in potato starch. The employee ratio of cooperatives andother types of non-capitalistic firms in this industry group has been around 20–25 percent over the past few decades (Table 4).

Historically, market power seems to have been a major reason why agricul-ture cooperatives undertake starch production. One instance is the potatoprocessing business run by the Shihoro Agriculture Cooperative in the prefec-ture of Hokkaido. Before the Second World War, potato farmers in the villageof Shihoro had long struggled with low prices and unfair terms of trade forpotatoes that were offered by starch manufacturers in the region.

17

After the war, the agriculture cooperative bought out a factory from a starch

manufacturer in the village and began processing their potatoes. The principal

16. The business category of starch and potato processing in the Ministry of Agriculture, Forestryand Fisheries (2004) roughly corresponds to the division of starch [0991] in the SIC. There aresome exceptions, however. For example, potato products, such as French fries and potato chips, areincluded in the category of starch and potato processing by Ministry of Agriculture, Forestry andFisheries (2004), but not in starch [0991] by the SIC.17. Traditionally, the Fair Trade Commission (FTC) of Japan has adopted a mild stance againstmonopolistic behavior of firms and has reserved the right to apply antitrust laws. Such an inclina-tion of the FTC may have allowed market power to persist in local markets.


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objective of the factory buyout was to establish a stable and fair transactionalrelationship between potato farmers and the starch factory. The potato process-ing business of the agriculture cooperative has attracted wide popularity amongpotato farmers in the village, and the scope of their products has expanded tocover such items as French fries and potato chips (Higurashi, 1985b).

Therefore, monopsonistic power seems to have played an important role inthe establishment of potato processing cooperatives in Hokkaido.

Potatoes are a relatively homogeneous farm product. Starch is also quite ahomogeneous product that is manufactured in a simple production line. In addi-tion, most starch produced is shipped not for final consumption but for inputinto the production of other foods. For these reasons, asymmetric informationon the quality of potatoes does not seem to cause serious problems in themarket for potatoes and, therefore, is not considered a principal reason for theestablishment of potato processing cooperatives.

III.4 Tea [1331]18

Manufacturing of tea leaves consists of two stages: processing raw tea leavesinto crude tea leaves, and refining crude tea leaves into final tea leaves. Theproduct in this food category that agriculture cooperatives primarily deal withis green tea leaves. Agriculture cooperatives’ revenue from the tea refiningbusiness amounts to 17.6 billion yen, which constitutes 15.8 percent of thetotal sales of their processed foods (2005, Table 1). One hundred and fifty-nine(13.2 percent) agriculture cooperatives and 39 (9.9 percent) stock companiesfunded by agriculture cooperatives are engaged in the production of crude tealeaves, whereas 134 (11.1 percent) agriculture cooperatives and 26 (6.6 percent)stock companies funded by agriculture cooperatives are engaged in the productionof final tea leaves (Table 2). The employee ratio of cooperatives and other typesof noncapitalistic firms in this industry group is 25.8 percent (2003, Table 4).Agriculture cooperatives have a substantial market share in the production of crudetea leaves, but they have only a limited share in the production of final tea leaves.

There are a great number of tea leaf manufacturers in Japan. Indeed, the con-centration ratio of the industry is quite low, with the CR3 being 16.0 percent(2004, Table 5). However, this does not necessarily mean that serious marketpower is absent in the market for raw tea leaves. Manufacturing of green tealeaves is a traditional business, and its distribution system is said to beextremely conservative and closed. Major local tea leaf refiners and wholesalersoften dominate the market for raw tea leaves and exercise strong monopsonypower over tea leaf farmers (Takenaka, 1984). There are several reasons whysuch an industry structure prevails over a long period of time.

First, green tea is a highly differentiated product. There is wide regionaldiversity in preference for green tea. For instance, green tea with a strong taste

18. The business category of tea refining, both crude and final, in Ministry of Agriculture, Forestryand Fisheries (2004) corresponds to the division of tea [1031] of the SIC.

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is preferred in the prefecture of Shizuoka, tea with a somewhat raw taste is pre-ferred in the prefecture of Kyoto, and tea with a steamed taste is preferred inthe prefecture of Osaka. Green tea that is favored in a particular region is fur-ther classified into even narrower varieties (Ohishi, 1983; Teramoto, 1999).

Second, green tea is not only regionally (or horizontally) differentiated, butalso vertically differentiated to a large extent. Grades for green tea leaves aredetermined mainly by the time the raw tea leaves are picked. For instance, inthe prefecture of Shizuoka, Japan’s largest raw tea leaf planting and final tealeaf producing area, raw tea leaves that are picked at the earliest time (the high-est grade), the second earliest time (the second highest grade), the third earliesttime (the third highest grade) and the fourth earliest time (the fourth highestgrade) are priced at 484 yen, 111 yen, 79 yen, and 38 yen, respectively, perkilogram (Fuchinoue and Fuchinoue, 1999). Each grade is further divided intoseveral narrower classes.19

Because of such fine horizontal and vertical differentiation, the market fortea leaves is partitioned into smaller and closed local markets, and in each dif-ferentiated market, refiners and wholesalers exercise monopsony power over thetea leaf farmers. In economics terms, the market for raw tea leaves is understrong monopolistic competition.

In addition, because raw tea leaves decay quickly, they must be processedimmediately after they are picked. Therefore, the price elasticity of supply forraw tea leaves is necessarily low, and monopsonistic power tends to leave aheavy deadweight loss in the market.20,21

19. According to different data for the prefecture of Shizuoka, between 1970 and 1972, green tealeaves that were picked in the beginning period, the middle period, and the final period within theearliest time (the highest grade) were priced, on average, at 350 yen, 192 yen and 166 yen, respec-tively, per kilogram. Similarly, green tea leaves that were picked in the beginning period, the middleperiod, and the final period within the second earliest time (the second highest grade) were pricedat 117 yen, 90 yen and 76 yen, respectively, per kilogram. See Fuchinoue and Fuchinoue (1999).20. Presumably because of such unstable quality of raw tea leaves, a commercial custom has beencreated whereby raw tea leaves that are picked by the farmers are immediately handed over to themanufacturers without a definite agreement on price. The price is later determined when the man-ufacturers recognize the quality of the tea leaves. Because manufacturers have dominant bargainingpower in such ex post negotiations of the price, there is no option for the farmers but to accept theprice the manufacturers offer. In the year of a good harvest, manufacturers assign a quota of rawtea leaves they buy from the farmers, and they refuse to buy any additional quantity. In this way, tealeaf farmers have been in a weak position in negotiations with the manufacturers about the terms oftrade for their raw tea leaves. See Fuchinoue and Fuchinoue (1999).21. In contrast to raw tea leaves, crude tea leaves can be preserved for an extended period of time.Crude tea leaf producers can therefore keep their intermediate products in cold storage and shipthem to the market when the price is favorable to them. In addition, because raw tea leaves reduceto about one-fifth in size when they are processed into crude tea leaves, transportation costs arelower for crude tea leaves than raw tea leaves. This makes it easy for crude tea leaf producers to selltheir products even to distant refiners outside the region. (See Fuchinoue and Fuchinoue, 1999.) Forthese reasons, monopsonistic power is less easily exercised in the market for crude tea leaves thanin the market for raw tea leaves. This explains in part why agriculture cooperatives are activelyengaged in processing raw tea leaves rather than crude tea leaves.

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For these reasons, the market for raw tea leaves would work quite ineffi-ciently under investor-owned firms. One solution to avoid such inefficiencies isto establish tea leaf processing cooperatives.

Private information on the quality of raw tea leaves can also give tea leaffarmers an incentive to start tea leaf processing businesses. Quality control oftea leaves is much easier if they are processed in a vertically integrated produc-tion line, from growing raw tea leaves in the field to manufacturing final tealeaves in the factory. Concerning this point, it has been a custom of the industrythat information on the place of production and processing is not labeled on thepackages of final products. Tea leaves made by the Kanagawa Prefectural Eco-nomic Federation of Agriculture Cooperatives have attracted wide popularityamong consumers through such information being revealed on their packages(Ohshima, 1985). One reason behind this phenomenon is that consumers wantsafety-related information about the tea leaves they consume every day, such asthe type, amount, and frequency of agricultural chemicals that the producersused in growing the raw tea leaves. Such information is easily obtained if thefinal tea leaves are produced by the raw tea leaf growers.

IV. Other Economic Factors

In the previous section, we examined how market power and asymmetric infor-mation affect the establishment of food processing cooperatives. In this section,we consider other possible economic factors that might influence the compara-tive efficiency of this type of firm in the food manufacturing business.

IV.1 Hold-up problems

Food processing factories are often built near the place of production of theraw agricultural products for on-the-spot production. This reflects the fact thatmany raw agricultural products easily lose their freshness after harvest, and arecostly to keep in stock in good condition (Takenaka, 1985b; Hiraiwa, 2005).The on-the-spot production method might cause hold-ups at the time of con-structing the food processing facilities (Williamson, 1979). That is, foodprocessing plants built in remote farming areas will be of little use once thesupply of the raw agricultural products is terminated. Therefore, investorshesitate to invest in those plants for fear of sudden termination of trade withfarmers.22 This kind of inefficiency can be prevented if farmers rent the

22. The hold-up problem is commonly discussed in a context such as when farmers threatenmanufacturers with a sudden termination of trade of their agricultural products. In practice,however, the problem occurs even in the absence of farmers’ strategic termination of trade withfactories. For instance, farmers might change the crops they grow in their fields according to themarket prices for farm products. Otherwise, they might quit farming because of the absence ofsuccessors. In these cases, food processing factories built in the rural farm area become worthless,which hinders investment in the area.



factories long term or own the factories themselves by mortgaging theirland.23,24

In reality, factories that process fruit and vegetables are often located ininland areas near the place of production. For instance, canned tangerines areproduced in the prefecture of Nagasaki, a major tangerine-growing area; cannedpeaches in the prefecture of Yamagata, a major peach-growing area; and cannedpineapples in the prefecture of Okinawa, a major pineapple-growing area.25 Theaverage value of physical assets per establishment amounts to 152 million yenfor fruit and vegetable products (2004, Table 6). This is not a small amount,and investors may well reserve investment in fruit and vegetable processingfactories that are built in rural farm areas. Farmers’ ownership of processingfactories is a solution for overcoming the underinvestment problem in thesecircumstances.

A similar argument seems to hold true for potato processing plants. Produc-tion of both potatoes and potato starch is concentrated in the prefecture ofHokkaido. Seventy-seven percent (or 2278 thousand tons) of all domestic pro-duction of potatoes (which is 2959 thousand tons) occurs in Hokkaido. Potatostarch is almost exclusively produced in Hokkaido. Ninety-two percent (or215 209 tons) of potato starch produced in the prefecture (which is 233 559 tons)is produced by agriculture cooperatives.26 The value of physical assets perestablishment is 332 million yen for starch production, a considerable largeamount (2004, Table 6). These facts imply that potato farming villages in theregion had difficulty in inviting new investment in the region from outside and,therefore, potato farmers in the villages built factories themselves that use theirpotatoes to produce potato starch.

IV.2 Monitoring costs

In theory, on-the-spot production as discussed in the previous subsection mightprovide another advantage to food processing cooperatives over food manufac-turing companies with respect to monitoring costs. Because farmers have goodaccess to the factory of their food processing cooperative that is located in theirfarm area, they can easily monitor daily operations of the factory. In contrast,stockholders of a food manufacturing company are not physically present at theproduction site. Therefore, they need to incur monitoring costs to alleviatemoral hazard in their factory.

23. Putterman (1984) and Hansmann (1988) consider a noncapitalistic firm that procures physicalcapital entirely by borrowing.24. Another way of avoiding the hold-up problem in this case is to let stockholders of the companyfarm themselves, which seems unrealistic. In particular, ownership of farms by stock companies islegally restricted in Japan.25. Japan Food Journal (2003).26. Data for 2001 are from the Ministry of Agriculture, Forestry and Fisheries, and are availableat http://www.tdb.maff.go.jp/toukei.

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Table 6 The value of tangible assets per establishment (million yen)

Code Industry 1980 1985 1990 1995 2000 2004

091 Livestock products 202.13 231.78 306.40 396.34 418.71 431.790911 Meat products 248.18 246.27 269.83 322.37 340.11 306.870912 Dairy products 277.31 364.61 523.49 747.47 851.16 954.980919 Miscellaneous livestock products 75.56 87.52 147.63 158.80 138.60 141.45092 Seafood products 32.20 44.70 66.67 90.91 96.67 72.100921 Canned seafood and seaweed 135.74 126.30 126.77 197.44 194.76 192.830922 Seaweed products, except canned 27.40 32.91 48.60 71.15 72.67 52.600923 Fish paste products 36.30 57.92 85.44 121.12 145.03 121.650924 Salted-dried and salted products NA NA NA NA NA 43.590925 Frozen seafood products

(unprocessed and packaged)93.82 110.69 186.93 230.70 164.15 94.57

0926 Frozen seafood products (processed and packaged)

56.16 73.25 89.28 111.92 122.83 99.68

0929 Miscellaneous seafood products 19.30 28.92 45.63 60.88 70.87 51.21093 Canned and preserved fruit

and vegetable products44.18 55.00 72.91 111.18 118.14 94.11

0931 Canned and preserve fruit and vegetable products, except vegetables pickled or in brine

80.08 98.77 108.25 172.94 171.34 152.18

0932 Vegetables pickled or in brine, not in air-tight containe

30.40 38.13 58.20 83.38 94.41 68.28

094 Seasonings 104.49 134.70 235.06 307.96 340.81 296.720941 ‘Miso’ (fermented soybean paste) 50.82 58.18 78.96 115.86 118.89 99.140942 ‘Shoyu’ (soy sauce),

and edible amino acids51.83 66.48 106.50 166.76 193.92 160.50

0943 ‘Umami’ seasoning NA NA NA NA 2326.45 2524.000944 Sauces 234.44 292.75 434.45 612.73 638.20 533.040945 Vinegar 41.33 81.76 199.55 159.23 151.27 104.890949 Miscellaneous seasonings 267.98 410.70 658.86 685.07 666.35 571.18

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095 Sugar processing 807.70 848.12 983.93 1434.50 1457.39 1428.480951 Sugar, except refined sugar 662.86 714.73 697.39 837.35 739.37 679.070952 Refined sugar products 903.16 805.54 932.33 1822.32 1971.56 2233.640953 Glucose, starch syrup and

high-fructose corn syrup743.63 1116.40 1475.23 1908.53 1891.94 1652.07

096 Flour and grain mill products 137.09 203.21 255.85 360.75 361.30 252.720961 Rice cleaning and polising 77.78 125.13 175.10 310.66 260.97 143.460962 Wheat and barley cleaning

and polishing70.17 159.37 168.91 501.75 724.00 266.87

0963 Wheat flour milling 631.33 955.22 1131.64 1292.25 1376.50 1400.210969 Miscellaneous flour and

grain mill products25.27 24.83 46.55 75.00 108.46 29.98

097 Bakery and confectionery products 55.79 86.57 125.77 167.39 179.31 176.940971 Bread 91.53 145.67 204.18 263.12 277.14 308.600972 Pastries and cakes 32.81 54.10 75.59 101.98 113.81 94.430973 Biscuits, crackers and other

dry bakery products47.64 72.79 98.72 135.67 147.24 110.67

0974 Baked rice confections 42.21 68.37 102.63 131.31 158.92 139.450979 Miscellaneous bakery and

confectionery products77.54 112.35 190.40 272.44 276.65 306.33

098 Animal and vegetable oils and fats 512.11 568.92 781.43 1012.91 1077.96 1156.840981 Vegetable oils and fats 646.23 828.25 1215.38 1331.35 1373.53 1714.860982 Animal oils and fats 55.74 74.18 121.60 158.91 176.84 144.260983 Edible oils and fats 1536.74 1570.52 1573.79 3003.19 3102.52 3169.79099 Miscellaneous foods

and related products28.86 40.70 67.29 103.38 126.57 125.00

0991 Starch 152.02 284.94 197.05 341.27 417.82 332.480992 Noodles, macaroni

and spaghetti20.27 28.68 41.20 68.92 81.16 71.14

0993 ‘Tofu’ (bean curd) and ‘aburage’ (fried bean curd)

11.27 16.59 25.48 42.30 51.67 41.39

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Note: NA, note applicable; n.e.c., not elsewhere classified.Source: Ministry of Economy, Trade and Industry, Census of Manufacturers, 1980, 1985, 1990, 1995, 2000, 2004.

Code Industry 1980 1985 1990 1995 2000 2004

0994 ‘Anko’ (sweet bean paste) and other related products

15.75 22.70 31.88 45.22 47.09 34.91

0995 Precooked frozen packed foods 117.94 167.19 305.00 315.68 363.20 317.910996 ‘Sozai’ (sidedish) foods NA 44.65 82.78 118.36 151.05 185.930999 Food and related products, n.e.c. 32.64 55.95 90.40 140.84 161.68 168.21101 Soft drinks and carbonated water 256.24 353.89 620.29 847.59 908.23 878.711011 Soft drinks and carbonated water 256.24 353.89 620.29 847.59 908.23 878.71102 Alcoholic beverages NA 258.72 441.61 626.96 701.14 683.821021 Wine, except ‘sake’

(Japanese rice wine)144.92 225.15 214.01 198.76 249.97 174.45

1022 Malt liquors 8563.35 9848.00 18 831.51 22 891.16 13 325.90 14 083.751023 ‘Sake’ (Japanese rice wine) 56.20 76.90 115.28 181.15 204.46 140.601024 Distilled, rectified

and blended liquors232.84 440.34 521.41 560.27 760.79 802.29

103 Tea and coffee NA 51.98 73.11 80.86 75.80 60.921031 Tea 13.89 20.35 30.20 38.64 48.91 25.821032 Coffee NA 441.76 472.01 545.89 360.21 396.69

Food manufacturing industry average

NA 90.74 135.10 185.39 205.57 197.21

Manufacturing industry average 91.80 125.98 167.82 227.50 256.73 256.50

Table 6 (continued)



In practice, however, we do not find any evidence in case studies that moni-toring costs of this kind have promoted the establishment of food processingcooperatives.

IV.3 Risk bearing

An agriculture cooperative consists of family-managed farms. Their livelihooddepends heavily upon the activities of the agriculture cooperative to which theybelong. Therefore, farmers are not in a good position to diversify the risks oftheir cooperative businesses compared with investors of a stock company.27

Consequently, costs of risk bearing will be great for a food processing cooper-ative when the undertaking requires a large amount of initial investment and isaccompanied with substantial business risks.

The value of tangible assets is not very low for meat, dairy, fruit and vegeta-ble products and starch. The only exception is manufacturing of tea, whichrequires only a very small amount of physical assets (Table 6). In contrast,except for starch, variations in profit as a proxy of business risks are moderatefor all food groups we studied in this paper (Table 7). Taking these facts intoaccount, tea leaf processing seems most consistent with the theoretical predic-tion based upon risk bearing. Generally speaking, however, we cannot findstrong statistical evidence that supports the hypothesis of risk bearing. We can-not find such evidence in case studies either.

V. Conclusion

In this paper, we examined the comparative efficiency of food processing busi-nesses run by agriculture cooperatives. We mainly considered the implicationsof market power and asymmetric information for the formation of this type ofcooperative firms.

Market power seems to play the primary role in the formation of foodprocessing cooperatives. We came across various cases in the literature of foodprocessing cooperatives being formed when the market for raw agriculturalproducts was under the strong monopsony power of large food manufacturingcompanies. Statistical data seem to support this tendency.

Asymmetric information is thought to be another important factor for theestablishment of food processing cooperatives in Japan. In several case studieswe reviewed, private information on the quality, particularly the safety, of rawagricultural products seemed to have given farmers some advantages in startingfood processing businesses.

Presumably, there are two reasons why private information on the safety offood can be influential in the formation of food processing cooperatives. First,

27. Also, managers of agriculture cooperatives assume unlimited liability for the results of thecooperative’s undertakings.



Table 7 Variance of percentage rates of change in the gross added value for 1980–2003

Code Industries Variance

091 Livestock products 21.8 0911 Meat products 40.0 0912 Dairy products 29.4 0919 Miscellaneous livestock products 58.1 092 Seafood products 19.1 0921 Canned seafood and seaweed 161.7 0922 Seaweed products, except canned 38.5 0923 Fish paste products 33.0 0924 Salted-dried and salted products NA0925 Frozen seafood products (unprocessed and packaged) 117.5 0926 Frozen seafood products (processed and packaged) 360.8 0929 Miscellaneous seafood products 35.5 093 Canned and preserved fruit and vegetable products 20.8 0931 Canned and preserve fruit and vegetable products,

except vegetables pickled or in brine48.1

0932 Vegetables pickled or in brine, not in air-tight containers

24.5

094 Seasonings 19.3 0941 ‘Miso’ (fermented soybean paste) 30.9 0942 ‘Shoyu’ (soy sauce), and edible amino acids 17.2 0943 ‘Umami’ seasoning NA0944 Sauces 90.1 0945 Vinegar 117.6 0949 Miscellaneous seasonings 112.5 095 Sugar processing 174.5 0951 Sugar, except refined sugar 671.9 0952 Refined sugar products 249.4 0953 Glucose, starch syrup and high-fructose corn syrup NA096 Flour and grain mill products 42.8 0961 Rice cleaning and polising 152.3 0962 Wheat and barley cleaning and polishing 598.1 0963 Wheat flour milling 96.4 0969 Miscellaneous flour and grain mill products 196.3 097 Bakery and confectionery products 9.9 0971 Bread 10.4 0972 Pastries and cakes 25.2 0973 Biscuits, crackers and other dry bakery products 47.0 0974 Baked rice confections 26.8 0979 Miscellaneous bakery and confectionery products 25.9 098 Animal and vegetable oils and fats 73.8 0981 Vegetable oils and fats 145.6 0982 Animal oils and fats 203.5 0983 Edible oils and fats 318.3 099 Miscellaneous foods and related products 26.0 0991 Starch 147.6 0992 Noodles, macaroni and spaghetti 23.2 0993 ‘Tofu’ (bean curd) and ‘aburage’ (fried bean curd) 25.3 0994 ‘Anko’ (sweet bean paste) and other related products 45.9



Note: NA, note applicable; n.e.c., not elsewhere classified.Source: Ministry of Economy, Trade and Industry, Census of Manufacturers, 1980–2003.

Code Industries Variance

0995 Precooked frozen packed foods 68.2 0996 ‘Sozai’ (side-dish) foods NA0999 Food and related products, n.e.c. NA101 Soft drinks and carbonated water 93.9 1011 Soft drinks and carbonated water 93.9 102 Alcoholic beverages NA1021 Wine, except ‘sake’ (Japanese rice wine) 150.5 1022 Malt liquors 108.8 1023 ‘Sake’ (Japanese rice wine) 23.9 1024 Distilled, rectified and blended liquors 127.9 103 Tea and coffee NA1031 Tea 49.8 1032 Coffee 570.4

Table 7 (continued)

from an international point of view, Japanese people seem to have a particularlystrong preference for food safety.28 Second, Japan depends heavily uponimports of food from overseas.29 Generally speaking, the safety of food is harderto recognize for imported food than for domestic food. For this reason, pro-cessed foods that are wholly made of domestic farm products gain prestige valuein the Japanese food market. Indeed, processed foods produced in this wayby agriculture cooperatives sustain competitiveness in the market even if theyare priced higher than their substitutes produced by major food manufacturingcompanies.

In contrast to market power and asymmetric information, monitoring costsand risk bearing appear less influential in the formation of food processingcooperatives. We found only limited evidence in statistical data or in casestudies that these factors might have promoted the establishment of this type ofcooperative firm.

28. For example, such a national characteristic is revealed in the testing methods for screeningBovine Spongiform Encephalopathy-infected cattle that are adopted in each country. Althoughsample testing is under way in, for example, the USA and Europe, Japan keeps administering com-prehensive tests. Japan had banned imports of US beef for an extended period of time, whichcaused trade friction between the two countries.29. Japan’s self-sufficiency ratio for food is 40 percent, which is quite a low level among devel-oped countries. The ratio is 237 percent in Australia, 145 percent in Canada, 128 percent in theUSA, 122 percent in France, 84 percent in Germany, 70 percent in the UK, and 62 percent in Italy.Data for 2003 are from the Ministry of Agriculture, Forestry and Fisheries, and are available athttp://www.kanbou.maff.go.jp/www/jukyuuritsu/index.html.

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