Cooperatives and the Commodity Political Agenda: A Political Economy Approach

1. Cooperatives and the commodity political agenda: a political economy approach to the evolution of a cooperative Ellen Goddard, Peter Boxall, and Mel Lerohl University of Alberta

2. Background • Cooperative evolution from commodity concerns • Internal differences of policy view among members of cooperatives • For the cooperative to be • the political arm of industry, • process product, and • provide maximum returns to producer members makes for a complicated objective function Department of Rural Economy, University of Alberta

3. Agricultural co-operatives in Canada • 3 major types • agricultural marketing and processing • farm supply, and • production co-operatives • Largest cooperatives are in marketing and farm supply • Major structural shifts taking place in coops in past decade Department of Rural Economy, University of Alberta

4. Political economy and Coops The ‘lobby’ process… Government Coops Farmers Other processors Department of Rural Economy, University of Alberta

5. Major current issue for coops • “(Dr. Murray) Fulton said the three prairie pools once aggressively lobbied for general farm interests, which made them different from companies like Cargill or Pioneer… Fulton thinks the pools…might also have lost much of their connection with members when they stopped serving as a political lobbying voice for farmers.(Western Producer, August, 2001). • Can a cooperative fill both a farm lobby function and serve as an effective competitor in farm product processing/handling? Department of Rural Economy, University of Alberta

6. Limiting the focus • Public choice approach to lobbying and business functions of the cooperative • Focus only on marketing cooperatives – farm supply/production cooperatives may differ • Focus on the lobbying function – how coop came to focus on ‘business’ vs ‘lobbying’ is not part of this paper Department of Rural Economy, University of Alberta

7. Public choice • “Political influence is not simply fixed by the political process by can be expanded by expenditures of time and money on campaign contributions, political advertising, and other ways that exert political pressure. Political equilibrium has the property that all groups maximize their income (welfare) by spending their optimal amount on political pressure, given the productivity of their expenditures and the behaviour of other groups. Each group acts as if expenditures by other groups are unaffected by changes in its own expenditures.” (Becker) Department of Rural Economy, University of Alberta

8. Public choice in coops • Reasons cooperatives arise as business entities • Historical ties between the business and the political role • ‘Influence cost’ problem (Cook) • Internally, potentially externally • Can the ‘lobby’ role interfere with the ‘business’ role • Branch line abandonment? Department of Rural Economy, University of Alberta

9. Objectives of the cooperative • The primary objective of the co-operative is to maximize the welfare of its members (W). • Max W = PS + πc, • where PS is producer surplus from sale of raw product X to the co-operative, and πc is the profits the co-operative earns. Department of Rural Economy, University of Alberta

10. Economic and Social Objectives • Cooperative may be operating to maximize an objective function that includes the following (from Hahn 1990): • Max W = α( π) + (1-α)S, where • π = f((PS + πc),p) and S = f((PS + πc),p) • where PS is producer surplus from sale of raw product X to the co-operative, • πc is the profits the co-operative earns • p is the political power of the co-operative • S is the utility achieved through the political lobbying process. Department of Rural Economy, University of Alberta

11. Size of α. • 0 ≤ α ≤ 1 • When α = 1, business issues dominate • Effects of high value of α • When α = 0, lobby issues dominate • Effects of low value of α • Possible stability issues with low α • Size of α is controlled by Board, to lesser extent management Department of Rural Economy, University of Alberta

12. Example: Marketing Cooperative in Supply Managed Sector • Under supply management, restrictions of farm product and imports are used achieve target producer prices • Political pressure involves lobbying for import restrictions • includes protecting the industry from trade disputes raised by other countries) • System also lobbies for increased raw product prices (e.g., milk), lobbies for support prices by-products (e.g., butter and skim milk powder) Department of Rural Economy, University of Alberta

13. Pressures in supply managed dairy sector • Imports constrained except • Butter and dairy spreads • Ice cream • Possible reduced domestic demand • Shifts in demand for fluid milk, other products • Technology (increased use of imported whey and casein to produce cheese, other dairy products) Department of Rural Economy, University of Alberta

14. Where does the coop fit in? • Cooperative benefits from lower milk prices if • Expands demand for milk, milk products • Opens export markets that can be accessed with lower cost inputs • Farmers likely benefit from success of cooperative, but lose from lower product prices • Reduced quota value needs to be set against benefits from ownership in processing cooperative Department of Rural Economy, University of Alberta

15. Sale of Dairyworld • “We remain committed to supply management…” ( Dairyworld Annual Report , 1999) • For Dairyworld, α likely near 0 • “Milk marketing boards are…an impediment for Parmalat Canada as they restrict the…supply of raw milk and charge…higher [than US] prices…” (Parmalat Canada President Michael Rosicki) • For Parmalat, α = 1. • New owners of Dairyworld? We expect α = 1 Department of Rural Economy, University of Alberta

16. Recent increased interest in milk prices Department of Rural Economy, University of Alberta

17. Example: marketing cooperative in grain handling • Role of the Canadian Wheat Board • Functions of grain handling cooperatives in relation to CWB • Evolution of grain handling cooperatives • Including competition from trans-national firms • Saskatchewan Wheat Pool – share capital • Agricore – merged with UGG to form Agricore United, shareholder-owned firm Department of Rural Economy, University of Alberta

18. Sample policy views of SWP • Date Quotes • 04-Dec-92 We are not just a commercial operation, we are involved in agriculture policy development. • 10-Oct-97 ….our recommendations would make the CWB a more effective marketer. • 23-Jan-01 The pool and our farmer members will be part of the debate about a Canadian strategic policy for agriculture Department of Rural Economy, University of Alberta

19. Forces leading to change in grain handling • increased competition among elevator companies for grain handling revenue in the past five to seven years due to: • deregulation of handling charges in amendments to the Canada Grain Act in 1995; • demise of the Western Grain Transportation Act, and the higher rail rates that resulted; • acceleration of the pace of abandonment of branch lines; • entry of a new firms into the now-more-competitive grain handling business; • breakdown of the solely provincial focus of the three prairie pools; and • widespread access to relatively low-cost long distance trucking. Department of Rural Economy, University of Alberta

20. Issues facing grain handlers • Quandary for grain handling coop • adopt the new technology which implies closing small elevators? • satisfy political constituents by maintaining existing infrastructure in spite of having facilities that are not cost competitive? • Rapid construction of new infrastructure • occurred earlier with different α? Department of Rural Economy, University of Alberta

21. High throughput elevators Sgh Sgh’ $/tonne Pgh Pgh’ Dgh throughput Department of Rural Economy, University of Alberta

22. Concluding comments • market share of cooperatives in the grain handling business has fallen to less than 50% with the sale of Agricore to United Grain Growers. • market share of dairy cooperatives has fallen to 50% from a high of close to 70% with the sale of Dairyworld to Saputo. • variety of reasons for the transitions occurring in both industries, twin roles of political lobbyist and business enterprise may not make the operation of the companies any easier. Department of Rural Economy, University of Alberta

23. Key issues • Estimating size of α. • Do twin roles of coop make task • Harder? • Impossible? • Future for large, cooperative organizations • Predict long-term success by knowing α? • Apply to other types of cooperatives? Department of Rural Economy, University of Alberta