The limitations of agricultural producer organisations

Dr Jane F. Eastham looks at the role of Producer Organisations in the EU agricultural sector – and raises the question of just how effective this form of...

Dr Jane F. Eastham looks at the role of Producer Organisations in the EU agricultural sector – and raises the question of just how effective this form of collective action can really be.

The producer organisation (PO) regime now covers all agricultural sectors in the EU, in an effort to encourage collective action to promote competitiveness and improve farm returns. But in any supply tier, additional players may not serve farmer interests, and in markets serving highly concentrated and consolidated buyers such as supermarkets, POs can deflate farm gate prices.

Recent reforms of the Common Agricultural Policy have placed even greater emphasis on the promotion of horizontal co-operative activity, extending policy and funding of the current PO programme.

Producer organisations were first recognised in 1972. Over time, from a position where they were designed to facilitate the management of post- harvest supply in the fresh produce sector, they have emerged as a means of improving the competitive position of growers following market deregulations post 1994. Recent reiterations have extended policy beyond EU fruit and vegetables to cover all agricultural sectors.

While there is a consensus that co-ops present a solution to power imbalances, few have questioned this position. The academic and policy communities maintain that benefits accrue from ‘strength in numbers’, but there is limited consideration of the extent to which this may be achieved given hostile downstream market conditions.

To apply for PO status, members have to state their objectives and methods
To apply for PO status, members have to state their objectives and methods

At times, POs can neither become effective countervailing forces or deliver positive yardstick effects. In fact it is suggested that measures designed to impede side-selling in POs can deflate farm incomes and result in negative yardstick effects.

In 1972, POs were established as a statutory measure in the EU to support the horticultural sector under the framework of the Common Market Organisation (CMO). They gained progressively greater prominence following reforms in 1996, 2003 and 2007.

In their initial incarnation, their major role was to manage the withdrawal of fruit from the market under the CMO, but from 1996, the PO regime placed more emphasis on enabling growers to improve their competitive position amid growing global competition; the upshot of the World Trade Organisation Agreement in 1994. Presumed successful, the scheme now covers all agricultural sectors.

Despite the extension to their role, POs continue to operate under the rules specified in the 2007 reform (number 1182/2007). PO status is awarded where there is a minimum of five producers with a total value of marketed production (VMP) of €100,000 (£72,000), who engage to either market their product, manage production in relation to demand or optimise production to stabilise prices.

In their application for PO status, members need to design an operational programme stating their objectives and methods. These are match-funded by members and the EU. In consolidating supply, reducing overproduction and investing technical processes to improve efficiency through collective effort, members are assumed to be able to improve leverage.

While the regulations offer a baseline, POs vary across the EU, and some northern European membership with a greater VMP than those in the UK and many southern European countries. A condition of membership is that members should be loyal to the PO and not engage in side selling.

There is limited examination of the effectiveness of collectives as a mechanism to redress power imbalances in current literature. Existing research examines the changing fortune of co-ops over time.

Co-ops are said to have a life cycle of five stages
Co-ops are said to have a life cycle of five stages

Co-ops are seen to have a life cycle of five time periods or stages. The fifth and final stage may be characterised by either the exit of the co-op from the market or its emergence into an alternative governance form. This final stage is said to materialise as a consequence of divergent member interests emerging from the need to augment product value through diversification or differentiation.

This body of literature inherently recognises imbalances of power, but it fails to explicitly consider the efficacy of collectives to redress these when faced with highly concentrated downstream markets.

Surely a key purpose of POs and collective action is to redress power imbalances and improve farm gate prices. Power dependency and resource dependency theories offer the idea that a PO will reduce the number of alternative sources of supply, improve farmers’ power position and thus farm gate prices. These theories maintain that the power held by one exchange party is dependent on the respective criticality of their resources to the other. This is contingent on scarcity, causal ambiguity, market share, economies of scale, entry barriers, availability of alternatives/ substitutes and the importance of the product/service to the parties’ business. Economic value or rents are distributed within a supply chain depending on the respective distribution of such resources between the two parties.

Mainstream research in co-ops normally considers the removal of alternatives on the supply side but fails to consider the demand side. Where the collective attains a significant proportion of the supply, the formation of a collective can reduce alternatives for buyers.

This position fails to consider that the ability of the collective to leverage on price and redress power imbalances is also contingent upon the power attributes of the downstream player. Even where the collective is unable to significantly influence the alternatives for buyers, a positive impact on the price would emerge with an increase in the number of channel options to farmers. This effect, known as the yardstick effect/positive externality, similarly fails to consider the balance of power and dependency between the two parties.

For example, SGT, which became a PO following the 1997 reforms, was an established small horticultural co-op with 21 members. It faced extra competition as a consequence of global market liberation and, as the only remaining English top fruit co-op, in a market where lobby groups and the media had promoted English apples and pears, it might be assumed it could be in a relatively strong position over its buyers.

SGT originally sold directly to retailers, but post 1997 Sainsbury’s introduced and promoted the development of an intermediary, Chingford. Chingford emerged as one of two category leaders, heavily tied to the retailer through a dedicated supply relationship and purpose-built, dedicated facilities. Their remit was ensure the highest quality fruit at the lowest cost.

Ninety percent of Chingford’s business was contractually bound to Sainsbury’s and, if they were to be delisted, there would be few alternative buyers to equal the volumes it supplied to Sainsbury’s. The risk of being delisted made the company a willing supplicant.

Consequently, SGT, who dedicated 60% of their total sales to the relationship, found that not only were they expected to absorb increased costs of transportation and packaging but also a decline in top-line farm gate prices.

Readily available global supply meant growers faced the rising costs of quality improvement. In contrast, the relatively low barriers to entry into the fresh produce ‘wholesale’ sector enhanced the retailer’s power.

POs sell themselves as offering farmers strength in numbers
POs sell themselves as offering farmers strength in numbers

It is presumed that positive yardstick/externalities emerge where the number of alternative buyers for farmers increase.

But if alternative supply sources to highly concentrated and contested downstream markets increase,
this can lead to greater horizontal competition, particularly where there is a threat of delisting. In such situations companies like Chingford need to ensure improved quality or value over their rivals.

Constant quality improvements to fruit led to an escalation of farm investment and costs for SGT, albeit match-funded by the EU. These are depreciated over a five-year period and inhibit member exit prior to the full depreciation, as this would result in forfeit of the whole asset, including the growers’ own investment. The inability of growers to shift their supply/sidesell, where the PO has no control over price, can result in negative consequences for the PO and the sector as a whole.

The PO has no control over price as members are bound to the collective through rules governing side selling and investment, which effectively eliminates any value for farmers in the entry of an alternative buyer to the market. This eliminates any potential for a positive yardstick effect. Only through the ability of farmers to switch can positive yardstick effects materialise.

To the contrary, locking farmers into a relationship where there are high levels of consolidation in retail reinforces the dependency of the PO on their buyers. Where POs are limited in size, and are particularly vulnerable to pressure from buyers and intermediaries, contestation can have, it appears, a negative influence on all the sector prices.

The policy promotion of POs is that they offer farmers strength in numbers. Such strength, it is suggested, will increase the product scarcity and eliminate choice to downstream buyers, thereby eliminating the need for other forms of intervention to support farm gate pricing. It is normally supposed that positive externalities emerge from the entry of the collective, with a corresponding inflationary impact on prices. This position may be overly simplistic.

It may be that POs offer farmers the opportunity to improve technical efficiencies and facilitate innovative practices, ostensibly reducing the productivity gap where subsidies and trade barriers allow greater global competition. Literature on power suggests, however, that when faced with highly contested markets and readily accessible information on technological improvements to growing techniques, CMO funding provides farmers with little competitive advantage.

Furthermore, by ensuring that POs inhibit side selling or member defection it may be that there is a net effect of reducing any real impact on the returns received. This is particularly a concern where retailers use the additional sources of supply as a means of driving down price by threat of delisting.

We need more careful consideration of PO regulations with respect to both specific investment in farm processes and infrastructure and potentially on the reality of the ‘strengths’ of collectives when faced with contested horizontal and downstream markets.

Dr Jane F. Eastham is a senior lecturer in supply chains, supply chain management, procurement and marketing at Harper Adams University’s department of Food Science and Agri-food Supply Chain Management. This is an edited version of an article which first appeared in the Journal for Co-operative Studies.

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