Vertical Coordination and Cooperatives

1
Vertical Coordination and Cooperatives

• Types of coordination
• Considerations in coordination
• Farmer cooperatives

2
Two Types of Integration/ Coordination

• Horizontal
• Ownership or control of parallel or similar firms
  (e.g., multiple retail chains, multiple farms)
• May raise questions of market fixing or excessive
  market share
• Vertical
• Ownership or control of various stages of the
  value chain
• May raise issues of conflict of interest

• Vertical Coordination Opportunities
• Ownership of upstream or downstream value chain
  members
• Contractual relationships
• Market specification (explicitly defined deal)
• Resource providing
• Management/income guaranteeing contracts

3
Vertical Coordination A Very Messy Chart!
FARM SUPPLIES
FARMING
PROCESSING
TRANSPORTATION
MANUFACTURING
FINANCING
MARKETING
RETAILING
WHOLESALING
4
Vertical Integration

• Several value chain members are owned by the same
  company

USUALLY NOT COST EFFECTIVE TO RUN FOR
CORPORATIONS
FARMER
TRANSPORTATION
INVESTMENT OPPORTUNITY BUT DIFFICULT TO RUN
PROCESSOR
POSSIBLE REAL OR PERCEIVED CONFLICT OF INTEREST
MANUFACTURER
WHOLESALERS/ RETAILERS
BANKING
5
Possible Conflicts of Interest

• Denying of resources to potential
  competitorse.g.,
• Bank owning food industry resources will be less
  likely to lend to competitors
• Retail store will not stock competing products
  (e.g., Pepsi owned but sold off KFC and Taco Bell
  chains)
• Lower priority given to potential competitors or
  non-competing customers under conditions of
  scarcity or limited capacity

6
Specialization

• Specialization
• Economies of scale
• Development of expertise and efficiency
• Possible bargaining advantage due to fewer
  competitors

• Examples
• Farmers
• Processors
• Manufacturers
• Retailers

7
Diversification

• Diversification
• Spread of risk
• Control of needed resources
• Balance of product life cycle and cash flow
  issues
• Synergy (?)

• Examples
• Store brands
• Manufacturers invest in
• Transportation
• Processors

8
Decentralization

• Technology now allows for transactions where
• Parties do not have to meet in person (e.g., as
  opposed to auctions)
• Product can be shipped from producer directly to
  a large buyere.g.,
• Commodities from the farmer to the processor
  without a stop at the auction house
• Products from the manufacturer to large retail
  customers
• Possible in part because there are fewer but
  larger buyerse.g.,
• Large vs. small manufacturers
• Larger supermarket chains as opposed to
  independent stores

9
Impact of Decentralization

• Less information available on overall market
  prices
• Reduced costs but loss of employment for
  intermediaries

10
Farmer Cooperatives

• Farmers joining in ownership of needed
  resourcese.g., processing capacity
• Often run for ideological rather than economic
  reasons
• Are effectively real businesses that must be run
• Either by volunteers with limited experience in
  the field
• By outside managers that must be hired,
  evaluated, and paid

11
Types of Cooperatives

• Marketing
• Selling activities
• Branding of regional products
• Purchasing
• Economies of scale
• Taking delivery of bulk that would be difficult
  to ship to individual farmers

• Services
• Credit, insurance, health benefits, irrigation,
  utilities
• Processing

12
Problems With Cooperatives

• Governanceone-person-one-vote or influence
  proportional to usage and investment?
• Financing of large investments
• Handling withdrawal of members
• Public resentment of tax advantages