Humboldt-Universität zu Berlin - Economics of Agricultural Cooperatives

For the Market Structure (position) subject area, the objective of the Raiffeisen Chair is to better understand and explain how cooperatives affect their market environments. It is assumed that, due to concentration processes in retail and processing, agricultural producers are increasingly being exposed to market imbalances in the agri-food chain. Producers have to deal with very large actors who have positional advantages [1]. In this situation, if concentrating downstream industries are shareholder oriented, they will stepwise reduce the realizable margins and profits of producers [2]. Because these effects are known to agricultural producers, apart from trying to increase farm productivity, they have been organizing into cooperatives and pursuing downstream integration strategies with a clear focus on achieving strategic positions on the market. Cooperatives are assumed to forward the benefits of positional advantages to their members, resulting in price levels for cooperative producers which are at least comparable to what producers would realize in a “balanced market scenario”. Under these circumstances, cooperative membership is attractive, and the market position of any larger processing or trading cooperative which follows an “open membership” strategy is quite likely to improve vis-à-vis its competitors. Consequently, non-cooperative competitors will have to offer price premiums in order to fill capacity. In markets in which cooperatives handle considerable shares of the product, the prices cooperative producers realize serve as a benchmark or “yardstick” for what non cooperative processors will have to offer to their clients.

Because of the complexity of price setting on markets, the high levels of cooperative organization in the agri-food chain and the already realized sizes of actors in the food chain, the above-described competitive yardstick theory (Cotteril 1987) offers a particularly interesting area for empirical research. Simple comparisons of regional prices do not suffice for testing hypotheses on yardstick competition on agricultural markets. Empirical analysis of panel price data with the help of price models [3] can reveal if cooperatives in imbalanced markets actually fulfill the functions described by theory. Such analyses are important because their results may inform debates on agricultural policy as well as on competition policy. In theory, cooperatives which are effectively controlled by their member-owners and handle considerable shares of their markets can fulfill important functions in modern agri-food sectors including: managing the re-balancing of the power of food retailers and corporate processing industries and helping to maintain comparatively high producer price levels.

For the analysis of these yardstick arguments regarding cooperative competition [4], the influence of cooperatives on the development of prices on regionally separable markets needs to be analyzed. This involves modeling prices on different regional levels (communal, regional, national, EU-wide) and considering market structure, agri-environmental conditions and specific product attributes, such as transportation costs, perishability and product quality [5]. An interesting question is how agricultural sectors in for example the EU or in particular regions of the EU differ in terms of price and market integration, market concentration, cooperative market shares, and producer prices. In regions or sectors in which patterns of yardstick effects from cooperatives exist, these effects have to be assessed in light of currently discussed reform policies and typical policy goals such as balanced markets, sustainable production structures and fair producer prices.