Cooperative and Marketing Orders

1
Cooperative and Marketing Orders

• Daniel Gregory
• Cody Eakin

2
Cooperatives and Marketing Orders

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

3
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

4
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

5
Incentive Problems

• In a co-op, management does not gain or lose
  depending on the firms 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?

6
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

7
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

8
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

9
Milk Marketing

• Two government programs involved
• Marketing orders
• Price supports

10
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

11
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

12
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

13
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

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EFFECTS OF THE DAIRY PROGRAM

• Effects of the dairy program
• First, its 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.

15
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.

16
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.

17
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.

18
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.

19
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.

20
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.

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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.

22
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.