Is a cooperative just a tribe?

Agricultural cooperatives, it was recently suggested to me, are about tribalism, and are therefore anachronistic. I believe this was directed at the dairy industry where most of the...

Agricultural cooperatives, it was recently suggested to me, are about tribalism, and are therefore anachronistic. I believe this was directed at the dairy industry where most of the new processing companies are not cooperatives.

Applying this logic to a review of New Zealand’s primary industry, one would have to conclude that dairy farmers and kiwifruit growers are somehow inherently more “tribal” than, for example, beef farmers or apple growers.

Cooperatives can appeal to a sense of parochialism, and also provide membership of a specific community. Perhaps that is where the confusion about tribalism arises.

That, however, is not sufficient to explain why cooperatives are more successful in some sectors than others. There is a deeper structural logic which drives the ubiquity and stability of some cooperatives.

The first point is that cooperatives are a deliberate expression of primary producers’ rights: the right to own and control the firm that buys their production, and a right to share in the profits of their firm.

When primary producers form a cooperative, they are ensuring that they have a say in the direction of their industry.

It also insures members against an abuse of purchasing power by the firm. However this still doesn’t explain why cooperatives dominate certain sectors and not others.

Cooperatives are strong in some sectors because of specific structural elements to do with exposure to market volatility, the mutual dependency between producer and processor, and the cost of processing and marketing capital relative to the cost of production.

New Zealand’s primary exports are exposed to volatile commodity and foreign currency markets. World dairy prices have fluctuated wildly, with price swings of plus 140 percent and minus 60 percent occurring over successive six month periods. Wool prices have jumped nearly 140 percent from early 2010, after falling 40 percent in the previous year.

The biggest driver of a sector’s exposure to this volatility is the amount that is exported.

The dairy and kiwifruit industries export over 90 percent of production. By comparison, no more than 80 percent of beef and 70 percent of apples are exported.

The consequence for dairy and kiwifruit sectors is that their fortunes tend to rise and fall more than any others, and this risk must be managed. High profile failures in apple and meat sectors demonstrate the issues arising from procurement risk. However, in the meat and apple sectors, a disaster for one processor is a boon for another as they can usually take up the production.

Beef farmers and apple growers can also hold off stock, or transport product to another processor.

The dairy farmer can typically do neither of these things as raw milk must be processed quickly before it spoils, and in any case there is rarely a feasible alternative processor.

Therefore it makes more sense for the dairy farmer to assume the risk through high and low payouts, and to manage their farming operation accordingly.

Last but not least is the issue of stability. In the meat sector, the processing company typically represents a capital investment of less than a third the annual payments to producers.

In the dairy sector, this is closer to two thirds, and for kiwifruit it exceeds the total annual payments.

This pattern also holds for the total assets, including marketing assets and working capital. Consequently it is relatively easier for sheep and beef farmers to set up a competing firm, and this leads to more opportunism and instability in that sector.

Anecdotally, banks are reluctant to lend anything on kiwifruit packhouses as the payback period is far longer than they are prepared to consider, making it far preferable for the kiwifruit growers to raise the capital for the facility which they then use.

It is therefore easy to see how, because of the underlying structures of the industry, cooperatives are a necessity in some of New Zealand’s primary sectors. Their ubiquity has nothing at all to do with tribalism.

— From the August 2011 Cooperatives News

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