by John Park, Ph. D.
I am a university professor of agricultural economics that works for the Texas A&M AgriLife Extension Service and supports agricultural cooperatives. So admittedly, when people ask me what I do for a living, there is a lot to take in. They generally understand the concept of a college professor, although I may have to explain that we do much more than teach classes. If they are familiar with agriculture, they probably understand my role as an agricultural economist. They may be familiar with Extension, but are surprised to learn that in addition to the traditional support for agricultural producers, Extension provides programming for just about everyone, including youth programs like 4-H, health programs like Walk Across Texas, or homeowner programs like Texas Master Gardener.
But the part that I generally have to explain in more detail is the part about agricultural cooperatives. I try to keep it simple when the misconceptions surface. No, they aren’t government supported organizations, and no, they aren’t part of some modern socialistic movement. In fact, cooperation is an example of democratic control within a market economy. In the most simple sense, a cooperative is a business that is owned by its customers. Once I patiently get past all that, I am often asked, “Do we need cooperatives today, or are they an outdated form of business that will eventually go away?” Now, that is a good question.
Do We Need Cooperatives?
There is no doubt that cooperatives are a major part of agriculture in the United States. The National Council of Farmer Cooperatives reports that the majority of American farmers and ranchers belong to one or more of the nearly 2,500 local farmer cooperatives across the country. These cooperatives process and market agricultural commodities, and provide farm supplies and financial services. In the process, they provide over 250,000 jobs with a total payroll in excess of $8 billion. That business activity is a great support to rural communities. Some commodities rely heavily on co- operatives. For example, dairy cooperatives handle 85 percent of milk produced in the United States. Our own research estimates that farmer cooperatives add an additional 12 percent to Texas GDP because of their cooperatively owned structure.
Cooperatives, then, are a benefit to our agricultural and rural economy, but why are they started in the first place? Cooperatives form out of an economic need to correct shortcomings in the market. In general, cooperatives are formed for several reasons:
- Reduce costs through volume purchasing
- Obtain market access to more buyers
- Improve bargaining power when marketing commodities
- Obtain products and services that might not otherwise be available
- Improve quality of products and services
- Improve income through activities that add value to commodities
Consider the benefits that cooperation might offer a group of cotton producers. These producers share similar expenses for fuel, fertilizer, chemicals, and seed. Individually, they might not be able to purchase in large enough quantities to receive any volume discounts. But if they purchase together, they might be able to negotiate a better price on these goods. They all need the services of a cotton gin, but owning and operating a cotton gin for one producer is not profitable.
Through cooperative ownership, they can ensure that ginning services will be available in their area. If there are other gins available, the cooperative also plays a role of helping to ensure competitive pricing for all producers. Through cooperative efforts, farmers might also own the warehouse for their cotton bales and their own marketing staff. They might even decide to further process cotton into fabric, or cottonseed into oil. So, to answer our question, yes, cooperatives are needed today.
Will We Always Need Cooperatives?
But, will we always have cooperatives as part of our farm economy? Or, with continued consolidation and increases in farm size, will they no longer be needed? To answer this properly, we need to compare the characteristics of agricultural and consumer markets.
Agricultural markets are focused on providing commodities. Commodities are economic goods that are considered to be interchangeable within themselves. In other words, yellow no. 2 dent corn, is yellow no. 2 dent corn, regardless of who produced it. Further, in these commodity markets, producers are numerous to the point where an individual producer is not able to influence the supply to the point that they can influence price. In that sense, farmers are typically price takers. At any given point in time, they can sell their commodity for the current market price. No matter how much you tell people about what a good job you do, the market price is what you get.
Consumer markets are focused on providing products. Products are economic goods that are considered to be unique from one another. They feature a combination of characteristics that are interesting to buyers and rely on the use of brands to present them as the production of an individual manufacturer. In other words, not all chocolate chip cookies are the same. I might prefer one over the other because it contains pecans, or has a better flavor or texture. I might simply perceive a difference in quality because of its brand. The companies that sell products have some control over price. They may set the price while taking into account their costs and competition from rival products. They are also able to influence sales and the price that customers are willing to pay through the use of advertising. (The largest food manufacturer, Mondelez International, spent over $1.2 billion on advertising in 2019 alone.)
Let’s summarize by considering all the companies in the food system. It begins with a large number of relatively small firms (farmers), selling commodities to fewer larger firms that store, process, and transport commodities and products to other large firms that manufacture differentiated food products that are distributed and sold by retailers to consumers who enjoy an incredible selection of inexpensive food and other products.
In other words, we have a system where commodity markets are made up of a large number of sellers that are price takers, and product markets are made up of a small number of buyers that are price setters. That isn’t going to change. The clash of these interacting market structures will always present an inequality of market power between farmers and the downstream markets that add value to commodities until they become the things that consumers demand.
The fact is that consumers don’t buy commodities, like cotton lint or cottonseed. They buy cotton in the form of products like t-shirts, blue jeans, and bedsheets. They buy cottonseed in the form of cooking oil and potato chips, hair care products, plastics, toothpaste, salad dressings, computer screens, cotton swabs, mattresses, and much more. Cotton is trading today for about 88 cents per pound, but a few pounds of cotton can be manufactured into denim jeans that easily sell for $200.
I’m not suggesting that this is unfair, but rather our food system adds a lot of economic value to commodities beyond the farm. Further, limited to their own operations, farmers would be unable to capture this value. Through cooperatives, however, farmers are able to own the firms that create value and reap a portion of the profits.
In that sense, you might consider that a farmer’s participation in cooperatives represents an investment in the infrastructure of our food marketing system. Without this investment, would these market services and products be provided? Probably, but not in all market locations, and not under all market conditions. When these assets are cooperatively owned by farmers, there is a greater likelihood that services will be available in a bad crop year, and that profits will be shared in a good crop year. In short, cooperatives represent the ability of the American farmer to counteract the inequalities and deficiencies that are inherent in the market and exert greater control of their profitability. Will we always need cooperatives? Yes!