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COORDINATION AND COOPERATIVES:
A COMPARATIVE STUDY OF THE APPLE SUBSECTORS
OF NORWAY AND MICHIGAN

By

Mojdeh Hojjati

A THESIS

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

MASTER OF SCIENCE

Department of Agricultural Economics

1988

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Qd/T»

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ABSTRACT
COORDINATION AND COOPERATIVES:

A COMPARATIVE STUDY OF THE APPLE SUBSECTORS
OF NORWAY AND MICHIGAN

By
Mojdeh Hojjati

This study analyzes the differences in the economic coordination
of the apple subsectors of Norway and Michigan. A framework for
analysis is developed for empirical analysis of the process of
coordination, giving income distribution a key role in determining
what form this process finally takes. This framework is used to
analyze the situational characteristics of each area’s apple
subsector, and to generate hypotheses about the subsector
organization likely to develop out of these situations. The
actual structure of incentives in each area are then examined in
relation to three issues: (1) short-run and (2) long-run matching
of supply with demand in the fresh market and (3) price
determination within the fresh and processing channels. The
potential and actual role of farmer cooperatives in the __
coordination process are also discussed. Finally, the conduct of

subsector participants and the resultant performance are examined.

ACKNOWLEDGEMENTS

Writing a thesis often seems like an interminable task. With
the help of many people, the task is finally completed. I owe
thanks to more people than I can name here, but by far the
greatest debt is to John Staatz, my major professor. His endless
store of patience and support (and suggestions for improvement!)
will never cease to amaze me. Allan Schmid’s insight contributed
greatly in formulating the approach to this research, and to
sharpening the final product. James Shaffer brought me into this
project to start with, and I thank him for his support.

This is a comparative study in which people from both sides of
the Atlantic have contributed. The United States Department of
Agriculture’s Agricultural Cooperative Service funded my research
in Michigan, for which I am grateful. I thank Donald Ricks, who
gave me constant encouragement and support. He was also my
richest source of information and guidance in Michigan with his
in-depth knowledge of the Michigan apple subsector and all its
participants. The many people I interviewed for this study were
also invariably helpful and generous with their time.

In NorWay, I especially want to thank my two guardian angels:
Per Ove Rpkholt and Solveig Volle. Per Ove’s support and
encouragement continually opened new doors for me, and Solveig’s

friendship gave me the strength to carry on my research in Norway.

Thanks go to the Department of' Agricultural Economics in the
University of Aas for funding a survey of growers, and to
Gartnerhallen for funding my trip to Norway’s west coast. In
Gartnerhallen, particular thanks go to Geir Isaksen for his
support and to Martin Nodenes and Helge Lptveit for the many hours
spent patiently answering my endless stream of'lquestions. I
cannot leave out Lars Tjugum, whose hospitality and warmth made my
short visit to Leikanger both fruitful and memorable. Many others
who are not named here also gave generously of their time and
contributed to my understanding of the intricate structure of
Norwegian agriculture. Despite the efforts of all these people,
there are undoubtedly errors in my interpretation of Norway’s
agricultural sector in general and the apple subsector in
particular. I apologize for these mistakes, and hope no one is
offended.

Many good friends in East Lansing contributed to my mental
health, and therefore to this study. Phil Post, Cheryl Danley and
Floridalma Castillo were a source of warmth and support in and out
of Chittenden Hall, while George Bowles, Fariba Khaledan and
Nicole Smith helped keep the academic life in perspective. In the
final months, Manfred Zeller was also a valuable support to me.

Finally, the last words and deepest thanks go to my family for
their unwavering love and support. And so to Moosa, Mahvash and

Mahsa (Fesghel Bademjoon) I dedicate this thesis.

iv

TABLE OF CONTENTS

Page Number

CHAPTER ONE: ANALYTIC FRAMEWORK AND PROBLEM STATEMENT ........ l

I. The Problem of Coordination: ............................. 3

A. Introduction ............................................ 3

8. Two Standard Neoclassical Approaches .................... 4

C. Transaction—Cost Economics .............................. 6

D. The NC-117 Approach ..................................... 9

E. Towards a Framework for the Analysis of Coordination ... 12

1. Situation ......................................... 14

2. Structure ......................................... 17

3. Conduct ........................................... 18

4. Characteristics of Performance .................... 20

F. Concluding Comments .................................... 23

II. Coordination Issues to be Studied: ...................... 24

A. Quality and Presentation of Fresh Apples ............... 24

B. Long-Run Supply vs. Demand ............................. 26

C. Price Determination .................................... 27

III. Farmer Cooperatives and Coordination: .................. 28

A. Transaction Costs and Asset Specificity ................ 29

B. Trust and Frequency of Transactions .................... 34

C. Multiple Objectives .................................... 36

IV. Plan of Thesis .......................................... 37
CHAPTER TWO: BASIC CHARACTERISTICS OF THE

APPLE SUBSECTORS OF NORWAY AND MICHIGAN .............. 39

I. Situation ................................................ 39

11. Structure: .............................................. 44

A. Market Structure ....................................... 44

1. Norway ............................................ 45

2. Michigan .......................................... 48

3. A Comparison ...................................... 50

B. Legal Structure ........................................ 52

1. Norway ............................................ 52

2. Michigan .......................................... 61

Page Number

CHAPTER THREE: MATCHING QUANTITY AND QUALITY DEMANDED

AND SUPPLIED IN THE SHORT AND LONG RUN ......... 68

1. Norway: ................................................. 69
A. Growers ............................................... 69
B. Packing Stations ...................................... 77
C. Gartnerhallen ......................................... 79
D. BAMA .................................................. 84
E. Retailers ............................................. 86
F. The Government ........................................ 87
G. Conduct ............................................... 89
11. Michigan: .............................................. 96
A. Growers ............................................... 96
B. Packers ............................................... 102
C. Shippers .............................................. 104
D. Grower Organizations .................................. 108
E. Retailers ............................................. 113
F. The Government ........................................ 115
G. Conduct ............................................... 116
III. Comparison of Norway and Michigan ..................... 126

CHAPTER FOUR: PRICE DETERMINATION IN THE FRESH

AND PROCESSED MARKETS .......................... 130

1. Norway: ................................................. 130
A. Annual Negotiations: The Process ...................... 131
8. Annual Negotiations: The Implementation ...» ............ 132
C. The Annual Processor-Grower Negotiations .............. 136
D. Import Regulations .................................... 138
E. Conduct ............................................... 141
II. Michigan: .............................................. 149
A. Growers ............................................... 150
B. Packers ............................................... 151
C. Shippers .............................................. 153
D. Retailers ............................................. 155
E. MACMA ................................................. 156
F. Private Processors .................................... 158
G. Cooperative Processors ................................ 159
H. Manufacturers/Retailers ............................... 161
1. Conduct ............................................... 162
III. Comparison of Norway and Michigan ..................... 171

vi

Page Number

CHAPTER FIVE: PERFORMANCE AND COMPARATIVE ANALYSIS ......... 174
I. Performance: Norway ..................................... 175
A. Prices ................................................ 175
8. Specification ......................................... 176
C. Transparency .......................................... 180
D. Adaptiveness to Market Changes .............. g .......... 182
E. Distribution of the Costs Associated with Risk and
Uncertainty ......................................... 183
F. Consequences Brought to Bear on Behavior .............. 186
11. Performance: Michigan .................................. 188
A. Prices ................................................ 188
8. Specification ......................................... 190
C. Transparency .......................................... 192
D. Adaptiveness to Market Changes ........................ 194
E. Consequences Brought to Bear on Behavior .............. 196
III. Institutional Comparison .............................. 201
IV. Cooperatives as a Coordinating Mechanism: .............. 201
A. Transaction Costs and Asset Specificity ............... 204
B. Trust and Frequency of Transactions ................... 210
C. Multiple Objectives ................................... 211
V. Of Lessons and Limits: .................................. 211
A. Caveats ............................................... 212
B. Norway ................................................ 213
C. Michigan .............................................. 218
D. Concluding Comments on the Analytical Framework ....... 222
Appendix:

A: Excerpts from the "Main Agricultural Agreement, 1950".. 225

8: Sample Norwegian annual agricultural agreement ........ 228
C: Graphs of actual and target prices for Norwegian

fresh apples, 1984 and 1985 .................... 235

D: Data Collection Methods ............................... 236

Bibliography ............................................... 239

LIST OF FIGURES AND EQUATIONS
Page Number
Figure 2.1: Structure of the Norwegian Apple Subsector ...... 47
Figure 2.2: Structure of Michigan’s Apple Subsector ......... 50

viii

CHAPTER ONE
ANALYTIC FRAMEWORK AND PROBLEM STATEMENT

Economic coordination is both a dependent and an independent
variable: it results from and in turn influences a particular
distribution of costs and benefits. The fOrm that this process
takes is a reflection of the ability of various market
participants to make their interests count, and this ability is
largely a function of the formal and informal institutions
ordering participant relations. This study examines two existing
ways of coordinating one subsector, and compares the implications
of each for the distribution of costs and benefits among market
participants.

Economic coordination is seen here as the process of matching
supply with demand in adjacent stages of commodity systems, taking
into account how the interests of various actors get counted. Any
functioning market develops this process in some form through the
interaction of the power, needs, goals and constraints of market
participants. The outcome of these interactions distributes costs
and benefits, and related goods and services, in a particular way.
Problems arise when this resultant distribution -- and its
absolute level as well -- is unsatisfactory to enough market
participants that they begin to agitate for change. It is at this

stage that policymakers and other participants not directly

2

involved irI the transactions become aware of the implications of
the existing coordination process -- a process they' may have
originally been involved in fOrmulating. Institutions that were
developed to guide the coordination process are called into
question, or new ones are demanded. In order to understand the
origins of problems, and the potential effect of various proposed
remedies, it is essential to have a thorough understanding of the
intricacies of the existing process. Such an understanding is the
first step to being able to judge the actual and potential
effectiveness of existing mechanisms, as well as the possible form
and implication of institutional changes.

This study examines coordination in the apple subsector as it
occurs in Michigan and Norway. The role of institutional
structure and its relation to the political and economic setting
is discussed. In each country, the existing process distributes
costs and benefits in a particular way, and leads to widespread
discussion of particular issues. While the thesis examines all
major coordination mechanisms, it gives a special focus to the
role of farmer cooperatives in each country. Farmer cooperatives
are a much-touted coordination mechanism across the world, thought
to have the potential to empower the traditionally weakest element
in the subsector, as well as having a potentially useful role in
the coordination process. By looking at the different role or
position of farmer cooperatives in Norway and Michigan, it may be

possible to understand better what potential farmer cooperatives

3
have, and what factors contribute to or detract from the
acheivement of this potential.

The approach to the analysis of coordination this study takes
has many differences and certain similarities with previous
approaches. The next section explains the approach used here and
its differences with alternate approaches. Following sections
identify and briefly discuss the specific coordination issues to
be studied, and outline the potential strengths of and pitfalls

for farmer cooperatives as coordination mechanisms.

I. THE PROBLEM OF COORDINATIONI

A. Intrgdugtigg

Agricultural economists have devoted much effort in recent
years to developing the concepts of "economic coordination" and
"vertical coordination." Particularly noteworthy is the work
carried out. by' Marion and his colleagues under' North Central
Regional Research Project. NC-117 (Marion, 1986). This section
attempts to develop more fully an operational definition of
economic coordination, arguing that previous analyses have tended
to confuse economic coordination as a gggl with economic
coordination as a process and have often given insufficient
attention to the income distribution consequences of alternative
coordination mechanisms. The section also presents an analytic

framework for empirical studies of coordination issues.

 

1. Sections A-E are adapted from Hojjati and Staatz.

4

This section is organized as follows. Parts 8 and C review the
theoretical approaches to economic coordination implicit in
simple neoclassical models and in transaction cost economics,
while Part D reviews and extends the approach to coordination
developed by NC-117. Part E presents the analytic framework for
empirical studies... This framework is then used in following
chapters in the comparative study of coordination in the apple

subsectors of Michigan and Norway.

8. Two Standard Neoclassical Apprgaches

Agricultural economists often describe vertical coordination as
the process by which adjacent stages of commodity systems are
organized in order to match supply with the quantities and
qualities demanded at adjacent stages. Standard economics texts do
not address coordination as a distinct issue, referring to it more
generally as something that prices have the potential to
accomplish in the process of their creating incentives for
achieving economic efficiency (Friedman, p. 30). In simple
neoclassical models, prices are assumed to do the work of the
coordination process by creating incentives that move the economy
towards an equilibrium.

The simplest economic model is the perfectly competetive
market. It assumes perfect knowledge, foresight and mobility of
assets and hence, no transaction costs. All agents are assumed to
be price takers and there exist no transaction costs, barriers to

entry/exit, externalities or increasing returns to scale. All

5

individuals behave in a rational, self—interested manner, with
consumers maximizing utility and producers maximizing profit. The
well-known result is that under these conditions perfectly
competitive markets will lead to consumption efficiency (all
consumers’ MRS’s are equal), production efficiency (all producers
use inputs such that the MRTS’s are equal) and product-mix
efficiency (in the economy as a whole, the MRT of goods for each
other equals the consumers’ MRS for those goods), using prices as
the allocative or coordinating mechanism. However, there exist
many possible efficient outcomes fulfilling these criteria, and
the model does not purport to tell us which outcome is preferable.
Furthermore, perfectly competitive markets can maximize social
welfare only if the distribution of rights and resources are
”right”, that is, if "each consumer can buy the consumption bundle
which corresponds to the welfare-maximizing configuration of the
economy" (Layard and Walters, p. 26). If this distribution is
”right” and the assumptions of the model are met, prices carry all
necessary information on the relative desirability of different
goods, costs of production, and the availability of each good, all
of which assure coordination of the economic system (Schotter).
If any of the aforementioned conditions or assumptions are
violated, free markets will not result in efficient outcomes.

Obviously, the assumptions of this model are extremely
stringent. One attempt to relax the assumptions of this very
simple model is the theory of perfectly contestable markets. This

theory drops the assumption that producers are price-takers, but

6

by stessing the assumption of absolutely no barriers to entry or
exit, it virtually ensures the same results as the perfect
competition model (Nicholson, p. 465). As the underlying
assumptions of the model are made more realistic (that is, as
markets are allowed to become less contestable) the resulting
analysis becomes more indeterminate, making it more difficult to
justify relying on prices to do all the work of allocating
resources. Indeed, the price system fails to convey all
information necessary for efficient resource allocation if there
exist imperfect information, uncertainties, imperfect competition,
externalities, or public goods (Nicholson, p. 658).

Another problem with these models is that they put the initial
distribution of rights and resources outside the analysis.
Prices are then considered to be an unbiased reflection of supply
and demand for products, usually with little recognition that the
initial distribution has a significant effect on what is supplied
and whose demand is heard. That is, the initial distribution of
resources is one of the factors that determine prices and hence

the way in which activities in the economy get coordinated.2

C. Igagsaction Cost Economics

Transaction Cost Economics (TCE) is a body of economic theory
that builds its foundations on some of the aspects of reality
explicitly assumed away by the preceding simple models. It is a

branch of economic analysis that originated with Coase in 1937 and

 

2. This is discussed further in Shaffer (1985).

7
has been most recently expanded by Williamson. TCE is an
extension of earlier neoclassical approaches, but is different
from the simpler models in that it includes opportunism and
bounded rationality in its behavioral assumptions.3 Given these
assumptions, transactions can no longer be thought of as costless.
This cost is compounded by asset immobility, i.e. that assets are
specific to certain uses, with some assets more specific than
others. According to Williamson, transaction costs, or the costs
of running an economic system, are the major factor in economic
organization (1985, p. 17). While the neoclassical approach
focusses ("1 production costs, TCE considers both production and
transaction costs, with the primary source of difference between
transactions being asset specificity. It is this condition, along
with opportunism, that makes investments risky. The major concern
of economic organization is then to minimize the sum of production
and transaction costs. Even though drawing up complicated
contracts or governance structures has a cost, it is worth it if
this results in an even greater savings due to a decrease in the
costs associated with risk, uncertainty and opportunism. In
Williamson’s own words, "TCE sees the problem of economic

'organization as devising contracts and governance structures that

 

3. Williamson (1981) defines opportunism as "self-interest
seeking with guile", a situation in which econimic actors will,
for example, strategically lie or take advantage of unforeseen
contingencies that may arise in a contract to extract concessions
from their trading partners. Bounded rationality refers to a
situation in which economic actors act rationally, but within the
constraints imposed by imperfect information and the actors’
limited capacity to analyze it.

8

have the purpose and effect of economizing on bounded rationality
while simultaneously safeguarding transactions against the hazards
of opportunism" (1985, p. xiii). TCE hypothesizes that if an
institutional form (or coordination mechanism) such as a farmer
cooperative minimizes the sum of production and transaction costs-
for a given activity, it will have a competitive advantage and
hence tend to dominate that activity. Organizational design is
therefore seen as part of the process of economic optimization.
The goal of policy, in Williamson’s view, should be to remove
impediments to the emergence of efficient coordinating mechanisms.

One shortcoming of TCE is that it focuses on minimizing costs
as the sole criterion for selecting among alternative institutions
without raising the question of whgsg ggsts get taken into account
under these alternative arrangements. Different institutional
arrangements have different consequences for the distribution of
costs and benefits among market participants. Alternative
arrangements also have implications for the distribution of the
rights and resources necessary to affect the future distribution
of costs and benefits. From a public-choice perspective,
information on the distributional consequences of alternative
institutional arrangements is also an important criterion for
choice about what sorts of institutions should be fostered in
society. Although Williamson appears to recognize ‘that factors
other than narrowly defined "efficiency" (e.g. dignity) are
important, he does not develop them as central parts of his

paradigm.

9

Williamson touches briefly on the distributional issue when he
contrasts "property rights literature" and TCE. Williamson
explains that the former emphasizes the importance of ownership
rights, and that resource misallocations occur because of mistaken
property rights assignments that create "incentive deficiencies"
(1985, pp. 26-27). He then distinguishes TCE as an approach that
accepts the importance of ownership and incentive alignments and
"adds the proposition that ex post support institutions of control
miter" (1985, p. 29). Since potential conflicts cannot all be
identified in the ex ante stage, ex post bargaining is pervasive
and institutions of private ordering become crucial.

However, the distribution of rights and resources has a much
more fundamental significance than Williamson appears to give it.
Even if bargaining is pervasive, the initial distribution of
rights and resources determines who can bargain and what they have
with which to bargain. This affects how costs and benefits will
be distributed and what the likely result of ex post conflicts
will be.

0. The NC~117 Approagn

The NC 117 Research Project on the organization and control of
the U.S. food system is a source of much literature on an array
of theoretical and practical topics related to nmrket structure
and coordination. Although rich with ideas on the nature of
coordination, the literature does not contain a definitive,

consistent paper on the concept. Here, the ideas scattered

10
through that literature are brought together and further
developed, with the goal of constructing an operational framework
for the analysis of coordination in empirical work.

Marion defines vertical coordination as both a process and a
state. As a process, he uses Mighell and Jones’ characterization
of vertical coordination as "all the ways of' harmonizing the
vertical stages of production and marketing" (Marion 1986, p.60).
He sees coordination as a continuum from "perfect coordination...
a perfect match between the goods coming out of an efficiently
organized pipeline and the preferences of customers", to "zero
coordination... no match at all... using this interpretation,
there is no such thing as an ongoing system that is uncoordinated"
(Marion 1976, p.180). In effect, then, he uses the prgggss of
coordination to mean the process towards the ideal state_ of
coordination.

As a state, he draws on Lang’s observation of coordination as
"the objective of a perfectly harmonized state" (Marion 1986, p.
61). In this state, Marion compares the notion of coordination
with that of economic efficiency. For this very reason, this
study avoids using coordination as an ideal. As argued earlier,
the concept of economic efficiency has embedded in it value
judgements about the existing distribution of rights. Measuring
the coordination of a market system, i.e., the level of
achievement of ani ideal, also requires valuation and judgements
about the rules of the game of market transactions. Market

participants often have conflicting goals and incentives, and

11
therefore conflicting conceptions of what coordination means and
how it should be pursued. A definition of coordination needs to
give explicit attention to such conflicts. Existing methods of
organization are a function of whose interests get counted as much
as a function of production and transaction costs, and these costs
are themselves affected by whose interests are counted.

Here, coordination is defined only in the sense of a process.
Furthermore, it is not viewed as a process whose outcomes can be
clearly ranked from zero to some ideal state. Rather, it is seen
as all ways ofaaouilibratinq supply and demand in adjacent stages
of cgmmodity systems, taking into account hgw the interests 9f
variog; actors get counted, Here, as in Marion’s definition,

there is no such thing as a lack of coordination. Supply and

 

 

demand algal; are equilibrated in some way. Markets always clear,
but it is hag they clear that may cause discontent. For example,
they may clear through the build-up of "unwanted" inventories,
which is disadvantageous to producers of the commodity and those
who have to bear the storage costs, but beneficial to those who
provide storage services. There are many different ways of
coordinating, with different implications for the absolute level
of production and transaction costs as well as their distribution.
In the cases where unambiguous "missed opportunities" (i.e.
Pareto-better solutions) exist, the approach approach outlined
here is in harmony with the approaches discussed earlier.

However, most economic reorganizations also imply a redistribution

12
of costs and benefits by some redistribution of rights and
resources.
Limiting coordination to a process does not entirely avoid the
value problem addressed earlier. Even though the effort will be
to describe rather than judge performance, value judgements are

made when choosing the characteristics with which to describe it.

E. Tgwargs a Framgwork for the Analysiagof Coordination

The challenge in developing an operational definition of
coordination is not only conceptual but also one of specifying how
the definition can be put to use in empirical work. For example,
what elements of coordination do we measure and how do we
establish what has caused a particular subsector to be coordinated
in a particular way? The framework presented in this section is
designed to generate hypotheses concerning subsector organization
likely to emerge out of a given situation. It also aids in the the
collection and ordering of information regarding coordination in
specific settings in order to establish why coordination takes the
form that it does in those settings and how it might change if
alternative policies, etc., were implemented. Although the
framework owes a great deal to the work of Bain, Scherer, Schmid,
Shaffer and Marion, it modifies their ideas extensively. It was
developed for use in this analysis of coordination in the apple
subsectors of Michigan and Norway, and has potential for

application to the analysis of other areas of coordination.

13

Analysis of coordination can be divided into four major
categories: Situation, Structure, Conduct and Performance. Each
of these have a number of more specific subcategories. The
purpose of these categories and subcategories are to help identify~
and order the factors that determine how coordination takes place.
These determining factors may not always fit neatly into a
particular slot, but an effort to categorize them can contribute
to a clearer understanding of the coordination process.

The starting point of analysis is the choice of the
coordination issue ix) be analyzed. Webster’s Collegiate
Dictionary defines "issue" as a “point of debate or controversy"
(p. 642). This implies a relation of some sort between different
people, i.e., a bond of interdependence. The debate or
controversy regarding coordination arises because of
interdependence and disagreement over who does and gets what
within these relationships. Within the broad concept of
coordination identified above, many issues could be raised for
analysis. In this study, three major issues have been chosen:

1. Matching the quantity and quality of fresh apples marketed

with the apples demanded in the short run (Chapter 3).
2. Matching long-run supply with long-run demand in quantity
and variety of fresh apples (Chapter 3).
3. Price determination in fresh and processed apple markets
(Chapter 4).
These are each coordination functions that the apple subsector

performs, and over which there can be considerable disagreement on

14
approach and practices of’ market participants. They' will be
broken down and analyzed in the following four steps:

1. Situation:

These are the inherent characteristics of the good or service
about whose coordination we are concerned.4 These inherent
characteristics are the source of participant interdependence, of
potential costs and benefits. Although their existence cannot be
affected, their impact can be. The inherent characteristics can
be more easily detected and ordered by classifying them \Nlth
respect to the following subcategories:

a. Exclusion Cost: ‘This refers to the ease with which one can
limit the use of a good or service. A physical good that is
individually purchased and consumed, like an apple, has a low
exclusion cost. A state’s reputation for high-quality apples has
a high exclusion cost, since participants who. did nothing to
contribute to this reputation cannot easily be excluded from its
benefits. The difficulty of assessing individual costs and
benefits for high exclusion cost goods is frequently a source of
conflict among market participants.

b. Transaction Costs: These are primarily of three types:
information costs, decision costs and governance costs. The first
is the cost of gathering, processing and distributing information.
The second is the cost of coming to an agreement in a group. The
last is the cost of monitoring and enforcing agreed-upon

contracts. The rules of the game (Structure) determine who will

 

4. The discussion of Situation that follows borrows from Schmid.

15
bear these costs, while Situation determines the source of the
costs.
c. Returns to Scale: The nature of returns to scale in producing
the good or service has important implications for what market
structure is likely to emerge under "free market" conditions. For
instance, increasing returns to scale are part of the reason that
small apple packing houses tend to close down and large packing
houses grow. This also makes it more difficult for a new packing
house to enter the market.
d. Asset Specificity: This concerns how specific to a certain use
an asset is. .An apple sorting machine, for instance, cannot be
used for anything but sorting apples. It is very costly to be
flexible in reaction to changes in market demand when a
substantial part of production costs are locked in assets specific
to a certain use.
e. Frequency of Transactions: Certain transactions occur
frequently by nature (Shaffer 1987). Major capital investments
may occur infrequently, while the sale of fresh apples from packer
to wholesaler happens both regularly and frequently. This has
implications for the kind of trading structure likely to develop
to order transactions, or for how costs and benefits might be
distributed given a trading structure.
f. Biological Constraints: When analyzing agricultural goods, one
needs to take account of the effect that weather can have, the

durability of the product (e.g., how long it can be stored, how

16
easily it bruises), the relative ease of acheiving physical
properties like uniform size and uniform color, etc.

This list is of subcategories is not exhaustive, nor are all
subcategories always relevant to a specific coordination issue.

In considering situation, we also need to make basic
assumptions about how people behave (are they profit maximizers?
etc.). The behavioral assumptions used in this framework are the
following:

a. Opportunism: People seek their self-interest with guile,
trying to take advantage of any unforeseen contingencies that may
arise to extract concessions from trading partners (Williamson,
1981).

~,b. Bounded Rationality: 'This refers to a situation in which
economic actors behave rationally, but within the constraints
imposed by imperfect information and the actors’ limited capacity
to analyze it.

c. Multiple Objectives: People try to satisfy more than one goal
-- these goals may even be contradictory. This is not to deny
that one objective may be dominant over all others, but to include
the possibility of multiple competing objectives.

d. Learning by Reinforcement: Present behavior is shaped by
perceived results from past behavior. People adjust their behavior
constantly in reaction to the reinforcements from their
environment (Platt).

e. Interdependence of Utility Functions: In keeping with the

preceding assumption, it is assumed that utility functions are

17
interdependent. A farmer may be content with the returns from
packer until he sees that another farmer is getting higher returns
for seemingly similar apples.

2. Structure:

Structure gives order to the interdependencies created by
Situation. It determines who has the opportunity to participate in
resource-use decisions (Schmid, p.179). This is where we describe
the distribution of rights and resources between the participants
or groups that are involved in the particular coordination issue
we are considering, i.e., the rules of the game. This is also
where we describe the participants themselves; e.g., taking
farmers as one participant group, we describe whether farm
production is atomistically organized, whether there is a large
gap of interests within the group (e.g., large vs. small farmers),
and what the farmers grow (e.g., specialized vs. diverse crop
production). Structure can be divided into three major sub-
categories:

a. Market Structure: This involves a description of the market
participants and the subsector organization, i.e., what the stages
are between producer and consumer. Here we discuss the
environment of transactions at each stage: clearly a competitive
environment has different implications for power distribution than
an oligopsonistic one.

b. Trading Structure: This includes the customs, covenants and

(contracts that define relations between trading partners (Shaffer

18

and Schmid, p.9). The only aspect of these relations not included
here is government legislation specifying rules for trading (e.g.,
marketing orders).

c. Legal Structure: The government-legislated rules that form the
bounds within which market and trading structure operate are
identified here. For instance, the Capper-Volstead Act allows
farmers to practice collusion. Whether they do or not is a
different matter, and is covered in the first two sub-categories.
Government-distributed rights to take part in decisions are also
included here, for instance the rules allowing only farmers to
vote on the formation of marketing orders.

3. Conduct:

While situation and structure define the framework, order, and
characteristics of participant relations, conduct outlines what
participant behavior actually is, i.e., what actions participants
take that determine how the subsector is coordinated. Conduct is
the link between the structure of participant relations and the
result of their interactions (performance or coordination).
Conduct is examined on three levels:

a. Objectives: What are the goals or incentives of each group?
Although profit-maximization is often posited as the major goal of
producers, there may be other (competing) objectives at work.
Within groups, individuals may place different emphasis on the
competing objectives (for example, level vs. stability of income).
b. Paths: Once the major objectives have been identified, one

looks at the possible paths the participants could take to reach

19

them, given the constraints imposed by situation and structure.
These paths may be contradictory, even if ‘there is only one
dominant objective identified. For instance, the dominant goal of
a packer may be to maximize profit. Packers receive their income
from per-pound fees on tonnage handled. Thus, their profit is a
function of the tonnage consigned to them by the farmers, the
tonnage sold to wholesalers, and operating costs. Low apple
prices attract buyers but displease the farmers. Bagging apples
(as opposed to packing in tray-packs) minimize operating costs if
the packer has already invested in bagging machines, but may not
attract wholesalers trying to fblfill a growing consumer
preference for bulk displays. High quality tray-pack apples
attract buyers an_d make it possible to sell at a higher price,
which pleases farmers, but this increases operating costs, at
least in the short run. Individual packers choose the course of
action perceived to be the most likely (or easiest) path to
acheiving the dominant goal. By setting out the objectives and
paths in this way, we can more clearly understand the choices
faced by the participants with respect to coordination, as well as
recognizing the reason for differences in behavior by people in
the same group (who are presumably trying to reach the same
objective).

c. Action: Lastly we observe or predict which path is actually
taken, that is, what conduct is or will be. If analyzing a
current state of affairs, we observe what action participants

take, while if trying to analyze the consequences of alternative

20
arrangements, we try to predict what actions are likely to be
taken. Here the relative power of participants can be seen at
work, as the more powerful are the more successful in their
efforts to obtain as many benefits and avoid as many costs as
possible.

4. Characteristics of Performance:

The interaction of situation, structure and conduct result in a
series of consequences for the market and its participants, which
we label coordination or performance. It represents the
distribution and level of costs and benefits, the "who gets what"
of the coordination issue we are considering. The analyst must
decide which aspects of coordination are important to consider and
which are insignificant, for "any list of performance effects is a
selection from an infinite number of effects and thus is
conditioned by the values... of the observer" (Schmid, p.184).
The characteristics introduced below should not be viewed as
ideals or goals, but as various angles from which market
consequences will be viewed. On a superficial level, performance
(or coordination) simply describes what the general market outcome
is in relation to the particular issue under discussion. On a
deeper level, performance (coordination) discusses the specific
outcomes for market participants.

Performance or coordination indicators need to be broad enough

to be suitable for use in the analysis of a variety of issues but

21
specific enough to be operationalized and used as a measure. The
performance characteristics used in this research are the
following:5
a. Price: Its stability, flexibility and level, as well as the
relationship of prices to the costs of production.
b. Specification: Concerns the flow of information on preferences
for and costs associated with characteristics of products, as well
as the flow of information on the characteristics of the product
being transferred between parties. For instance in apples, the
information of relevance to specification would include what
variety and pack of apples are preferred by customers and how much
it costs the producer to supply those apples. Given a particular
level of information, specification also concerns how the products
supplied compare with what is demanded, and whether the buyer has
access to enough information to recognize the quality of apple
being purchased (Shaffer 1987, p.17). Often price is assumed to
carry this information but it can also omit or distort information
in the presence of "market imperfections".
c. Transparency: concerns "the extent to which the terms of trade
of all transactions are open to observation by all potential
participants in the market" (Shaffer 1987, p.17).
d. Adaptiveness to market changes: Different market arrangements
result in different levels of flexibility. This includes

flexibility in incorporating new opportunities and conditions,

 

5. The following section borrows from Shaffer (1987), with
some modifications.

22

such as technological innovations, as well as in reacting to
changes in existing variables, such as a shift in consumer
preference from bagged to bulk apples.
e. Distribution of the costs associated with risk and uncertainty:
Different _arrangements distribute costs differently. Each
participant tries to minimize her own burden and to pass on as
much of the risk and uncertainty to others as possible. The
resulting distribution is a reflection of the power of different
participants to make their wishes count. For instance, the fact
that many apple packer—shippers receive their income from flat
fees on the amount handled rather than from a percentage of price
received for the apples means that price fluctuations are wholly
passed on to the farmers, who receive the per-pound price received
by the ipacker, minus the flat fee. The burden of price
uncertainty is borne primarily by farmers in this case, reflecting
a balance of power in favor of packers.
f. Bringing consequences to bear on behavior: This indicator
refers to the extent to ‘which participants bear the cost or
receive the benefits of the actions they take. In more commonly-
used language, this is the idea of internalizing externalities.
For instance, if a packer uses rough sorting techniques, bruises a
farmer’s apples and consequently sells them for a low price but
still receives the same fee per pound of apples handled, he is
imposing an externality on the farmer.

Externalities are ubiquitous, and to aim at internalizing all

of them is not possible. Oftentimes to remove the effects of an

23
externality from one person means to impose it on someone else.
All actions have ripple effects that can reverberate through the
economy, affecting multiple participants (Schmid). The aim of this
indicator is neither to identify all externalities nor to propose
eliminating them. But externalities that affect participant
conduct in the issue under consideration need to be recognized.
If, in the above example, the farmer’s reaction is to switch
packers, then he has in effect forced the first packer to
internalize the externality. However the farmer may stay with the
same packer and react by producing lower quality apples (reasoning
that they will not get a high price anyway). If a policy goal was
to improve the quality of apples supplied to the market, it would
be important to recognize why quality was low in the first place,

in order to design effective policies.

F. Conclgding Comments;
The focus of this approach is not actually the market but the

analysis of institutional arrangements, and their effect as they
interact with a particular setting. The categories and sub—
categories are meant to generate hypotheses and facilitate
analysis, by providing a means of classifying the variety' of
contributing factors and information the analyst unearths. It
also can help point to what information needs to be gathered and
what questions need to be asked.

When an analyst perceives an existing or potential issue in the

coordination process, she is actually observing performance.

24
Thus we begin the actual analysis with performance and work
backwards to trace its sources. By following it back to its
roots, we come to understand why the coordination process has
taken the form it has, and what this means for the different
market participants. The participants observe and continually
react to their environment; thus performance in one time period is
incorporated into structure and conduct in. succeeding time
periods. The dynamic nature of the framework also allows us to
take performance as a starting point, change parts of structure,
and follow the effects in the short and long run. Certain
structures or conduct may be desired as ends in themselves, e.g.,
the continued existence of family farms may be a priority of
decision-makers. The extent to which these ends are reached then

become performance indicators of their own.

11. COORDINATION ISSUES TO BE STUDIED

A. Qpalitv and Presentation of Fresh Apples

The quality of the fresh apples sold to consumers is a variable
on which many market participants have an effect. Quality itself
is a composite variable, and can be broken down into size, color,
lack of bruising and crispness. The former three are quite easy
to detect, while the latter is not easily visible. Size and color
are the factors over' which the farmer has the most control;
crispness and bruising are factors that can be positively or

negatively affected at every stage from farmer to consumer.

25
Presentation, as referred to in this study, concerns how the
apples are packed for sale, i.e., the type of box or bag in which
apples are packed, and the range of quality within the pack type.
This is an area that is out of the farmer’s domain a; producer.
Apples are currently packed and presented in bags of various sizes
or in tray-packs of various kinds.

After the apples have passed through more than two hands, it is
very difficult to know who is responsible for the apple quality,
especially in its less visible aspects” Some readers may be
wondering at this point why the very important variable of taata
has been left out. The reason for this is that taste is most
strongly related to apple variety rather than growing or handling
techniques. This is not to deny that factors other than variety
have an effect on taste, only to maintain that the major factor is
variety.

Providing quality apples can be fraught with problems. Who can
tell what quality of apples are desired by consumers? Whose
responsibility is it: to disseminate this information? ‘The less
visible qualities of the apple are harder to control-- who is to
blame if apples are mealy or bruised? Can the less visible
qualities be made more visible? If so, whose responsibility is to
to do this? Who is to decide how the apples are packed?

Quality is not only a matter of layal but also of consistency:
if Michigan’s apples are only sporadically of excellent quality,
this damages Michigan’s reputation and its sales. Who is to bear

the cost of inconsistency, and who will be responsible for keeping

26
quality consistent? These are just a few of the questions that
can cause conflict and are resolved somehow in any functioning
apple market. How they are resolved has a bearing not only on the
quality of apples marketed but how costs and benefits are

distributed in providing that quality.

8. Long an Supply vs. Demand

If asked, few consumers would be able to say how many and what
variety of apples they will want to consume five years from now.
Farmers, however, regularly make planting and tree removal
decisibns based on such imponderables. Storage operators do the
same when they decide on a size for their storage facilities, as
must packers when they decide to invest in a tray-packing machine.
All along the channel, participants in both the fresh and
processed markets try to guess what the future will bring and make
long-term investments in assets specific to certain uses based on
these guesses. Once a decision is reached, it is difficult and
costly to change. A farmer who plants an apple tree is, in
effect, making a 40-year investment.

In such a situation, information about future market conditions
is extremely valuable. This information includes what demand and
supply will be. Individual farmers responding to price increases
may each substantially increase plantings. Together, this leads to
long-term oversupply and depressed prices for the farmers.
Misinformation is also very costly, so giving advice to market

participants is itself a risky and potentially costly venture.

27
With different tactics and plans, market participants make their
investment decisions. They may do it based on a simple rolling
average of the past few ,years’ apple prices. They may pay
consultants to tell them what the future will look like. They may
even attempt to act collectively to control the supply side of the
long-run coordination problem, or to focus their efforts on
affecting total demand once long-run planting decisions have been
made. But somehow, decisions must be and m made. Decisions
made today about future supply reflect not only the market
participants’ reaction to their limited information about the
future, but also the outcome of participants’ struggle between the

(often conflicting) needs of the short vs. long run.

C. Pri etermination

For all the shortcomings of price as a coordination mechanism,
and for all the misinformation it can carry in a world of
uncertainty, opportunism and bounded rationality, nevertheless it
remains one of the most important variables in the coordination
process. Given a particular season’s output, price is the single
greatest determinant of many participants’ income. It is also one
of the central variables in resource allocation decisions for
planning future output capacity. Thus the level of price, and the
distribution of power to have a voice in setting this level, are
important areas over which conflict can easily arise between
participants.

Here, when we speak of price determination, the focus is not

28
only the price of apples, but also of related necessary services
like storage, packing and selling. The major area of participant
conflict may be what the level of prices are and how these prices
are determined, but intertwined with that are the concerns of who
has a hand in determining price, and how the final price pie is
divided up between all the people in the subsector channel who

have claims to pieces of it.

111. FARMER COOPERATIVES AND COORDINATION

Over time, a wide variety of structures can be developed by
subsector participants to protect their interests in the
coordination process. Some structures are suited to a specific
transaction, while others lend themselves to a broad variety of
situations and transactions. Farmer cooperatives are an example
of the latter category. In theory, farmer cooperatives can be a
powerful and effective mechanism for the furtherance of farmer
interests. Farmers have often been viewed as the most
disadvantaged participant-group in agricultural commodity
subsector channels, being vulnerable to opportunistic trading
partners and unpredictable weather.

Farmer cooperatives are touted the world over as the most
effective mechanism for aiding farmers attempting to provide
themselves with a more secure and stable environment by pooling
risk, losses, and their (often) individually slight power. All
over the world, farmer cooperatives have been formed; sometimes by

the farmers themselves, other times at the urging of outsiders.

29

Their success has been mixed. The credit given to the cooperative
as a coordinating mechanism, and its mixed record of success,
raise two broad questions:

a. Why are 'farmer cooperatives considered to have such

potential?

b. Why have so many not reached this potential?
To shed some light on these questions is the goal of this section.
They are analyzed using the framework previously introduced,
focussing mainly on the subcategories of situation. With the use
of these subcategories, we will see how cooperatives can
potentially affect situation, and how situation creates barriers
to the acheivement of this potential. At this stage we are
considering only the generic cooperative. In later chapters, the
specific potential and actual role of farmer cooperatives in the
coordination of the apple subsectors of Norway and Michigan will

be discussed.

Cooperativg Potgntials and Problem;
A. Tr n cti n s an A t S ecificit :

As pointed out. by' Williamson (1985), transaction costs stem
from the existence of bounded rationality and opportunism,
interacting with the condition of asset specificity. Institutions
that minimize the transaction costs incurred by a group will be
favored by that group. Thus cooperatives can exist where they are
able to economize on the transaction costs which farmers face,

providing that the transaction costs of forming the cooperative do

30
not outweigh any potential savings. These transaction costs can
be further subdivided into decision costs, information costs, and
the costs associated with asset specificity.

1. Decision Costs: An individual farmer does not have to
consult with anyone or seek anyone’s consensus before deciding on
a course of action. His decision costs are thus very low. In a
cooperative, however, decision costs can be very high. Being
democratically controlled, the larger and more heterogenous is a
cooperative’s membership, the higher are the costs of coming to an
agreement within the increasingly diverse interests of the group.
This cost could be one of the forces that often breaks down
cooperatives, for they may be slower in coming to decisions and
conservative due to the juggling of diverse interests. This can
put them at a competitive disadvantage with respect to investor-
owned firms, where decision-making is more centralized and thus
possibly faster.

2. Information Costs: The costs to an individual farmer
of collecting market information, such as the terms of trade
secured by other farmers or the overall supply picture of the
state, can be prohibitively high. It is just not practical for
the individual farmer to shop around for the best deal every time
he wants to buy some fertilizer or sell some apples; the costs of
collecting this information, valuable as it may be, far outweigh
its potential benefits. Market information is a good with
marginal costs approaching zero; that is, the major cost of this

good is iri its initial "production" (i.e., gathering it). Once

31
this cost has been incurred, there is little difference in cost
whether 5 or 50 people use it. A cooperative is thus very well
suited to providing such goods; the initial fixed cost is paid by
all the members through their membership fees and the low marginal
cost can be charged according to indiviual use.

3. Governance Costs: Williamson (1985) focussed a great deal
of attention on the monitoring and enforcing of contractual
agreements. He recognized that after contractual agreements have
been reached, major costs are often involved in finding out
whether both parties are upholding their side of the agreement.
The level of governance costs depends on the nature of the product
and the nature of the relations between subsector participants.
For instance, apple processors used to provide pallet bin boxes
for growers to deliver apples in. Growers paid for this service,
and relied on processors to return the bins quickly so they could
continue the harvest. However, processors did not always return
the bins reliably. This created a problem for growers, as in the
harvest period delays of a few days can mean apples that are
overripe and thus worth less. It is likely that a grower-owned
cooperative processor would be more likely to put a higher value
on grower needs, and return pallet bins more conscientiously.

Other agreements that are not as clear and visible as the
return of pallet bins may have a higher governance cost, even
within cooperatives. Quality standards are essentially
contractual agreements to provide only apples that have specific

characteristics. These characteristics are not all easily visible

32

or measurable, and even for those that are easily discernible it
would be very costly to check individual apples. Transactions
involving apples of specified quality must rely to some extent on
trust, or at least, the ability to rely on trust significantly
decreases transaction costs. One could argue that a farmer
cooperative can trust its members not to try and deliver sub-
standard apples, but this need not be the case.

4. Asset Specificity: Williamson (1985) also pointed out that
as asset specificity increases, so does vulnerability to
opportunistic behavior by trading partners. On average, farming
involves a much higher capital investment per worker than does
manufacturing (Shaffer and Staatz, p. 55), and much of this
investment is in highly specific assets such as apple trees.
Agricultural producers are also constrained by the fact that their
products are perishable, making them even more vulnerable to
opportunistic behavior. By putting more information at the
farmer’s disposal, a cooperative can help him make more informed
decisions. If a farmer cooperative controls a significant portion
of the market for its members’ products, it can also provide a
common front for bargaining with potentially opportunistic trading
partners. This is, in effect, a sort of insurance that farmers
can provide for themselves. In an alternative scenario, the
farmer cooperative serves as a sure home for its members’
products, protecting them from suffering large losses on
transaction-specific assets should an investor-owned market outlet

close down (Staatz, p. 179). For instance, farmers have banded

33
together and bought out processing plants that were going to close
due to poor earnings.

Asset specificity also raises two problems for cooperatives;
one concerning farmer-members’ investments and the other,
cooperative investments (Shaffer, 1987). The problems are due to
two characteristics of cooperatives: first, gains and losses are
always pooled to some extent; thus no individual member bears the
full consequences of actions he takes. Second, decisions are made
by reaching consensus among some proportion of members,
representing diverse and sometimes incompatible interests.

Individual members all have investments in 'transaction-
specific assets. When technological change or changes in market
demand take place, individuals who had invested in now-obsolete
assets are likely to resist adapting to the new conditions. For
instance, even if researchers develop a new, hardier strain of
apple, the farmer who just invested in a block of trees 6 years
ago will be very reluctant to remove them and plant the new,
improved variety. The farmer will continue to expect his
cooperative to accept his less hardy apples. On an aggregate
level, the cooperative will either have to offer buyers lower
quality apples, or be forced to sort out a higher percentage than
if the hardier varieties were planted. Since losses are pooled to
some extent, the individual farmer has less incentive to take his
trees out of production than if he had to bear the full cost of

his actions himself. When the farmers in this situation are

34
numerous enough, they can ensure that the cooperative does not
stop accepting their less-than-optimum quality apples.

On the cooperative level, certain investments may be made to
offer services to all members, as in the processing plant purchase
referred to earlier. The purchase of such an expensive and
specific asset makes the cooperative vulnerable to opportunistic
behavior by its members. Once the investment has been made, the
cooperative needs the patronage of its members at a level
sufficient to acheive economies of scale for the asset. Eyery
member that exits the cooperative before the cost of the asset has
been recovered imposes higher costs on remaining members, giving
them an even greater incentive to exit. This leads to a vicious
circle that can quickly kill a cooperative. Again, the fact that
each member is shielded from the consequences of his action may
provide the incentive (or rather, remove the <1isincentive) to
taking such action. The group decision-making structure of the
cooperative may allow some members to block the passage of rules

creating barriers to exit from the cooperative.

8. Trust and Frequency of Transactions:

We have said that opportunistic behavior is generally present
to some extent in any situation, and have also pointed out that
people learn by reinforcement. The obvious conclusion is that
once a person has experienced the opportunistic behavior of a
trading partner, he will avoid that partner the next time the

transaction is to be repeated. The effectiveness of this

36
farmers with countervailing power as in the first example; rather,
it would serve as a tmustworthy provider of services previously
purchased from an investor-owned firm. Thus theoretically, since
the members would trust their cooperative’s management, they would
not dispute the product price paid to them, nor would they feel a
need to check on their cooperative by shopping around. Trust is
the foundation upon which cooperatives are built, and without it
no cooperative can last for long. Especially in times of economic
hardship, trust is what keeps the cooperative going. Not only is
it necessary for members to be able the trust their fellow members
and management staff to protect their individual interests, the
cooperative must be able to trust its individual members not to

take opportunistic actions that weaken the collective whole.

C. Multiple Objectives:

It was mentioned that an individual may have more than one
objective to consider when making decisions. If individuals are
aggregated into the specific level of the subsector channel they
form, the existence of multiple objectives becomes even more
pronounced and important. Taking farmers as a whole, it is clear
that different farmers may have different objectives or interests,
or at least different ideas of how best to reach those interests.
The interests of farmers as a group are also different from the
individual interest. Finally, at both the individual and group
level, strategies. to benefit long-run interests may be

diametrically opposed to those promoting short-run interests.

37
Farmer cooperatives can help reconcile and find compromises for
the differing interests, but they can also be torn apart by the
ensuing conflict.

By providing a forum for discussion and dissemination of
information, a cooperative can make farmers more aware of their
fellow farmers’ needs and constraints. It can make farmers as a
group aware of market conditions and changes. The management
staff of the cooperative can provide the "big picture" to the
members, pointing out the needs of the cooperative as a business,
and the strategies in the best long-run interests of individuals
and the group. However it is exactly the conflict between
individual vs. group and long vs. short run interests that have

spelled the demise of many a couperative.

IV. PLAN OF THESIS
This chapter laid out the roots of this study. The issues to

be discussed were introduced, and an approach for analyzing them
suggested. This approach was used to outline the potential role
of farmer cooperatives in the coordination process as well.

The following chapters pull the focus away from theory and back
to empirical reality. Chapter 2 describes the basic
characteristics of apple subsectors in general, and the
environment of these subsectors in Norway and Michigan in
particular. At this stage, the specific issues to be analyzed are
not discussed. Chapters 3 and 4 then turn to a step-by-step

analysis of each subsector as it relates to the specific issues.

38
Chapter 5 is a slight shift back to the general, as the overall
performance of each subsector is described and then compared.
Chapter 5 also makes an overall comparative analysis of
coordination in the apple subsectors of Norway and Michigan,

including the role of farmer cooperatives.

CHAPTER 2
BASIC CHARACTERISTICS OF THE APPLE SUBSECTORS
OF NORWAY AND MICHIGAN

This chapter will start with the most general characteristics
of any apple subsector and move to a successively more specific
description of the fresh vs. processed and Michigan vs. Norwegian
apple markets. In terms of the framework introduced earlier, the
chapter covers situation, market structure and legal structure.
These are the aspects of the two subsectors that can be discussed
on a general level, before moving to a specific focus on the
issues previously introduced. This chapter' does not consider
trading structure, as the rules and covenants ordering participant
relations are transaction-specific. Different components of
trading structure are introduced in Chapters 3 and 4, as they
relate to the particular issues involved. Aspects of legal and
market structure with particular relevance to each issue will also

be referred to when relevant.

I. SITUATION

This section introduces the most basic characteristics of the
generic apple subsectors, and considers the implications of these
characteristics for the organizational structure of the subsector.
Most characteristics will not be specific to a geographical area
or apple variety, although some may be more relevant to the fresh

(or processed) sector. The behavioral assumptions introduced in

39

40
Chapter 1 are not elaborated on here; their presence and effects
are alluded to when relevant throughout the study.

The production of apples involves long-term investment in
highly asset-specific goods. Apple trees do not begin bearing
fruit until they are at least 4 years old, do not reach full
bearing capacity until their 8th year, and have a potential
lifespan of 40 to 50 years. Growers must invest not only in
physically specific assets such as trees but also in the human-
specific assets needed to care properly for each variety of tree.
The tree’s growth and productivity are heavily influenced by
weather conditions, even given all the chemical regulators,
hormones, pesticides and fertilizers available to farmers. In
their fresh form, apples are very perishable, although it is
possible to store some for several months in controlled-
atmosphere (CA) storage.

Long-run increase in apple supply is thus a very risky and
uncertain business. Producers need to be able to distinguish
temporary supply fluctuations and demand surges from shifts in the
supply or demand curve. If farmers invest in more trees in
response to a temporary demand increase, they will drive price
down, to their own detriment. Conversely, a farmer who owns
fruit-bearing trees would be reluctant to cut them down in
response to a price drop since this is, in effect, the
irreversible destruction of a fixed asset.

Apple packers and processors are also constrained by their

fixed assets, though not to the degree of producers. Apple

41

juicing, sorting and bagging machines are both costly and fairly
specific to a particular use. It can be argued that these actors
have more flexibility than producers, since the storage rooms,
trucks, and even juicing machines can be used for goods other than
apples. There is an opportunity cost involved in idle machinery,
but it least it will not rot if left unused for a period of time,
unlike apples and apple 'trees. Apple shippers are» even less
constrained by asset specificity. Being a successful shipper
requires the talent and connections to sell high volume, but
requires little more monetary investment than a telephone. Thus
the percent of total costs ascribed to asset-specific investments
is the highest for growers and the lowest for shippers.

The higher is a participant's investment in asset-specific
goods, and particularly the higher is this investment relative to
his trading partners’ asset-specific investments, the more he is
vulnerable to opportunistic behavior by those trading partners.
As vulnerability increases, so do the potential benefits from
vertical integration. Integrating allows the participants to
protect their asset-specific investments. Integration also has a
cost, especially when the investments required are very high or
not complementary to those already made by the participant. For
instance, even though fewer investments are needed for a grower to
integrate into shipping than into packing, the human-specific
assets required for packing are more complementary to the grower’s
own skills than the marketing skills necessary to be a successful

shipper. Thus we may expect to find growers integrating into

42

packing more often than integrating all the way into shipping.
Note that integration can take more than one form; a group of
growers may cooperatively integrate into packing to protect their
asset-specific investments jointly, or a single grower may
integrate into packing and then sell his services to other
growers. Who actually integrates and what form this integration
takes will depend on the specific conditions and structure of
incentives faced by individual participants. These are analyzed
in subsequent chapters.

Information costs are variable for fresh apple quality: size,
color and bruising are relatively easy to detect while crispness
and flavor are more difficult and costly to perceive visually.
The needs of different aspects of apple quality are to some extent
contradictory, e.g., picking the apples at optimum time for color
may be past the optimum time for crispness. When the needs
conflict, producers will be most likely to maximize the qualities
they get paid for, which will probably be the ones most easily
detected. This is not limited to apples, as anyone who has
purchased a beautiful red tomato and found it tasteless knows
well.

Market transactions are repeated frequently at all stages in
both the fresh and processed channels, from the daily purchases of
consumers to the (seasonally constrained) weekly purchases by
processors and wholesalers. Given the constraints they operate
under, this theoretically allows market participants to adjust

their behavior in response to opportunistic behavior by trading

43

partners (Shaffer 1987, p.24). However, apples are an easily
damaged commodity. Especially with fresh apples, handling and
storage techniques can bruise, soften and otherwise lower the
quality at every stage from farmer to consume. Some varieties are
more easily damaged than others, but the quality of all apples is
affected very much by how they are treated. This can cause many
disputes between industry participants, since after apples have
passed more than two hands if is difficult to recognize who is
responsible for lowering the apple quality.

This quality externality is likely to weaken the ability of
market participants to adjust their behavior in response to
opportunistic behavior for two reasons. First, it is difficult to
evaluate the quality of service offered by a participant without
trying it. Second, even after purchasing the service, it is not
easy to detect when the provider occasionally mishandles the
fruit. These difficulties cause market participants to rely on
trust and personal relationships, and to place importance on
maintaining long-term relations with their trading partners.1
Participants more constrained by asset specificity (such as
growers) are likely to have a greater interest in continuing the
relationship and thus bear unsatisfactory service more often than
will their trading partners. Finally, effective frequency is
likely to be lower with fresh than processing apples, as the

quality externality is greater in the former area.

 

11. As used 'hi this study, trust and personal relationship
refers to the informal, long-term bonds that Williamson (1985)
calls relational contracting.

44

On a larger scale, the quality externality is one source of the
high exclusion cost of a reputation for high-quality fresh
apples. For instance, Michigan is trying to establish a positive
reputation among buyers and consumers for consistently high-
quality apples, to replace its currently’ mediocre reputation.
Although individual shippers try to distinguish themselves and
stress tpaip consistent high quality, it is buyers’ perceptions of
the whole that makes up the state reputation. Shippers’ efforts
to brand their products by offering only high quality under the
name are thwarted by their individually small market share and the
large number of competitors. Thus the state reputation is what
often distinguishes a shipper from shippers in other states.
Reputation has a high exclusion cost, and individual efforts to
raise the state reputation run into free-rider problems. In the
eyes of potential new customers, the people who bore costs to be
able to offer high-quality apples will not be seen as any
different from those who did not bear such costs. This is a
situation widely encountered by producers and marketers of

homogenous goods.

11. SIRUCTURE
A. _arket Structure: In this section the participants and

 

subsector stages in the fresh and processed channels of Norway and

Michigan will be examined in turn.

45

1. Norway:

There are approximately 1500 apple producers in Norway, the
majority of whom are located around the southwestern fjords, the
southern coast, and around the capital city of Oslo. A survey
conducted for this study in July 1986 found that 79% of the
farmers received less than half their income from apple sales (see
Appendix D for survey description). On an average farm size of
less than 5 hectares (approximately 12 acres), most farmers grow
three or four crops. As we will see later, this characteristic of
farmers has many effects on subsector performance. These 1500
farmers produce approximately 60,000 tons of apples annually. The
proportion going to processing is quite variable and depends
greatly on weather conditions, but is often over half of total
production (Nodenes, Teien). Norwegian apples come in over 35
varieties, and are harvested starting mid-August.

Farmers are responsible) for' growing, picking, initial rough-
sorting and packing the apples in large crates. The rough-sorted
apples go to the processors, while the rest go to packing stations
that pick up, store, final-sort and pack the apples in boxes.
Most of the farmers are serviced by the 24 main packing stations
in Norway. These packing stations do not generally handle large
volumes and there is much discussion about the need to consolidate
them in order to reach the economies of size possible with new
machinery for sorting apples. The packing stations are almost all
operated and at least partially owned by the patron-growers. They

are cooperatively operated, with power vested in a board of

46
directors made up of grower-members. The board hires the manager
and invests in him the powers necessary to carry out his job.

Most of the stations are tied in some way to one of the two
largest wholesalers in Norway. Nineteen are tied in varying
degrees to Gartnerhallen (GH), the national fruit, vegetable and
flower marketing cooperative, and five are tied to Banan Matisse
(BAMA), Norway’s largest private fruit and vegetable wholesaler.
These two transport and sell the apples to smaller wholesalers and
retailers. Together, GH and BAMA handle over 60% of the apples
coming out of packing stations, and over 50% of apples going to
the retail market.

Processors buy most of their apples from the packing stations.
Due to the high acidity of Norwegian apples, even in high crop
years processors import at least 25% of their apple concentrate
needs to mix with the domestic juice or concentrate. Ninety-five
percent of Norway’s processed apples go towards the production of
juice (Nodenes, 6/8/87). The great majority of apple processing
is done by Hardangersaft, a wholly-owned, independently operating
subsidiary of GH. For reasons that will become clear later,
Hardangersaft only sells to manufacturers and bottlers. It does

not compete at all in the retail market (Nodenes, 1/6/87).

47
Figure 2.1 illustrates the structure of the apple subsector of

Norway:

_G__|

Y‘OWEY‘S

 

 

Seasonal
Imports

 

Packing Stationsl

__:L_

> Hardangersaft

J

Manufacturers

 

 

 

 

 

 

   

  
  

 
   
 

Private
Processor

GH

 

 

 

 

 

   
  

> Wholesalers

 

 

 

 

 

 

 

 

 

  

 

Retailers Imported semi-

processed apples
l Consumerl

Figure 2.1. Structure of the Norwegian Apple Subsector

 

 

 

On the political side of Norwegian agriculture are the farmer
unions and government ministries. Over 80% of all farmers belong
to one of the two farmer unions: Norwegian Farmer Union or
Norwegian Smallholder Union. In the green sector (fruits,
vegetables and flowers), however, the proportion of farmers
belonging to the unions is substantially less. The ministries
most relevant to agriculture are the Ministries of Finance,
Consumer Affairs, and Agriculture.

An interesting point about. the Norwegian apple subsector is

that at no stage are participants relying solely on apples for

49

Michigan’s apple subsector involves three or four steps between
farmer and consumer. The farmers produce, harvest and transport
apples to the first handler. A minority of farmers are also
integrated vertically into storage, grading, packing, and even
selling. But usually, in the fresh market, packers are
responsible for storage, grading and packing. Shippers are
responsible for selling and providing or arranging for shipping;
of Michigan’s 26 year-round shippers, the two largest account for
close to 60% of fresh market sales (Schwallier). The "shipper"
label is sometimes misleading, as they are often only brokers.
That is, they sell the apples for their client packing houses but
do not actually take possession of them. Mos‘tshippers are
actually packer-shippers, i.e., packers that have vertically
integrated into shipping. But while most shippers are packers,
most packers are not shippers. Shippers negotiate with and sell
to retailer-buyers, who then sell to the individual consumer.

In the processing channel, farmers may sell directly to
processors, or sell through the state-wide bargaining association,
the Michigan Agricultural Cooperative Marketing Association
(MACMA). The processors may sell directly or through brokers to
retailers or the fbod service industry. Processors in Michigan
are generally privately or cooperatively owned; fifteen years ago
there were very few cooperative processors in Michigan, but today
they control approximately half of the processed market share.
The reasons for this, and the role of MACMA, will become clearer

as we continue.

50

Figure 2.2 summarizes the apple subsector of Michigan:

 

 

 

 

 

 

 

Growers
_T'l— ,
--JL-—- TL Juice
Packing Cooperative Imports
House Processor

 

 

 

 

Shipper Private

—>~ Processor

 

 

 

 

 

Retailers’-—-—-—~ ~ Manufacturer-<-J

Buyers

 
    
    

 

 

 

 

 

 

 

 

 

 

 

(Retailer

Consumer

 

Figure 2.2. Structure of Michigan’s apple subsector

3. A Comparison:

Although Michigan and Norway have approximately the same number
of apple producers, Michigan’s output is, on average, over 8 times
that of Norway’s. There are several factors contributing to this
gap; the average farm in Michigan is three times as large as its
Norwegian counterpart. On these smaller farms, the Norwegian
farmers generally grow more crops and within those crops place
less emphasis on apples than Michigan’s farmers. It is also more
feasible to reach economies of scale with available technology
more suited to Michigan’s relatively flat farms than in Norway’s

very steep mountainside farms. Michigan’s milder' climate and

51
longer growing season is another advantage.

Norway does have one major advantage over Michigan in
coordinating its apple subsector: it is a sovereign state. It can
and does control the flow of competing imports into the country.
When trying to implement structural changes, it only has to
consider the effect within its own boundaries. Michigan, on the
other hand, constitutes approximately 10% of the nation’s market
and must contend with imports. Many of the major forces affecting
Michigan’s apple growers originate from outside the state’s
borders.

Theoretically, one might expect farmer cooperatives to be more
prevalent in sectors where farmers are subject to more risk and
vulnerable to more opportunistic behavior. Today in Michigan
this sector is the fresh market. On the other hand, Williamson
1985) argues that specialized governance structures such as
cooperative integration are more likely to occur the more often a
transaction is repeated. Given the dampening effect on frequency
in fresh market transactions caused by the quality externality, we
might expect specialized governance structures to be more
prevalent in the processing channel.

The need to protect one’s asset-specific investments is an even
more pressing factor cited by Williamson as an incentive to
integrate. A processing plant requires relatively greater asset-
specific investment than a packing house, thus there are
incentives to integrate in order to provide insurance for the firm

not only at the grower but also at the processing stage. In both

52
Norway and Michigan, cooperatives and other specialized structures
are in fact more prevalent in the processing channel.

Some private processors in Michigan claim that the primary
reason for the prevalence of grower cooperatives is the
comparative advantage given to cooperative processors by
Michigan’s legal structure. Chapter 4 will argue that this claim

is an oversimplification of reality.

8. ngal Structure

The laws and regulations that have a bearing on the apple
subsectors of Norway and Michigan will be discussed in this
section, including everything from general laws for agriculture to
specific government grades for apple quality.

1. Norway:2

All Norwegian agricultural participants are bound by a number
of broad and far-reaching pieces of legislation. First, the
global economic crisis beginning in the late 1920’s, and then
World War II, had deep economic and psychological effects on
Norway. This is reflected in the breadth and depth of its
national agricultural policy. While many industrialized countries
responded to the economic crisis in agriculture with marketing
boards, the Norwegian government decided to use and strengthen the
existing farmer cooperative structure to channel help to the

farmers (Bergflpt).

 

2. The following section owes a great deal to P.O.Rokh¢lt
and O.Bergflpt.

53

It was the Market Regulation Act of 1930 that first gave
national recognition to the role of farmer cooperatives. It made
farmers responsible for alleviating what they saw as an oversupply
problem, albeit with some government assistance. Under this Act,
a Marketing Council (Omsetningsradet) was set up to collect a fee
deducted from the producer price and put it in a fund to be used
for market regulation and promotion. The Council administers the
fund, but the actual regulation and promotion in the different
branches of agriculture were left up to "farmers and their
economic organizations" (Bergflpt). In practice this meant that
the farmers, through their cooperatives, were to be responsible
for the regulation and promotion of their own products. There
exist separate cooperatives for different branches of agriculture,
including Gartnerhallen, which is the Marketing Cooperative for
fruits, vegetables and flowers (also called the "green sector").

Although there are no laws prohibiting more than one
cooperative per sector, in practice only one per sector has been
encouraged. The legislation of 1930 was a reaction to the
economic crisis of the time and was relatively limited in scope.
Then came World War 11. Norway was occupied by the Germans.
Since it imported much of its food needs, being cut off from the
rest of the world during the Occupation exacted a heavy toll on
the domestic food supply. The small villages scattered throughout
Norway were a major force in the Resistance, and many children
from the cities were sent to live in the rural areas during this

time.

54
This experience was not forgotten. Although many concerns were
‘incorporated into national agricultural policy, the need to
maintain the rural settlements as a security force and the need to
secure more of the nation’s food needs domestically were two of
the more important forces at work. These have a role in shaping
Norwegian agricultural policy to this day.

a. Major Goals of Agriculture: The agricultural policy of
Norway rests on five major pillars. These are described in detail
in Rapppt May 15 tp tpa Storting (Parliament) of 1976, excerpts of
which are included in Appendix A. Because of the central role of
these goals in the distribution of resources in general and the
position of agriculture in particular, this report will be
summarized below:

"Since the war, an active agricultural policy has been pursued
in Norway... in order to secure safe economic and social
conditions for the operators, and because agriculture will play an
important role in solving several of the problems in society" (p.
1). The following five goals are then laid out:

i) Agricultural Production: "Shall cover the domestic
demand for milk and milk products, meat, eggs, potatoes and rough
vegetables that can be stored. For other vegetables, fruits and
berries, the goal is to cover domestic demand as far as
possitile... the growing of' cereals should be increased
substantially"(p. 4).

ii) Regional Policy: Agriculture should contribute to the

realization of the general goals of the regional policy, which is

55
to prevent depopulation of the rural and economically weak areas,
especially in the north.

iii) Income Parity: This primarily concerns farming, but
does include other agricultural businesses as well. Specifically,
the objective is that "the net income per work-year on an up-to-
date and rationally operated farm big enough to provide an
experienced adult with year-round employment shall at least be at
a level corresponding to the annual salary of adult men in
industry" (p. 9). This objective is the cornerstone, though not
the sole purpose, of the annual negotiations between the
government and farmer unions.

iv) Efficiency: Is clearly used here as one of the
considerations in achieving other objectives, and not really an
objective of its own. "There is a conflict between (efficiency)
and other goals of the agricultural policy... efficiency norms
vary according to region and size of farm", and are "adjusted
according to the importance attached to the different objectives
of the agricultural policy" (p. 13).

v) Conservation of Environment and Resources: This broad
goal aims at conserving non-renewable resources and limiting the
pollution from agriculture, especially "pollution from silos,
straw treatment, fertilizers, pesticides, etc." (p. 7), while also
calling on agriculture to contribute to the reduction of pollution
in other sectors, for instance by recycling organic materials from
the urban areas.

Creating an economic and social environment that is self-

56

reliant for its basic needs and secure from a national defense
standpoint can be seen as a public good, or more accurately, a
high exclusion cost (HEC) good with marginal costs approaching
zero (at least, over a wide range of use). Private markets will
tend to underallocate resources to the provision of such goods,
however, since individuals consider only their own marginal
benefit (Nicholson, p. 709).

HEC goods are typically provided by some higher authority that
can provide it and tax all potential users, thus avoiding the
free—rider problem. The Norwegian government has in this case
taken a broader view of national defense, a classic HEC good.
That is, continued government support of agriculture can be seen
as public provision of an evenly-populated and self-reliant
country, just as government support of the army is seen as public
provision of strong national defense.

If this broader view of national defense is accepted, the
central questions that must be asked are first, what is the best
way to finance this agricultural aspect of national defense, and
second, how much defense (self-reliance, stability) is desired--
that is, what is the opportunity cost of providing this good.
This former point is not a subject of current national attention,
but the latter is being raised more and more frequently by
Norwegians in and out of the political sphere. As the cost of
providing an evenly-populated, nutritionally self-reliant nation

becomes scrutinized more closely, the debate will necessarily lead

57
to the related issue of how to best finance whatever level of
agricultural support is decided on.

b. The Annual Negotiations: Legislation passed in 1950 set the
framework for annual price negotiations between farmers and the
government. Negotiations on price were carried out, in effect, to
secure the income objective for the farmer. The original
legislation did allow for either party to demand negotiations on
issues other than prices, and over the years the annual
negotiations have grown to involve' much more than just price
setting.

The negotiation results take a slightly different form in
different agricultural subsectors. In general, the two parties
(growers and government) first negotiate on an income increase for
the growers, based on factors such as operating costs, inflation,
and the income increase received by industrial workers. The next
step is to decide how much of this will come from higher prices,
and how much from higher government subsidies. In some
subsectors, such as dairy, a set price increase is decided on as
well. In others, such as apples, the agreement specifies by how
much prices may be adjusted throughout the (year, leaving the
details to be worked out later. The remaining income increase
comes from an increase in various government subsidies received by
the farmer, ranging from input subsidies to differential transport
subsidies based on farm location. Excerpts from the 1980-82

Agricultural Agreement are contained in Appendix B.

58

Upon completion of the general agreement, the Ministry of
Agriculture makes specific interpretations for price and subsidy
increases. The implementation of the agreement is the
cooperatives’ job. ‘This is not to imply that membership in
Gartnerhallen is compulsory, just that the responsibility of
market regulation is on the cooperative’s shoulders. In return
for this responsibility, Gartnerhallen receives compensation from
the Marketing Council. Gartnerhallen’s responsibility to implement
the Agricultural Agreement and to accept all the produce brought
to it by its members, and its mandate to practice open membership
is often cited as justification for this compensation. The
Marketing Council pays almost all of Gartnerhallen’s storage
building costs and approximately 18% of its total administrative
costs, as well as various other costs decided on a case-by-case
basis by the Marketing Council (Isaksen, Bergflpt).

c. Processor-Grower Negotiations: Processed apples in Norway
also have negotiations on price every year. The parties involved
are the Processor Association on the one side and Gartnerhallen
(GH) and the Farmer Union on the other side. GH is a member of
the Processor Association as well, but in the negotiations it can
only sit on one side. The result of these negotiations has three
major components: first is the actual price for processing apples.
Two prices are set, with juice apple prices being higher during
the Norwegian fresh apple season. After February 1, fresh apple

imports are unrestricted and remaining Norwegian apples (which

59
store very poorly) all go to processing, thus the lower price set
for processing.

The second two components are not variables like price: they
are promises. The Processor Association promises to buy their
full domestic needs -- but no more .. from available Norwegian
apples. In actuality the maximum they would buy would be 75% of
their total raw product needs, as the acidic Norwegian apples must
be mixed with imported juice. Legally, imported juice can make up
a maximum of 25% of the final juice volume. GH, on its side,
promises to approve imports if the Norwegian supply is not enough
for the processors’ needs. This promise is relevant because the
group that controls the approval of processed-fruit imports is
made up of GH, the Processor Association, and the Ministry of
Agriculture. If GH and the Processor Association both agree that
imports are necessary, the Ministry will also agree.

GH’s negotiations with the Processor Association does not mean
that it is bargaining with itself. GH’s processing plant,
Hardangersaft, only semi-processes apples. That is, Hardangersaft
sells nothing to the retail level. It sells mainly to other
members of the Processor Association. Hardangersaft has nothing
to gain from a low raw product price, since it only takes out a
processing charge and returns the rest to growers. Since it knows
processors must buy 75% of their needs from domestic apples, it
does not need to lower prices to move volume. It is up to the
processors to argue that with a lower raw product price they can

sell more processed apples and thus buy more Norwegian apples.

60
Even this is a weak argument, since oversupply of domestic apples
relative to processor needs has rarely been a problem in Norway.

d. Quality Standards: The quality standards for Norwegian
fresh. apples are set by the Government Standardization Board,
which consists of 11 people appointed by the Minister of
Agriculture. These include representatives of the farmer unions,
private wholesalers, Gartnerhallen, plant inspectors, government
advisors, and the Ministries of Agriculture and Consumer Affairs.
Current standards divide Norway’s many varieties into three
groups, and for each group specifies a Class I and II. A higher
Class Extra also is defined but is not used. Quality standards
are based on appearance, size, and for the two top classes, size
variations within a class and a minimum refractometer measure.3
Packaging and labelling standards are also specified by the
Standardization Board.

Enforcement of standards is up to government inspectors, who
inspect only occasionally, and then usually at the retail level.
Gartnerhallen and private first-handlers are also formally
responsible on a day-to-day basis, but in practice this is left up
to the packing stations.

Legal structure in Norwegian agriculture is a complex and
important part of the apple subsector’s Operation. The preceding

description covered the more general aspects of the legal

 

3. A refractometer measures the sugar content of an apple as
an indicator of its maturity.

61
framework. More specific or detailed explanations will be
relegated to the following chapters, as they become relevant.
2. Michigan:

Legislation on apples in Michigan is very limited, both in
number of laws and their scope. On the federal level, the few
laws relevant to apples are very broad and ambiguous, leaving much
room for interpretation. The following section will start with
the most general federal laws relevant to apples, and move
successively to the most specific state laws dealing solely with
apples.

a. The Capper-Volstead Act: The Capper-Volstead Act of 1922
(CVA) granted farmer cooperatives limited immunity from the
Sherman Antitrust Act. It also defined what a farmer cooperative
was, and what it could and could not do. Section 1 of the CVA
allowed farmers "to act together in associations, corporations or
otherwise... in collectively processing, preparing for market
handling [and marketing... such products of persons so engaged.
Such associations may have marketing agencies in common" (quoted
by Rhodes, p.319). In order to be considered a farmer cooperative,
the farmer associations had to:

i) Be "operated for the mutual benefit of the members".

ii) Not deal in nonmember products more than member products.

In addition to these two requirements, it had to conform to at
least one of the two additional requirements:

iii) No member was to be allowed more than one vote because of

62
allowing more than one vote per member for other reasons.

iv) No dividends could be given on stock or membership capital

greater than 8% per annum.

Section 2 of the CVA instructs the Secretary of Agriculture to
investigate and intercede in a cooperative if it is found to be
unduly raising the price of agricultural goods through monopoly
power or trade restrictions. The meaning of "undue" is
subjectively determined, however, and no cooperative has ever been
found guilty of undue price enhancement in the 65-year history of
the CVA.

b. Michigan Public Act #344:4 PA#344 concerns only the
processed apple market, and its history is a good reflection of
the recent history of this market in Michigan. When the demand
for processed apple products increased in the 1950’s and 1960’s,
many large national-brand processing firms were located in
Michigan. Smaller private-label firms were also important in the
market. Growers felt disadvantaged in negotiations with
processors, particularly with the larger national-brand processors
which had influence on both raw and finished product prices. Some
growers charged that not only did the processors pay them too
little for the raw product, but they were inconsistent in paying
for corollary services such as transport of apples to the plant.

The 1967 Agricultural- Fair Practices Act did little to
alleviate this problem, as it did not require good-faith

bargaining. Although legally prohibited from doing so, processors

 

4. The history of PA#344 is adapted from Berger.

. 63

bargaining. Although legally prohibited from doing so, processors
could easily discriminate against producers belonging to
bargaining associations -- ostensibly for other reasons. Growers
organized into a voluntary bargaining unit, MACMA’s Processing
Apple division. This cooperative apple bargaining association
was successful in influencing price and other terms of trade to a
limited degree. Its influence was most noteworthy in short-crop
years. The bargaining cooperative also influenced grading
standards and corresponding prices, and disseminated more market
information. The voluntary nature of MACMA provided definite,
limitations to the association’s ability to influence grower price
gand to achieve its other goals. There was also a clear free-rider
problem, such that MACMA represented only 40-50% of the processing
apple tonnage.

In 1972, mandatory bargaining was instituted under Michigan’s
Public Act #344. PA#344 allowed growers to bargain collectively
with processors for raw apple prices on an exclusive agency basis,
with special provisions made for binding arbitration. Under
PA#344, the Processing Apple division of MACMA became the
Association of Michigan Processing Apple Growers (MPAG) and the
exclusive bargaining agent for Michigan’s processing apples. MPAG
is now one section of MACMA, which is involved with a number of
the agricultural commodities produced in Michigan. All producers
who grew over 5000 bushels of processing apples per season,
whether members of MACMA or not, were represented by and paid fees

to MPAG.

64

In 1985, the United States Supreme Court declared exclusive
agent representation to be unconstitutional. The Michigan Supreme
Court thus overturned the exclusive agent representation provision
of MACMA. Therefore MPAG can no longer collect fees from or
bargain for non-members MACMA, nor are non-members bound by MPAG-
negotiated prices. In effect, the Supreme Court decision allowed
the unwilling riders created by PA#344 to disembark, while
allowing free riders onto the bargaining train. MACMA’s current
(weaker) role in coordination of the apple subsector will be
discussed in Chapter 4.

Since the boom period of the 1950’s and 1960’s, the demand for
apple sauce and frozen slices has been declining. Even without
PA#344, declining demand probably would have led to a decreasing
number of processors. Some industry participants argue that the
exclusive agent representation provision of PA#344 hastened the
departure of the processors, especially the larger national-brand
ones. Processor departure was probably encouraged even more by
the flood of cheap foreign imports in the apple juice market, the
only processing market experiencing piping demand. That is, the
avenue for fully half of processing apples experienced a rise in
demand, and this rise was met almost entirely by imports.

Nor did it help that cooperative processors were exempt from
bargaining. This was a less important matter in 1972 when PA#344
was passed, for at that time processing cooperatives handled a
much smaller part of the processed apple market. Since then,

processing cooperatives have come to play a much larger role in

65

Michigan -- in part because of the dual phenomena of declining
demand and cooperative exemption from bargaining-- thus exemption
from committing the cooperative to a raw product base price at the
beginning of the season. At any rate, the processed apple channel
today is in a very different position than it was 20 years ago,
when demand was strong and rising, and private processors
dominated the market.

c. Michigan Public Act #232: In the 1940’s, the Michigan Apple
Commission was formed to assist growers through advertising and
promotion of Michigan apples. In 1965, the Michigan legislature
passed PA#232, which was a state marketing order enabling
legislation. By 1967, the Michigan Apple Commission had decided
to operate under PA#232 in order to qualify for mandatory fee
assessments and thus eliminate the free-rider problem. The
Michigan Apple Commission became the Michigan Apple Committee
(MAC), a mandatory grower-financed organization for the
advertising and promotion of Michigan’s apples. \

d. Quality Standards: Most of‘ Michigan’s fresh apples are
labelled using Federal quality grades, even though most the
industry operates under much higher levels. Apple grades are U.S.
Extra Fancy, Fancy, No. 1, and Utility. Generally apples destined
for the fresh retail market are U.S. Extra Fancy, Fancy, or a
combination of the two. Apples are graded on color, and lack of
blemishes/bruising. There are no legal limitations on size,
except that it be clearly labelled, There are, however,

limitations on how much apples within one box can diverge from the

66
standards are also specified.

At the time that the Federal standards were written, blemishes
were the primary industry problem and blemish-free fruit is the
major focus of the standards. Thus of the 18 categories under
"limits of defects in U.S. Apple Grades" listed in the Apple
Grader’s Manual, 11 have to do with various kinds of blemishes.
The remaining 7 include such vague statements as "all grades must
be mature but not overripe". There are no precise quantifiable
measures of maturity, such as refractometer standards or pressure-
test levels, included in the federal grade standards.

The highest percent color required in federal grade standards
is 66%, whereas today apples are regularly sold at over 70% color,
sometimes even up to 90% color.5 Shippers are formally
responsible to the retailers for the quality of apples they sell,
but on a day-to-day basis it is the packers who implement the
standards. Shippers responsibility is thus to coordinate
retailers’ quality demands with packing houses’ operations.

The legal structure relevant to apples in Michigan includes
mainly the Capper-Volstead Act, PA#232, the no-longer mandatory
PA#344, and the Federal quality standards. For the analysis of
Michigan, the (informal trading structure that has developed to
order participant relations is very important. In Norway,

although the informal structure is certainly important, the formal

 

5. Percent color is in the eye of the beholder —- that is,
there is no standardized device for measuring it. Currently,
percent color is measured by eye for all colors and varieties of
apples. The implications of this are discussed in Chapter 3.

67
although the informal structure is certainly important, the formal
legal structure plays a much more central role in the coordination

process than in Michigan.

CHAPTER 3
MATCHING QUANTITY AND QUALITY DEMANDED AND SUPPLIED
IN THE SHORT AND LONG RUN

Having laid out the basic picture of Michigan and Norway’s
apple subsectors, it is now possible to move to the discussion of
specific areas within the coordination process. This chapter
focusses on the first two of three areas to be studied. The first
area concerns what quantity and quality of fresh apples are
produced and marketed by each subsector in the short run, and how
information on quantity and quality immediately available and
demanded is transmitted through the subsector channel to the
reievant participants. The second concern is the long-run
coordination of fresh-market supply and demand: that is, what
quality and quantity do participants in the supply channel prepare
to produce and market, what information do participants in the
demand channel make available to guide supply decisions, and to
whom is this information made available? In terms of the
framework for analysis presented in Chapter 1, the chapter will
complete the discussion of structure, and cover conduct, as it
applies to these coordination areas.

A discussion of trading structure involves a great deal of
detailed information. In order to facilitate this discussion, the
chapter will consider trading structure from the point of view of

each level in the subsector channel in turn, that is, the formal

68

69
and informal structures ordering each participant-level’s
relations with adjacent levels.

Following the discussion of 'trading structure, this chapter
considers conduct, i.e., the objectives, possible paths and
actions of each participant-level. The first section of ‘the
chapter will be devoted to the Norwegian fresh apple subsector.
The second section moves to a similar discussion for Michigan.
Finally the two subsectors will be compared briefly. The bulk of

comparative analysis will be found in Chapter 5.

I. NORWAY

 

The previous chapter drew a broad, general picture of the
Norwegian agricultural environment. In this section the focus is
narrower and more in-depth, taking as starting points the brief
treatment given to the issue of quantity and quality of apple
production in Chapter 1, and to the Norwegian market and legal
structure in Chapter 2. The participant levels to be discussed
are: growers - packing stations — Gartnerhallen (or GH; the farmer
cooperative) - BAMA (the largest private shipper/wholesaler)-

wholesaler/retailers - the government.

A. Growers

Given a: particular variety and the effects of weather, growers
are the only actors who can influence size and color of apples
produced. This is not to deny the advice or influence of non-

growers on grower cultural practices, but in the final analysis,

70
growers are the primary actors influencing the quality of apples
produced. In Norway growers have very little influence on the
packaging and presentation of apples.

Quality is also a function of random events such as weather.
Two farms on opposing sides of a fjord, perhaps 20 kilometers
apart, may have very different rainfall patterns (Tjugum). Other
contributing factors include water availability, climate, the soil
type and geography of the area. Norway in general has a short
growing season, resulting in .apples that are thin-skinned and
easily bruised. All these factors are out of the farmer’s
control. Factors that app under the farmer’s control are cultural
techniques, tree maintenance and tree planting/removing decisions.
Tree removal is not just a matter of decreasing supply; it is also
a matter of maintaining high-quality apples, as old trees tend to
produce smaller and less-colored apples. Likewise, planting is
not just a strategy to increase supply; it can be to replace old
trees with newer ones, to replace trees that are not so old with
improved strains, or to change the varietal mix of production.

Improved strains of apples for Norwegian growers are developed
in the three government research and experimentation centers for
fruit in Norway. Their major focus is the adaptation for domestic
use of hardier imported varieties (as opposed to the development
of hardier varieties), pruning and shaping techniques, and
intensification of per-acre production through smaller trees and
denser planting. Research station results are disseminated by the

county extension agents, who are responsible for properly

71
educating the farmers in the new techniques (Husabo). Some
farmers are also engaged in experiment circles or "forspkring",
where each will try a new technique or input and share the results
with the others. These experiment circles are affiliated with,
though not organized by, the research stations.

The primary outside source of information on quality
improvement techniques for farmers is the county or "fylke"
extension service. The bulk of information on w_hat_ to produce--
as opposed to M to produce it -- comes from Gartnerhallen (GH)
and BAMA. GM is concerned mainly with the marketing of apples;
insofar as it relates to this concern, it provides its farmers
with suggestions of what trees to plant or remove, and may suggest
research topics to one of the government research stations. If
time permits, the GH representatives may offer production advice,
but their primary responsibility is marketing advice and
information-gathering. Some information about technological
innovations and particularly new improved varieties and strains
may also be provided by GH to the farmers. GH advisors have
individual telephone contact with the growers, as well as regular
group meetings in each packing station at least twice a year.
Although non-GH farmers have the right to call on these
government-subsidized advisors, they generally do not.

BAMA farmers also have a source of information especially for
them, through the annual BAMA-packing station meetings. These
meetings concern the economic performance of the previous year,

and some information on technical innovations -- generally one

72

theme per year (Anondsen). In the annual meetings, BAMA also
gives information on apple varieties and qualities demanded by the
market. Individual packing stations may also hold quality-
improvement seminars for their own members. Farmers receive some
information about the type of apples demanded through the price
variable. Information about the demand for variety and class of
apples (i.e., Class 1 vs. Class 2) is relatively clear to detect
in the price mechanism, but yitpip a certain class and variety, it
is not clear how the different attributes are valued. In this
respect BAMA farmers have an advantage over GH, as BAMA practices
differential pricing between farmers, rewarding those who produce
apples that provide qualities the market is willing to pay for
(Anondsen). GH has recently begun looking into ways of
implementing a differential pricing policy as well.

Plentiful information about market demand may not lead to the
long-run fulfillment of that demand, if incentive structures
dictate otherwise. Within GH, the lack of differential pricing
for higher-than-minimum quality is a disincentive to farmers
shouldering the—higher costs associated with the production of ,
higher-quality apples.

The very large number of small growers is a barrier to long run
coordination of quantity produced. Even with all the information
and predictions at his disposal, as long as each grower sees his
own production as being small, he will not change his variety or
capacity of production -- especially if the long-run predictions

are not yet apparent in the current prices.

73

The diversified nature of Norwegian farming and subsequent non-
crucial nature of apples for family income is another hindrance to
grower response to market changes. On the small farms in Norway,
growers must allocate the limited household resources (monetary
and otherwise) among many competing activities. Assuming that
growers have already chosen the product mix and corresponding
resource-use weights to maximize expected total utility by
equating the marginal utility of each activity, a certain product
mix emerges on each farm. In Norway, for instance, this product
mix generally consists of 4 or 5 crops. The grower allocates his
scarce resources among leisure and these 41<n~ 5 crops such that
the expected marginal return from each activity is equated. This
allocation decision is based on a number of factors, including
expected price, cost of production and susceptibility to weather
damage of each crop. When market demand changes and a different
variety or quality of one of the crops are desired, the grower
must then reevaluate his resource allocation decisions and decide
whether he wants to commit the necessary resources to adapting to
this change.

Adapting to market change is a costly endeavor for producers of
any goods requiring asset-specific investments. 'This cost is
especially high for assets like tree crops. Although adapting to
changes in market demand is costly no matter if a producer is
diversified or specialized, this cost is more likely to be a
hindrance to adaptation for the diversified farmer.

Adaptation requires a: number of investments whose amounts are

74

independent of the grower’s scale of operation. The most
important of these is the training (i.e., human-specific assets)
needed to learn how to care for new varieties. The fixed costs
are lower when a grower is just shifting the weight of his output,
i.e., planting more or less of varieties he already grows. The
high fixed costs of planting wholly new varieties are easier for
larger or more specialized growers to bear, as they can spread
these costs over a higher output, leading to lower per-unit cost
of adaptation.

Even if diversified growers have invested in the human-
specific assets needed to begin producing a particular variety,
they may still be at a disadvantage in adapting to changing market
conditions. Information about changes in market demand and
techniques for adapting to these changes give a higher net return
to specialized than to diversified growers (Zeller). This is due
to the greater information base a specialized grower starts from.
Growing the highest quality or most desirable apples requires a
large human capital investment, and given bounded rationality it
is much more likely that a specialized grower’ will have the
capacity to invest in this asset-specific investment than a
diversified one. The specialized grower can spread the cost of
investing in human-specific assets over a larger volume, resulting
in a lower per-unit cost than possible for the diversified grower.

Diversified growers must invest in collecting information and
skill (i.e., Williamson’s human-specific assets) about £1 the

crops they grow, and they spread this cost over a lower volume of

75

production. Advances in production techniques and varieties are
most often simply refinements in existing knowledge; thus they are
most accessible to those growers already familiar with the full
scope of current techniques. These growers are most likely to be
specialized in the production of one or two crops. Thus, given
the same farm size, a diversified grower is less likely to adapt
quickly to market changes than a specialized one.

Government subsidies, by keeping the price of apples higher
than the value placed on them by consumers, also serve to slow
down grower response to changes in market demand. Due to
uncertainty and asset specificity growers do not disinvest or
change production as soon as demand changes: they need to be
relatively sure that the demand change is a long-run one. The
perceived value of a fixed asset in use (e.g., an apple tree) must
fall below its salvage value in order for a producer to disinvest
in it. Apples trees have a zero or negative salvage value
(cutting down trees costs resources), which is one reason why
growers continue producing apples that do not match market demand
even if they know market demand has changed. Growers will cut
down productive apple trees and replace them with new ones when
the expected opportunity cost of the existing trees exceeds their

expected value in use, i.e., when:
(3.1) E P’Q’ +...+ P’Q’ - c' > 5’ p" ,, ...... pI"
(1+r) (1+r) ] (1+r) - FIFTH

Where:

E = expected value

76
P’s expected price for apple of new variety
0’: expected'annual yield from new tree, assuming full yield
8 years after planting.
r a grower’s discount rate
C’s cost of planting and bringing to bearing age a new tree
P”- price for apple of existing variety
0”8 average annual yield of existing tree

t - Age of existing tree, assuming each tree lives 40 years

By raising the price received for existing apples (P”),
government subsidies raise the value in use of existing trees,
slowing down both disinvestment of existing trees and investment
in new ones. This is not meant to imply that government subsidies
are bad; an important point to consider is the reason for having
subsidies in the first place. If their purpose is to maintain a
given population of' growers and to support the production of
otherwise unprofitable crops, then the subsidies are fulfilling
their purpose. But as far as promoting the production of quality
and quantity desired by a changing market is concerned, government
subsidies -- as they are currently structured -- act as a
hindrance to supply response. In their current form, government
subsidies do not differentiate between varieties or qualities
within Class 1 apples. This means that Class 1 apples of the type
less desired by the market are subsidized proportionately more
than 'Class 1 apples with more widely desired attributes and

correspondingly higher price.

77

B. Backing Stations

Most apple growers, through their packing stations, deliver to
either GH or BAMA. GH growers generally deliver to one of three
types of packing stations: GH-owned and operated, GH-owned (at
least partially) and grower operated, or independent packing
stations. The relation of the latter two with GH is that of
voluntary membership. The majority of GH growers deliver to the
second type of packing station, but all three have the obligation
to deliver all their goods to GH. Growers in all three categories
have one vote each in GH meetings, but only growers delivering to
GH-owned and operated packing stations are direct members.
Growers delivering to other packing stations are indirect members
of GH, as it is the packing station board that signs the contract
with GH. The major difference between these two types of
membership is GH’s’ involvement in the internal operation of the
packing station. When the packing station signs the GH contract,
GH does not interfere in its operations, and the packing station
is responsible to ensure that the members fulfill their
contractual obligations to GH.

BAMA growers also deliver to BAMA in three ways: through BAMA-
owned and operated packing stations, through independent packing
stations with BAMA contracts, or through direct delivery to BAMA
(this option involves only the larger farmers). In the former two
categories, the packing station is obligated to sell 100% of its
produce through BAMA. With the large farmers, BAMA does not

78
stipplata but does encourage 100% delivery. This is expressly a
strategy to improve relations with farmers and woo them away from
GH-

Packing stations that are at least partially owned by the
growers are operated cooperatively by a board of grower-members.
The packing station manager is thus an employee of the farmers.
Most are located in southwestern Norway, and some are quite small
and old. Packing stations transport the apples from farm to
packing station, store them, and upon receipt of an order from
their shipper-broker, sort and pack them. They also send the
Class 2 apples to processing.

Most packing stations are clients of either GH or BAMA. They do
not have a direct voice in the sale of their apples. Some
independent packing stations also sell to the wholesale-retail
market but these are very few and only in close proximity to large
urban areas. The sales firm (e.g., GH or BAMA) is formally
responsible for delivering the quality specified in the buyer-
seller transaction. Once standards have been set, it is the
packing stations’ responsibility to sort and pack incoming orders
to those specifications. Thus although the packing station does
pack the apples, it does not decide how or in what form to pack
them. It is up to the packing station members to allocate funding
for the purchase of specialized packing or sorting machines,
although GH may build or purchase certain facilities and lease

them back to the packing station.

79

Packing stations receive funding for their operating costs
through government subsidies and a percentage fee from the total
revenues received by the packing station’s apples. They also
serve as a community information network, especially if they are a
GH-packing station. Market information, production plans and
advice from GH are all channelled through the packing station. So
although the packing station itaalf does not do long-run planning
for grower optimal production mix, the shipper’s long-run planners
do use the packing station structure as a way to reach groups of
growers efficiently and easily. Packing stations are an informal
but crucial link in the micro-micro coordination of the

cooperative.1

C. Gartnerhallen (GH)

OH is a centralized cooperative, with the Central Office in
Oslo having the power to set and change the boundaries of
districts and departments, as well as having formal control over
operations 'hi the districts.2 Districts, in turn, have formal
control over the departments. In day-to-day matters, however, GH
operates similar to a federated cooperative. For instance,
district offices, although formally under direct control of the

central office, are actually independent sales desks, and have a

 

1. Micro-micro coordination refers to coordination within a
firm (Shaffer and Staatz).

2. Gartnerhallen divides its areas of responsibility into
geographically-defined districts, with each district being
divided into a number of departments.

80
great deal of autonomy in their own daily operations. Each
district’s accounts are held separately. Departments, the
smallest GH offices, function mainly as a receiving station for
apples en route to the retailer. Packing stations are the primary
local point of reference for growers.

As described earlier, most packing stations are farmer-
operated GH members. In other words, they are local cooperatives
that are in turn members of GH. All members are required to bring
to GH their total production in all goods marketed by GH: roadside
stands or direct farmer sales to local markets are not allowed.
Nor can a member deliver, e.g., his apples but not his pears. GH
is responsible to sell all its members’ produce, and is the final
decisionmaker in packaging and presentation. Each district is
responsible for the sale of its own apples. Although it does not
generally take physical possession of' members’ apples, it .is
committed to selling everything its mcmbers produce. Districts
may purchase from other districts, and in such cases the GH buying
office may take possession of the apples. In general, packing
stations are responsible for the storage of their members’ produce
until GH sells them.

GH can attempt to affect apple condition and appearance by
sending marketing representatives directly to the retail store to
give guidance on storage, handling and presentation of apples.
This can only be done for the 50% of its fresh apples that GH
sells directly to retailers (generally the larger retailers). The

other 50% of GH’s fresh apples are sold to wholesalers who sell in

81
turn to small retailers. For these sales there is little that GH
can do to affect the in-store presentation and handling of apples.

The marketing representatives also channel information on
retailer demands back to GH management. ‘ GH marketing
representatives and farmer advisors are the same people, which
allows information on retailer demand to be transmitted directly
to farmers in their packing station meetings. GH does very little
in the way of demand-manipulation through retail-level advertising
or promotion. There is a general fund for generic apple
advertising -- i.e., GH’s name cannot be mentioned -- but GH
itself does not allocate resources to apple promotion. There is
no consistent campaign to promote apples and shift consumers’
demand curve to the right.

Through its quality research committees, GH-Central can focus
on production and marketing issues. One committee focusses on
improving marketing methods and on coordinating marketing and
extension. Another committee 'considers the feasibility of
introducing new varieties, and does long-range planning for tree
plantings and removals. Of relevance to apples is the
comprehensive fruit production plan drawn up for each district.
The plan spells out what variety of each tree has been planted,
how old it is, what is the five-year goal set by GH, and how many
trees of each variety need to be cut down or planted. It also
shows what the previous plan was, and how the current situation

compares to the previously-set goals.

82

The district-level plan is then broken down to a number of
smaller-scale plans that are easier for growers to relate to and
(presumably) more likely to be followed. These plans set planting
and tree-removal goals for each individual packing station. These
plans are then distributed to members through the packing station
manager’s meetings with the growers. Adherence to the plan is not
mandatory and it is presented only as GH’s best guess of the
future demand picture and where each grower fits in that picture.
The only incentives growers have to follow the plan is GH’s claim
(not guarantee) that this is the mix currently demanded by the
market, thus the mix that will command the highest price. Since
GH makes the plan only after having studied the market and its
growers’ present farm profile, it is presumably a reliable claim.
But the final decision -- and risk -- is on the grower’s
shoulders.

The GH advisors also meet together to discuss common marketing
and production problems. However; this apparently' impressive
array of institutionalized communication and research may be
little more than a formal shell if the Central’s management does
not attach importance to these functions. In the past, GH-
Central tended to focus primarily on selling whatever its members
grew. It gave a high priority to the collection of information on
what the members were growing, and in planning the overall volume
and variety they should grow. However, little attention was given
to the marketing of the apples; that is, targeting markets,

finding out what specific qualities (i.e., with respect to

83
color,size or packaging) the market was demanding, and working on
newer or more effective ways of presenting the apples.

The increasingly competitive environment of Norway’s fresh
produce markets, along with turnover in management, has brought in
a more dynamic approach to GH, but the existing series of
committees and offices are still often little more than an
occasional meeting of minds. The committees are generally staffed
by people who already have a fUll load of responsibilities, and
although they may try very hard, the groups may end up meeting for
a few hours once every three or four months to discuss two or
three issues related to as many products, out of the hundreds of
products in which GH deals. Thus, it is not surprising that the
work of some of these committees tends to progress very slowly.

Information about current market conditions, e.g., price
received and product. movement, is distributed from lcentral to
district level. Much of this information is the d_gynai_r_i of the
districts, since they are the cooperative’s major sales offices.
District managers have the power to decide what information to
pass on to the packing stations: GH-Central interferes in district
affairs only in the case on unusual problems. One major complaint
at the packing station level is that GH provides little or no
post-production information: only annual market reports are
regularly provided to GH members.

While having post-production information may make little or no
difference in grower or packing station production decisions, it

does contribute to a sense of belonging and involvement. A

84
packing station manager admitted as much when attempting to
justify his call for* more post-production information: almost
immediately after voicing the need for this information in order
to evaluate GH’s production plans, he admitted that the plans were
reliable and generally on-target. But, he concluded sadly, the
farmers are now little more than paid laborers. Looking from the
outside, it appeared that the increased information was desired
not in the participants’ capacities as growers or packing station
managers (since the plans given by GM were considered to be
reliable), but as owner-members of a farmer cooperative. Thus,
for instance, BAMA giving very little post-production information
might not result in the same complaint due to the different
expectations growers and packing station managers would have of a

private company.

D. BAMA

Insofar as the marketing of quality apples is concerned, BAMA’s
major differences with GH are its policy of pricing growers’
apples differentially by quality, and its right to turn away
growers. Much of the information on quality demanded is
available to GH and non-GH growers alike, and many of the
constraints faced by both groups of growers (e.g., weather) are
also very much alike. The difference arises in which growers’
apples are accepted, how they are paid for their apples, and how

BAMA sells these apples.

85

BAMA targets its apples: those of average Class 1 quality go to
average retailers in standardized boxes labelled "Norwegian
Fruit". The higher quality Class 1 apples are separated, packed
in boxes labelled "BAMA", and sold for a higher price to the
higher-quality retailers. BAMA not only makes its own class
divisions within Class 1, it only applies its label to the higher
quality, thus building an association of BAMA’s name with high
quality.

BAMA owns three large packing stations, has exclusive contracts
with two others, and has direct contracts with 20-25 of the larger
apple farmers in eastern Norway, where fewer’ packing stations
exist. Like GH, BAMA specifies the quality to be packed, the
packaging, and also tells the packing station what to pack and
what to put in cold storage. Although the private packing
stations are not required to use particular machinery, BAMA does
make available its preferred grading equipment for them to buy.

BAMA. competes actively' with GH, being careful to treat the
farmers with some lenience and making efforts to build a BAMA
group identity between its farmers. It holds annual meetings with
farmers, where information on the previous year’s market situation
is provided, and plans for the future composition of production
are discussed. Like GH, regular short-run market information is
provided only at the annual meetings. Not being a cooperative,
BAMA can more easily make business decisions that might meet with
farmer resistance in a cooperative, such as turning away low-

quality farmers or maintaining only a few large packing stations

86
rather than many small ones. It, appears that BAMA. has been
successful in its efforts to balance unpleasant business decisions
with the promotion of a positive reputation with growers: BAMA has
been in the fruit marketing business for over a century, but it
was less than 20 years ago that BAMA began buying and marketing
domestically-grown produce. Today it is Norway’s second largest
fruit and vegetable wholesaler, with 28% of the nation’s retail

market share in apples.

E. Retailers

The production and marketing efforts of the previously
introduced subsector participants culminates -- and their control
ends -- at the retail level. The output of each separate
subsector or industry, carefully planned and packaged and
marketed, meets hundreds or even thousands of other goods. All
compete for shelf space, as well as for the limited care and
attention available from store employees. The more numerous and
smaller are the retailers, the more difficult it is for
representatives of particular subsectors to circulate among them,
to collect feedback or to attempt to affect the handling and
presentation of their particular goods.

In Norway the corner store is still very much a part of the
urban scene. Employees of retail stores, large or small, deal
with many different goods, each requiring different care.
Particularly in the smaller stores where employees are less

specialized, the probability of mishandling and bruising the

87

delicate Norwegian apples is very high. As mentioned earlier, GH
does send representatives to the retailers to whom it sells
directly, but this involves only 50% of their fresh apple sales.
Major wholesaler-retailers may also have their own product
promotion programs. NKL, the Norwegian Consumer Cooperative
Wholesale Society, has stores all over Norway and periodically
sends NKL representatives around the country to help display
fruit, to teach proper handling techniques, and so on.

Retailers do not engage in the sort of long-run planning of
relevance to growers. The focus of retailer long-run planning is
more directed at total store capacity, or total number and types
of produce to be handled. They may identify particular
characteristics of apples (size, color, even variety) that
consumers seem to prefer, but they will not venture to plan how
much of which varieties they will want to purchase, which is the
sort of information of use to the growers. It has been the role
of the shipper to deduce this sort of information through sales to
and conversations with the wholesaler- and retailer-buyers, and

then to relay it back to the growers via their packing stations.

F. Tha Governmapt

Government involvement in coordination of quality is important
primarily in two areas: enforcement of quality standards and
subsidization of apple production and marketing. Government
representatives are responsible for monitoring enforcement of

standards. They do so primarily at the retail level, but also at

88
the packing stations. Implementation on a day-to-day basis is the
shipper-wholesaler’s formal responsibility and the packing
station’s actual duty.

Of the three standards of apples available, only Class I and II
are used, and generally only Class I apples are sold on the fresh
market. Although there is a trend towards preference of quality
over price in Norway, neither the incentives of shipper-
wholesalers nor the quality of available production. has been
strong enough to cause the use of the highest quality standard
available. Differentiation within Class 1 is as far as the
wholesalers have gone, but this is purely voluntary and thus not
subject to government regulation.

Numerous subsidies exist for ‘the 'transportation, storage {and
packaging of apples, with farmers in geographically more distant
or harsh areas receiving relatively more money. Recalling that a
major goal of Norwegian agricultural policy is to maintain
population centers throughout Norway, these higher subsidies can
be understood as attempting to compensate inhabitants of these
areas for the particularly difficult conditions they endure.
Class 1 apples receive subsidies for transport, packing and
”materials", while Class 2 apples receive only a juice subsidy.
In addition, the Annual Negotiations to ensure income parity
concern only Class 1 apples. That is, a farmer growing Class 2
apples is not assured of a wage equal to an industrial worker’s.
Many part-time farmers with off-farm jobs and limited farm acreage

will continue growing the relatively low-cost Class 2 apples,

89
however, knowing that they are assured of some small amount of
money to supplement their income.

There is much debate whether the country can continue the
current policy of supporting all the growers, especially the
smaller ones. Norway’s food prices very are high, even for
Scandinavia. The current face of Norwegian agriculture is in large
part a reflection of conscious choices embedded in the five goals
set out in 1950 -- especially the goals of income parity, rural
settlement development, and increased food production. While some
argue that the government could support these goals more cheaply
by subsidizing only the larger or more cost-efficient growers,
others fear that a great reduction in the number of Norwegian
growers will mean a loss of the base that makes it politically
feasible to maintain popular support for continued subsidies.
Losing government funding for all growers if only a few large
growers remain in the country is a concern not only for growers

but grower organizations like GH or the farmer unions.

G. Cpndugt

The working assumption about subsector participants is that
they are utility maximizers. Most often this can translate to a
profit-maximization goal in the short run, subject to
individually-determined preferences for security and leisure. As
shown earlier in this chapter, the utility-maximizing choice for
growers is to diversify to the point where the allocation of

resources equates the marginal utility to be derived from each

90
activity. A common choice of many Norwegian growers is in fact to
diversify and grow fruits, vegetables, and also to have a few
sheep or cows: in fact, the previously cited survey found over 60%
of growers growing fruits and vegetables as well as one or two
other products.

Given that the farms we are concerned with are generally 5
hectares or less and are operated primarily by a single family,
the farm-level strategy must be to split the limited labor
available among the different crops, with those providing a larger
proportion of total income receiving proportionally more care and
time. Over 75% of growers in the primary apple-growing district
of Norway (Vestlandet) receive less than 50% of their total farm
income from apples. However, this district is also where more
growers are actively involved in their packing station, and
actively soliciting market and long-run production information.
The highest proportion of Norway’s apples come from this district,
and relatively more of its growers adapt the new techniques and
strains on their farms.

A logical option for hobby farmers (people with full-time jobs
who also have a small orchard) may be to grow primarily Class 2
apples, but Vestlandet growers are farmers, first and foremost.
The survey conducted for this study found over 70% of growers in
Vestlandet reporting that the majority of their apples were in
Class 1. However, the lack of incentives to grow the highest-
gpality Class 1 apples may be reflected in the fact that only 25%

of farmers growing Class 1 apples reported growing this quality.

91

To some extent, the ability to grow the highest-quality apples is
limited by the geographical location of the farm: some are
naturally more suited to apple production. Predictably enough,
however, the weight that should be given to this factor is a point
of dispute between and within growers, packing station managers
and GH. In general, growers produce average-quality' Class 1
apples and rely on subsequent levels of the subsector to care for
and sell them.

It might seem that growers would try to increase their own
incomes by increasing their productivity at any given price level.
Undoubtedly this is a strategy followed by some growers, but it
would be surprising to find it occurring on a large scale. This
is because the annual negotiations aim at providing growers with a
minimum income level. If a grower’s average income level is above
this minimum, then they will not be able to negotiated for price
or input subsidy increases until the industrial minimum wage level
reaches and passes the grower’s level.

The packing stations, almost all being cooperatively operated
by farmers, have much of the same goals that farmers do: to return
as much as possible to the farmers. Packing stations also have
many of the problems that studies on cooperatives have pointed
out. Among these is the difficulty in inducing members to act in
the long-term interest of the capperative firm by investing in it
(Staatz, 1984). The different discount rates that participants in
the decision-making process are operating under often results in

low long-term investment in the cooperative. 1m» the packing

92

stations, members are required to buy a number of packing station
shares commensurate with their patronage. This brings in some
funds for investments, and distributes overhead costs. Other
funds for investment must come from retained earnings. The
packing stations generally take off a flat percentage fee from
total returns (rather than charging for individual services), for
"operation and maintenance". This percentage fluctuates from 12%
to 20% of earnings, and setting the percentage is one of the
yearly points of negotiation between the packing station manager
and board. However, a look at the current issues facing the
packing stations allows the deduction that the packing stations
were operating with an implicitly high discount rate that placed
low value on investments with short-run costs and long-run
benefits.

Most packing stations that are members of GH are small and old.
They were built 50 years ago, and most are operating with
outdated machinery. In some cases GH builds an addition to an
existing packing station and rents it back to the packing station
members, thus assuming the risk of investment and helping the
packing station overcome the members’ reluctance to make long-
term investments. GH does this only for the larger or more
profitable packing stations, however. A controversial issue
within GH today is the plan to "rationalize" the packing station
structure: to eliminate many of the small, inefficient,
inappropriately-located packing stations and to expand a few of

the larger or better-located ones. The fact that close to half of

93
the packing stations related to GH are slated for closure leads to
the deduction that investment in modernization was not their
primary goal.

I believe the farmer-operators have one other objective for
their packing stations: that they remain under member control. GH
‘is a farmer cooperative, but being as large and as connected to
the government as it is, management plays a major role in its
operation, and individual farmers do not perceive themselves as
having much power. It is in their packing stations that the
farmers seem to feel in control of "their" organization. To this
end, farmers may resist consolidation of their packing station
' with another, even if it is the economically wisest choice.

The farmer is the most important participant-group when it
comes to quality of apples produced on the farm. But the shipper-
wholesaler (GH/BAMA) is the most influential when it comes to
presentation of' goods and transmission of' market ,information.
Although formally this power is vested in GH’s central office, in
reality each district has a great deal of autonomy in pricing,
pooling, deciding what to sell or store, etc. Each district’s
accounts are also kept separate, so that one district does not
inadvertently subsidize another.

GH’s mandate from the government is to implement the Annual
Agreement on prices (to be discussed in Chapter 4) and also
general agricultural policy, among whose goals are the support of
rural communities. GH receives various government subsidies to

fulfill its role. In recompense, the state requires GH to have an

94
open membership policy and accept everything its members deliver.
Once the price band for Class 1 average price has been determined
through negotiations (of which GH is not a part), GH’s major
objective is to sell as many Class 1 apples as possible at a price
within the band. Its incentive is to focus on high quantity at
average price, mixing sizes to ensure the sale of the smaller
Class» 1 apples. Another policy of relevance to GH behavior is
that when Norwegian apples are available, apple imports are
strictly regulated. This dulls but does not eliminate competition
at the retail level, as numerous competing substitutes (imported
and otherwise) are available for apples. Finally, an important
factor affecting GH’s behavior is its vertically-integrated
character. A firm considers its own pecuniary net benefits when
deciding whether to adapt to market changes or technological
advances. By vertically integrating, GH internalizes costs
imposed on growers and therefore includes these icosts in its
decision making. All these fOrces have worked together in the
past to create an environment where GH did not behave
competitively. It did perceive the need to affect long-run
supply: the annually negotiated price band is a function of the
industrial sector wage level, since agricultural incomes are by
law supposed to be on parity with their industrial counterparts.
At worst, incomes stay constant, and most often, they increase.
The subsequent increase in agricultural-sector incomes is provided
by price and input subsidy increases, with historically over half

of the increase coming from output price increases.

95

GH thus knows that the future price bands it must work within
will be at or above the level it currently faces. Since GH cannot
affect the level of the price band, it must pay attention to
affecting the quantity and variety planted, to make its task of
selling its members’ apples a feasible one. For the reasons cited
above, formerly it did not have to pay much attention to the
active marketing of its apples. But GH, unlike the other major
Norwegian cooperatives, only has an average of 30% of farm-gate
market share (50% in apples), and increasingly strong competition
from BAMA. Thus in order to stay in business it is getting forced
to shake loose its complacency and become more competitive.

BAMA, on the other hand, can pick and choose between the
growers that come to it, and has targeted its markets, price-
discriminating with both growers and retailers. In an
increasingly quality-conscious market, BAMA has everything to gain
from this strategy. It is also bound by the price band, but since
its focus is high profits rather than simply high volume, it has
the incentive to aim at the top of the band. BAMA. is not
vertically integrated to the grower stage and thus has less need
to consider the costs imposed on some growers through its use of
very high packing standards. Competition with GH, however, brings
a grower-conscious attitude to BAMA management. Just as BAMA
forces GH to behave more competitively, GH forces BAMA to be

careful not to be seen as exploiting the farmers. /

96
II. MICH GAN
The trading structure that has developed around the apple
industry in Michigan has a number of similarities with that of
Norway. This section provides an analytic description of the

trading structure and subsequent conduct of participants in

Michigan. The participants to be considered are : Growers-
Packers - Shippers - Retailers - Michigan Apple Committee-
Government.
A- Gimme

Growers in Michigan influence the size, color, condition and
appearance of the apple. As in Norway, the growers have a number
of sources for production advice: extension agents are the primary
source, and when packer-shippers have field advisors, they can
also be a source of production-oriented guidance. The final
decision and responsibility for tree planting and cultural
practices remain the grower’s. Growers can also make requests to
their packer to have their apples packed in a certain way, e.g.,
to pack in tray-packs and not bags, although the packer is under

no obligation to fulfill this request.3

 

3. Apples are generally packed in 3 or 5 pound bags, or
traypacks. The latter form involves packing the apples in
cardboard trays that have a hollow for each apple. The trays are
then stacked in a cardboard box. The number of apples per tray
and trays per box depends on the apple size, thus traypacks are
typically distinguished by the number of apples per box they
contain. Apples that are naturally softer and easier to bruise
may be packed in cell packs. In this form, apples are covered
from above and below, looking much like e1 large polyurethane
carton of eggs. Cell packs are also ordered by the number of
apples per box they contain.

97

The grower is also not legally obliged to follow the production
advice he receives, as long as his fresh apples meet minimum
quality standards. Apples that do not meet these standards are
sent to processing. The quality standards are defined partly by
federal grades and partly by individual packer-shipper
requirements. While the potential for opportunistic packer-
shippers attempting to extract the value of growers’ fixed assets
is high with the use of packer-shipper defined standards,
extensive interviews with subsector participants did not reveal
this to be a problem. As the following sections will show, trust
and personal relationships play a major role in Michigan’s apple
subsector; this is one reason why the opportunistic behavior
possible with packer-shipper defined quality standards has not
surfaced.

Although weather is an important variable for any agricultural
product, it is less of a force in Michigan than in Norway.
Michigan does have its share of weather—related problems,
especially in comparison to the number-one apple-producing state
in the U.S., Washington. The cloudy, rainy Michigan climate makes
the achievement of excellently-colored apples difficult compared
to Washington. However, county extension agents as well as other
subsector participants claim that especially with the new strains
of apples being released, weather has less of an influence,
relative to cultural practices, on quality.

Packer-shipper field men do not generally provide a great deal

of advice on production techniques. However, they do coordinate

98

their employer’s market orders with the volume and maturity of
apples available for the packer-shipper to sell. Subsector
participants interviewed agree that packer field men are there to
promote packer-shipper interests, i.e., to adapt the farmer’s
actions to the packer-shipper’s market orders. Disagreement
exists even within the presumably unbiased county extension agents
as to the level of coincidence between packer and grower
interests. A particularly sore point for many growers is the
market demand (communicated to growers by packer-shippers) for
apples that are both red and hard. With most varieties already in
production, the apples attain maximum color past the time for peak
crispness; that is, in order to deliver the reddest apples
possible, growers have to let the apples get soft. This may then
mean that the apples cannot stand up as well to Controlled
Atmosphere (CA -- long term) storage and must be sold within the
first few months after harvest, even if at a lower price.

Newer varieties have been introduced that attain color more
quickly, but it will take some years before the existing trees are
taken out of production. Grower-investors would prefer to wait
until they are certain of recovering the costs of taking a
productive fixed asset out of production before investing in new
ones. Although most packer-shippers will not provide unsolicited
production advice, a growing number gill suggest what varieties or
strains should be planted if the grower requests advice.

'Information about current market conditions and price movement

is scarce at the grower level. Even more scarce are projections

99

about the future; for instance, information about what growers as
a whole w to plant or cut down, or what shippers as a whole
feel demand will be. The Federal market news service puts out
(information on current movement and price of apples, by grade and
variety. Although it serves a useful function, this service has a
number of problems: for instance, the USDA quality grades are
used, which are inadequate for an understanding of what quality
was actually sold.

The great majority of apples in the market conform to standards
far above the USDA nfinimums. These higher standards are set in
negotiations between packer-shippers and retailer-buyers. USDA
minimum percentage color for Extra Fancy Red Delicious apples, for
instance, is 66 percent. Information stating that y bushels of
this category were sold at the average price of y is of limited
Usefulness when in reality some of these apples were sold at 70%
color, others at 85%, and still others at 90% or higher.
Finally, price carries many different pieces of information; it
reflects the values placed on various characteristics such as
size, color, variety, value of substitutes. Price fluctuations
reflect both the effects of short-run crop fluctuations and long-
run supply-demand relations. Thus, this information is of limited
usefulness in helping the grower decide what long-run actions to
take.

Many packers will share weekly reports with growers on sales
figures for that particular grower’s lot of apples. This

information does not showI what the grower’s returns will be,

100

however. Each variety and class of apple is generally pooled
along with all other apples sold in the same period. Growers will
thus receive an initial advance payment, then payment for first
fall sales (i.e., for apples not put in storage but sold
immediately), then monthly payments for cold-storage apple sales,
and finally for CA-storage apple sales. All apples of similar
variety and quality in cold storage sold by a particular shipper
would thus receive the same returns, regardless of whether they
were sold in the beginning or end of the period for cold-storage
apple sales. Payment practices may, however, differ considerably
between packer-shippers. Some packer-shippers also pay growers a
bonus for extra-high quality apples.

In short, Michigan growers receive little usable aggregated
information about market or price conditions. They receive
somewhat more advice about what variety and quality to grow, and
even more on how to grow it. They receive the information on
growing from extension agents and, depending on individual packer-
shippers, from the field advisors. These agents and advisors make
their recommendations based on their own interpretation of
aggregated longer-term market information, but since growers do
not receive this market information, they have no way of judging
the (often contradictory) advice they receive. Some packer-
shippers constantly encourage their' growers to produce higher
quality, assuring them that the higher cost this entails will
eventually be returned to them. One grower explained his view of

why growers were slow to react to this advice: they need at least

101

two good years in a row to have the cash to innovate and upgrade.
However, after a couple of good years in a row, the farmer gets
complacent, forgets the need for change or at least decides to
take it easy and not work his normal 70 hours per week, and loses
his chance. A logical response to this would be to ask why the
grower does not borrow to finance upgrading of operations. The
above-mentioned grower cited a number of reasons, stated here in
slightly different terms. The reasons involve three
interconnected components: uncertainty, physical asset
specificity, and human asset specificity (Williamson, 1985).

Uncertainty about long-run supply and demand for new varieties
of apples and about short and medium-run apple supply
(particularly competing states’ crop size) for the existing trees’
apples are two important reasons why growers may be slow to take
out loans to finance an upgrading of their trees. Some growers do
take out such loans, depending on their risk-aversity, leverage
(i.e., past borrowing) and business acumen. Uncertainty is an
argument for not taking out loans because of the costs of a wrong
investment decision: trees are highly asset-specific. A
marginally profitable apple tree will at least produce relatively
certain returns, while cutting that tree down and replacing it
with a new one means a negative profit for the first four to eight
years.

New apple varieties and planting techniques require, apart from

a monetary investment, special care and management. Growers may

102

be reluctant to cut down trees that they know how to care for--
i.e., have invested in with human asset-specific capital -- and
replace them with new varieties and higher-density planting
techniques requiring different knowledge and management skills.

Another impediment could be that some growers do not recognize a
clear goal, like a specific higher quality standard, towards which
to work. Growers that take the initiative to ask their shippers
for direction do receive consistent advice on size and color.
Even now, a farmer who grows high quality is not always sure on
which aspects his apples will be promoted: this depends primarily

on the negotiation between shipper and buyer.

0mm

Ninety percent of Michigan’s apple packers are also growers.
Generally these packers store their own apples as well as those of
other growers. They also sort and pack apples to the
specifications of the shipper through whom they sell. Shippers
who have field men use them to visit packers as well as growers,
mainly to ensure that packing standards are upheld. Less often do
shippers look into their packers’ storage techniques. Shippers’

field men may give advice to growers, but with packers their role

 

is to enforce agreed-on packing standards. Shippers do buy from

each other, and in such times the field men will also serve as the

buying shipper’s eyes in the selling shipper’s packing station.
Packers affect the condition and appearance, not color or size,

of the apples. They may harm the apples with improperly

103

maintained storage rooms or careless, rough sorting techniques.
They affect the color and size of apples marketed (i.e.,
presentation) through sorting and packing standards. They most
often receive their revenues from flat per-box or bag charges,
regardless of the price at which the apples are sold. It is not
clear whether the incentive of keeping a farmer’s business year
after year is sufficient to discipline a packer, as most
participants interviewed agreed that there was "plenty of business
to go around", implying that competition for volume was not severe
at the packer level.

While necessary start-up investment in packing equipment and
storage facilities can serve as a barrier to entry and thus
restrict competition, packers need to handle a substantial volume
to reach economies of scale on up-to-date packing equipment--
especially tray-pack equipment. This requires building a
reputation as a reliable, quality packer who takes farmer
interests into account.

Packers paka their money on volume, but maintain it on
steadiness of volume. Thus it is conceivable that charges on a
per-unit and not percent of price basis would not necessarily lead
to packer carelessness in maintaining apple quality. Growers and
packers are both constrained by asset specificity, and have an
incentive to take each others’ interests into account. Shippers
also make their money on volume, and to maintain or increase their
revenues they must build a reliable supply channel. They do not,

however, have substantial asset-specific investments to worry

104
about. Thus they have greater scope for opportunistic behavior,
and can attempt to extract at least part of the value of growers’
and packers’ asset-specific investments.

Packers are the information link between the grower and seller
of apples. Packers’ major source of market information is their
shipper, from whom they may receive weekly price and market
movement information which they can share with their growers. The
information is generally not market-wide but only concerning the
movement of goods from the packer’s supply through an individual
shipper. Packers are given information on exact standards and
boxes to use by their shippers. If farmers request packer advice
on what trees to plant, it is from their shipper that packers find

the answer.

C. Shippers

Knowledgeable subsector participants estimated that 75 percent
of shippers are also packers, and that 33 percent are grower-
packer-shippers. Shippers control the sale and presentation of
apples directly, though they have a substantial voice in packer
and grower practices as well. They negotiate with buyers on price
and packing standards: in effect, they are the sales agent for the
growers. To some extent, shippers just provide the apple pack and
quality that buyers demand, but they can also play an active role
in promoting particular packs, varieties and qualities. Shippers
generally have relational (apt formal) contracts with "their

packers" as a supply source -- who in turn have similar relations

105
with "their growers" -- and sell primarily to "their buyers".
Each buyer will typically use more than one shipper, however, and
competition for the buyer’s business is fierce.

Shippers generally sell apples based on the average color,
minimum color and size contained in a bag or box. A few also use
pressure tests; that is, they will try to include apple crispness
as a selling point. Such shippers will then institute a pressure
test standard for apples coming from the packing house, and the
packer in turn needs to pressure test the) grower’s incoming
apples. Pressure tests may' be used not only' as an entrance
requirement, and a selling point, but also as an indicator of what
path the apples need to take. Apples that do not pressure test
high enough, for instance, would not be put in the long term
Controlled Atmosphere (CA) storage. Softer apples may be sold for
a lower price to the more price-conscious buyers, leaving the
harder apples to be targeted to the quality-conscious buyers.
Thus far, the use of pressure tests is limited and the extent of
their use differs from shipper to shipper. Although sometimes
packers and shippers stress color to the detriment of crispness,
there are some shippers who are trying to give crispness a higher
priority.

The shipper has a significant voice in the quality and
presentation of apples sold in his role as the negotiator for
trading standards (above the USDA minimum). In addition to the
aspects mentioned above, shippers have some control over the form

in which apples are packed, i.e., bags, trays (n: cell-packs.

106

There are conflicting views on whether the demand for bagged
apples .is decreasing. Formal statistics suggest that national
demand is decreasing, while individual packer-shippers claim that
may have not experienced any drop in demand. Packer-shippers,
retailer-buyers and extension agents all agree that Michigan could
sell more tray-packs than it is currently set up to provide.
Although the cost of packing in traypacks is higher than in bags,
the service fees paid by growers for traypacked apples are also
higher. In her study of Michigan’s apple subsector, Leslie Berger
found that the average cost differential for bags vs. traypacks in
1983-84 was $.74/bushel, while the price differential was at least
SZ/box. Since the packer-shipper passes on the higher cost of
traypacking (including a portion of the fixed cost for buying the
equipment), the relevant question for him is whether* he can
maintain the volume necessary to use the equipment at capacity,
recuperate the cost of his fixed assets, and make higher net
returns than if he had continued to pack in bags. That is, the
combination of uncertainty and asset specificity has made some
packer-shippers wary of investing in equipment targeted at access
to an unsure market. This uncertainty is not only about retailer-
buyers’ commitment to pgyipg Michigan’s traypacks, but also about
growers’ ability and willingness to produce the higher quality
apples needed for traypacks.

Growers are constrained by unpredictable weather, and the
marginal net returns of producing for a higher-quality market.

Although the recent price spread between bags and traypacks has

107
been close to $2.00, a growing number of participants believe that
once Michigan establishes a reputation as a consistent producer of
high quality traypacks, it will be able to command a higher price
in the market. Other participants are not so sure that margins
will rise sufficiently to merit the investment necessary to grow
or pack traypacks.

In general the larger, more dynamic, aggressive shippers are
stressing both pressure tests and the expansion of tray-pack
capacity. Similarly minded packers are also stressing quality and
good presentation, and many growers are actively growing for the
high-quality end of the market. A great deal of information
passes between retailers and shippers, and packers and shippers,
in the almost-daily short chats on the telephone. The content of
what is said in these chats is neither organized, regular nor
written down, but information is constantly being shared and
updated. The lack of formal institutions for the transfer of
information does not mean that it is not transferred, only that it
is of variable depth and breadth. However, most of this informal
information never reaches the grower. To their credit, some
packer-shippers will take the time to answer any concerns a grower
may raise, once the grower makes the initial move.

Growers are left responsible for growing, and are generally
encouraged to grow the best quality they can. They are not
encouraged to get involved 'hi their* packer-shipper’s arena. of
responsibility, nor do growers generally do so. An awareness of

market conditions, however, can lead to more appropriate

108
production decisions both in the short and long run. The grower’s
bounded rationality most often leads to a dependency on packers
and shippers to take the first step in providing advice (rather
than growers having to ask for advice). Packers and shippers, on
the other hand, will often say that production decisions--
especially concerning planting -- are up to the growers, and that

it is not their role to “give growers all the answers".

0. Grower Organizations

1. Patron-owned Firms: Grower cooperatives play a relatively
small role in Michigan’s fresh apple market. Two firms were
interviewed for this study that could be defined as grower
organizations. One, Belle Harvest Sales (BH), is over thirty
years old and one of Michigan’s largest shippers. Formally, it is
a patron-owned corporation. The other, Wilderness Fruit, is only
three years old, and a relatively small packer-owned shipper
cooperative.

BH formally started as a farmer cooperative in 1956, to
counteract the substantial market power wielded by the broker-
buyers who would visit individual farmers and buy their apples.
Today the organization is divided in two: Belding Fruit Storage
Co. (BFS), which packs and stores the apples, and its wholly owned
subsidiary Belle Harvest Sales, Inc. (BH), which sells fruit for
BFS and other packers. BH ships approximately 22% of Michigan’s
fresh apples, making it the second-largest shipper in the state.

The management for 8H adamantly declares that it is not a

109

farmer cooperative but a stock corporation, even though the
stockholders are all present or former growers. Although the 1982
"Agreement Between Stockholders of Belding Fruit Storage, Inc."
explicitly defines a stockholder as a person selling fruit through
BFS, BH also explicitly calls itself a "Michigan profit
corporation". Each unit of stock represents a tonnage quota. The
quotas are a function of the number of shareholders and BFS’
capacity, i.e., each shareholder is responsible to fill his quota
of BFS’ CA-storage, cold storage, and fall sales capacity. Quotas
represent the minimum requirement, and growers may try to deliver
more, but BFS is not obliged to accept it. BFS stockholders are
required to deliver to BFS all production from the blocks they had
at the time of stock purchase, but the BFS supply constitutes only
one-quarter of the volume sold by its wholly owned subsidiary, BH.

Farmers often refer to BH as a cooperative, but the management
does not encourage the idea that individual farmers have the right
to become involved in the organization’s day-to-day operation.
The repeated stress is that BH is like any other shipper, and that
it treats BFS as any of its other client packers. Given that 75%
of BH’s volume comes from outside of BFS, the argument is that
they cannot afford to be seen treating BFS as a favorite if they
want to keep their other business.

BH and BFS both charge in a manner similar to other packers and
shippers, treating members and non-members alike. The only
apparent benefit given to farmer stockholders is an agreement to

provide storage space in BFS. 8H pools packer returns by variety,

110

quality and, after the first fall sales, by sales period. BH also
provides market movement and price information to its packers,
which they may share with farmers. The BFS packing operation does
share this information with its members, and pools member returns.
Members are not even encouraged to think of BFS as a cooperative.

The result is an organization with a mixed identity: with a
board made up of farmer-stockholders and the roots of a
cooperative, but a profit-making focus and a management apparently
in charge. The very reasonable logic offered is that a
cooperative is also a profit-making organization, with the profits
returning to the farmers. BFS returns its profits to its
stockholders, who happen to be farmers. The logic paying the
formal logic seems to be the need of BFS/8H to act business-like
if it is to survive. A not insurmountable difficulty faced by
many cooperatives is the reconciliation of group and long-run with
individual and short-run interests. Stockholders do not typically
interfere in the running of a business: patron-owners can and
often do. This interference can be a business asset as well as a
liability, but BH seems to have chosen the option of avoiding this
issue altogether by calling itself a for-profit corporation.

Wilderness, on the other hand, is an explicitly cooperatively
owned shipper: it is the sales arm for six packers, two of whom
are farmer cooperatives. In reality, then, it is a packer
cooperative. Wilderness is a division of Cherry Central, a large
packer-processor cooperative with 18 members, most of whom are

grower-owned cooperatives. Wilderness fresh sales division was

111

set up by its six members in 1984, and though small, is growing
quickly. It provides packing materials to its members at cost,
and has the unusual practice of charging 4% of each sale as a
brokerage fee. Generally, those few shippers who charge a percent
fee do so on approximately 6% of the selling price. Wilderness
also provides its members with daily information on prices and
market movement of each packer-members apples. It does not treat
members and non-members alike, openly admitting that it attempts
to make a profit off the latter, to subsidize the business of the
former.

Both of these shippers have internal organizations affected by
their patron-owned status. For instance, both have a supply
planning mechanism that is common in cooperatives and very unusual
elsewhere in the fresh channel: stock-tonnage contracts. Growers
buy shares to correspond to what they want to deliver. The total
number of shares and the bushel allotment per share is set by the
management and board. In effect, this is the cooperative’s long-
run contract with its members. Barring very bad weather, the
cooperative knows approximately how much capacity it must have to
fulfill its commitments. Growers know how many bushels they can
deliver to the cooperative. They are not bound to deliver the
promised volume if weather does not permit them to grow it, but if
they have the volume, they must deliver. These cooperatively
operated firms are the only packer-shippers with any sort of long-
run arrangement with their growers. In the negotiations with

retailer-buyers, however, each shipper has ifll individual style,

112
with apparently no special characteristics related to their
patron-owned status.

2. Michigan Apple Committee (MAC):

The MAC represents an attempt by Michigan growers to affect the
coordination process through demand expansion. Its mandate is to
promote Michigan apples, i.e., to increase demand in order to
bring consumer demand closer to existing supply as well as
ultimately increasing prices. It is financed by a mandatory
grower tax; it works ipp the growers, but yitp packers and
shippers. Promotion involves advertisements, including campaigns
and periodic sales on particular varieties. For this latter
activity, MAC needs to consult with the people holding and selling
the apples, to set appropriate times and contents for sales.

Since packer-shipper profits are positively correlated with
volume, MAC also benefits and works for them. While the support
of growers is necessary for the legal existence and continued
funding of MAC, practically speaking it cannot function without
the support of packers and especially shippers. 'Thus, MAC has
historically moved cautiously and diplomatically to garner the
support of packers and shippers as well as growers. This requires
a very sensitive and tactful manager, as well as a concentration
of MAC activities on areas such as demand expansion that have
broad support in the grower, packer and shipper communities. MAC
has been successful in gaining the trust and backing of packers
and shippers. However, its conservative style and focus on

building good relations with packers and shippers appears to have

113
resulted in the lukewarm enthusiasm voiced for MAC by growers

interviewed for this study.

steam

Shippers are the locus of power in the supply chain, and
retailer-buyers hold power in the demand side. Negotiations
between these two groups sets the price and quality standards for
apples. Growers and packers have little voice in determining the
characteristics on which the apples will be promoted, nor the
price they will receive. As retailers have become ever fewer and
larger, their individual demand and bargaining power grows
accordingly. Industry sources estimate that there were
approximately 4000 buyers of fresh apples in Michigan ten years
ago, and closer to 400 such buyers today. The fewer, larger
retailers not only have more bargaining power, they have higher
standards in quality, consistency and service that must be met.
The general consensus among subsector participants is that, for
most buyers, quality and service path outrank price in importance,
reflecting the increased consumer demand for high-quality fresh
produce.

Once the goods reach the retail outlet, however, control over
maintenance of quality is out of the apple-supplier’s reach. As
in the case of Norway, numerous goods enter a single arena,
competing for care and shelf space. Apples that are left for too
long in room-temperature displays or are not rotated properly will

be soft and mealy by the time they are finally bought -- despite

114
all the care invested 'Hi growing, picking, storing, sorting,
packing and delivering. Larger retailers tend to have personnel
who work solely with fresh produce and are (perhaps) trained and
knowledgeable about proper care techniques. However, even they
work with dozens of different fresh produce items, having limited
time to spend on any one item.

In recent years, retailers have put increasing importance on
quality and service -- both high information cost goods -- rather
than price. Thus, long-term relations are fostered once a shipper
is found who performs satisfactorily in these areas. This is not
to imply that price is unimportant: if a competitor could supply
the same quality and service at a lower price, this information is
relayed to the regular shipper as part of the telephone
negotiations. Given the inadequacy of USDA quality standards to
the current state of the market, some retailers such as Kroger
have their own quality standards. These standards are explained
to prospective shippers and expected to be followed consistently
thereafter.

Retailer-buyers are generally quite explicit about the quality
characteristics they want to buy in the immediate term. For the
long run, they will generally stress high-quality, consistency and
tray-packs, rather than going out on a limb by suggesting possible

specific quantities, varieties, or price ranges.

115
F. Govgrnment

Insofar as quality issues are concerned, the government has
historically played a minor role. Once standards have been set,
printed up, and circulated there is little else that the
government actively does. Federal inspectors are used primarily
in cases where one party files a. complaint involving quality
against another and requests federal inspection. In an industry
built on long-term relationships, this is not a common occurrence.
Subsector participants generally agree that enforcement of
standards is variable; for instance, what one packer-shipper will
sell as 85% color, another would call 70% color. However in the
fast-moving world of fresh produce, dissatisfied parties generally
rely on personal comunication or exit rather than calling for
federal inspection. Another difficulty with calling federal
inspectors is that they enforce federal standards --_ which are
below what the market uses. The inspector cannot come and enforce
verbal shipper-buyer agreements above the federal standards.

The main active role of government is in the collection and
dissemination of aggregated information concerning production and
crop movements. State crop report surveys are published every
four years, providing information on existing numbers, age and
location of trees of different varieties and strains, farm sizes,
and so on. These surveys are somewhat useful in long-run
planning. They give no clue as to what growers are piappipg to do
or are even being advised to do, but they do provide a clear

picture of what is currently in the ground. The USDA also puts

116
out weekly "Apple Market Reports" that provide information on
prices and product movement by federal grade and variety. As
explained earlier, these reports are inadequate for understanding

what quality of apples were actually sold within a grade.

G. gondpct

As was the case for' Norway, the analysis of' conduct which
follows assumes that individuals are utility maximizers. In
interpreting what this means for producer it is important to
remember that the majority of fresh market apples in Michigan are
grown by specialized growers, on farms usually over 65 acres.
Growers in highly diversified areas such as southwestern Michigan
grow an average of five or six crops, with apples ranking first or
second. The 400 growers in the highly specialized area of west-
central Michigan grow only one or two crops, with apples ranking
first. The climate there is better suited to apple production,
and an estimated 80% of Michigan’s fresh-market apples come from
this area.

The cash flow and asset specificity constraints faced by
growers, as well as uncertainty about the future, act as brakes on
their adaptability. Adapting to changes in demand can cause the
grower either to change the area under production or to replace
existing trees with new ones of a different variety/type. Both of
these options are costly and neither begins to repay the
investment until many years later. Having to bear all the risk of

inappropriate decisions also acts as a disincentive to adaptation.

117

Packer-shippers have historically concentrated their long-run
advice on plantings to identifying preferable varieties, rather
than advising ("1 volume, and few provide the market information
needed by growers to make independent decisions in line with
market demand. The reason often given is that "it’s the grower’s
responsibility to get information for long-run planning".

A question that comes to mind in response tO this statement is
whether grower production decisions affect only the grower.
Clearly, they do not. But taking a stand on production decisions
is risky, and those who can separate themselves from having to
bear this risk will do so. This is apparent from the way charges
are set up: shippers and packers make their money primarily from
the volume, not price, Of apples sold. There is more volume and
profits to be had for the packer-shippers who can deliver what the
market demands, so there are incentives to try tO af_fec_t the
grower’s production decisions, but not tO bear the risk. Most
packer-shippers will not commit themselves to providing a home for
"their" growers apples. In the interest Of the long-term
relationship, a packer-shipper may try to be a reliable partner,
but even the highest-quality grower knows that his packer-shipper
is not a guaranteed home for his goods. Only the cooperatively
Operated firms actually have a contract that involves both sides’
expressing a commitment to each other.

In general, no one who can be held accountable wants to give
growers long-run advice. Projections and planning for the long

run generally fall to the university extension programs, with most

118

subsector participants being leery Of even lending public support
to projections Offered by the extension service. In the end,
decisions about the long run are primarily the grower’s problem.

Some growers have joined forces to discuss and attempt to
affect the subsector coordination process. The largest broad-
based apple grower interest group in Michigan, the Pomesters, has
recently become active on issues such as quality standards.
Although the Pomesters began as a social group, in recent years
they have become increasingly involved in representing grower
concerns and trying to initiate action in areas such as increasing
grower-shipper' communication and increasing the level and
consistency Of apple quality. Pomesters, although representing
only 8% of the growers, produce an estimated 50% Of Michigan’s
fresh apples. Since their recent expansion into controversial
areas, they have felt the need for a broader base Of support. The
success Of their efforts to expand membership and generate broad
enthusiasm has been mixed, and their willingness to continue
putting time and energy into industry-wide issues has dwindled
accordingly. It is a classic case of the difficulty with
mobilizing large-scale action for a high exclusion cost good.

On the whole, growers concern themselves with apple production
and leave marketing concerns primarily for the packer-shippers.
Some participants argue that growers’ economic difficulties in the

early tO mid-1980’s have caused them to be more critical Of their

119
packer-shippers, and more apt to switch to a competitor if
dissatisfied. Larger growers Often expand and begin providing
packing services for themselves and other growers.

Packers are overwhelmingly either growers or shippers, or both.
If they are shippers, subsector participants broadly agree that
allegiance tO the shipper-identity takes priority over all
others. If they are grower-packers, they Often identify with the
grower-identity. Packers’ and shippers’ revenues depend primarily
on volume, not price, of apples sold. The relation of a shipper’s
fee structure with his approach to his responsibilities can be
illustrated by comparing profit functions under two different
structures: flat fee and percentage-of-sale-price charges. Flat
fees are levied by pack types, e.g., all apples packed in bags
will be charged equally.

Compare:

(3.3) Flat fees:
PP’ = x’Q - C(Q,q) dC/dQ > 0 dC/dq > 0
(3.4) Percent-of-value fees:

99" = x”P(q)Q - C(Q,q) dP/dq > 0 dC/dQ > 0 dC/dq > 0

Where:
x’ . flat fee, given pack type q = quality sold
x”= percent-Of-price fee C a Operating costs
Q a quantity Of a given pack sold P = sale price

PP = Profits
This is an admittedly simplified version of the shipper’s

incentive structure, but may provide some insights nevertheless.

120

incentive structure, but may provide some insights nevertheless.
Thus with a flat fee (x’), the shipper’s revenues (x’Q) are a
function Of quantity. Price does not enter directly into the
profit function, and quality enters only as a component Of costs.
However, quantity delivered to the shipper by growers as well as
the quantity sold to retailers clearly depends on price and
quality, and thus are concerns Of the shipper. His incentives for
price bargaining are contradictOry: growers lOOk for shippers who
sell for higher prices and retailers patronize shippers who can
deliver desired quality at' lower prices. With pooling and
complicated lagged payment schedules, a shipper (can try to
postpone or avert growers’ negative reaction to low returns while
capitalizing on retailers’ immediate reactions to price cuts.
Finally, shippers will probably be slow to adjust to market
changes since it is only when these changes reach a wide scale
that the increased volume makes up for the increased coSts Of
handling higher or different qualities.

With percentage fees (x”), a shipper’s revenues are directly
affected by the price and thus quality Of apples sold. If redder,
crisper or more uniformly-sized apples sell for a higher price,
this returns more to the shipper than with the volume fees. His
price-bargaining incentives are also consistent with the growers’
interests, whom he is representing. Finally, with percentage
fees, the shipper has a greater incentive to make sure that apples
are produced, stored and packed in just the way the market

demands; thus he will be more likely to take the initiative toi/

121
inform his packers and growers Of market changes rather than
relying on growers to ask first (as is currently the case).

Under the current fee structure in Michigan, packer-shippers
have an incentive tO exaggerate apple quality tO potential buyers
in order to ensure faster turnover and higher short-run volume Of
sales; especially in those aspects not easily measurable. While
bruising and size are both visible and unambiguously measurable,
color and crispness are not. This, and the effect Of fickle
weather, have created a reputation Of inconsistency in quality for
Michigan.

Since the formal USDA grade standards are not adequate for
current industry needs, practically each shipper-buyer transaction
sets a different quality standard. They are set over the phone,
with some buyers checking quality Of the apples upon delivery and
some going so far as to check the packing house for quality.
Given the perishable, variable-quality characteristics Of apples
and the individually-determined quality standards, trust and
personal relationships play an extremely important role all along
the apple subsector. This is not meant to imply that
opportunistic or exploitative behavior is generally absent,
because it certainly is not.

Michigan’s apple industry has been making efforts to address
the need for more relevant quality standards in recent years.
There is a growing sentiment that something must be done about the
quality standards, and various participants have been searching

for appropriate approaches and leaders for this task. Some

122

growers point to shippers, saying that since they have the most
power, they must also assume the most responsibility. Some
shippers point to growers, saying that quality standards will
affect growers the most and thus they should be the ones to carry
the torch Of change. Furthermore, since not all shippers yapt any
changes in standards, no pro-change shipper wants to suggest
anything that will alienate him from the others. Politically,
visible grower support for change is necessary.

Some packer-shippers point to the Pomesters as the appropriate
channel for grower voice. The Pomesters reply that they are only
125 out Of 1500 growers, and cannot push for industry change
alone. Attention inevitably turns to the Michigan Apple Committee
(MAC): it represents all growers, and its area Of responsibility
might legally be broadened (with a grower vote) to include quality
control. But quality control is a very controversial area, and
the historically cautious MAC is unwilling tO jeopardize either
its demand-expansion program, its bureaucratic survival or its
alliances with packers and shippers by getting involved. It needs

a large number Of growers supporting its expansion into the area

 

Of quality control, because it is the growers’ votes that funds
MAC. SO far, this support has not been visible.

MAC is an excellent example Of the difficulty faced by grower

organizations with a large <n~ heterogenous membership. When
members have diverse interests and constraints -- which Michigan
apple growers do -- then their common organization must play a

delicate balancing role in order to maintain the level Of

123

consensus necessary for its survival. The specialized growers
constitute a large proportion Of Michigan’s fresh apples, but
numerically they are a minority. In a one-person, one-vote
governance structure, they cannot ensure the continuation Of MAC
funding on their own if it ventures into hostile waters. MAC
needs the support Of a numerical majority Of growers in order to
survive, and of the packers and shippers in order to be effective.

Packer-shippers, in their quest for maximum profits, have
options for action that are mutually exclusive. In their
cutthroat competition for volume, for instance, they sometimes
seem to cut prices unnecessarily, just to make short run sales.
Participants all along the subsector agree that this harms
everyone in the subsector. TO some extent, shippers are
disciplined by the need to maintain a steady supply of fruit and
the growers’ trust, but especially in large crop years the intense
competition between shippers can cost the growers substantial sums
Of money. 'An "invisible fist"4 situation emerges where everyone
competes fiercely because everyone else does, forcing each packer-
shipper to cut prices to ensure the sale of their apples.

Shipper’s profit goals can also be reached by focussing on
gaining market share in the high-quality/price segment of the
market, thus attracting higher-quality growers and tapping into

the increasing volume of high quality demand. This requires

 

4. Platt defines an invisible fist as a situation ‘where
everyone is forced to take a specific action in order to survive,
but the result is harmful to all parties involved. Price wars
are a common example of a social fist.

124
especially aggressive, future-oriented shippers with the ability
and inclination tO bear the higher costs Of risk associated with
such a path.

One barrier to the expansion of shippers’ volume is Michigan’s
reputation among grocery buyers for inconsistency. To combat
this, some shippers have adopted the practice of targeting their
customers. This involves making sure that each customer receives
the same quality Of apples over time. It does not require that
the packer accept only high quality fruit, or that the shipper
sell only the best. The supply from growers may continue to be
inconsistent, but the packer-shipper paytatt the fruit carefully,
making sure that the supply to each retailer-buyer remains
consistent.

Shipper behavior in the price-setting process will be discussed
in more detail in Chapter 4n In general, shippers share little
supply information with each other. In relations with buyers,
shippers are fiercely competitive, while with growers they
project the (partially illusory) image Of a united "shipper
community". Recent years have found shippers moving towards closer
cooperation on some issues. A Michigan Shipper’s Association now
exists, where shippers meet with each other regularly and invite
others to discuss industry problems and possible approaches. But
cooperation comes slowly to a group that has historically Operated
as fierce competitors. Shippers are not all Of one mind on most
industry issues, and the Michigan Shipper Association is as much

an arena of power-jockeying for state leadership as it is of

125
mutual cooperation for mutual advantage.

Retailer-buyers benefit from the competition between shippers:
even between the six to eight shippers that a retailer may use,
there is competition for each to push through as much volume as
possible, and the consequence is Often price-cutting sprees. When
goods are sold at prices below the costs of production or at a
level that covers only variable costs, this gives the message to
apple suppliers that fewer resources need to be devoted tO apple
production. This is undesirable for the entire subsector if these
prices do not accurately reflect effective demand. Even the
consumers dO not receive benefits from artificially low prices, as
retailers do not generally decrease in-store prices until they
know the decrease from shippers is not a fluke.

There have been no claims from interviewers that retailers are
making economic profits as a whole. Some do claim that retailers
use the produce department (including apples) as a high gross-
margin profit center for the store as a whole to subsidize other
less profitable departments. While reasonable from a retailer
standpoint, higher-than-average margins on the produce department
are unsatisfactory from the grower, packer and shipper
standpoints. Retailers also cite the need for high markups on
produce to pay for the high volume Of throwaways from this

department.

126
III. tQMPARI§ON OF NORWAY AND MICHIGAN

The number Of similarities in the quality issue between Norway
and Michigan are surprising. Both have as their major quality
issue the broadness and subsequent inapplicability Of existing
standards. Both have a reputation for quality inconsistency.
Both are experiencing demand shifts towards higher quality produce
and consumer willingness to pay more for it. County extension
agents are the primary source Of production information and the
apple shippers are the locus of supply-channel power' in both
countries. What long-run advice is given to growers comes
primarily from the shippers, although in Michigan this constitutes
very little advice. In both countries, the shipper-broker
function is frequently separated from the packing house. Although
the two have ties, and in both countries shippers Often also own
packing houses, the shipper function is dominant and its interests
sometimes are separable from packer interests.

There are also a number Of significant differences between the
two subsectors. Growers in Norway are much smaller and more
diversified than Michigan growers. Within the products grown on
the farm: apples hold a lower priority in Norway than in Michigan.
Norwegian growers are more certain Of the prices they will receive
(for reasons covered in Chapter 4), and they are somewhat more
informed about what they should plant or cut down. Most packing
stations are quite small and still sort the apples by hand. The
majority Of growers control the packing houses they use, and so

can hold the nmnagement responsible for poor storage or packing

127
techniques. The packing house is really the highest level at
which most growers perceive themselves as wielding any power. The
huge grower-owned cooperative is indeed run by growers (and the
management), but the feeling among many growers and even packing
station managers is that precious few farmers’ voices are heard in
the cooperative’s decision-making structure.

The largest shipper in Norway is a farmer-owned cooperative,
with strong ties tO the government. It handles 50%. of the
nation’s apples. Much Of the subsector relies on established
rules and general standard Operating procedures rather than trust
and personal relationships. It is not that the latter
characteristics are unimportant, but that they are not as central
an ingredient as in Michigan.

GH takes an active role in giving long-run production advice to
its members. This is due to the structural design that separates
the makers of agricultural policy -- of the Annual Agreements, to
be exact -- from its implementors. GH must somehow sell its
members’ apples at prices comensurate with the annual income
level set for the farmers. TO prop prices up, many apples go to
processing; some argue that Class 1 apples are even sent to
processing. GH’s long-run strategy for 'fulfilling this
responsibility, however, is to try tO influence growers’
production decisions, so that long-run supply is brought closer to
what long-run demand might be at the negotiated prices.

Michigan’s apple subsector Operates under much more uncertainty

than Norway’s. This could be the reason why trust and long-term

128

relations play such an important part in the subsector. But long-
term relations are rarely between equals, and one side can
generally afford tO be more cavalier about adapting tO the
other’s needs. Michigan’s growers have little idea what prices
their fresh apples will receive, especially at the time of
planting. Many growers rely on apples for the majority Of their
income. The packer-shippers negotiate for prices with buyers, but
their income is independent Of the price received. Packing houses
may be owned by one or more growers but are most Often run as
private enterprises, not cooperatives. Cooperatives play a small
part in Michigan’s fresh apple market. Growers have most of their
influence in the production arena, but these 1500 growers that
comprise about 10% of total national production have very little
individual power. Their interests are kept in mind to some extent
by their packers and shippers, especially if they happen to be
higher-quality growers whose continued patronage is valued. Even
the best growers, however, are not fully secure that their packer-
shipper will continue to accept their apples or that their apples
will bring a profitable price. Only the few cooperatively-
Operated shippers promise their growers a home. The importance Of
maintaining the bonds Of trust has meant that most packer-shippers
will generally work with the same growers from year to year, but
there is nO formal commitment involved.

The following chapter discusses the structure and conduct
surrounding the issue Of price determination in fresh and

processed channels of Norway and Michigan’s apple subsectors.

129
Chapter 5 then examines how the interaction of participant conduct
with the subsector’s structural organization and underlying

situational characteristics affects performance or coordination.

CHAPTER 4
PRICE DETERMINATION IN THE FRESH AND PROCESSED APPLE MARKETS

This chapter analyzes the process Of determining the retail
market price Of apples and the process Of dividing this price
between subsector participants. Both the fresh and processed
markets are discussed, as the prices in these two are mutually
dependent. Although tO some extent processing and fresh apples
are different goods, i.e., of different qualities or varieties, to
some extent the processed market serves as an escape valve, taking
out of circulation some potential fresh-market apples and enabling
the remaining apples to command a higher price.

As in the previous chapter, the discussions of structure and
conduct are organized in a step-by-step fashion, focussing first
on Norway, then Michigan, and finally on a brief inter-country
comparison. Chapter 5 will then turn to a broader comparative

analysis Of the performance in each subsector.

I. NORWAY

 

This section considers the role of each participant-level in
price determination. Although many of the institutional
structures relevant to the fresh and processed sectors are
separate, the participant-levels involved are, for the most part,

the same, even though the participants play different roles in the

130

131
different structural. The chapter considers each institutional
structure in turn, describing the structure and the role Of
various participants within it. The institutional structures to
be considered are: Annual Negotiations: The Process - Annual
Negotiations: The Implementation - Annual Grower-Processor
Negotiations - Import Regulations. These structures have all been
introduced in Chapter 2; the emphasis here will be on providing a
more detailed description of the structures and the role of the
participants within them. Having introduced the different
structures, the chapter then turns to conduct, considering the

Objectives, paths and actions Of each participantslevel in turn.

A. Annual Negotiations: Thg Process

The Annual Negotiations take place between the farmers and the
government. The government has three representatives, from the
Ministries Of Finance, Consumer Affairs, and Agriculture. The
farmers also have three representatives, one from each Of the two
farmer unions, and a third person mutually acceptable to both
unions. The negotiations first decide what the income increase
should be. Then, this increase is divided between output price
increases, which are really per-unit taxes paid directly by apple
consumers, and input subsidy increases, which are paid by the
government and financed by income taxes paid by all Norwegians.
Generally over half the growers’ income increase comes from
adjustments in output price. These negotiations also decide the

amount to be alloted to the green sector’s market regulation fund.

132

Farmer unions are the vehicle for the expression Of grower
political influence. The income increase is negotiated without
reference to specific farm commodities, but the discussion of
price and subsidy adjustments is on a sector-by-sector basis.
This is feasible for, e.g., the livestock sector because there are
relatively few commodities to consider. The green sector,
however, encompasses all fruits, vegetables, berries, potatoes,
live plants and flowers. This includes dozens Of commodities--
thus the annual negotiations just set the total amount by which
price of all goods in the green sector must be adjusted throughout
the year (see Appendix B). The commodity-specific adjustments are
decided on later, by a council with 13 representatives from the
government, private industry, and farmer organizations (including
GH). The individual farmers have a say in the setting Of the
standard price level, the upper price ceiling, and the weekly
setting Of the guiding price level only through their
representatives. Packing stations also have nothing to dO with
price determination. GH has very little influence in the annual
negotiation process itself, but it is fully responsible for

implementation of the resulting agreement.

8. Annual Negotiations: The Implementation

After the general annual negotiations are completed, the work
of price-setting for the green sector begins. Soon after the
completion Of negotiations, the Ministry of Agriculture comes out

with the list Of green sector target prices agreed on by the

133

council Of 13 representatives. Each commodity has a base target
price and ceiling price (12.5% over the base price) identified for
every week of regulated imports. The weekly target prices are set
for generic Class 1 apples, i.e., with no variety specified. The
final result is a target and ceiling price quoted for each
commodity, for each week Of the domestic season. Thus an average
Class 1 price for apples is set from week 32 or 33 (mid-August),
through week 5 (early February). The target prices are not
actually different for every week of the year; in general, there
are two or three target prices, with later target prices being
higher than earlier ones in order to pay for storage costs.

It is the job of GH-Central’s director Of Market Regulations to
estimate and disseminate target prices for each domestic variety
of apple weekly, aiming to avoid imports during the Norwegian
apple season. These specific target prices are used as the
starting f.o.b. wholesale prices for Qaig for the following week,
and fluctuate according to market forces for the remainder of the
week. GH’s district Offices, which actually sell the apples, thus
have some flexibility in setting prices in their negotiations with
buyers. If prices fall 12.5% below the base price for two
consecutive weeks, GH may use market regulation funds (as long as
they are available) tO subsidize exports, to have a sale to get
rid of seasonal excess volume, or to send off some apples for
processing. The result of all this can be seen in Appendix D,
with the graphs Of target vs. actual prices from 1982 to 1985 for

Norwegian fresh apples.

134

GH pays the packing stations for its apples, after taking out a
percentage fee for its administration costs. The packing station
then takes out its costs and returns the rest to the growers.
Payment by GH and BAMA alike is on a split-season basis, with a
base payment made in mid-season, and the balance paid at the end
of the year.

Earlier' it was pointed out that growers have ‘voice 'through
their unions and responsibility through their cooperatives. The
pricing structure illustrates this well: if prices fall too low,
it is GH members’ apples that are shipped Off to processing, to
boost prices back up. GH district salesmen have more pressure on
them than BAMA salesmen to keep prices close to the quoted
estimates from GH-Central. On the positive side, if prices are
tOO low and GH requests funding to subsidize a sale, it is GH
members 'who receive the subsidy' even though the price of all
apples on the market at that time will fall to the sale level.
The market regulation funding serves as a buffer for GH’s
regulation efforts.

Private-sector wholesalers can also request market regulation
funds, but the conditions attached are such that few ever request
them. The fund is administered by the Marketing Council
(Omsetningsradet), which also provides GH with separate funds for
construction of storage facilities and reimbursement for GH’s
administrative duties.

Individually, the growers have no voice in setting the price, or

dividing the price pie. TOgether, they have a voice in setting

135
target prices, an institution (GH) to give them both advice on
what to grow to make the achievement Of that price easier to
accomplish, and guidance of market prices towards that goal. They
have a source Of funds to take some Of the pressure Off when
planning and reality do not coincide. But once the regulation
funds have been exhausted, it is the individual growers who must
bear the burden Of price decreases.

Growers receive small price subsidies for apples that are sent
to processing. Processing apples do not receive transport and
packaging subsidies, nor are farmers who grow only processing
apples be guaranteed any particular income level. The major
manufacturer Of semi-processed Of apples in Norway, Hardangersaft,
is owned by GH.1 Its recent history is a good illustration of the
nature Of Norway’s market regulation, as well as a useful
introduction to the annual processor-grower negotiations.

In 1972, Norway was considering joining the European Economic
Community (EEC). Such a move would have spelled death for most of
Norway’s agriculture, with its relatively high costs Of
production, as well as having drastic effects on the rest Of the
economy. The question was put to the people in the form of a
referendum, and they rejected joining the EEC. Certain trade
agreements were made, however. One of these was to Open up the

fruit market to some extent -- in apples, this meant moving the

 

1. Semi-processed apples refer to apples that are processed
into a form used by industrial consumers Of the good, who then
further process and pack the apples into their final form.
Processed apples, then, are those that are in a form ready to be
sent to retailers.

136
beginning date for unrestricted imports from April to February 1.
This effectively shortened the Norwegian apple season twO months,
as Norwegian apples cannot compete with the cheaper, higher-
quality imports.

Growers protested through their farmer unions, and 'tO
compensate them, the government paid GH (and only GH) to expand
one of its processing plants to take up the excess supply Of
apples. Hardangersaft’s goal is to aid in the control Of the raw
market. Its goal is apt tO compete in the retail market: it is a
market regulation device, not a profit-making company. It sells
semi-processed apples, primarily to Norwegian bottlers. Because
Of this, the private industry did not Oppose Hardangersaft’s role.
Today GH’s two major apple processing plants supply 60%. Of
Norway’s semi-processed apples. Hardangersaft’s formal GH-source
Of raw product is the central office, but in reality apples are
delivered to it directly from GH member-packing stations, as well
as from independent packing stations and BAMA” 'There are no
formal contracts for raw product delivery: deliveries are
primarily based on past years’ delivery records. In large-crop
years, whose apples are accepted by Hardangersaft is especially a
function Of who was a reliable supplier in previous short-crop

years.

C. The Annual Processor-Grower Negotiations
Early every year, Norway’s processors and growers get together

to set raw product prices for the coming year. Prices are set

137

above the level they would otherwise command, and thus include an
implicit per-unit tax. First vegetable prices are negotiated,
then fruits prices. GH and the Farmer Union represent the
farmers, and the Processor’s Association represents the
processors. This Association was formed primarily due to farmer
pressure to have a unit with which to bargain. Although GH is a
member Of the Association, it cannot sit on the processor’s side
Of the table.

Processors must estimate their input needs before the
negotiations begin. These estimates are distributed tO the
farmers via GH, and whatever cannot be provided domestically may
be imported. The negotiations result in two prices set for
apples: a higher price before January 1, when Norwegian apples are
still being sold on the fresh market and the Opportunity cost of
processing is higher (at least for those apples that could
potentially go to the fresh market). The month of January is the
clearing-out period for Norway’s fresh apples, and from February 1
any remaining apples compete with imports in the fresh market.

The Processor Association also promises to buy its full
domestic needs (i.e., 75% of total needs) from Norwegian apples,
although processors are not committed to buying everything that
growers produce. GH, in return, promises to support import
requests if growers cannot fulfill the Association’s needs. Thus,
although farmers have little power in the day-to-day decision
making, they have significant group power when it comes to policy

formulation on major issues of concern to them. The negotiation

138
format described above sets prices for all processing fruits and
vegetables, most of which are used by large private processing
firms. For apples, however, GH is actually bargaining on the
growers’ side for the raw product price it will have to pay, since
the majority of processing apples go tO GH-Owned plants.

The crucial ingredient for the success of Norwegian market
regulation efforts is import regulation. These regulations
themsglves are not a factor in setting either the target price for
fresh apples or the fixed price for processed apples. Without the

regulations, however, neither price would be achieved.

0. import Regulations

 

A complete understanding Of the Norwegian coordination process
as it relates tO price -— and perhaps more important, Of the major

coordination issues as they relate tO price -- requires a

 

discussion of the restrictions on the imports of fresh, half-
processed, and processed apples.

Fresh apples may be imported with no restrictions from 1
February to 30 April. For the following three months, imports are
restricted so that importers cannot stockpile varieties such as
Granny Smith that can be stored for long periods and thus compete
with domestic apples in the Norwegian apple season. From 1 May-

30 July there are restricted imports: the Ministry of Agriculture
designates a certain number Of tons that may be imported and the
rights to import are then divided up on a quota basis. These

quotas are based on a three-year average of free-period imports,

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which gives an institutional incentive to increase imports. The
farmer unions are trying to change the quota basis tO domastic
market share, thus giving an incentive for wholesalers to try
harder to sell Norwegian apples.

Apple imports are completely restricted after 30 July. Since
the first Norwegian apples are not available until mid-August,
this allows two weeks for the market to clear Of imported apples.
After this time, apple imports are allowed only if the average
domestic supply price is above the designated ceiling for two
consecutive weeks. Private shippers and GH are both bound by this
price ceiling.

Imports of fruits not grown in Norway, however, are always
allowed. Subsector participants at levels closer to the growers
accuse wholesalers and retailers Of promoting competing goods,
i.e., imported fruits, in the Norwegian apple season. Wholesalers
such as NKL (the consumer cooperative), who dO not have any
allegiance to Norwegian growers, claim instead that Norwegian
apples are simply inferior to the imported varieties, and thus do
not sell as well. In any case, the ready availability Of
substitutes for apples allows consumers to avoid the some Of the
per-unit tax on apples by purchasing other fruits.

Decisions concerning imports are completely out of the domain
of growers and packing stations. The GH districts also do not
import produce, but they do order and buy it from GH-Central. The

other two major importers of fresh produce are BAMA and NKL, the

140
consumer union: together these three account for 65% Of Norway’s
fresh produce imports.

Imports of semi-processed apples -- i.e., apple pulp and
concentrated juice required by manufacturers Of apple juice, soda,
and other processed apple goods, are also restricted. As long as
Norwegian semi-processed apples are available, no more than 25% Of
the industry’s total needs may be imported. This 25% is allowed
only because Of the high acidity of Norwegian apples. In return
for this, producers of' goods containing semi-processed apples
receive market protection. That is, no one can import processed
apples that would compete with its counterpart containing domestic
apples. Thus, although apple processors also pay a per-unit tax
on the domestic apples they use, they are committed to purchasing
these apples. In return, they are given the right to pass this
tax onto the consumer. TO the extent that consumers shift their
purchases away from processed apple goods, the processors and
ultimately growers bear the tax implied in price-supports. The
incidence Of the tax depends on the price elasticity Of demand,
and hence the price Of' substitures. In Norway, many' Of ‘the
substitutes for apples also are subject to price supports.

Within Norway, apple processors compete on a level playing

 

field, and are subject to the common input prices set by annual
negotiations between representatives Of the growers and the
processors. The existing arrangement protects both apple growers
and processors, so neither has any reason to agitate for change in

the status quo. Someone has to pay for all this protection,

141
however. This "someone" is the consumer, now paying the highest
food prices in all Of Scandinavia. The result is an annual upward
spiral Of wages and food prices. This is a major issue in Norway
today: the performance Of the apple pricing process pay .s_e has
engendered no major Opposition; rather, it is the broader result
Of this process aggregated over all food crops that is the source
Of growing consumer dissatisfaction. Norwegians are increasingly
questioning the value of continuing this costly agricultural

pricing policy.

E. Conduct

This section will consider the Objectives, paths and actions Of
each participant-level in turn. The levels to be considered are:
growers and their unions, packing stations, GH, BAMA, the
Processor Association, and the government. To the extent
possible, they will each be considered separately. The section
following this will bring together all these details, and present
an overview Of the subsector as a whole.

As in the previous chapters, growers are assumed to be utility
maximizers, translating here to a profit-maximizing Objective,
given individually—determined preferences for leisure and
security. In terms Of price, this means as high a price as
possible to have and still sell the domestic supply. It is the
aggregate desire Of growers for price and stability levels that
determines, to £1 large extent, the outcome Of negotiations, and

thus price levels, for apples. Norwegian growers have traded the

142
freedom to seek out and bargain for the highest price individually
-- with its concurrent risk Of being subjected to monopsonistic
relations and low price -- for the security Of a stable,
predictable, livable income. This income is determined by the
level Of prices and subsidies (given a quantity to be sold), both
of which are set at the annual negotiations.

Norwegian growers generally grow a variety Of crops, and their
representatives at the negotiations are the farmer unions, who
represent the general grower. Thus in the annual negotiations,
the push is not for a high price for any particular crop, but for
a high income increase, which translates into higher prices and
subsidies for all produce. This push is met by the competing
interests Of consumers and the spending priorities Of the
government, as represented by the government’s representatives.
In negotiations for processing-apple prices, the push is
specifically for high raw product price, met by the competing
interests Of private processors.

Some subsector participants believe that given the current
system, the most profitable option for most growers is to grow
low-quality Class 1 apples and sell them through GH or BAMA. Once
the negotiations have been completed, most growers have the choice
of selling through BAMA, which prices individually and gives the
grower of apples with more desired qualities a better price, or
through GH, which treats everyone the same but is the distributor
Of many subsidies. GH’s job Of maintaining price within the

agreed-upon area is more feasible the more volume it controls, so

143
growers with an interest in supporting the price band may see it
in their best interests to support GH. The free rider problem,
however, may prevent growers from acting in their best interests
in this case.

Tax evasion is one factor contributing to the decision not to
sell through GH: tax rates in Norway are very high, and especially
for smaller farmers the opportunity tO sell produce under the
table and avoid the income tax is more attractive than the
subsidies they qualify for through GH. Finally, GH’s policy of
not using a differential pricing policy makes BAMA an attractive
Option for growers who can produce apples with characteristics
most desired by the market. The result Of these factors is that GH
handles only 50% of Norway’s apple production.

Although an important structural link and information channel
for the subsector, packing stations are not much involved in the
price determination process or its implementation. Their
participation in GH, for instance, is limited to letting the
district Office know how much is in cold storage, or to pressuring
that Office to sell faster.

GH district Offices are the actual salespeople for' most GH
apples. Given the weekly indicative price from GH-Central, they
individually negotiate for prices with retailer-buyers. Each
district’s accounts are held separately, and remuneration for its

Operating expenses come from percentage-Of-sale-price fees. Thus

144
the district Offices each have an incentive to negotiate for as
high a price as possible, while being conscious Of the GH mandate
to control prices.

The considerable autonomy given to district Offices despite
GH’s formally centralized structure, represents an attempt to deal
with the problem Of economic organization as outlined by
Williamson: tO "economize on bounded rationality while
simultaneously safeguarding transactions against the hazards Of
opportunism" (1985, p. xiii).

GH’s centralized structure gives a core management group the
ability to draw up and implement large-scale plans for, e.g.,
long-run supply, and to coordinate the activities of the local and
regional units. But in day-to-day activities, it is judged to be
a more efficient use of mental and physical resources to allow
districts room to maneuver according to their knowledge Of their
own areas’ conditions rather than to require that daily stock
information and price negotiations. all go through one central
office. Since districts are still part of the cooperative,
growers are still safeguarded against the "hazards of
opportunism", while the cooperative as a whole economizes on its
resources and bounded rationality by giving districts the
authority to run their own daily affairs.

GH management does not receive monetary rewards for getting a
high price gt staying within the price band. Managers are
censured, however, if they fail to accomplish these goals. When

asked about the negative effect this might have on management’s

145
incentive to do more than minimally well (minimizing risk. of
failure), participants were invariably indignant. Even BAMA
management disagreed with the need to provide a monetary reward
for exceptional performance. The general consensus was that the
desire tO do a good job and get a promotion was sufficient
incentive, and that extra bonusses for specific actions were
culturally uncommon.
In years past, GH was accused Of paying little attention to the
quality of apple pack and presentation of goods. GH fees are
based on percent Of sale price, which were suggested earlier to
promote a greater shipper (GH) focus on quality and presentation.
At first glance this appears to contradict the fee structure-
shipper behavior relationship put forth in Chapter Three. This is
not the case, however, since GH’s revenues are not just a function
Of price and quantity sold. A significant portion of GH’s budget
is paid by the government through subsidies, administrative
compensation, and market regulation funds. The continuance of
these payments to GH depends on GH’s ability to fulfill its role
as implementor of national agricultural policy. Part Of this role
requires GH to sell as many Class 1 apples in the fresh market as
possible, at prices within the price band. In order to ensure
that most are sold in the fresh market, GH has an incentive to mix
the various qualities under the Class 1 standard.
Mixing of quality enables GH to label a box as containing
apples of a certain quality, while mixing in lower-quality apples

(within the limits of legal standards) that might not have been

146
purchased on their own merits -- at least, not at that price.
Critics argue that if GH did not mix sizes, it could secure a
higher price for larger apples that would more than compensate for
the lower price Of smaller apples. This criticism is gradually
being taken seriously by GH as consumer demand moves more clearly
to a preference for quality over price.

However, GH-Central’s maintenance Of itself as an effective
implementor of agricultural policy requires a high market share.
Efforts to increase its market share have the dual effect Of
making GH’s policy-implementation job easier to accomplish, and of
building public confidence in and respect for this weakest Of the
national grower cooperatives. Although the management at GH-
Central had been relatively passive and complacent about its
roles, the recent combination Of increased competition, national
economic difficulties, and management turnover has resulted in
what participants call a much more dynamic and aggressive core at
GH-Central. Today the effort is not only to keep prices within
the price band but to promote actively the cooperative character
Of GH to growers, to streamline Operations, and to recruit new
members.

Hardangersaft, GH’s processing plant, is Operated as a separate
business unit. Its major Objective is to stay solvent and to
dispose Of the domestic Class 2 and excess Class 1 supply. Class
2 apples are sent directly from packing house to semi-
processors, and Class 1 apples experience the same fate in

periods of seasonal oversupply. Its efforts are apt directed at

147
expanding market share, or at recruiting delivery, any more than
necessary to achieve the aforementioned Objectives. Raw product
prices for apples are set at a fixed level; thus it is not
necessary for the cooperative to control a large portion of the
market in order to implement agricultural policy.

BAMA is bound by the Agricultural Agreement’s price band, just
as is GH. It is not, however, rasppnsjple for implementing it.
BAMA prices differentially between growers in its drive for
maximum profits and market share; it only need aim for an average
price within the belt. This policy Of pricing differentially is a
definite competitive advantage for BAMA (Nodenes). It may also be
seen as an advantage for consumers who would be willing tO pay a
higher price for higher quality. BAMA is, in effect, capturing
some Of the consumer surplus by separating apples Of different
quality and selling each type where it is most valued. In order
to get the high quality apples from growers, BAMA passes on some
of this consumer surplus back. to the higher-quality growers.
Given the current subsidies and regulations, it is profitable for
BAMA to handle Norwegian apples in this way, but many believe that
the day import regulations are removed, BAMA will not touch
Norwegian apples.

The Processor Association has three stated Objectives: to
negotiate annual prices of raw products for processing, to
allocate import quotas, and to act as an intermediary between the
government and Association members. Although it does try to

negotiate prices downward in the annual negotiations, it does not

148
face intense pressure from its membership to do 50. All Norwegian
processors will face the same price at any rate, and all receive
the same market protection.

The government has to walk a narrow line in the price area:
yearly it must balance consumer and producer interests and
national and individual interests in the negotiations with farmer
unions. Costs Of production are very high on the small,
diversified Norwegian farms, especially in the geographically
harsher and more isolated areas. It is precisely these areas,
however, that are the highest priority to maintain for national
security. As incomes rise faster than productivity increases,
farm labor costs and thus the costs Of production rise on these
small farms.

In the apple subsector, the combination of fresh and processed
import regulations, and annually-increasing target incomes for
farmers result in high costs for Norwegian consumers. The desire
to achieve income parity between the industrial and agricultural
sectors in order to maintain population centers in remote rural
areas and to increase food self-sufficiency has thus far
outweighed the concern for high food costs. Industrial wages
increase to keep up with the rising cost Of living, and
agricultural wages increase to keep up with industrial wages.

In recent years, high food prices have led tO increasing
popular pressure on the government to re-evaluate its costly
agricultural policy, especially since the fall in Oil prices

(Norway is an Oil exporter) and subsequent government efforts to

149
cut back on spending. The pressure to re-evaluate has not yet
reached the level to cause changes in basic policy and national
priorities, however. Until the time when deep policy changes are
made, the conflict of interests and priorities continue to be
resolved through the interaction of ministries and unions
representing the competing interests. As the pressure from each
Ministry’s constituency and the conflicts between the Ministries
grows, Norwegian governmental policy will have to change as well.
Increased economic and political pressure makes it likely that the
issue Of joining the EEC will be raised again in Norway. Even if
it does not join the EEC, Norway will have to address somehow the
problem of an increasingly costly agricultural policy in an

increasingly troubled economic environment.

II. MICHIGAN

In Michigan, formal (legal) institutional structures are not as
numerous as they are in Norway. Rather, participant relations
are ordered through informal "gentleman’s agreements" and private
treaty negotiations, particularly in the fresh market channel.
This makes it feasible to consider each participant-level in turn,
discussing how they relate to the structure Of price determination
in fresh and processed channels. Due to the prevalence of private
treaty contracts, participant relations are revealed more clearly
in the discussion Of conduct that follows the section on

structure. The participant-levels to be considered are: Growers-

150
Packers - Shippers - Retailers (fresh) - MACMA - Private
processors - Farmer Cooperatives '- Manufacturers/Retailers

(processed).

A. Growers

In the fresh market, growers have the choice of selling their
apples directly to consumers, selling wholesale tO packer-
shippers, or consigning their apples to packer-shippers. The
latter is by far the most common method used and thus is the path
described in this section. In the processed market, growers may
sell tO private processors individually, through their packer-
shippers, or deliver to their cooperatively owned processors.

When growers sell their fresh-market apples through
consignment, they Often have little or no involvement in the price
determination process. They give this right up to a packer-
shipper, who by representing a large volume Of apples can
presumably market and bargain for price more effectively with the
large retailer-buyers. When a grower decides to consign his
apples to a particular packer-shipper (or several packer-
shippers), he is in effect making a one-year commitment, with no
certainty Of what his returns will be. As discussed in Chapter 3,
it is difficult for a grower tO decide which packer-shipper is the
"best" without trying his services first. This high information
cost is due in part to the pooling of returns and the myriad Of

ways packer-shippers charge for their services.

151

Many growers have also opted to pass on the responsibility Of
selling their processing apples. For the past 25 years, some
growers have attempted to bargain collectively with processors for
price and terms Of trade; the history Of grower efforts in
collectively bargaining with private processors was discussed in
Chapter Two. Despite the current non-mandatory status Of
bargaining in Michigan, MACMA. still bargains annually for its
members. The bargaining sets floor prices that can be but are
generally not undercut by individual growers and cooperative
processors. MACMA has always tried to get cooperatives to agree
publicly to the bargained prices in order to decrease the chance
Of such undercutting.

Approximately 65% Of Michigan’s apple growers are members Of
MACMA’s apple division, the~ Michigan Processing Apple Growers
(MPAG). MPAG committee members are elected grower representatives
who work closely with the MPAG Secretary—Manager. In essence,
MPAG is a grower bargaining cooperative, with the Committee being
the board Of directors and the Secretary-Manager, the

COOperative’s manager.

8. Packers

Packers pg: 59 are not involved in the selling price
determination process. If they are also shippers, they negotiate
with retailer-buyers in that capacity. If they are grower-
packers, they will use a shipper to sell their apples for them.

Most packers charge for their services on a per—box or bag basis:

152
that is, their revenues are a function of volume handled, not
price received. Implications of this charging structure were
discussed in Chapter Three. Fees are differentiated according to
the type of storage and pack, with lower handling charges for
processing apples.

There is a high information cost to finding out how a packer
treats individual growers’ apples. If a grower feels that a
packer is not fulfilling his responsibilities, his Options are to
complain, to switch to a different packer or to integrate into
packing. He does not have the option Of paying the packer less
(more) for inferior (superior) service. This payment structure is
enforced by the procedure for payment: money paid by retailers to
shippers goes to the packer, not the grower. The packer then pays
the grower for his apples after deducting service charges.
Growers’ evaluation of their packer’s performance is complicated
by the fact that a high sort-out and subsequent low returns to the
grower may be because the grower has delivered low quality apples
and not because of poor packer performance. Establishing the
reasons for poor grower returns is thus difficult to do.

A packer wishing to expand on even maintain a given volume will
have to persuade the growers that he is fulfilling his
responsibilities. This persuasion may take the form of Open
communication, or complicated justifications, or some combination
Of the two. Successful packers cultivate a relationship with
their growers, convincing them that high-quality packing and fair

treatment of growers are the major concerns. This may or may not

153
actually be the case, but while packers may be concerned about
treating the apples well, they do not typically 90 so far as to

make their charges directly dependent on this treatment.

C. Shippers

Shippers are the main supply-side participants responsible for
marketing and pricing in the fresh channel. It is at the
shipper-buyer transaction point that the price for each shipment
Of apples is determined. Shippers’ revenues are also based
primarily on volume, not price. Shippers might not see the apples
themselves; they sell according tO the qualities and quantities
demanded by the retailer-buyer' with those available, as
communicated tO them by their packers and field men.

Sales of packed apples take place through the negotiations Of
individual shippers with individual buyers. Shippers are usually
bargaining with a clear idea Of the general market conditions, but
little idea Of the price and quality Of their buyer’s immediate
alternative supplies. Soon after the sale, shipper’s terms Of
trade are Often known by his competitors, but at that point it may
be too late to correct an artificially low price. In the past,
most shippers did not know what the nation-wide or even state-wide
stocks were. Through grower encouragement and shipper influence
(through the Shipper Association), weekly sales information and
bi-weekly stock information are gathered and disseminated to the
shippers. Although this increased information helps shippers

bargain more knowledgeably with buyers, there is still a tendency

154

for rumors and misinformation to be spread (sometimes on purpose,
sometimes not). The misinformation then leads tO shipper
bargaining tactics that would not have been made if more complete
information had been available. This combination Of bounded
rationality and cutthroat competition leads to what every
participant-level from grower to retailer say are frequently
depressed prices that dO not reflect the true market value of the
apples.

The discussion in Chapter 3 on the relationship between fee
structure and packer-shipper behavior is relevant here to
understanding shipper behavior in the pricing process. Chapter 3
argued that with the current flat fee structure, a packer-shipper
wanting to increase his revenues had contradictory incentives that
could lead to inattention to quality and a willingness to cut
prices in order to make a sale. It was also argued that packers
are much more constrained by asset specificity than are shippers,
and will thus be more likely to take their grower-clients’
interests into account than will shippers. This is corroborated
by the fact that grower-packers tend to have lower service charges
for their packing fees than do packer-shippers.

Low physical investment requirements and low asset specificity
would seem to imply that there are low barriers to entry for
potential shippers, but this is not the case. Due to the
importance of high information cost aspects of the shipper-
retailer transaction like service and quality, and the resultant

high search cost retailers must pay to switch shippers, retailers

155
prefer and tend to find a few satisfactory shippers and cultivate
long-term relationships with them. Thus the barriers to entry for
new shippers are personal connections, not monetary investments.
Buyers will typically have relations with more shippers than
necessary for their volume Of demand as a supply insurance. The
total volume Of a buyer’s purchases are then divided between these
shippers, which leads to a situation Of fierce competition between

the shippers.

D. Retailers

The food retailing industry in the United States is becoming
concentrated increasingly in the hands of a few large chains. In
1982, the twenty largest chains accounted for over 35% Of U.S.
grocery sales (Marion, 1986, p.332). Since many Of the large
chains exist only"hi particular regions, local concentration is
actually much more concentrated. These large grocery chains Often
vertically integrate into wholesaling, developing a widespread
procurement system using buyers specializing in fruits or dairy or
some other area. It is with these buyers that Michigan’s shippers
make most of their sales.

Some shippers argue that buyers use their superior market
knowledge to encourage false rumors Of oversupply in order to play
shippers Off on one another and force prices down. Buyers reply
that shippers deliberately undercut each other to make a sale. It
is likely that there is truth in both of these claims. All agree

that shippers do not communicate much with each other.

156
Private treaty pricing systems, such as the pricing Of fresh
apples in Michigan, are not governed by formal, structured rules.
Thus there is not much that can be discussed in this stage of the
chapter: it is the conduct Of negotiating parties that affects the

price outcome.

E. MACMA

 

The prices Of Michigan’s processing apples are determined
through a system Of grower bargaining, with Michigan’s PA#344
setting the legal ground rules and MPAG negotiating with
individual processors for floor prices and terms Of trade.
Although MPAG-negotiated prices now apply only to MPAG members’ .
apples, in practice MPAG negotiations affect non-members’ apples
as well. MPAG growers represent over 55% of Michigan’s processing
apple supply. In addition, packing houses with some MPAG members
will typically sell all their processing apples under MPAG-
negotiated terms. Finally, even though cooperative processors
have traditionally been exempt from PA#344 negotiations, MPAG
always includes them in the proceedings and attempts to get verbal
support for the prices and terms Of trade negotiated with the
private processors. The verbal support is then publicized in the
MPAG newsletter, presumably making it more difficult for
cooperatives to undercut the target floor prices.

Before negotiations with processors begin, MPAG representatives
engage in a series of information-gathering sessions, in their

capacity as members of the American Agricultural Marketing

157

Association (AAMA).2 Representatives from all ten AAMA states
travel to each member state and visit orchards, grower committees
and processors to find out what the crop supply and market demand
look like in that area. The AAMA group then meets with the local
grower group, sharing the information and discussing its
implications, after which the local grower group meets and makes a
price recommendation. Finally all the AAMA meets at a national
meeting in order to try to come up with a coordinated set Of
grower prices for processing apples Of different uses. Despite
the different costs Of production and transportation in different
states, the AAMA meetings aim for pan-territorial pricing. This
aim is not achieved in practice, due in part to the different
bargaining power Of growers in the different states and in part to
the different quality and variety of the apples. The set of
prices that emerge from the national AAMA meeting are targets that
the MPAG committee uses in negotiating the state’s processors.

The standard Operating procedure is to approach the largest
users of Michigan’s processing apples first. Once an agreement is
reached with them, the effort is to get other processors to accept
the agreed-on terms. The processors who have agreed to the price
floor are announced, along with the cooperatives who support it,
in the MPAG newsletter. Negotiations begin in August and
continue into September, generally being completed by the start of

harvest (mid-September). Until the end of March, the negotiated

 

2. The AAMA consists of growers from Michigan, New York,
Virginia, West Virginia, New Jersey, North Carolina, South
Carolina, Georgia, Pennsylvania and Maryland.

158
floor prices are the minimum market prices. After that time,

prices can and Often do rise above that level.

F. Privata Processors

MPAG contacts all major private processors in Michigan for
price negotiations, starting with the larger ones like Gerber’s.
MPAG’s aim is to stabilize apple prices from processor to
processor, so processors will treat their inputs Of apples the
same way as inputs such as tin cans and sugar. Processors pay
common prices for these latter inputs and, the argument goes,
their paying common prices for apples as well will increase the
certainty Of their total costs and facilitate long-run planning
and provide a floor for pricing of processed apples within that
year’s marketing season.

Before organized grower bargaining became widespread,
processors Often approached growers with a 'take-it-Or-leave-it
Offer. Search costs for alternatives were much higher for growers
than for processors -- at least, when measured proportionally to
total revenues. As a result, processors could practically dictate
prices to growers. Now processors calculate the expected average
retail price for their goods, subtract their' other costs and
needed margin, and come up with the price they would like to Offer
the growers. MPAG and the processor bargain, essentially, over
the size of the processor margin and the retail price of the
product (since some processors can affect retail price). A price

is finally negotiated for each variety, type and use of apple.

159

G. Cooperative Processpts

In just fifteen years, cooperative processors have moved from
handling a negligible part Of the Michigan processed apple volume
tO handling over 35% Of the state’s processing. This includes not
only cooperative processors which sell their own goods but also
joint ventures Of cooperative processors with private companies
which label and market the goods. Although various factors were
cited by subsector participants as reasons for this change, the
dominant reasoning was that apple processing was not as profitable
as it used to be. Demand for all forms of processed apples except
juice have been steady or declining, and although demand for juice
has been increasing, since 1980 this increase has been met almost
completely by cheap juice imports. Despite the relatively lower
value Of the dollar in 1987, the volume Of juice imports rose
relative to 1986, but one could argue that with a strong dollar
even more would have been imported. This may have more to do with
the lags involved in adjusting to the lower dollar; it takes some
time for manufacturers to overcome the transaction costs of
setting up relations with new suppliers. It remains to be seen
whether a continued low value Of the dollar will reverse the juice
imports trend.

Many private companies sold their facilities to farmer
cooperatives in the 1970’s, and existing processing cooperatives
increased their apple volume. By' purchasing these facilities

rather than allowing them to close, growers hoped to guarantee

160

themselves a home for their apples. Farmer cooperatives also have
potentially lower requirements for returns to investment than dO
private companies. An unprofitable venture for a private company
might be considered a feasdible one for a cooperative. Many
private companies require that an investment earn a rate of return
equal to its Opportunity cost: when the rate of return falls to
the point where the estimated Present Discounted Value of the
processing factory is below its salvage price, the private company
may disinvest and move on to another investment Opportunity.
Patron-owners in a cooperative, however, consider not only the
rate Of return Of their investment but also the value to them Of
having a guaranteed home for their product in whose services, fees
and pricing policy they have an input.

The difficulty for growers to enforce contingency pricing
contracts results in an unwillingness to accept prices lower than
the going market price in order to keep a private processor in
business. First, there is no way fOr growers to verify whether
the private company is really experiencing financial difficulty.
Second, even if growers share company losses by accepting lower
returns in order to keep the private company in business, there is
no guarantee that the company will not later exit or that it will
share later profits with the growers. In a cooperative, however,
representative patron-owners sit. on the board, have access to
their cooperative’s financial statements, and hire and fire the

management.

161

Farm-level market prices for processing apples are essentially
bypassed by many cooperatives. Cooperative managers sell the
processed apples for the highest price possible, deduct operating
costs and return the rest tO growers. Pooling arrangements,
retained earnings and distribution Of profit differ from
cooperative tO cooperative. Payments to growers are generally on
a split-season or monthly basis, with a down-payment made upon
delivery and the final payment made upon sale of all the crop’s

inventory.

H. Manufacturers/Retailers

Cooperative and private processors alike Often sell to
manufacturers and retailer-buyers with no written contract. For
canned products, the buyers can simply state what amount they
foresee wanting for the entire year, without negotiating on prices
or delivery dates. When the buyer desires a delivery, he calls
the processor and at that time they discuss prices. In order to
keep the buyer’s business, the processor must have the amount
ordered in inventory, despite the fact that the buyer may change
his mind and buy less. The processor has already processed the
apples when price negotiation takes place, so buyers can attempt
to exploit the sunk cost of processing by claiming to have found a
better deal elsewhere and demanding a lower price. As a short-
term strategy this is an Option that some buyers might choose, but
then in short crop years they will be likely to find themselves

with insufficient processed apples.

162

I. Cpnduct

The majority of growers in both fresh and processing channels
delegate the power and responsibility for selling the apples to
other parties. In the fresh channel shippers negotiate with
buyers for price and other terms Of trade, and in processing it is
usually either through MACMA negotiations or the cooperative that
f.o.b. prices are determined. MACMA and cooperative processors
are run by grower representatives and managers hired by these
representatives, whereas shippers are almost all privately owned
and operated.

A major difference between shippers and grower-run structures
in the Options available to dissatisfied growers. With shippers,
very large or high-quality growers may be able to effectively
exercise the voice Option, but for the majority of growers the
only practical Option is exit.3 In MACMA and grower cooperatives
(both processors and shippers), growers’ voice is potentially a
powerful force, despite the fact that in practice this force is
not used very much. Although trust and personal relationships are
important in MACMA and grower cooperatives as well, between

growers and shippers these relationships take the place of highly

 

3. The terms "exit" and "voice" are taken from Hirschman
(1970). The exit Option involves members leaving an organization,
or former customers no longer purchasing a given good or service.
The voice Option involves members or customers expressing their
dissatisfaction directly to the management or some other
authority.

163
specified long-run contracts and short-run guarantees that grower
interests will be protected.

TO maximize their profits in the short run and their security
in the long run, growers attempt to find the shipper who gives
them the highest returns, and stick with that shipper. What sort
of shipper this will be depends in part on the quality of the
growers’ apples. A very high-quality grower will prefer the
shipper who divides the apples discriminatingly and targets the
highest-quality goods to the high-price market, while an average
grower may do better with a shipper who mixes high and medium-
quality apples and sells to the price-oriented buyers.

Subsector participants agreed, however, that growers had become
much less blind in their loyalty tO shippers since the economic
difficulties Of the 1980’s. In the past, shippers could count on
a relatively free hand in their sales, marketing and pricing with
buyers. Now an increasingly loud clamor can be heard calling for
shippers to be held accountable. That is, some growers want
shipper service charges to be affected in some way by the level of
prices shippers agree to, or for there to be greater ways of
including growers’ voice in the negotiation process. In
response, many shippers have been attempting to communicate with
their growers more. Shippers that were already fulfilling grower
interests relatively well experienced an increase in business from
growers. Some Of these shippers Oppose changes in the current
pricing structure, pointing to their own growth as proof that the

system is responsive to dissatisfaction.

164

Some growers, not fully convinced Of the desirability of the
current structure, continue to agitate for change. The Pomesters,
for instance, are attempting tO encourage more complete market
information and communication between shippers, so that they can
approach sales and pricing with buyers from a more complete base.
This would help tO avoid the recent situation, where one shipper’s
oversupply can lead tO a price war. That is, at least until 1986,
shippers bargained with buyers knowing primarily what their own
supply situation looked like. The shippers’ situation is easier
in years with a clear high or low crop, but in an average year
with short periods Of over and undersupply, it is difficult to
know what price to start at, and where to stop, in the weekly
negotiations with buyers. A recent increase in sales and stock
information started by the Shipper Association is likely to help
reduce price wars. Another solution Offered by some participants
was a single state-wide information and sales desk, surprising
because Of the very high level Of free market philosophy normally
espoused by the same people.

The shipper-retailer transaction point, as pointed out earlier,
is the primary point for price determination in the fresh apple
channel. Shipper-retailer relations are cultivated over years by
both sides, and many participants are reluctant to cut relations
over occasional disagreements or dissatisfaction. It may be that
this is a condition to be found in all fresh-produce subsectors,
where quality can vary from day to day, where in the absence Of

trust, governance costs can be extremely high, and where

165

perishability gives quality Of product-handling and speed of
service a very high value. Edward McLaughlin found the same high
reliance on trust and personal relationships in his in-depth study
Of the United States fruit and vegetable industry. In the apple
subsector there is a mix Of close personal relationships and
intense competition. This is not only because the few shippers
that each retailer-buyer uses are all striving for more Of the
retailer’s business, but also because most shippers try to break
new ground and get new accounts -- which means breaking into
existing ‘retailer-shipper marriages. This provides the
undercurrent of suspicion with which shippers view each other.

The Michigan Fresh Apple Shipper Association represents a
recent effort by shippers to try to address some Of the issues
facing the subsector, particularly issues that affect everyone and
that nO one can solve alone. Chapter 3 mentioned the
Association’s consideration Of the lack of relevant quality
standards. The Association has also begun talking about ways to
affect the price determination process. Although shippers
vehemently Oppose any changes in the process itself, i.e., changes
in the fee structure or in who can be involved in the process,
they are increasingly amenable to considering sharing stock
information. To this end, they have made efforts to bring about
changes for more complete market information through the USDA
Market News Service.

Both these issues are sources of transaction costs in the

subsector, and addressing them would be a step towards decreasing

166

these costs for all participants. More relevant quality standards
would decrease information costs and governance costs for buyers
Of fresh apples, and more complete stock and price information
would decrease shipper uncertainty about market conditions.
Change in the conduct Of shippers will come very slowly, however.
This is especially true because Of the increasing awareness that
the state can support only a few very large shippers. The
increasing size Of retailers and the higher transaction costs Of
dealing with more than one shipper means that retailers will
patronize shippers who can supply a larger proportion Of their
needs reliably and satisfactorily. As a few shippers get larger,
some current shippers will be forced out. The major question is
yap will be forced out. It is understandable that shippers asking
themselves this question are likely to be distrustful Of other
shippers.

For many retailers of fresh apples, the most important
considerations today are quality, service and price -- in that
order. This means that a shipper who can deliver higher quality
and better service may get a higher price app a greater volume Of
business. ‘This affects the content of shipper-retailer trading
relations. It appears that buyers cannot play shippers off on
each other as easily as in the past, simply by quoting
competitors’ lower prices. The astute, high-quality oriented
shipper presses the buyer to be clear on the quality he wants and
offers lower-priced apples of lower quality if the buyer prefers

that Option.

167

In the processing channel, a major point for price
determination is the MACMA-Processor negotiations. MACMA
represents grower effort to establish a single sales desk. By
consolidating regional (AAMA) and state (MPAG) information on
apple supply and demand, grower representatives can bargain with a
clearer idea Of their buyers’ market alternatives. By
representing a significant portion Of the state’s crop, MPAG can
attempt to push for a higher price rather than be a price taker,
but since Michigan’s apples represent only 14% Of the U.S.
processing apple supply, it is not clear that MPAG could
artificially increase price. It is more likely that the otiated
pices are able to approach the true Opportunity cost Of the
apples.

Some participants claim that private processors who have quit
business have done so because of MACMA’s effect on raw product
prices, and that cooperatives have an advantage because they are
exempt from negotiations. Although MACMA may have been one of
Inany factors influencing private processors’ decision to
disinvest, it seems very unlikely that it was a deciding factor.
MACMA attempts to get the support of cooperatives in price
negotiations. One large cooperative processor claims to have paid
the negotiated price level every year since 1975 and continues to
do so. Another telling fact is that when the MPAG Secretary, who
is responsible for negotiations, Offered a private processor the
option in) pay growers the average Of three cooperatives’ grower

price as a floor price, this Offer was rejected. A more logical

168
interpretation Of the situation seems to be that apple processing
is an area Of dwindling profitability, and cooperatives are more
willing to Operate in such an environment.

Nevertheless, the market structure Of the processing industry
is changing in Michigan. These changes are also changing the
realm Of the possible for’ MPAG. In 'the 1970’s, demand for
processed apple products was high and indications were that
processor profit margins were also relatively high. Now, demand
for U.S. processed apples are declining, profit margins have
shrunk, and cooperative processors are a ‘rising force 'hi the
market. In such a changing environment, MPAG faces the danger Of
becoming Obsolete. In the 1970’s, MACMA as an institution was
relatively confident Of its own survival, and could devote all its
attention to representing grower interests. Now MPAG’s interests
are being jeopardized, so its attention is necessarily focussed on
ensuring its own survival as an institution. These> concerns
partly explain MPAG’s drive to bring cooperatives into the
negotiations and the attempts at extending MPAG into the fresh
channel. MPAG Offered its services in the fresh sector as the
institution capable of organizing and implementing relevant
quality standards. This Offer was met with an extremely negative
reaction by shippers, and MPAG withdrew from the picture.

MPAG is certainly not Obsolete yet; it still represents a
majority (Hi the state’s processing apples and affects the price
that all processors, including cooperatives, pay for apples.

Managers Of the processing cooperatives interviewed for this study

169

held different Opinions about the usefulness Of MPAG. One held
that there was a need for MPAG as long as private processors
remained a major force, particularly in the setting Of a price
floor. The other was more critical, maintaining that MPAG affects
only the short-run price, that in the long run supply and demand
eventually rules, that MPAG-negotiated prices hurt some farmers
because prices are set too low, and finally, that price
negotiations were ineffective anyway because processors are not
limited to buying Michigan’s apples.

Cooperative processors have the best Of both worlds in the
current structure. Their private competitors ane, for the most
part, bound to a floor price through negotiations with MACMA.
Management personnel Of cooperatives are involved to some extent
in determining this floor price, but if worst comes to worst, they
are not bound to it. In order to keep its members, a cooperative
must pay its growers at least the same price (on average) as
private processors. But due to its grower-owned character, a
cooperative may have the ability to pay members less than market
price for short periods, if necessary, without losing their
business.

Cooperatives’ management often argue that the firm’s grower-

Owned status is the reason why they cannot bargain with MPAG, as

 

they would in effect be bargaining with themselves. This argument
seems, at best, weak. First of all, cooperatives are already
negotiating with MPAG. According to some participants,

cooperatives’ management even get quite upset if left out of the

170
negotiation process. Second, a cooperative is by nature a
continual balancing Of grower interests with the business needs Of
the cooperative; negotiations Of the management with MPAG grower
representatives is just an explicit form of what the cooperative
does implicitly every day.

Admittedly, a large body of cooperative theory argues that
profit-maximizing behavior for a cooperative is different from a
private firm, that a cooperative can charge lower for its services
and pay more for its members’ raw product than a private firm.
Typically, however, a cooperative will pay the going market price
for its members’ raw product. Profit margins are then returned
through patronage rebates, subsidized goods such as insurance, or
through some other method, giving growers higher returns on their
apples. Having cooperatives bargain for raw product price is thus
justifiable both theoretically and practically.

Another reason voiced for cooperatives’ inability to negotiate
formally with MACMA is the Bank for Cooperatives’ requirement that
the cooperatives not formally commit themselves to any agreement
that might result in a significant likelihood Of Operating on a
loss. This reason is more compelling than the first, since
cooperatives do rely on the Bank for much Of their financing needs
and thus need to fulfill the requirements to continue being
eligible for loans. It is likely, however, that cooperative
processors would argue for a change in this restriction if they
felt it necessary. The Bank for Cooperatives is itself a

cooperative, and sources familiar with the operation of the Bank

171
agreed that attempts were made to design loan requirements so they
fit the needs Of borrower-members. Borrower requests for
redesigned loan requirements are considered on a case-by-case
basis, and approved if they make "business sense". Thus although
the restrictions pointed at by cooperative management may indeed

exist, they are also convenient for the cooperative to have.

111. COMPARISON OF NORWAY AND MICHIGAN

With the very different economic policies and market structure
of Norway and Michigan, it is not surprising to find vast
differences in the price determination process. What is
noteworthy are the similarities. One Obvious similarity is the
division between producing and selling responsibilities.
Apparently, the skills and information base needed for producing
apples are very different from those needed to market them. In
both Norway and Michigan, in both fresh and processing channels,
most growers have relinquished the job of selling their apples to
specialized sellers. In both countries, private sector
involvement in selling is stronger in the fresh channel. Perhaps
the situational characteristics Of fresh apple marketing is
particularly suited to private entrepreneurs. ‘There is high
variability possible in the quality Of perishable goods, and there
are potentially high profits available to sellers who can target
the sales of particular qualities to those willing to pay the most

for them.

172

It is interesting to note that in both countries, the income of
apple sellers is relatively independent of price received, and
that in both, the majority Of apples are sold by shippers
historically more concerned about volume than price. This and the
relative advantages enjoyed by these shippers led to a complacency
about price level and quality. Norway’s GH had the advantage of
protected borders, price negotiations, and little competition.
Also, GH’s responsibility is not price but the selling of Norway’s
apples at prices determined by grower-government negotiations. As
the emphasis Of consumer demand shifted from price to quality, and
as BAMA began aggressively pursuing the retail market, GH had to
focus more strongly on quality Of marketed goods.

Michigan’s shippers had a locational advantage relative to
their biggest competitor, Washington. Michigan’s proximity to
large markets enabled it to Offer lower prices for apples than
Washington, whose price has to cover high transport costs. When
price was more important than quality, Michigan’s shippers could
focus on moving a high volume at a low price, being rewarded for
the former and not bearing the cost Of the latter. Now that price

is cited by buyers as third priority -- after quality and service

 

-- Michigan’s low selling prices are not as strong a selling
point. Once they were hit where it hurt -- in volume Of sales--
many shippers shifted their priorities and began to adjust to this
new high quality, high price demand.

Both Michigan and Norway are also feeling increasing pressure

from international competition. This pressure shows itself

173

differently in the two countries due to the different structure to
which it is applied: in Michigan the free and abundant flow of
cheap imported juice is making juice processing less of a viable
enterprise, reducing the demand for Michigan’s processing apples.
In Norway, the trade barriers and annual negotiations ensure a
steady income and sure market for apple growers, but the resultant
high food costs are causing political pressure and popular
dissatisfaction.

Most Of the differences between Norway’s and Michigan’s price
determination processes stem from the very different economic and
legal structures concerning agriculture. The different
structures, rooted in the histories and conditions of these areas,
are faced with very different issues. But a lOOk at the
structures and related participant conduct clearly illustrated one
simple point: participants put their efforts into affecting those
aspects of market transactions that enter most directly into their
utility functions. hi other words, what participants do can be
understood by looking at their incentives and constraints.

The interrelatedness of situational characteristics with
structural form and related conduct continues to be illustrated
when the outcome Of all these components -- performance -- is
examined. In the following chapter, the performance of Norway and
Michigan’s apple subsectors is examined in relation to the issues

discussed in the previous two chapters.

CHAPTER 5
PERFORMANCE AND COMPARATIVE ANALYSIS

The previous three chapters went from a very broad overview of
Norway and Michigan’s subsectors to an in-depth treatment of
specific coordination processes. This chapter takes a step back
again, to examine the consequences of previously examined
processes for: (l) short-run and (2) long-run matching of supply
with demand in the quality and quantity Of fresh apples marketed,
and (3) the price determination process for apples and related
marketing services in the fresh and processed channels.
Discussion Of performance involves a description Of the general
market outcome, and Of the specific outcomes for market
participants. The description is limited to six characteristics
or descriptors: price, specification, transparency, adaptiveness
to market changes, distribution of the costs associated with risk
and uncertainty, and bringing consequences to bear on behavior.

The next two sections will describe performance in Norway and
Michigan’s apple subsectors, examine the implications Of this for
subsector participants, and identify the role Of farmer
cooperatives as coordinating mechanisms. Following that will be a
comparison Of institutional arrangements in the two countries.
One question tO be considered in this section is the extent to

which differences or similarities in market performance can be

174

175
seen to be a result Of the different institutional arrangements.
The different role Of cooperatives and their potential in each
country will also be examined and compared.

Finally, this chapter will propose approaches to dealing with
current subsector issues, based on the ideas Of each country’s own
participants and on comparison with the other country’s subsector.
There are limits to the comparisons that can be made, however, due
tO the very different social and historical bases Of each

country’s agricultural sector.

I. P RFORMANC : NORWAY

A. Pritas: Costs Of production and subsequent market prices for
apples are relatively high in Norway. Nevertheless, the annual
price negotiation process seeks to set a target price band that
will provide returns to growers that cover costs Of production for
the average farmer growing Class 1 apples. Charts depicting GH
prices for apples, 1982—1985 (Appendix 0), show that fluctuations
around the weekly target price generally remained within the
target band set by negotiations. On average, annual prices were
easily within the 25% price band allowed for the subsector (12.5%
above and below the target price).

Prices were invariably at their lowest in the month Of
September, when supply is at the highest. To some extent, this
reflects planners’ recognition that prices later in the year need

to be higher in order to cover storage costs. The fluctuations in

176
actual prices (as opposed to target prices), illustrated in
Appendix 0, go beyond these planned price differentials. This
suggests that despite the control aimed at with the use of target
prices, some price fluctuation to reflect market conditions is
still possible. Available information is limited to prices for
generic Class 1 apples, so it is not possible to determine whether
prices for different varieties were flexible enough to reflect
consumer preferences. Price data for the private sector,
specifically BAMA, were also not available, but BAMA’s stated
policy Of pricing differentially makes it likely that the prices
received by BAMA growers are more unstable and less predictable
than those Of GH growers. Prices received by BAMA growers are
also more likely to reflect the preferences Of consumers -- at

least, if BAMA uses its price differentiation policy consistently.

8. Specification: As defined in Chapter 1, specification concerns
the extent to which characteristics Of products supplied match
those desired by users of' the product, at each stage in ‘the
commodity subsector. In essence, this was the topic of Chapter
Three. Shaffer (1987, p. 72) discusses the types of information
relevant to specification. The information can be categorized as
answers to four general questions, although Shaffer: does not
categorize them thus. The last question is, in effect, the result
Of answering the first three questions. The four questions are:

1. DO suppliers of goods know consumers’ preferences?

177

2. DO consumers recognize what characteristics are being

supplied?

3. DO consumers know the costs associated with their

preferences?

4. Given the above, do product characteristic supplied match

those demanded?

In neoclassical theory, price is assumed to carry this
information. In the real world, however, where market
imperfections are the rule rather than the exception, price
carries confusing and even distorted signals. When growers
experience a drop in price for their apples, it is not clear if
this is because the apples did not have the desired size, color or
crispness, or because the shipper agreed to a very low price in
the negotiations in order' to make a sale, or because Of an
oversupply Of apples. Relying on price alone, a grower would have
little idea Of what the market wants.

In Norway, participants responsible for selling apples to
retailer-buyers are well aware of' consumer preferences. The
incentives Of BAMA and GH tO pass on this information and to see
that the preferences are fulfilled differ, however. Being a
farmer cooperative with a mandate to carry out national
agricultural policy, GH has been most concerned with selling all
its members’ apples at prices consistent with the results Of the
Annual Negotiations. The negotiations are also the mechanism for
transferring information on what consumers want (through the

representative from the Ministry Of Consumer Affairs), and on what

178
it costs to supply these characteristics (through the
representative from the farmer unions).

These negotiations have the potential to transmit the
information needed by consumer representatives to choose which
characteristics they would prefer and be willing tO pay for. But
since all domestic agricultural products are being discussed, the
likelihood that much detailed information is being transmitted on
preferences for individual products (especially the more
economically minor products) is very small. Cost information is
transmitted more systematically through the Budget Commission on
Agriculture, a government Office with the sole purpose Of
collecting cost-of—production information and providing it to the
negotiating parties. Thus most information on what consumers want
is transferred at the shipper-retailer point, while the
information on what these characteristics cost to produce is
transferred in the Annual Negotiations.

GH regularly passes on information concerning preferred
varieties and qualities, but it has neither rewarded those who
adapt to this information nor punished those who do not. Rather,
the most common policy is to pool all Class 1 apples in a
district. Since growers who would be willing to adapt their
production do not receive benefits for this until a great many
other growers follow suit (thus raising the total pool), there is
little incentive tO follow the information given.

BAMA prices apples differentially, rewarding higher quality

with higher returns. Specification coordination concerns not only

179

condition of apples grown but also the way these apples are packed
and presented, and BAMA is quick to implement information gathered
on this latter aspect. In the past, BAMA has practiced targeting,
so that different markets receive apples having the
characteristics most preferred by the customers of those markets.
Since the distribution Of profit is over a very small population
(BAMA is owned by 2 families, with over 75% Of shares belonging to
one family), the drive for profit maximization is strong relative
to GH, where profits are divided among hundreds Of people. Thus
although GH does have incentives to «distribute information on
changes in market demand and to push for this information to be
used, the incentives are much stronger in BAMA.

BAMA has a greater market share at the retail level than at the
farm-gate level. It buys much Of its needs from GM, repackaging
the apples it according tO BAMA’s own standards. This means that
aggressive implementation Of information on changes in market
demand is more prevalent in the marketing rather than growing Of
apples. At the farm level, GH is by far the largest and most
influential shipper. Historically, it has been slow tO press for
changes in the growing and marketing Of apples, taking a passive
role and concerning itself mainly with selling existing apples and
advising on what varieties to plant. While some might argue that
such passivity is an inherent characteristic of a grower—owned
marketing firm, many participants interviewed blamed the passive,

cautious management prevalent at GH until the early 1980’s. These

180
participants felt that much about GH’s approach tO marketing had
changed since 1981, and credited the new core management and

director for this change.

C. Transpargncy: This refers to "the extent to which the terms of
all transactions are Open to Observation by all potential
participants in the market" (Shaffer 1987 p.71). Transparency is
a function Of numerous factors, including the existence and
relevance Of market news reports, the existence and use Of quality
standards -- i.e., where standards exist, do they match the needs
Of buyers and sellers, or are individually-negotiated standards
more prevalent? Where individually-negotiated standards are
common, market news reports using, e.g., federal standards, cannot
accurately reflect what quality of product. was actually
transacted. Transparency and uncertainty -- thus transaction
costs -- are inversely related.

D1 the processed apple channel, terms Of trade are negotiated
and a fixed price is set for the raw product. The results are
widely publicized and TH) price negotiations, private or public,
normally take place after the agreement has been reached.
Processors know exactly what price they must pay, and growers know
what price they will receive. The major variable is how much Of
the domestic crop will be allocated to processing. This is a
function Of crop quality and quantity -- largely the result of
weather conditions -- as well as market demand. In high-crop

years, some Class 1 apples go to processing in order to prop up

181
the fresh-market price, while in short-crop years some Class 2
apples make it to the fresh market. This is a decision made by
those responsible for selling the apples, i.e., GH or BAMA. But
in the processed market as a whole, there is a very high degree Of
standardization and transparency.

In the fresh market, the price band is arrived at through
widely-publicized negotiations. The negotiations and results are
fully transparent. The final sale price Of individual apple
orders are arrived at by private treaty, however, and are widely
reported only in annually aggregated form (i.e., annual statement
Of weekly average prices for generic Class 1 apples). The GH
director of' Market Regulations receives information about all
sales prices in order to set the starting target price for the
following week, but this information is not disseminated on a
local level. In BAMA, both prices to retailers and to individual
growers are set in private treaty negotiations. Growers Of
different qualities receive different returns. Although the
differential pricing policy itself is well-known, the contents Of
individual BAMA contracts with retailers and growers are not.

In general, neither GH nor BAMA transmit detailed market
reports to growers on prices received. GH contracts with its
growers are standardized and its contents commonly known. On the
whole, the fresh subsector is the most transparent at the grower-

GH point the least transparent at the shipper-buyer point.

182

D. agaptiveness to Market Chapgass_ As argued in Chapter 3,
government protection and subsidization of agriculture in Norway
weakens incentives to adapt to market changes. Since adapting to
certain changes can mean no longer being a grower, the Norwegian
policy has in this sense fulfilled its goal Of supporting the
rural population. hi the fresh market, GH is now struggling to
find a way to protect the survival of small family farms and also
reward those who are willing or able to grow the qualities most
preferred by the market. The existence Of a strong private firm
with incentives to adapt to and capitalize on market changes, as
well as increasingly difficult economic conditions, give GH a push
to encourage grower adaptiveness where possible. Some growers are
limited by geographical location, but many do have the capacity to
produce apples with more highly demanded qualities. Chapter 3
showed that information on what attributes are desired by the
market is widely available at the grower level, but that
incentives to follow this information are not.

The processed market in Norway is very small and protected from
competition by import restrictions. Products identical to those
produced using domestic apples cannot be imported, but other
products containing processed apples may be. Thus processors are
still subject to some Of the pressures Of changes in market
demand. Adaptiveness is very much a function of the incentive
structure. Although not necessarily the case, adaptiveness and

stability do not seem to occur together. Historically the focus

183
in Norway has been on stability rather than adaptiveness, although

there are indications that this is changing.

E. Distribution Of tha Costs assotiatag with Risk and Dntertainty:

The process Of coordination is to a great extent the process of
decision-making under risk and uncertainty. That risk and
uncertainty exist is immutable: what gap be changed is its level,
how much Of it each participant operates under, and who bears the
cost Of decisions that, with hindsight, prove to be inappropriate.
The power distribution in a subsector is reflected in the
distribution of these costs: each participant wants to bear as
little Of the costs as possible, but at the same time, if tOO much
of the costs are borne by one participant, he may choose a path
detrimental to the interests Of others relying on his production.
Thus even the relatively powerful participants may choose to bear
some costs associated with risk and uncertainty if this is
expected to encourage others to behave in a way advantageous for
the more powerful.

The source Of risk in decisions is, in general, uncertainty
about future product supply and consumer demand. Uncertainty
about future supply is in turn related to the unpredictability Of
weather. These factors interact to create considerable
uncertainty regarding future prices. The following three general
categories of decisions that growers must make are affected by

these areas of uncertainty:

184

1. Investment/Disinvestment: What variety or quantity of trees
should a grower plant (or cut down)? What sort and how
much new machinery should a grower or packer invest in?

2. Output: Given an orchard capacity, how much should a grower
grow? What qualities should he focus on? What volume will
be demanded by consumers?1

3. Distribution: Which apples will go to the fresh or
processing market?

Participants have only partial information about these subjects
when they make their decisions. In Norway, growers receive a
great deal of information on how much and what qualities Of apples
to grow. Through GH, they have a guaranteed home for their
product, regardless Of whether this information was correct or
whether they followed it. So GH shoulders some Of the costs
here. The growers also shoulder some costs, since apples that do
not correspond to consumer preferences cannot command a high
price. On the other hand, GH decides on packaging and
presentation techniques, and if these do not correspond to
consumer preferences, the apples will still get a lower price.
Growers bear some Of the risk Of their cooperative’s management
decisions as well.

Packing houses generally decide for themselves whether to

invest in new machinery or not. The volume they receive does not

 

1. Output is related to, but not completely determined by,
investment. Given an orchard, a grower can decide gasp season to
encourage fewer high-quality apples (n: more apples of average
quality. Given a bearing tree, a grower can focus on color or
crispness, depending on which quality is demanded.

185

change dramatically from year to year, but most are too small to
use modern packing equipment to capacity for more than a few weeks
per year. GH helps shoulder the risk of asset-specific
investments on occasion, for instance by building storage
facilities adjoining a packing station and leasing those
facilities back to the station. But in helping packing stations
in this manner, GH also has a voice in packing station Operations.
One Of the current sources Of controversy within GH is its
decision to "rationalize" the packing station structure, i.e., to
close some down and expand others so as to cut down on
transportation and overhead costs, and to allow the use Of modern
packing equipment. But in general, GH helps shoulder the costs
associated with risk and uncertainty in the areas Of investment,
output and also weather.

Through the Annual Negotiations and the Market Regulation Fund,
taxpayers help shoulder the burden of price and distribution
uncertainty. In both the fresh and processed markets, apple
prices are decided on by negotiation, although in the fresh market
prices are allowed to fluctuate slightly. GH helps smooth these
fluctuations and reduce the risk their members operate under by
pooling returns. When an oversupply Of apples threatens to pull
fresh-market prices down, the Market Regulation Fund can pay extra
subsidies to GH growers whose Class 1 apples are sent Off to
processing, thus easing the cost to growers of propping up prices.

In reality, the taxpayers help ease the burden of' risk and

uncertainty in all of the three previously mentioned areas. Their

186

contribution is in paying the tax implicit in the price of apples
they buy, and in paying income taxes that finance: government
market regulation efforts. Fellow growers also share this burden,
since pooling spreads the costs associated with all three areas.
As pointed out in Section 4 Of this chapter, the safety and
stability ensured by the current structure also means that the
potential gains to growers from bearing risk are dampened.

The very high variability in product type and quality in the
fresh produce sector, as well as the potential profits available
to growers willing to bear the costs of risk and uncertainty, are
factors contributing to the low rate Of cooperative membership in
this sector. Participants in various levels agreed that produce
growers have historically been the most independent in Norway.
Especially if located close to major urban centers, it is feasible
for growers to make their own market connections with the many
small retailers in these areas. In this way they would bear more
Of the risk but also more of the potential profits from acting

alone or in small groups.

F. Consequences Brought to Bear on Behavior: This category has
some overlap with the previous section, but the two are by no
means identical. This category focusses more specifically on the
distribution of costs or benefits associated with particular
actions. Who gets to impose externalities on whom? For instance,
by pooling member returns, growers Of lower-quality Class 1 apples

impose a negative externality on higher-quality growers. Or

187
conversely, high-quality growers provide a positive externality to
other growers. Either way, individual GH members do not fully
bear the cost or receive the benefits Of their production
decisions.

GH bargains for' prices, and sets packaging and presentation
standards that its member packing stations must follow.
Regardless of prices received, or how well (or poorly)
presentation style matches retailer preferences, GH as a
cooperative receives its Operating revenues and GH management
receives the same salary. Since growers and packing stations have
nO contact with retailers, they cannot judge whether prices
received are "too low" because of poor presentation or poor
quality. But GH growers do have contact with non-GH growers, thus
GH growers may know about the pricing, or the sort of packaging
and presentation, done by BAMA.

A common complaint heard at levels closer to the farm was that
GH did not put sufficient care in setting packaging and
presentation standards, for instance by encouraging too much
mixing Of sizes within one box. One could argue that the reason is
that the consequences Of poor packaging or presentation are not
brought to bear fully on GH. It apps hear complaints by growers
and packing station managers, and this exercise Of ‘the voice
option does appear to have some effect on the cooperative’s
management -- especially as external conditions make the threat Of
grower exit more real.

Some consumers argue that since growers do not bear the cost of

188
inefficient production practices, they have less incentive to
look for cheaper ways tO produce. Growers’ production costs are
taken into account when setting the annually negotiated target
price, with little investigation into why costs are what they are.
In other sectors such as dairy or meat, there are "model farms"
drawn up on paper, that set out minimum efficiency levels for
farms Of different sizes in different parts of Norway. The fresh
produce sector is so complex, however, that no model farms have
been drawn up. Once subsidy levels have been set, a potential
grower strategy could be to cut production costs as much as
possible, thus increasing their own net revenues. Some
participants argue that given the current structure Of incentives,
there is greater incentive to maintain the farms at average (not
lowest) cost. That is, the marginal savings from cutting costs tO
the minimum are less than the marginal costs involved in achieving

these savings.

II. P RFORMANCE: MICHIGAN

A. Prices: There is I") institutional mechanism to ensure that
prices for fresh apples will reflect the growers’ costs Of
production in NHchigan, since the people who bargain for prices
are generally not the ones who grow apples. Final prices are a
function of shippers’ perceptions of market conditions, their
market power and bargaining skills relative to the retailer-

buyers, rather than being a function of the costs of production

189
and marketing as well. Marketing costs are taken Off by packers
and shippers regardless Of price received for the apples.

Since fierce competition exists between shippers, fresh-market
prices are quite flexible in response to market changes. Some
argue that prices are more flexible downward than upward, as
shippers undercut each other tO make a sale. With the increasing
weight given by retailers tO factors other: than price (e.g.,
quality and service), some shippers are becoming less inclined tO
cut prices, attempting instead to focus the bargaining on quality
and service. In the past, shippers bargained with little idea Of
market-wide supply, and even with the increased information now
available shipper incentives are to cut prices if in doubt about
true market conditions. Many participants argue that this leads
to unstable prices that reflect neither' market conditions nor
costs Of production very well.

hi the processed apple market, MACMA negotiations with
processors serve as an effort to include grower concerns,
including the costs Of production, in determining prices. Prices
remain flexible since MACMA does take into account overall supply
and demand conditions, and negotiates only a floor price. Prices
can and do rise above the floor, and if the floor is set too high,
processors can import apples from other states. Some participants
argue that raw-product prices for apples have been too low, but
this price level is not necessarily inappropriate.

Prices for processing apples may indeed be tOO low relative to

the costs Of production of some growers, but if this is an

190
accurate reflection of market conditions and not a result Of poor
negotiation, then the resulting difficult times for some apple
growers are a signal for them to exit, not a signal Of poor
performance. If the maintenance Of a population Of processing-
apple growers is a goal Of the comunity, the difficult times
could be construed as poor performance -- but there is no such
population goal in Michigan. At any rate, Michigan’s growers
received an average price for their processing apples higher than
the national average every year from 1976 to 1986 (AAMA 1987 Crop
Statistics). While this may' be explained in part due to a
prevalence of the highly-demanded Northern Spy variety in the
state, some participants argue that it indicates the success Of

PA#344 in increasing grower bargaining power and thus prices.

8. Specifitation: Some consumer preferences are communicated to
growers via their packer-shippers, who receive this partial
information from the retailer-buyers with whom they negotiate.
The preferences communicated are primarily on short-run
characteristics like size and color, rather than long-run
preferences on quantity or variety. Traditionally the stress has
been on color, with crispness holding an increasingly important
position. A problem with the preferences on color and crispness
communicated to growers is that they are mutually incompatible
after a certain point: with many varieties currently in
production, maximum color is attained after the point for maximum

crispness. Thus growers have to choose which one to focus on: the

191

short run sale is usually more dependent on color than crispness
(although this may be changing), but long run demand is affected
by crispness. Thus although growers know that consumers prefer
red, crisp apples, they have not been able to do both
consistently. New varieties have been developed that attain peak
color more quickly, allowing growers to maximize both color and
crispness, but it will be some time before a significant number
are planted and brought to fruition.

The problem with crispness is that, unlike color and size, it
is not visible; i.e., even if consumers prefer crisper apples,
they cannot recognize them by sight. Crispness can be made
visible with the use Of pressure tests. While the information
cost on crispness is high for individual consumers tO bear, at the
shipper-retailer point it is quite easy to communicate pressure-
test information. That is, a retailer can screen incoming apples
by including a minimum pressure-test level for his apples. Or, a
shipper can make a sale by focussing on the pressure test level of
his apples as well as price. The cost Of this screening is then
passed on to the consumers at a much lower individual cost than if
each had to pressure-test their own apples.

Packer-shippers are also aware of the packaging preferred by
retailers, for instance less size variation within a box, but many
find it difficult to use this information. The reasons for this
were discussed in Chapter 3, and have to do with the pricing
policy for their services: quality Of presentation enters into

their profit function only as it affects quantity demanded, not

192

price received.

C. Transparency: One Of the major issues in Michigan today is the
inappropriateness Of current official quality standards and the
resultant difficulty for growers of' comparing terms Of trade
Obtained by various shippers. Michigan’s fresh apple subsector is
characterized by private treaty markets, which are minimally
transparent without the help Of market information reports. When
the few available sources of information are based on broad
quality standards and non-standardized packer-shipper fee
structures, the transparency level is low. Such is the case in
Michigan.

Information on market movements and f.o.b. prices according to
class and variety are published by federal market services, but
these have not reflected what qualities were actually sold:
shippers negotiate deals and standards individually with retailer-
buyers, so a traypack Of Extra Fancy Jonathan apples sold to
different retailers can differ considerably. Helpful information
that is currently unavailable includes actual quality Of apples
exchanged, amount Of each quality-category exchanged, and average
grower price received broken down by quality and variety.

At the packer-grower transaction point, the fee-charging
structure is ostensibly very easy to Observe since with many
packers this information is clearly laid out on paper. However
there are numerous services that the packer performs, and numerous

ways to charge for each; there are practically as many charging

193

structures as there are packers. Each weights the charges for
different services in his own way, and the final amount that the
grower pays depends on the packout, i.e., the proportion Of his
apples allotted to traypacks vs. bags vs. processing. In such a
situation, growers cannot compare the returns they would get from
different packers simply by looking over the formal charging
structure. Within a packing station, charging practices are
standardized and some level Of pooling is common. At that limited
level, the market could be considered transparent.

hi the processed channel, MACMA’s annual bargaining for price
and terms of trade serves to make the market more Open tO
Observation than is common in the fresh channel. Prior to
bargaining by MACMA, growers charged that the prevalent private
treaty system resulted in impacted information and market power
greatly weighted to the processors’ benefit. Now even though PA
#344’s exclusive agency clause has been nullified, MACMA bargains
with processors for the majority Of Michigan’s processing apple
crop. By representing such a large portion of the state’s crop,
MACMA serves to standardize the prices and terms Of trade. It
also publicizes the negotiation results to members and non-
members alike, functioning as a market information source.
Finally, through its involvement in the ten-state American
Agricultural Marketing Association, it helps put Michigan’s
subsector in a broader context and adds to regional transparency.

Processor cooperatives provide a level of transparency for

their members comparable to what MACMA provides for the rest of

194
the market. Given the existence Of MACMA, it is not clear that
cooperatives add to market transparency: the impetus for their

formation and strength must be looked for elsewhere.

0. _gaptiveness to Market thapgas: Chapter 3 argued that
historically, Michigan’s fresh apple subsector has not been very
adaptable to market changes. Two reasons Offered were the pricing
structure that makes packer-shipper returns relatively independent
of price received, and the transportation cost advantage that
allowed Michigan to undercut the price Offered by distant'
competitors on the West Coast. There are limits to how long the
state can drag its feet and still remain competitive, however.
First of all, the transportation cost advantage has waned in
importance as quality and service have become valued over price.
As a matter Of fact, when Norway imports U.S. apples, it does so
from Washington, despite the high price. The reason cited was the
consistently high quality Of goods Norway had received from
Washington, a reason also cited by retailer-buyers in the United
States. Also, while packer-shippers are not vulnerable to price
changes, when the inappropriate quality or form of apples affects
the quantity Of apples demanded, they are very much affected.
Given these changes, Michigan has been adapting to the new
preferences during the last five years. That is, Michigan has not
been a leader in adaptation, but eventually the threat of losing
market share spurred Michigan’s packer-shippers to start adapting.

This is not to imply that all Michigan packer-shippers are

195
sluggish to adapt to change, but that on average, most have not
been very eager to make the changes necessary to conquer new
markets.

Growers have historically relied on their packer-shippers for
advice and direction concerning adaptation tol market changes.
After all, it is the packer-shipper who has his hand on the pulse
Of the market, and it is he who will sell the growers’ apples. Of
course, growers who are most willing and able to adapt their
production tO market demand will seek out like-minded packer-
shippers. Looking at Michigan’s fresh apple market, one could not
accuse it Of being unresponsive to changing preferences. Being
only a small part of the national supply, and surrounded by
competition from near (New York) and far (Washington), Michigan’s
growers, packers and shippers cannot ignore changes in market
preferences. One could argue that a change in the incentive
structure could make Michigan even more responsive and thus more
successful in competing in the national and international markets.

In the processing channel, the issue at the grower level has
not been so much a change in the varieties or qualities demanded
as it has been in the total quantity demanded. There are some
varieties that remain particularly in-demand for processing, but
on the whole, demand for domestic processed apples is flat or
declining, while supplies are increasing. Many private processors
adapted to this change by simply selling the business and moving
out. Many cooperative processors, on the other hand, have adapted

by implementing stock tonnage contracts and limiting the amount

196
each grower can deliver. One cooperatively owned processor
recalled 20% Of all its stock tonnage, thus giving a clear message
to its members to produce less.

Cooperative processors are the most suited to deal with such
(long-term changes because they are the only ones with long-term
commitments to the grower. These commitments result in a
structure that eases the short-term cost to growers, while still
resulting in a longer-term decrease in supply. Private processors
can also encourage a decrease by various methods, the most extreme
Of which is going out Of business, but many Of these methods have

a much more severe effect on the growers.

E. Distribution Of the Costs_ Associated with Risk apg

 

Uncertainty: Three categories Of grower decisions associated with
the risk and uncertainty were identified in the beginning Of this
chapter: investment, output and distribution. In Michigan,
growers are essentially on their own when it comes to long-run
planning for the fresh market. They do receive some advice from
county extension agents, packers and shippers, and they receive
crop surveys every four years to see what has been planted or
removed. But since no one wants to be held accountable for
inaccurate advice about an unclear future, most participants are
reluctant to give clear direction on supply and demand outlook and
on what growers should plant. Growers are expected to collect the
necessary information to nmke these decisions on their own, and

they bear the costs if their information or analysis is wrong.

197
Even the grower-owned packer-shippers generally accord a low
priority to researching what growers are doing, intended to do, or
should do -- while at the same time admitting that such research
would be very helpful to the grower.

Packers also must bear the risk on their own when it comes to
investment in new machinery or storage facilities. Since long-
term contracts are not used in the privately-owned packing houses,
packers rely on their personal relationships with the growers, as
well as on their own performance in fulfilling grower needs, to
keep a steady supply coming. Shippers have very little capital
investment needs, but they do need a steady, reliable supply
source and a set of reliable buyers in order to succeed. One
factor' in gaining and keeping packer-clients. is 'the shipper’s
willingness to share information with the packers, which aids them
in investment decisions. Available evidence shows that the
largest or fastest-growing shippers do communicate actively with
their packers. None, however, will link their own profits to
their packer-clients’ investment decisions. This clearly reflects
the power Of the different participants to make their wishes
count.

In the processing channel, only the cooperative processors
Offer an avenue for mutual insurance. Growers are assured a home
for their product within the limits imposed by stock-tonnage
contracts, and the processor is often assured of input supply
through these same contracts. Fhivate processors, like packer-

shippers, rely on trust and personal relationships. In processing

198
there also exists a grower-financed bargaining and marketing
agency (MACMA) for the collection and dissemination Of market
information. Although most information provided to growers by
MACMA is short-run in nature, some may also be helpful to growers
trying to decide on long-term plantings.

In the short-run, growers receive more guidance on the quality
(not quantity) to produce. As mentioned earlier, some Of this
guidance is contradictory: when given the advice tO grow crisp,
red apples, the grower must Often choose between these twO
characteristics. If the shipper emphasizes color and then cannot
get a high price for the apples because they are not crisp, it is
the grower who receives lower returns. He will not even know when
this happens, since the returns are pooled and divided up through
the season.

A grower who focusses on growing traypack quality apples is not
assured that his apples will be packed in trays. SO although the
packer-shipper may contribute to decreasing the uncertainty under
which a grower Operates, the cost is still borne by the grower.
Once the grower consigns his apples to a packer-shipper, the
latter’s major concern is tO move the apples out.

A similar argument holds for the distribution of apples between
fresh and processed markets. Packer-shippers do have an
incentive tO send as little as possible Off to processing, since
they make very little money on that volume. However, a packer
with storage facilities will want to fill that capacity, and

especially in short-crop years may encourage storing apples that

199
are not in a condition tO withstand storage. If a grower’s apples
go from storage to processing due to poor storage practices, or
because they were Of a quality that should not have been stored in
the first place, the packer-shipper is still paid in full for the
cost Of storage.

In the processing channel, the burden Of some price uncertainty
is borne by private processors: they commit themselves to a price,
which sometimes turns out to be too high. This does not happen
Often, however. If the growers belong tO a cooperative and prices
are dismally low, at least the cooperative bears some of the cost
by retaining less for investment. In the long run, the costs
associated with underinvestment in the cooperative are borne by
the grower-members, so this strategy is necessarily one to be used
sparingly if the cooperative is to remain in business. All in all,
growers bear most of the costs associated with risk and

uncertainty.

F. Conseguences Brought to Bear on Behavior: In the fresh market,
shippers bear little Of the cost associated with their price-
cutting behavior. Growers’ Options are to stay or leave, and
since most shippers follow similar price-bargaining patterns,
leaving Often does little good. Between growers’ (particularly
the Pomesters’) pressure and the shippers’ increasing acceptance
that their isolated price bargaining is to the detriment Of the
subsector, slow changes are being made. None of the changes

involve making the shippers bear the cost of price-cutting

200
behavior. Rather, the focus is on greater sharing Of market
information tO aid shippers in the price discovery process.
Although switching packer-shippers may not help the grower, it can
hurt the packer-shipper. 'This could be one more reason why
shippers are slowly inching towards cooperation.

Packers also bear the consequences Of poor storage or rough
handling only tO a limited degree. A grower would have to be
especially alert even to suspect that the level Of his returns are
a result Of poor packer performance (rather than market demand,
competition, or the quality Of apples delivered by the grower).
He would then have to express his discontent through exit or
voice. If the grower exits, the packer bears the cost Of poor
performance. However, competition for grower business exists, and
packers must prove that they treat the growers’ apples well in
order to build the trust and personal relationship so necessary in
the subsector.

In processing, MACMA does bear some Of the consequences of its
behavior. If it negotiates a price below what emerges as the
market price (which has been known to happen), it usually receives
strong feedback from irate growers, since the negotiated floor
prices are the market price for the first few months Of the
season. If the negotiated floor price is tOO high, processors
will buy fewer Michigan apples, which also results. in grower
discontent.

Unless they belong to a cooperative with stock tonnage

contracts, growers do not feel the full consequences of

201
overproducing already abundant processing apples. Since total
volume not allotted tO cooperatives is taken into account in MACMA
negotiations with processors, the grower who cut back production
bears some Of the cost created by his fellow growers’
overproduction. This free rider problem is one that MACMA cannot
solve easily. The inability Of growers to capture the benefits Of
cutting back -- or conversely, the ability Of growers to spread
the cost Of not cutting back -- is a factor contributing to the
continuation Of apple oversupply in the United States in general

and in Michigan in particular.2

III. INSTIIUTIONAL COMPARISON

Taking a step back to lOOk at both countries simultaneously,
differences and similarities in performance emerge that can be
related back to the situation, structure and conduct in each
country. Given the particular situational characteristics, it is
clear that the structure Of incentives has a great effect on
participant conduct and resultant performance. For instance, we
find in both countries evidence Of inadequate quality standards.
Reasons for this undoubtedly include the high variability in
quality possible with any agricultural product, changing consumer
demand, and the constant improvements being made through breeding

that render quality standards Obsolete soon after they are set.

 

2. Oversupply is defined here as a condition where the
marginal cost to the grower of producing one more unit of apples
is greater than the marginal revenues the grower receives from
selling those apples.

202
Apples are being sold above the formal standards in both areas,
and in neither area dO the shippers want to be bound to sell at
higher legal standards -- the risk of quality variability due tO
weather is high in both Norway and Michigan.

The sellers of fresh apples to retailers in both areas are the
shippers, and in neither area do their revenues depend primarily
on price received. Given a quantity Of apples to be sold, price
is directly related to quality, both Of the apple itself and Of
the packaging. Thus in both Norway and Michigan the majority Of
apple sellers have focussed on selling maximum quantity, giving
less attention to quality and price Of the apples, with the result
that the quality of apples marketed in both countries has much
room for improvement. Both eventually did have to pay attention
to quality, since lower quality affects the quantity demanded at
some point.

This shows the importance of looking at the structure Of
incentives under which the participants are operating. ‘That
shippers are the relatively powerful participants in the channel
from grower to shipper is shown by their ability to pass on the
risk Of price variability to the grower. The research in Norway
shows that even if information on consumer preferences does reach
the relevant participants, they will not use this information if
appropriate incentives for doing so do not exist.

Looking at both countries also shows that consideration of
growers’ costs Of production will not necessarily be included in

the price determination process without mechanisms designed fOr

203

the voicing Of this information. While growers’ costs Of
production are implicit in their supply function, biological
constraints associated with apple production mean that grower
supply responses are lagged a number Of years. This situational
characteristic contributes to the widely observed oversupply-
undersupply cycles experienced in agriculture, particularly in
perennial crops such as tree fruits.

In Michigan, growers have relatively little voice in
determining the price of fresh apples, at least in the short run.
If a shipper happens to also be a grower, he will have access to
his own cost-of—production information, but otherwise this
information does not enter the price negotiations. When grower
groups are involved in the price determination process, as in
Michigan’s MACMA or Norway’s farmer unions, the cost Of production
concerns have at least the potential to enter into the discussion.

It can be argued that grower involvement creates inflexible,
excessively high prices. Although some have accused MACMA Of
having such an effect, it is doubtful if MACMA’s effect has been
so strong, since Michigan has Open borders and a great many
competitors. Norway, however, strictly controls imports of fresh
and processing apples. This control, along with grower
involvement in price determination, does appear to result in
higher prices. There is good reason to believe that prices are
high in Norway because Of the high costs Of production rather than
the growers reaping monopoly profits, although the latter factor

may also be at work. Since supporting its agricultural population

204
has been a central goal Of the Norwegian government, the price
distortions could be considered useful or necessary. It is not
clear, however, that subsidized prices are the best way to reach
this goal. Grower involvement in price determination also
contributes to transparency in the market, as MACMA and both fresh

and processed markets in Norway show.

IV. COOPERATIVES AS A COORDINATING MECHANISM

Chapter I discussed the theoretical potential Of farmer
cooperatives to act as a coordinating mechanism, and the
theoretical obstacles in this path. This section will compare
that discussion to the reality in Norway and Michigan, in order to
discover whether the contributions Of cooperatives and the
Obstacles they have faced match the earlier predictions. This

section will follow the same format as Chapter 1, Section C.

A. Transagtion Costs and Asset Specificity:

1. Decision Costs: A comparison Of BAMA and GH clearly reveals
the higher decision costs faced by GH. BAMA’s aggressiveness in
marketing, while certainly a function of its incentive structure,
is also a function Of its centralized decision-making structure.
For any significant action, such as rationalization Of the packing
station structure or implementation of narrower quality standards,
GH-Central’s management must first confer broadly with other
management and board members.

Michigan’s shippers illustrate that cooperatives do not have a

205

monopoly on slow decision-making when adapting to changes in
market conditions; the incentive structure of these shippers
causes them to avoid substantial risk-taking and change. However,
a shipper who apps perceive a need tO adapt to market changes can
do so more quickly than a cooperative. This may be a reason why
cooperatives are generally' weak in the area. Of 'fresh produce
marketing. Fresh produce is a subsector with wide variations in
quality, involving highly perishable commodities that must be
moved quickly. The slowness with which some Michigan shippers
adapted to changing market demand was not due to cumbersome
decision-making procedures. Rather, these shippers were waiting
until they perceived it to be in their interests to adapt.

In a cooperative, the presence Of decentralized decision-
making procedures that involve a large number of people means that
decisions take a longer time to be made. Experience shows that
cooperatives have a greater chance Of succeeding in a competitive
market when the members are willing to allow some centralization
Of decision-making. The time and resources saved through
centralization become relatively more important as the decisions
involve more specialized information. Time is a particularly
important factor' in the fresh fruit. and vegetable industries,
where the many site-specific and time-specific decisions made
daily are poorly suited to lengthy decision-making procedures.
The danger with centralization is that members may lose control of
their cooperative, resulting in a patron-owned firm that is hard

to distinguish from an investor-owned firm.

206

At any rate, the necessity to economize on transaction costs
make the centralization question an important one for the
cooperative to address. When the cooperative has a large market
share, as does GH, it may be more able to afford the time and
resources it needs tO come to agreement within a decentralized
structure. GH, for instance, has now reached the point where it
can discuss ways to implement differential pricing, and it is also
going ahead with the packing station rationalization plans.

The pace Of change in GH reflects many factors, some that are
characteristics of cooperatives in general. Being an integrated
firm, GH considers a wider range Of costs than would a non-
integrated firm considering change. Being a cooperative, it has a
decentralized decision-making structure. Participants in the
cooperative’s decisions have a broad range of interests and
discount rates, thus adaptations with short-run costs and long-
run benefits are likely to be opposed by some members. Finally,
being partially supported by the government gives GH a margin of
security and thus potentially a complacency that may slow down
reaction tO market changes.

NO shipper in Michigan has the market share or public support
enjoyed by GH. The costs Of slow adaptation can be bankruptcy or
at least a significant loss of market share. The largest and most
successful shippers in Michigan are the ones who have adapted
quickly to market changes, and who cultivate relationships with
like-minded growers and packers. The need for rapid decision-

making ability in the fresh apple channel and the lack of

207
protective buffers (such as government support or legislated price
negotiations) for cooperatives in Michigan thus appear tO have
been factors contributing to the lack Of grower marketing
cooperatives in this channel. Even yi_tp its buffers, GH has the
lowest market share Of the major national grower cooperatives in
Norway.

2. Information Costs: Both Norway and Michigan’s apples
subsectors illustrate that where cooperatives or grower groups
exist, information costs for growers and even shippers has been
less than where they do not exist. This contributes to the
transparency Of the market.

3. Enforcement Costs: In Michigan growers’ bargaining with
processors, grower group involvement significantly reduced the
costs to growers Of enforcing their agreements with processors.
After the passage of PA #344, for instance, growers had recourse
when processors were lax in returning pallet bins at agreed-on
times. Where private participants perform their role with no
grower interference, as Michigan’s shippers do, grower enforcement
costs are very high. There is no way to check to see if a shipper
is fulfilling his agreement to try to bargain for the highest
possible price.

While enforcement costs are high for growers, the shippers’
need to be able to trust growers creates a situation of mutual
dependency that can lessen the need for formal governance
structures. A shipper needs to be able to trust his packers and

growers to deliver the quality of apple he has promised to a

208

retailer, just as a grower needs to be able to trust that a
shipper will try his best to sell the apples for a high price.
Trust without some means Of verification is difficult to sustain,
however. In Michigan, a shipper may use a field man to check on
packing station and even orchard management practices. A grower,
on the other hand, has no means of verifying the sincerity of
shipper effort. This would not be the case (or at least would be
less severe) iri a cooperative, as grower representatives sit on
the board and work somewhat closely with the management selling
growers’ apples.

4. Asset Specificity: Processor cooperatives in Michigan have
proven their insurance value for growers. The cooperative
provides both a home for the growers’ apples and some guidance in
long-run planning for investment. in asset specific items like
apple trees (through stock tonnage agreements). The contracts
also insure the cooperative against Opportunistic behavior by
growers.

There are very few grower cooperatives in Michigan’s fresh
market. When asked for possible reasons for this, some
participants said the growers’ insistence that managers accept
poor-quality apples killed the cooperatives. Chapter 1 also
suggested that this is one shortcoming of cooperatives as
coordination mechanisms. Upon reflection through this research
project, it now seems that this is not a shortcoming of
cooperatives, but Of quality standards. If standards are

sufficiently well-defined, a cooperative can accept all Of its

209
members’ apples and sell the mediocre quality for a mediocre
price. Since pooling is generally for apples of the same quality
standard and variety, growers Of high quality would not have to
subsidize lower-quality growers.

Fresh fruit and vegetable marketers can more easily adapt their
produce to market demand if precise quality standards are used.
However, some cooperatives may be poorly equipped to implement
precise or rigid quality standards that are above what is legally
required. One reason for this is the vertically-integrated nature
of a cooperative, which leads it to take into account the costs to
all its growers Of fulfilling precise standards. However, growers
Of high-quality apples may protest the situation which leads to
them subsidizing the lower-quality apples produced by other
grower-members. This may lead to a more precise definition Of
quality standards that results in narrower pools and decreased
cross-subsidization. Whether a cooperative maintains broad
quality standards tO pacify growers Of average-quality apples or
precise standards that restrict cross-subsidization will depend on
the proportion and decision-making power Of the growers of high
vs. low quality goods. Another possible strategy for grower
cooperatives may be to lobby for the state or national government
to establish more precise standards for the whole industry.

The quality issue in Michigan lends credence to the assertion
that the lack Of well-defined quality standards is a more relevant
culprit than the cooperative institution. Shippers in Michigan

are not cooperatively owned, but they have long been accused of

210
selling bags and traypacks with large variation in size and color.
The problem is more that federal quality standards are of limited
relevance to subsector needs, and shipper incentives have been to

promote quantity even if at the expense Of quality.

8. Trust and Frequency of Transactions: Trust is the foundation
of Michigan’s fresh apple subsector, in and out Of cooperatives.
As explained earlier, shippers and growers both need to be able to
trust one another, but shippers have a means of verifying the
trust. Apples are a non-standardized good involving infrequent
but repeated transactions, and the consignment method Of sale is
an incomplete loose contract with price contingencies related to
uncertainty. According to Shaffer (1987), these are both factors
that can make a cooperative an attractive Option for growers. In
Michigan, these factors have not led to the establishment of
grower cooperatives. Dissatisfaction with shipper performance has
sparked some action from the Pomesters, a grower interest group,
but despite their privately—owned status, shippers still seem to
have the growers’ trust.

Processing cooperatives in Michigan have served as a source of
services previously purchased by most growers from investor-
owned firms (IOFs). Interviews conducted for this study showed
that trust was and is an important ingredient in cooperatives’
operation, although this trust must be backed up by proof of
performance satisfactory to the grower.

It is difficult to gauge the role Of grower-trust in GH, for

211
two reasons. First, GH Operates within a price band handed to it
from the annual negotiations, which it has no part in setting.
Second, GH is a very large organization and individual grower
perception Of their own power to affect GH is low -- in which case

trust may also be low (Shaffer, 1987, p. 76).

C. Multipla Dbjegtivas: Norway is a good example Of the

differences between cooperatives and IOF’s in reconciling
conflicts between grower interests, and between growers’ and
consumers’ interests. BAMA more readily caters to changing
consumer demand, maintaining relations with growers who can
fulfill this demand. Facing the same change in demand towards
higher-quality produce, GH’s approach has instead been to struggle
to find a way to cater to this demand without abandoning the
smaller or lower-quality growers. The conflict accompanying this
struggle has been painful, for example as GH tries to cut costs by
consolidating the packing stations.

GH has exploited its potential as a forum for discussion and
dissemination Of information on what growers should grow, but not
on what the cooperative as a business is going through. The
result is that when business decisions have to be made that hurt
some growers, the members do not understand the basis for this,

adding to the estrangement they feel from their cooperative.

V. OF LESSONS AND LIMITS

This section looks for lessons and suggestions for the apple

212
subsectors of Norway and Michigan, based on discussion with
participants and comparison between countries. Comparison is
possible only to a limited degree, however, due to the significant
differences in the basic conditions Of the two countries. SO that
these differences will be kept in mind when reading the
suggestions, the section will begin by discussing the limitations
to comparison and then turn to a few suggestions for changes that
have the potential to redistribute resources and risk 'hi the

subsectors.

A. Caveats: The first and most Obvious point is that Norway is a
country, and Michigan is a state. Norway can restrict imports and
implement nationwide policy, while Michigan has open borders and
is a state within a sovereign nation. It is constitutionally
forbidden to implement a state policy similar to Norway’s
agricultural policy. The implications Of this have been seen in
the Operation of coordination mechanisms discussed in the previous
two chapters. Norway and Michigan are also very different
climactically and geographically: Norway is very mountainous and
its summers are short compared to that of Michigan.

For a number of reasons, but particularly due to being occupied
during World War 11, Norway has an explicit policy of supporting
through government policies its rural population and its
agricultural production. To date, these two policies have been
joined, so that supporting the rural population has to a great

extent been seen as synonymous with supporting agriculture. GH

213

and the farmer unions have been major actors in these policies,
with the farmer unions being the avenue for the expression Of
voice in national policy, and the cooperative being the mechanism
for its implementation. Many Of GH’s actions and restrictions
stem from being not just a grower cooperative but also a
government-supported tOOl for the implementation of national
agricultural policy. From these basic differences stem the
structural mechanisms discussed earlier: the Annual Negotiations,
the Market Regulation Fund, restricted imports, and so on.

The quality Of' Norwegian apples does not allow the use of
Controlled Atmosphere storage. Thus the domestic apple season for
Norway is 5 months, while for Michigan it is almost the whole
year. Michigan apples have more paths tO which they can be
allocated. Whereas Norwegian apples go either to the fresh market
or to juice, Michigan’s apples also gO to applesauce, pie filling
and frozen slices. Finally, Norway is a country with a long
history of government involvement in the economy and broadly

defined social welfare; the United States is not.

8. Norway: Given its national goals for agriculture, Norway has
devised an ingenious system of checks and balances. By separating
the grower representatives for the annual negotiations from the
implementors of its results, a number of issues are resolved.
First, to have grower marketing cooperatives be the grower
representatives for price negotiations might create incentives to

distort data on operating costs in order to push for a higher

214
price. As it; is, all growers together negotiate for an iptppa
level, using cost Of production data provided by an external
source and Open to criticism by growers.

For reasons discussed in Chapter 3, subsector participants are
generally reluctant tO make predictions on future market
conditions that could be used by growers for long-run planning.
Since no one wants to be held responsible, the final decision is
left to the grower. The separation Of powers in Norway forces GH
to become involved in long-run planning on orchard plantings in
order to make its mandate a feasible one tO fulfill. The final
decision is still the growers’ but this decision is made with more
information (n1 market conditions and fUture demand outlook. It
would seem, however, that the assurance Of income parity gives
growers little incentive to follow these plans very closely. The
same type Of information provided to Michigan growers might be
followed more closely, since they bear a higher proportion Of the
costs of changes in consumer demand than dO their Norwegian
counterparts. In some of Michigan’s processor cooperatives, where
pooling returns also provides growers with a disincentive tO adopt
their production, stock tonnage contracts are used to make each
feel individually the decrease in consumer demand.

Using such contracts in GH would not be impossible, but it
would raise some sticky issues. For instance, GH’s policy is
currently to accept everything its members produce, and with stock
tonnage contracts this would no longer be the case. Also, if

members can only deliver a set quantity, they will try to sell the

215

rest themselves locally, most probably undercutting GH’s price.
Finally, since need in Norway is not tO cut back production but to
change its composition, GH would have tOV sell stock tonnage
contracts by variety, recalling only the stock. Of particular
varieties and issuing new stock for more desired or newly improved
varieties. Stock tonnage contracts are essentially a tOOl to
control supply, and since oversupply is not a problem in Norway,
this tool may' be an expensive and inappropriate one to use.
Differential pricing is a tOOl more suited to quality control, and
thus may be more appropriate for the Norwegian apple subsector’s
needs. Regardless of the tool chosen, GH will continue trying tO
adapt growers’ production to consumers’ demand. Some Of the push
to do this comes from BAMA.

One Of the major rationales for the existence Of cooperatives
is that they contribute to market competitiveness. This rationale
can also be posed as justification for the existence Of private
firms when cooperatives have significant market power. The
competition provided by BAMA pushes. GH to take into account
consumer demand to a greater extent than the cooperative would
otherwise have done.

In competing with BAMA, GH as a cooperative has certain
advantages and disadvantages; tO overcome its disadvantages with
respect to its competitors, GH needs to use its advantages to the
fullest. It is only in the past few years that GH has begun
focussing on one of its greatest potential advantages as a

cooperative: its relations with its patron-members. The

216
alienation of growers from their cooperative was reflected by
their responses to the survey conducted for this study: over 65%
said that their primary loyalty was to their packing station, and
only 22% said it was to GH. This alienation can hopefully be
reduced with a continuation of attention being paid to member
relations and mutual communication.

Most Of the government’s support Of agriculture is through
output price supports rather than production subsidies. These two
have very different effects on consumption. From a consumer’s
point Of view, price supports are a specific tax, and production
subsidies are funded through general income taxes. Tax incidence
theory shows clearly that specific per-unit taxes inhibit
consumption Of the taxed good and that general taxes dO not. This
is also intuitively clear: an individual can avoid paying a per-
unit tax by shifting his consumption away from that good, but a
general tax cannot be avoided by changing consumption habits.
While it is true that all food prices are supported in Norway, it
is doubtful that they are all taxed at equal proportions. Thus,
the taxing Of all goods does not mean that price supports can be
considered a general tax. ~It would be instructive to look into
the effects on consumption Of supporting growers completely with
direct subsidies rather than price supports. Other factors, for
instance political considerations, may make it difficult to raise
personal income tax rates, even if food prices are allowed to
fall.

NO matter what kind of taxes growers are supported with, one

217

fact has emerged in Norway: it is simply not possible to ensure
the continuation Of a dispersed population by focussing only on
agriculture. Rural development includes but is not limited to
agricultural development in the United States, Norway, or anywhere
else. The reality is that most Norwegian rural families have at
least one member working part-time in an Off-farm job. This is
widely recognized in Norway, but there does not appear to be any
well-defined policy or institutional mechanism in place to support
rural non-agricultural development. TO date, GH has not been
actively involved in this area either. No GH participants
interviewed said that they would advise a grower to get out of
agriculture: that was not seen tO be their role. But GH would be
very well suited to play a role in promoting rural development; it
has the institutional and physical infrastructure to enable it to
reach the small villages scattered throughout Norway.

Such action by CH has many potential benefits. Grower surveys
in Norway and empirical evidence in Michigan showed that
specialization is an important factor in growing high-quality
apples. Growers in Norway are generally very diversified; this is
primarily a risk-management strategy. With appropriate training
and Off-farm job Opportunities, growers could specialize in One or
two crops and also work outside. Thus a grower with a 12-acre
farm could plant (for instance) 10 rather than 4 acres Of apples,
devoting himself to producing high-quality apples for part of the
year, and working in an Off-farm job during the remainder of the

year. This would raise the average quality of Norway’s apples.

218
Land in areas least suited to apple growing could be devoted to
other crops. The farms most costly to operate could be taken out
Of production, thus reducing the average cost Of production and
the amount of subsidies needed. It would also mean an explicit
recognition by the grower-cooperative Of its members’ needs.

The farmer union is likely to Oppose such a change in GM, and
to charge that this amounts to abandoning Norway’s growers.
Political considerations may make the promotion of non-
agricultural activity by GH infeasible. It would be unfortunate
if GH did not seriously consider such action, however. The uproar
over GH’s plan to rationalize the packing station structure is
only partly due to grower loyalty to their packing stations and
poor communication with GH. Participants within GH admitted that
what growers were really protesting was the deterioration Of the
communities. One village that was cited as an example had in
recent years lost its post Office, church and school. Losing the
packing station was one more blow to the viability Of the
community. NO matter what agricultural subsidies are provided to
growers, they cannot be expected to continue living in towns

consisting solely of themselves and their farms.

C. Michigan: As much as growers are protected in Norway, they are
unprotected in Michigan -- at least, in the fresh market. The
costs of most types of uncertainty are borne by the growers.
These costs are borne less by the growers in the processing

channel, supporting the idea that if growers do not band together

219

to protect their interests, no one else will do it for them. It
is clear that fresh-market growers have the least market power,
since they bear most of the costs associated with risk and
uncertainty. It is also clear that they have the least market
power despite being numerous because they are fragmented. The
only grower interest group, the Pomesters, represents a scant one-
sixth Of the state’s apple-grower population and its actions are
not oriented towards increasing grower market power. However,
concerted grower action generally shows results; even this small
group has been able to affect some minor changes.

It is neither possible nor necessarily desirable for Michigan’s
fresh apple subsector to be as protected as that Of Norway. But
there are certain conditions existing that would be beneficial to
change, from the lgrowers’ and possibly packers’ and shippers’
standpoint. First is the inadequate quality standards. Every
person interviewed for ‘this study' agreed that current federal
standards do not accurately describe what is being bought and
sold. This decreases market transparency, allows for
inconsistency in what is marketed, and increases uncertainty on
both the buying and selling sides.

The question is not whether higher standards are needed, but
from where the impetus for change should come. MACMA is willing
but politically unpalatable. MAC is politically palatable but
unwilling to jeopardize its demand expansion program to take on a
quality-improvement role which is likely to be highly

controversial. The Pomesters are both willing and palatable, but.

220
(so far) unable to bring about the change on their own. One
feasible line Of action would be for the Pomesters to pressure MAC
to get involved in the issue. There are indications that MAC
would be willing to get involved if strongly supported by growers.
This is the only option that, when suggested to various
participants, did not meet with vehement disapproval.

Another area of uncertainty that growers must bear but cannot
control is the price level for their apples. Shippers bargain for
price and sell apples to buyers, without having their own returns
be affected substantially by the price levels to which they agree.
Growers argue that shippers Often agree to overly low prices and
engage in cutthroat price-cutting. Individual shippers argue that
they bargain as best they can, and that they pgst take grower
interests into account if they want to keep their business. It is
true that shippers need growers’ business and that they do take
growers’ interests into account to some extent, but it is most
likely that shippers protect their own interests first and
foremost. Given the highly competitive shipper relations, price-
cutting is not only possible but very likely. Growers might wish
tO have shippers’ revenues be affected by the prices they agree
to, and this could well be the long-run goal Of a grower interest
group. But given the current distribution of rights and resources
in the fresh market, it does not appear to be a feasible short-run
goal.

One goal that is feasible to accomplish in the short run is to

have shippers bargaining with a more complete picture of at least

221

the state’s supply situation. Some steps towards this goal Of
more complete market information have even been taken. The
Pomesters sponsored a meeting of shippers in 1985 to (discuss
subsector issues, and through grower pressure MAC sponsored
another shipper meeting tO discuss information-sharing. Shippers
have made moves to institutionalize information-sharing on sales
and stocks. Farther efforts by the .Shipper' Association, the
Pomesters and MAC have a very good chance of furthering progress
towards the goal Of more complete market information.

There is a deficiency in the sort Of aggregated information
growers need to make their long-run planting decisions. The state
Orchard and Vineyard Survey that is published every 4 (years
provides some useful information on number, variety and age Of
existing trees. The 1986 survey also included a brief outline of
growers’ stated planting intentions. According to growers, county
extension agents and some shippers, more information on present
supply and future demand outlook would be extremely useful to
growers making planting investment-disinvestment decisions. NO
one wants to make demand predictions and be held responsible if
these are incorrect, and while this reluctance is understandable,
it does leave the grower with little direction or basis on which
to make decisions. ‘The increased availability of information
relevant to long-run decision-making might be another goal for
growers to pursue.

Two institutions already have the infrastructure to carry out

the role Of information-gatherer to aid in long-run planning for

 

222
grower plantings; the State Department of Agriculture, which
publishes the crop survey, and MACMA. It is true that MACMA’s
apple division is by name the association of processing apple
growers, but all apple growers in the state deliver some apples to
processors whether they plan to or not -- it is just not possible
to grow an entire crop Of fresh-market quality. A market
information-gathering role would not only give MACMA a new area Of
responsibility but would also give it a chance to communicate more
closely with fresh-market participants, and perhaps to decrease
some of ‘the suspicion and animosity' with which it is viewed.
Shippers and others could voice their long-run projections without
fear Of being blamed later, and by aggregating all these
predictions a reasonably well-founded long-run projection might be

made.

D. Concluding Comments on the Analytical Framework: The research
for this study was done using the framework for analysis developed
in Chapter One. The framework was particularly useful in
generating hypotheses and in guiding the collection of data; it
was somewhat less helpful as an organizing tool in writing the
thesis. Using the framework helped to organize the complexity Of
agricultural subsectors into a relatively coherent set of
categories and subcategories. These categories and
subcategories, used with specified behavioral and environmental
assumptions, allow predictive statements to be made about the form

of organization likely to emerge in the subsector. Predictions

 

223
about the consequences Of this organization for specific
participant groups can also be made. This study showed that the
predictive statements made with the use Of the analytical
framework are in general proven valid. Detailed predictions are
less likely to be exactly correct, due to the many conflicting or
issue-specific forces at work.

One Of the advantages Of this framework is its ability to
reveal similarities and differences in coordination processes
where they are not immediately apparent. Even what appears tO be
the same outcome can be shown to be very different if only one
looks beneath the surface. For instance, to say that shippers in
both Michigan and Norway adapt slowly to changes in market demand
and to delve no further is to miss important differences in the
reasons for slow adaptation in each area and the consequences Of
this for subsector participants. TO say that growers have
cooperatively integrated forward into packing and shipping in
Norway but have relied on the market in Michigan is also to miss
revealing similarities in the way responsibilities are divided in
the two areas. Finally, to say that either area is more efficient
that the other is to neglect the important question of what costs
and benefits are included in the calculation of efficiency.

The insights Offered by transaction cost economics(TCE) have
been a valuable and central contribution to the approach offered
in this study. By itself, however, TCE neglects certain important
distributional issues. It also fails to detect certain

similarities and differences when doing comparative studies of

224
economic organization. The approach used here is a useful
modification Of TCE that can be a valuable tool in approaching the

Often daunting subject Of economic coordination.

APPENDICES

APPENDIX A

Excerpts from the "Main Agricultural Agreement, 1950":

What follows are excerpts from a paraphrased translation Of the
"Main Agricultural Agreement, 1950", from Dordbrukavtalene. 1945-
1970 by Karl Bonden, pp. 56-61. This Agreement is the enabling

legislation for the Norwegian annual price negotiations.

Introduction:

From now on, we must realize that production and demand,
without regulating devices, will be problematic. There will be a
need for activities to secure for the farmer a decent income
relative to incomes in other sectors. Therefore, we have to ...
perform many regulations that aim to influence agricultural
production. Activities Of this kind must be implemented partly by
the state, partly by the farmer organizations, but always with
close cooperation between the two. The state should plan and
implement .. regulating devices in cooperation with farmer
organizations. The farmer organizations .. should seek to
coordinate their activities with the general economic policies of
the nation. This cooperation should be .. brought into stable,

formal structures.

225

226
Chapter 1: Price Negotiations

This is an agreement between the Ministry of Finance and the
farmer unions Norske Bondelag (N8) and Norske Smabrukerlag (NS):
the Norwegian authorities, N8 and NS are to negotiate prices for
agricultural products. Such negotiations are to be performed
annually, unless the parties agree to a different period.

The negotiations aim at getting agreement on general or
specific guidelines for the determination Of prices. The
negotiations are to be closed before 1 April. The Ministry may
decide that certain negotiations are to be carried out by other
state institutions.

N8 and NS are tO negotiate through a common negotiating body.
The two organizations are to have three members, and can use as
many experts in addition as they find necessary. Both the farmer
unions and state authorities have the right to demand negotiations
with the other party about other issues or Inarket regulatory
devices than prices.

The price authorities (not. the negotiating body) decide the
prices and specific regulatory activities consistent with the
agreement that comes out of the negotiating body. N8 and NS are
to carry out regulatory activities in line with the agree-upon
guidelines from the negotiations. The two organizations should
also see to it that other institutions in agriculture do the same
[N.B.: this becomes the clause that, in practice, involves farmer

cooperatives in implementation of regulatory activities].

227

The economic organizations [i.e., the cooperatives] should
participate in implementation Of the results Of negotiation to the
utmost Of their ability. The economic organizations are required
to send all their suggestions or demands about price and other
market regulation activities to the Negotiation Committee, as well
provide information relevant to negotiated issues to the
negotiators.

When an agreement is reached, each economic organization must
decide for itself the necessary details concerning pay by quality,
season, etc., Of product. The prices must be fixed by the
economic organization in such a way that the average is the price

agreed upon by the negotiating body.

APPENDIX B

Sample Norwegian annual agricultural agreement:

What follows is a slightly edited version of the English
translation Of the Agricultural Agreement Of 1980-1982, published
by the Ministry Of Agriculture.

The Ministry Of Consumer Affairs and Government Administration on
the one part and the Norwegian Farmers’ Union and the Norwegian
Small-holders’ Union on the other part have concluded the
following Agricultural Agreement for the period July 1, 1980-
June 30, 1982, pursuant tO resolution passed by the Starting
[Parliament] on June 11, 1980, cf. Committee Report S. nr. 345
(1979-1980)...

4. Potatoes, Fruit, Berries, Vegetables, Live Plants and Parts of
Plants.
4.2. Periods Of Regulation.
The periods of restricted imports of the various commodities are:
1. Greenhouse vegetables:
Tomatoes May 10 - October 14
2. Vegetables grown in the Open:

Carrots June 1 - May 31

228

229
3. Fruit:
Apples May 1 - January 31
4. Potatoes:
June 16 - June 15

4.3. Standard Prices.
Standard prices and upper price ceiling for the most important
commodities shall be fixed weekly in accordance with the Import
Council’s proposal for the established periods, in order to form
the basis Of price determination.1

The basis for the Import Council’s calculations will be the
quality grade Standard 1 Of the representative items; apples,
tomatoes, and carrots... According tO proposals made by the Import
Council, the standard prices Of potatoes, vegetables, fruit and
berries shall be adjusted by Norwegian kroner (Nkr) 74.7 mill.
throughout the year. Upper Price ceiling will be fixed at 12%
above current standard price.

4.5. Imports.
When the price Of a Norwegian commodity in two consecutive weeks
is above the upper price ceiling, restriction Of imports shall be
removed. The import ban shall be re-introduced when the price Of
the Norwegian commodity is at or below upper price ceiling. Goods
ordered during a period Of unrestricted imports shall be cleared

within a week after the suspension of unrestricted imports. The

 

1. The Import Council is a group Of 13 representatives from
private industry, farmers, farmer cooperatives, and government.
They and their deputies are appointed by the Minister of
Agriculture.

230
upper price ceiling may be fixed as maximum price. The price
quotations used as a basis are the prices of goods delivered
c.i.f. Oslo. The prices are quoted every Tuesday.

The Import Council will propose quantity and time for
supplementary imports, needed to secure a reasonable supply to the
market in regard to the standard prices mentioned in 4.3. The
Import Council will make proposals for distribution and marketing
of the supplementary imports as well. Except during the
regulation period, imports are free.

4.6. Production Support, etc.

4.6.6. Regional Support and Freight Support for Fruit.
The grant from the concentrated feed levy for regional and freight
support for fruit of a fixed quality will be increased by Nkr 5
mill. to Nkr ll mill. per year.2 The regulations will be set by
the Ministry Of Agriculture in consultation with the Norwegian
Farmers’ Union and the Norwegian Small-holders’ Union, cf.
Protocol 14.

4.6.7. Support for Storing Of Fruit. The support for
storing of fruit will be increased by Nkr. 0.5 mill. to Nkr 4.5
mill. per year. The amount will be granted in the Budget.

4.6.8. Packing Support for Fruit, Vegetables and Berries.

 

2. The "concentrated feed scheme" is the arrangement by
which farmers pay a fee that is gathered and supplemented by the
government. It is administered by the Marketing Council for the
purposes Of market regulation and promotion. The small and
scattered fresh produce farmers no longer pay this fee, due to the
prohibitively high costs Of collecting this fee from them.
Instead, these growers are given a grant corresponding to the
amount they theoretically would have paid in fees.

231
The grant from the concentrated feed levy for packing support for
apples, pears, tomatoes, cabbage heads, cauliflowers, cucumbers,
leeks and head garden lettuce, and plums, cherries and
strawberries, will be increased by Nkr 2.0 mill. to Nkr 18.5 mill.

annually.

6. Marketing and market regulation measures.

6.4. Administration.

Grants for marketing schemes, regulation plants (e.g., apple
processing plants built. for' regulation purposes) and Inarketing
measures will be disposed Of by the Marketing Council pursuant to
regulations laid down in this agreement. Money that has not been
spent during the first year Of the agreement period, may be used
for the agreed purposes in addition to the means mentioned above
in the second year Of the agreement period.

The Ministry may, if the Norwegian Farmers’ Union and the
Norwegian Small-holders’ Union agree, decide that money not needed
for one Of the listed purposes, shall be spent for another
purpose. Funds, that according the rules have been granted fOr
marketing schemes, shall not be used for regulation plants or for
other purposes.

6.5. Operational Credits for Market Regulation.

At the request Of the Marketing Council, the State Bank of
Agriculture may give loans to ... the Sales Organization of
Horticultural Producers in Norway (Gartnerhallen)... up to Nkr 80

mill. in total, to cover Operational credits for regulating

 

 

232
measures during the agreement period.3 The money shall be lent on
interest and otherwise on usual terms for cash-credit loans in

banks at that time, cf. earlier recorded minutes.

9. Social Welfare Schemes.

9.2. Holiday Fund for Farmers.
It has been proposed tO increase the grant for the Holiday Fund by
Nkr 20 mill. to Nkr 280 mill.

9.3. National Insurance Membership Levy.
Nkr 197 mill. will be granted per year as National Insurance
membership levy - an increase by Nkr 12 mill. The arrangement is
based upon the following principles:

1. The individual farmer shall pay a levy to the National
Insurance, equal to the levy paid by wage-earners, on pensionable
income within agriculture, animal husbandry, horticulture, and
forestry...

2. The difference between the levy fixed for self-
employed tradesmen and the levy tO be paid by individual farmers
pursuant to item 1 has in the current agricultural agreement been
fixed at Nkr 197 mill. per year.

9.4. Sickness Benefit Scheme for Agriculture.
The refund scheme for expenses paid for hired workers during

sickness will remain unaltered.

 

3. Not to be confused with the market regulation funds
described earlier, which are granted (not loaned) to GH.

233
10. Other Grants in the Budget and from the Concentrated Feed
Levy.
10.1. Fund for Rationalisation of Agriculture.
The Fund for Rationalization Of Agriculture will be granted Nkr
424.6 mill. per year. The maximum support for reduction of prices
will be as follows:
North Norway Nkr 200,000 per holding
South Norway:
Zone 1 Nkr 180,000 " "
Zone 2 Nkr 160,000 " "

The following changes have been agreed upon:
- Field leveling.
The maximum basis for support will be raised to Nkr 1,200 per
decare [about 1/4 acre].
- Support for Farms in Less Favored Areas.
An increase in the support by Nkr 25,000 to Nkr 125,000 per

holding has been proposed.

12. Decisions for the Second Agreement Year.

The following decisions have been made for the second agreement
year:
Negotiations between the Government and the Norwegian Farmers’
Union and the Norwegian Small-holders’ Union about decisions for
the second agreement year shall be Opened before July 1, 1981.

The basis of the negotiations shall be:

234
- The decisions and principles made by the Storting for achieving
the standard-Of-living and income parity objectives of the
agricultural policy.
- The adjustment in income for agricultural workers will be allowed
to develop in accordance with the expected income adjustment for

industrial workers.

13. The Basic Agreement.

The Basic Agreement Of 1950 will be prolonged for the duration
of this agreement. The Basic Agreement’s references to the
"Ministry Of Finance" shall be replaced by whatever Ministry the

King at any time decides.

APPENDIX C

Graphs of actual and target prices for Norwegian fresh apples,

1984 and 1985:

1. 1985 Prices:

 

750

700-

650-
A A A A

 

 

p
b
H
b
b
D

 

 

 

 

 

 

 

 

OO-i / r . .

6 I \

a * f i c : : , r— . : 4

i en:-

5

O
I I I T I I f I I I I I I
‘142434446484740499515212

MW
Legend: : ceiling prices

: target prices
. floor prices
: actual prices

9 D +'O

235

APPENDIX C

Graphs of actual and target prices for Norwegian fresh apples,

1984 and 1985:

2. 1984 Prices:
790

 

 

 

 

 

 

or. per kg.

 

 

 

 

: ceiling prices:
cargec‘prices
floor prices
actual prices

Legend:

235 a

APPENDIX D

Data Collection Methods:
1. Intarviews: Norway

The majority Of information on the Norwegian apple subsector
contained 'hi this study was gathered from twenty six interviews
conducted in the summer Of 1986 and January 1987. My contact
person in Norway was Dr. Per Ove (Rpkholt, a professor of
agricultural economics who has worked with Gartnerhallen (GH) and
has done extensive research on cooperatives in Norway. After
numerous sessions to familiarize me with the Norwegian
agricultural sector, he arranged interviews for me with various
subsector participants. Interviews were arranged with people who
(a) worked with or were familiar with the issues relevant to this
study, and (b) spoke English. Interviewees Often suggested other
participants who could contribute to the study, which led to more
interviews.

With the help Of Dr. Geir Isaksen, head of GH’s Department of
Member Relations, a fOur-day trip was arranged to Norway’s west
coast. The purposes Of this trip were to visit a local packing
station and regional GH Office and to conduct further interviews.
The language constraint limited the range of interviews and
especially limited the amount of independent reading I could do.
In January of 1987, with the help Of a Michigan State University

Department of Agricultural Economics grant, I returned to Norway

236

237
to conduct further interviews. Again, my contact person was Dr.
Rpkholt. He helped arrange meetings with BAMA, the Processor
Association, and‘ the Norwegian Consumer Cooperative. Further
interviews were also held with GH, focussing this time on their
apple-processing activities.

The interviews held in Norway lasted from one to six hours,
with the majority lasting two and a half hours.

2. The GH qrower survey:

In July 1986, a grower survey was carried out with the
cooperation and financial support of the Department Of
Agricultural Economics at the .Agricultural University of' Aas.
This survey also benefitted from the backing and logistical
support of GH. The purpose Of this survey was to gather
background information on the apple growers’ general situation,
and to get GH growers’ views on two issues: (a) upgrading Of the
Class 1 standard for fresh apples, and (b) the plan to rationalize
the GH packing station structure by closing some stations and
enlarging others.

The survey consisted Of twenty six multiple choice questions,
which were formulated and translated into Norwegian with the
assistance of Dr. Per Ove Rpkholt. The survey was accompanied by
two cover letters; one from Dr. Isaksen, GH’s director Of member
relations and the other from Dr. Rpkholt.

Growers were chosen from the three major apple-producing
districts of Norway. Due to budget limitations, only half of the

growers in Vestlandet (the largest apple-producing district) were

238

included. These (approximately 500) growers were chosen at
random, by selecting every other name from an alphabetical list of
growers. All of the GH-registered growers of the Oslo and
Vestfold/Telemark districts were included in the survey. A total
Of 575 surveys were mailed out, and 224 or 39% were returned. The
results were put at the disposal of GH, the Department Of
Agricultural Economics at the University Of Aas, and me.
3. Interviews: Michigan

A great deal Of information on the apple subsector Of Michigan
was gathered from twenty three interviews conducted in the summer
and fall Of 1987. My contact person in Michigan was Dr. Donald
Ricks, a professor of Agricultural Economics at Michigan State
University, who has many years Of experience as an extension
specialist in the Michigan fruit industry. After six interviews
with Dr. Ricks to familiarize me with the Michigan apple
subsector, he provided me with a list Of key participants in the
apple industry. Some interviewees were interviewed more than
once, others suggested additional participants, some Of whom were
interviewed later. Interviewees were chosen such that at least
one person from each participant group and level Of the subsector
channel was included.

Interviews conducted in Michigan ranged from one to three
hours, with the majority being two hours long.
4. Confidentiality:

For the sake of confidentiality, this study has avoided

identifying interviewees by name.

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