NUIVE ERS Y LIBRARY Mill “W“ \\l\ \l “M l l 3015363 I! ,-~"‘. . t ‘1‘ I. .V , A {L‘— K. [1' i l“\ 1” i“ .It‘.\ ._- i I ‘ rvliclngan @313 55* University THE-19's This is to certify that the thesis entitled THE POLITICAL ECONOMY OF FARMER BARGAINING: COOPERATIVE AND PROPRIETARY PROCESSOR RESPONSES TO FARMER BARGAINING presented by Wilson Compton Chase-Lansdale has been accepted towards fulfillment of the requirements for Ph.D. degreein Agricultural Economics 49 oil/ax Major professor Date June 23, 1980 0-7639 OVERDUE FINES: 25¢ per day per item RETURNING LlBRARV MATERIALS: Place in book return to remove charge from circulation records THE POLITICAL ECONOMY OF FARMER BARGAINING: COOPERATIVE AND PROPRIETARY PROCESSOR RESPONSES TO FARMER BARGAINING By Wilson Compton Chase—Lansdale A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1980 up a“ ,-. -u" :5 .l. .'ut-‘ ' ‘ Al‘AH—H . . ~’.U-': ~ u “Hiram-“ 3!" r" F I. dudbvlyn '.‘ I”: in at " n I mantles between ~° ‘ states w * ithout share M‘ '- u: thetoopera"1 ABSTRACT THE POLITICAL ECONOMY OF FARMER BARGAINING: COOPERATIVE AND PROPRIETARY PROCESSOR RESPONSES TO FARMER BARGAINING By Wilson Compton Chase—Lansdale Production in numerous fruits and vegetables-for-processing industries is currently being affected by farmer bargaining over terms of trade for raw product. Several states have implemented farmer bargaining, others are considering its introduction, and a national farmer bargaining bill is before Congress. This research analyzes the market interrelations created by the imposition of farmer bargaining. It does so by focusing not only on market interrelations between bargaining associations and proprietary processors but also on the market interrelations between these two parti- cipants and cooperative processors. Compiled structural data indicated a 26.2 percent decrease nationally in the number of canning processing establishments in fruits and vegetables between 1967 and 1977. Statistical tests showed no evidence of a higher rate of decrease in states with farmer bargaining than in states without farmer bargaining. Data also revealed the market share of the cooperative processing sector in farmer bargaining to be above 40 percent in many industries and increasing. In conjunction, these data indicated a decreasing and often low percentage of raw product moving through cash market Channels. RCODC'C‘PUaI Frar la framework uses a v :‘sanageria? :referer ‘iPKET. 53ml Ci ODS, 6375 ’ie data toilet?! :ecision makers fr.- :ar ceaserative processcrs k3 (I) f .23 Q) c 9‘ - ‘9 C) D on O < n) e . :FAI.‘ A ..,.-:,n.:s-ror-:rocess q . a 5"!!! I AA C" .‘AngiHch 38‘ 'F A" 1 «\JW- H‘- ."I£5833l‘3 SCY‘EEC C‘JE!‘ The conclusions (.1 .".i .‘ a" .«4 - Isms-ton, anc 3 “TM" .‘. .I". I l I - I .anons an ram 1,: Research. reveal “in about deiand am < meaning associations Sunsequent improve: .aenng decisions b‘j Elitiv ‘ - .. " ERREIS I A conceptual framework was developed to guide the empirical work. The framework uses a model of organizational behavior stressing the notions of managerial preference for discretion, organizational slack, endogenous market conditions, and interest group competition. The data collection process consisted of interviewing managerial decision makers in bargaining associations, proprietary processors, and cooperative processors. The sample was selected by the researcher to provide a national overview of farmer bargaining in the fruits and vegetables-for—processing industries. Managerial decision makers from 14 bargaining associations, 18 proprietary processors, and 25 cooperative processors spread over the states of California, Oregon, Washington, Idaho, Michigan, New York, Pennsylvania, and Virginia comprise the sample. The conclusions of this research identify aspects of: l) coordination; 2)distribution; and 3) structural change that are attributable to market interrelations in farmer bargaining. Certain policy implications follow. 1) Research revealed that farmer bargaining elicited market informa- tion about demand and supply conditions from all three participant groups. Bargaining associations can promote this aggregation of information and the subsequent improved coordination of production, processing, and marketing decisions by conducting industry seminars, disseminating com- parative information on past performance of alternative marketing channels, and bargaining differential terms of trade with a nonuniform population of proprietary processors. 2) The research showed that numerous cooperative processors actively participate in farmer bargaining and as a result, become obliged to value raw product inputs at the same price as their proprietary processor fl , PM ‘f‘n Af 535093103. be... a. "o 'n '. '0 A (nor II'Q'QSIS CV 3'..":.".3 .- vb‘ ‘ "1 ‘l\ Ziiiflfi :3 7°.“ TEES“ . 'i:'r A - .'.-\n:.., ‘0‘. '15.. H “'ILIU. v" : .ge‘r vulva-i n " .valhiHn F ”ADD-Jere "1 vv "‘ny I. . :Q ;‘ A 9‘ “I: h“ 3 end. Y‘ “. g. 1‘: “A r“... F ‘- "'5 -.5:a!‘..", 'i:p.:.'n“ . ‘ f‘. R .\ "lab F‘MN ‘ vul.l||\:! ”I I |ay|i _ v U a I]: ‘Ffl‘fia. O A . ' ”“5533. are P. ‘19.: ‘.’ “rm competitors. Such obligation can serve cooperative processor member interests by strengthening the accountability of the cooperative organi- zation to its members. It also serves the interests of proprietary processors by putting cooperative processors on a more similar competitive basis regarding input costs. Commitment of cooperative processors to farmer bargaining can be enhanced by: a) encouraging cooperative pro- cessor members also to belong to the bargaining association representing their commodity interest(s); b) introducing single pool multiple commodity accounting in cooperatives; and c) bargaining formally with cooperative processors as is currently done with proprietary processors. 3) The research also revealed that market interrelations in farmer bargaining, primarily that of competition between proprietary and coopera- tive processors, are contributing to the decline of the numbers of pro- prietary processors, the increase in the market share of the cooperative processing sector, and organizational linkages between proprietary and grower interests such as joint ventures and participation plans. These structural Changes can be attenuated by: a) expanding the formal purview of bargaining to include all processors; b) in the absence of a), bargaining terms of trade that are contingent on the performance of non- bargaining processors; and c) insofar as these structural changes are transferring grower resources to proprietary control, challenging their existence on legal and public policy grounds. (c) Copyright by WILSON COMPTON CHASE-LANSDALE 1980 To Patricia Lindsay Chase-Lansdale ridissertatmn ‘ .ndtiis one is no 91 contributed to L'iiS 7 Professor James intis support. iis inank nin for his a Jonalo‘ Ricks nas also through nis intimate ntnny questions. T iiianScnnio and Kenn not the research be ilany individuals Statistics, and Cooper iiritulture also conti otiank Doctors Rance day and o i thers wi thir racious in their sup; Financial support ultral Experiment Si Statistics, and Cooper ii iiriculture. lam ACKNOWLEDGMENTS A dissertation is typically the product of numerous individuals and this one is no exception. I would like to thank everyone who has contributed to this research effort. Professor James Shaffer as my principal advisor has been unceasing in his support. His guidance during the research has been invaluable. I thank him for his encouragement, insights, and direction. Professor Donald Ricks has also played a central role in the research largely through his intimate knowledge of the subject matter and his patience with my questions. The other members of my committee, Professors Allan Schmid and Kenneth Boyer, provided many useful criticisms from which the research benefitted greatly. Many individuals in the Cooperative Unit of the Economics, Statistics, and Cooperatives Service of the United States Department of Agriculture also contributed to this research. I would especially like to thank Doctors Randall Torgerson, Martin Blum, and Jack Armstrong. They and others within the Department of Agriculture have been very gracious in their support. Financial support for the research came from the Michigan Agri- cultural Experiment Station and the Cooperative Unit of the Economics, Statistics, and Cooperatives Service of the United States Department Of Agriculture. I am indebted to these organizations. i 1', Hr Many of my otne Econonics at P'iicniga Inouid especially l iiilip landscnneioer int Tleunann. Finally, I WOUII cotne researcn by g: neaooendix. Zexté igrfculturai inoperat ioel Stucfcnan, Tom. 3, zero" tie .‘iicnigan : “iii generous oartic Many of my other colleagues in the Department of Agricultural Economics at Michigan State University also aided me in this research. I would especially like to mention Mahlon Lang, Larry Hamm, George Johnston, Philip Wandschneider, Cindy Cordes, Sandy Wellso, Shirley Rabbage, and Pat Neumann. Finally, I would like to thank the many individuals who contributed to the research by granting me interviews. Their names are listed in the appendix. I extend Special thanks to the personnel of the Michigan Agricultural Cooperative and Marketing Association, among them Noel Stuckman, Tom Butler, and Harry Foster, and to Tom Moore, administra— tor of the Michigan Agricultural Marketing and Bargaining Board, for their generous participation in the research. EPEROHE DAROO 1.1 importance: of the Sony. ‘2 Objectives : 1.3 lesearcn lie 1.1 Overview CdilEiTlO. DESCEIP AND Eiii‘ 2.1 Legal Bases 2.1.1 fiatio 33 Absolute Ecoe Select Strut: 2'“ NatiOr i. Ba 8. pp ar C. s1 As ‘32 Struct Seiect i- Ca 8- No A Mr Dr in Pet TABLE OF CONTENTS Page CHAPTER ONE. INTRODUCTION .............. . . ._. . . l 1.1 Importance and Previous Treatment of the Subject Matter .................. 2 1.2 Objectives of the Research ............... 7 1.3 Research Methods . . . . . . . . ............ 8 1.4 Overview . . . . . . . . ................ 13 CHAPTER TWO. DESCRIPTION OF PARTICIPANTS AND ENVIRONMENTS .................. 15 2.1 Legal Bases of Farmer Bargaining ............ 15 2.1.1 National Basis . . . ............... 15 2.1.2 State Bases 2.2 Participants in Farmer Bargaining .......... . . 24 2.2.1 Bargaining Associations ............. 25 2.2.2 Proprietary Processors . . . ........... 26 2.2.3 Cooperative Processors .............. 27 2.3 Absolute Economic Importance and Select Structural Characteristics ............ 31 2.3.1 National Economic Impact ............. 31 A. Bargaining Association Activity ....... 32 B. Processing Activity in Fruits and Vegetables ............ . . . . 39 C. Simultaneous Presence of Bargaining Associations and Cooperative Processors . . . 44 2.3.2 Structural Characteristics of Select States . . . . . ............. 47 A. California .................. 47 8 Northwest: Oregon, Washington, Idaho . . . . 56 C. Michigan ............... 60 D Appalachia: Apple Industries of New York, Pennsylvania, and Virginia .......... 7O 76 2.3.3 Summary of Economic Setting ........... vi ENTER TriREE. A C3 PART BARS 3.1 Subsystems .1.1 The 3.2 Tne Process Management ' 3.2.1 Toe: Maxi: 3.2.2 Nanag 3.2.3 VOICE 32-4 Grgar 3‘3-3 Cooper Proces t0 the 3'4 Wary . . NHRI no» ttR FOUR. FINDING we. CHAPTER THREE. A CONCEPTUALIZATION FOR ANALYZING PARTICIPANT INTERRELATIONS IN FARMER BARGAINING . . . . ..... . . . . . . 77 3.1 Subsystems in Farmer Bargaining . . . . . . . . . . . . . 78 3.1.1 The Bargaining Association Subsystem . . . . . . . 78 3.1.2 The Proprietary Processor Subsystem . . . . . . . 80 3.1.3 The Cooperative Processor Subsystem . . . . . . . 81 3.2 The Process of Choice. A Look at Management in a Subsystem . . . . . . . . . . . . . . . 83 3.2.1 The Origins of Non-Profit Maximizing Behavior . . . . . . . . . . . . . . . 85 3.2.2 Management's Concern for Constraints . . . . . . . 86 3.2.3 Voice and Information . . . . . . . . . . . . . . 89 3.2.4 Organizational Complexity . . . . . . . . . . . . 91 3.2.5 Summary . . . . . . . . . . . . . . . . . . . . . 92 3.3 Areas of Inquiry . . . . . . . . . . . . . . . . . . . . 93 3.3.1 Bargaining Association—Proprietary Processor Interrelations and Accommodations to these Interrelations . . . . . . . . . . . . . 93 3.3.2 Bargaining Association—Cooperative Processor Interrelations and Accommodations to these Interrelations . . . . . . . . . . . . . 95 3.3.3 Cooperative Processor- Proprietary Processor Interrelations and Accommodations to these Interrelations . . . . . ..... . . 99 3.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . 106 CHAPTER FOUR. FINDINGS AND DISCUSSION . . . . . . . . . . . . . . 109 4.1 Accommodations to Interrelations Between Bargaining Associations and Proprietary Processors . . . . . . . . . . . . . . . . . . . . . . 109 4.1.1 Responses of the Bargaining Association Sector . . . . . . . . . . . . . . . 110 A. Investment in Market Intelligence and Scope . . . . ............ . 110 8. Differential Treatment of Proprietary Processors . . ..... . . . . . 112 C. Interest Group Competition in a the Association Sector . . . . ..... . . . 113 4.1.2 Res; Proc 9 4.2 Accomocati. Bargaining . Processors CHAPTER FIVE. STRUCll FINDING . Findings - 5.1.1 Motiva mces A- Se 3. Pr Page 4.1.2 Response of the Proprietary Processor Sector . . . . . . . . . . . . . 114 A. Transmittal of Infonnation . . . . . . . . . . 114 B. Alternatives in Raw Product Procurement . . . . . . . . . . . . . . . . 119 C. Price Uniformity as a Benefit . . . . . . . . 120 4.1.3 Discussion of Findings . . . . . . . . . . . . . . 121 A. General Results of the Transmittal of Information . . . . . . . . . . 121 B. Varieties of Informational Signals . . . . . . 126 C. Summary . . . . . . . . . . . . . . ..... 132 4.2 Accommodations to Interrelations Between Bargaining Associations and Cooperative Processors . . . . . . . . . . . . . . . . ..... . . 133 4.2.1 Responses of the Cooperative Processor Sector . . . . . . . . . . . . . . . . . 134 A. Sensitivity of Cooperative Processor Management . . . . . . . . . . . . . 134 B. Sensitivity of Other Cooperative Processor Interest Groups . . . . . . . . . . 151 C. Interdependence Between Bargaining Associations and Grower Processors . . . . . . 155 4.2.2 Responses of the Bargaining Association Sector . . . ...... . . . . . 156 A. Attempts to Enlist CoOperative Processor Support for Bargaining . . . . . . . 156 4.2.3 Discussion of Findings . . . ..... . . . . . . 159 A. Cooperative Processor Management . . . . . . . 159 B. Other Interest Group Influences . . . . . . . 167 C. Bargaining Association Interdependencies . . ...... . . . . . . 173 D. Summary . . . . . . . . . . . . . . . . . . . 175 CHAPTER FIVE. STRUCTURAL RESPONSES OF PARTICIPANTS: FINDINGS AND DISCUSSION . . . ....... . . . . 177 5.1 Findings . . . . . . . . . . . . . . . . . . . ..... 178 5.1.1 Motivation for Proprietary Processor Exit . . . . . ..... 178 A. Secondary Data . . . 178 182 B. Primary Data . viii (" '\) U‘l ._. N (1' . a (A) c3 -—-1 (J) JlSCJSSlOO 5.2.1 ~7 do. l\) 5.1.3 ‘ H Prop .ran fl rrOC Prop IV,“ All? I .~'.. SU‘II Hi Aq‘JPI ‘ VJI‘LLV‘ Area Assoc IDtEr to In A. 5 B. A u. D. Area r R9590: Case c Linkag I}? m (:7 Page 5.1.2 Transition in Ownership of Processing Facilities . . . . . . . . . . . . . 188 A. Proprietary Perception of Resource Availability . . . . . . . . . . . . 189 B. Cooperative Management Perspective . . . . . . 191 5.1.3 Proprietary Linkages With Growers . . . . . . . . 193 A. Participation Plans ..... . . . . . . . . 195 B. Joint Venture Case Study . . . . . . . . . . . 197 5.2 Discussion . . . . . ....... . . . . . ...... 208 5.2.1 Proprietary Exit Responses . . . . . . . . . . . . 208 5.2.2 Transition in Ownership of Processing Facilities . . . . . . . . . . . . . . 212 5.2.3 Proprietary Participative Linkages With Growers . . . ..... . . . . . . . . . 213 A. Joint Venture Case Study . . . . . . . . . . . 215 5.2.4 Summary . . . . . . . . . . . . . . . . . . . . . 220 CHAPTER SIX. CONCLUSIONS AND POLICY IMPLICATIONS . . . . . . . . 222 6.1 Conclusions . . . . . . . . . . . . . . . . . . . . . . 223 6.1.1 Area of Inquiry: Bargaining Association— Proprietary Processor Interrelations and Accommodations to Interrelations . . . . . . . . . . . . . . . . 223 A. Specific Uses of Information . . . . . . . . . 224 6.1.2 Area of Inquiry: Bargaining Association-Cooperative Processor Interrelations and Accommodations to Interrelations . . . . . . . . . . . ..... 226 A. Cooperative Management . . . . . . . . . . . . 226 B. Cooperative Members ..... . . . . . . . . 229 C. Grower Processors ......... . . . . . 231 0. Association Management . . . . . . . . . . . . 231 6.1.3 Area of Inquiry: Structural Responses of Participants and the Case of Cooperative—Propr1etary Linkages . . . . . . ............ 232 A. Proprietary Exit . . . ......... 232 B. Transition in Ownership 234 235 C. Linkage Arrangements . . ...... 6,2 Policy in” 5.2.1 The 5. 22 Bars Proc u: 3’ 6.2.3 .. w ‘7’ :1.- u . . =1 .1“ [4(1) A c. 1 6.3 Final Sumner 21111111391111. FUTUR 7.1 Researcn to 1.2 Related Rese iFPENDlCES )4 . Glorietta Foo. Considered," Membership am NJ. 1-3. . . m . Touche Ross ar Cooperatives , Tillie Lewis F Exhlanation of ngram, Augus r) G Cherry Hill 0r Er §tatement of a Lewis F mm "1—1 m 6.2 Policy Implications The Bargaining Process . 6.2.1 6.2.2 Bargaining and Cooperative Processors . . . . . A. Dual Membership 8. Accounting Rules . C. Bargaining with Cooperatives . 6.2.3 Bargaining and Structural Change in the Processing Sector . A. Cooperative Saturation . B. Participative Plans and Joint Ventures . Page 236 236 240 240 242 243 244 245 246 247 C. Grower Processors 6.3 Final Summary . . ..... CHAPTER SEVEN. FUTURE RESEARCH SUGGESTIONS 7.1 Research to Complement Policy Implication . 7.2 Related Research Issues . . ............ APPENDICES A. Glorietta Foods, ”Special Risk Factors to be Considered,“ in Disclosure Statement Concerning Membership and Marketing Agreement, January 10, 1978, pp. 1-3. ........................ B. Touche Ross and Company, Financial Planning for Cooperatives, January 11, 1979 ............. C. Tillie Lewis Foods, Inc., Simplified Explanation of TLF Tomato Grower Participation Program, August 24, 1978, and Rider. .......... D. Cherry Hill Orchards, Inc., Participation Plan E. Statement of George Visgilio, President, Tillie Lewis Foods, Inc., Before the California Assembly Committee on Agriculture, May 3, 1978. ..... F. Statement of Hugh E. Cumming, President, Curtice-Burns, Inc., A Presentation Before the New York Society of Security Analysts .......... Pro-Fac Cooperative, Inc., Management and Member Letters to the Bargaining Association for Michigan Apples for Processing, March 9, 1979; January 26, 1979, G. c lunt-Vesson California Jecenber 12 Coniadina F: Tomato Grows to Participa Interviews: ( . 11311131111911. . . H. Hunt- Wesson Foods, Inc. , Index Pricing - California Tbmatoes, Participation Plan, December 12,1979 1. Contadina Foods, Inc., Letter to California Tomato Growers Association Explaining Move to Participation Plan, December 18, 1979. . J. Interviews: Organization, Person(s), Date . BIBLIOGRAPHY . . . . . . . . . . xi Page 302 307 312 2-1 Total "lolume an iargaining asso legetables and Fiscal 'r’ear 197 12 Geographic Inci Associations: ‘ fornooi'y 3:539 Dopei‘avflye PY‘OC 0i. :Gri165t :6”: 191615.111 ES U Ufis UHG .. ”in. \l .XCrQDOIQ‘H ‘1n 3% SOiU under. CID ,9 ”Hi KS am gege: L~ IQiJe, PCP :entac 25 10151 Std-T, e Oboe lOdUCt Ion 07.1; TOP those 3. Cd" Hesr CLIYItfiV LIST OF TABLES Table 2-1 2-2 2-3 2-4 2-5 Total Volume and Sales Represented by Bargaining Associations in Major Fruits, Vegetables and Sugar Beets for Processing: Fiscal Year 1971 Geographic Incidence of Bargaining Associations: Fiscal Year 1971 . Commodity-State Matrix on Current Identification of Bargaining Activity, Cooperative Processing Activity, and Date of Earliest Bargaining Efforts: Fruits, Vegetables, Sugar Beets . . Value, Percentage Change in Value, and Extrapolation of Value of Commodities Sold Under Collectively Bargained Contracts: Fruits and Vegetables and Sugar Beets . Total State Production of Commodities for Processed Use as a Percentage of Total U.S. Production of Commodities for Processed Use for those States Having any Bargaining Activity for those Commodities (Fruit, Vegetables, Sugar Beets) for the Year 1978 Incidence of Fruit and Vegetable Cooperative Processors by State: Select Years Cooperative Processing Volume as Share of Total Volume: 1969 .............. Processing Establishments for Reported States With Canning Fruit and Vegetable Capacity: Select Years, SIC 2033 ............ States With Simultaneous Bargaining Activity and Cooperative Processing Activity in Fruits and Vegetables Z—lO California: Select Statistics on Bargained 2~11 1978 Processor Tomato Tonnages and Select Other Commodities: 1978 xii aaaaaaaaaaaaaaaaa ...... ------- 42 Page 33 34 35 37 2.12 Processor Char 2-13 Proprietary Pr 214 51111 Market St 2/11/78 - 3/9/ 2-15 Almond Process 2-16 Northwest: Se Bargained and 2-11 Michigan: Sel Bargained Conn 01‘ Selecc Marin 118 Michigan Tar: 1 2-19 Michigan Apples Channels for 15 Tonnage Vhic‘n 5 Processing) 3'20 Pennsylvania: fDPies for Proc 1‘1 Proorietary Pro Whether 01‘ not InI‘Onnation to 1 1-2 Bargaining Assoc 0n Receipt Of 11 Proprietary Proc Table 2-12 Processor Characteristics 2-13 Proprietary Processor Market Shares 2- 14 SAMI Market Shares for Period 2/11/78 - 3/9/79 2-15 Almond Processors 2-16 Northwest: Select Statistics on Bargained and Select Other Commodities . 2-17 Michigan: Select Statistics on Bargained Commodities and Description of Select Market Channels: 1978/1979 2—18 Michigan Tart Cherry Market Channels: 1979 2—19 Michigan Apples for Processing Market Channels for 1978—1979, (Net of Brokerage Tonnage Which Equals 20% of the Crop- for Processing) . . 2-20 Pennsylvania: Select Statistics on the Apples for Processing Industry: 1978/1979 . 4-1 Proprietary Processor Manager Responses on Whether or not they Contributed Market Information to the Bargaining Association(s) . 4-2 Bargaining Association Managers' Responses on Receipt of Information From the Proprietary Processing Sector 4-3 Characterization by Managers of Bargaining Associations of Cooperative Processor Managements' View of Bargaining Activity ..... 4-4 Extent of Simultaneous Grower Membership in Bargaining Associations and Cooperative Processors: Dual Membership ............ 4-5 Select Percentages of Bargaining Association Member Volume That is Cooperatively Processed: 1978/1979 ............... 4—6 Bargaining Association Characterization of Extent of Cooperative Processor Support for Bargained Prices .................. xiii uuuuuuuuuu 54 55 57 61 ..... 137 . . . . 143 .. . . 157 5-1 Select Reason Processors to Processors . 5-2 Cements by 9' Managers on iii Reason for Exi Table Eggs 5-1 Select Reasons Cited by Proprietary Processors to Explain Exit by Proprietary Processors . . . . . . . . . . . . . . 183 5-2 Comments by Proprietary Processor Managers on Whether Bargaining is a Reason for Exit by Proprietary Processors . . . . . . . . . 186 xiv ES f .onpar Hi- -.-u In 116 a. . he a i v LIST OF FIGURES Figures Page 2.1 Distribution of Canning and Freezing Piants . . . . . . ................ 45 3.1 Comparative Impacts: Proprietary 101 Versus Cooperative Processor Cost Curves .......... XV "oilectfve serge " - .-n ; ‘Isexpancmg in ...e ' “‘ a! bounding, ocners rational famer co; .e Tie ridesoreao :resen "nr a careful Study 3 :n's narket process. This study focus. iants in farmer barga' for raw product. The: 5‘3"“, interdeilendenci anaiyzed; second, part 39 identified and ana‘: un interdependenci es exploratory dimension . analyzed in Order to h i) the coor: 2) the acc0L distribut structure 1 See Chapter Two f CHAPTER ONE INTRODUCTION Collective bargaining between farmers and handlers of raw products is expanding in the United States.1 Several states have implemented bargaining, others are considering introducing bargaining laws, and a national farmer collective bargaining bill is now before Congress. nW-r‘fifi‘. . The widespread presence and expected growth of farmer bargaining argues for a careful study of the nature of market interrelations created by this market process. This study focuses on the interrelations among principle partici- pants in farmer bargaining as they interact to determine terms of trade for raw product. These interrelations will be addressed in two parts: first, interdependencies among participants will be identified and analyzed; second, participant responses to these interdependencies will be identified and analyzed. The classification and analysis of partici- pant interdependencies and responses to interdependencies constitute the exploratory dimension of this research. These findings will be further analyzed in order to identify their import for select performance issues: l) the coordination of economic signals; 2) the accountability of decision processes; 3) distributional impacts; and 4) structural change in raw and processed product markets. 1See Chapter Two for economic importance. lbe inquiry ui vegetables for pro 1.] I As noted by La bargaining in fruits activity date from t latter l9th century, teams of trade for r including dairy prod 1966 National Comis 109 fruit and vegetal of l964.2 Antitrust Clayton Act of 1914 a bargaining activity. similar state initiat instrunental in promo growers, farmers, or proprietaril y organiz in this study). To d ENUPS, notably fruit widespread and influe bmduct transactions. 1bang. at, 1977, 2National Comiss IaIIIIIIIIIIIIIIIIIII:—TTTTTTTTTTTTTTTTTTTTTTTTTTT"TTTZTTTTTTTTTTTT'T'TTT”T'T' The inquiry will limit itself to bargaining in the fruits and vegetables for processing industries. l.l Importance and Previous Treatment of the Subject Matter As noted by Lang in his comprehensive inquiry into farmer collective bargaining in fruits and vegetables the antecedents for current bargaining activity date from the l870$ and the efforts of the Grange. Since the latter l9th century, bargaining efforts by producer groups to influence terms of trade for raw product have grown in various commodity groups The ‘nfi;$ including dairy products, fruits, vegetables, and sugar beets. T966 National Commission on Food Marketing noted the organization of 109 fruit and vegetable associations since l919 with 70 still active as of l964.2 Antitrust exemptions for such activity contained in the Clayton Act of 19l4 and the Capper-Volstead Act of T922 served to support The Agricultural Fair Practices Act of l967 and bargaining activity. similar state initiatives as described in Chapter Two below, have been instrumental in promoting bargaining activity between producers (called growers, farmers, or producers interchangeably in this study) and proprietarily organized first handlers (called proprietary processors in this study). To date, bargaining activity in certain commodity groups, notably fruits and vegetables for processing utilization, is widespread and influences a significant value and percentage of raw product transactions. 1Lang, M., l977, p. l citing Tweeten, Luther, l970. 2National Commission on Food Marketing, Technical Study No. 4, p. 273, Notwithstandi is limited. Onet . 1 strategies. 0the impacts using welfa listed specific eco bargaining populatic of bargaining have n asa function of div amltiplicity of pa A better unders of the scope of inqu virtue of their respv and shape that proces sectors needs to be d not only on the organ the processing sector organized parts. Some researchers gaining have attempte bore participants and environments. In thei address the broad boun itcoperatively as we] irdthe existence of a \\ 1Coddington, A., l ZGarver, but, 196 3hr. Ewell 9., 19 fiww,m * Notwithstanding this impact, understanding of the bargaining process is limited. One theorist has attempted to mathematize bargaining Other theorists have studied bargaining by focusing on strategies.1 Another student has impacts using welfare economics methodology. listed specific economic benefits to a producer and first handler However, these contributions to an understanding bargaining population. of bargaining have not explored the variable impacts of farmer bargaining as a function of diversity in the processing and production sectors and a multiplicity of participating groups. . A better understanding of the bargaining process warrants expansion g of the scope of inquiry to include all the primary participants who, by virtue of their responses to farmer bargaining activity, may influence and shape that process. The variability in the production and processing sectors needs to be directly addressed. Accordingly, this means focusing not only on the organization of the bargaining association but also on the processing sector consisting of its proprietarily and cooperatively organized parts. Some researchers in the subject matter of farmer collective bar- gaining have attempted to broaden the scope of the analysis to include more participants and to sort out relationships in farmer bargaining environments. In their seminal study Helmberger and H005 begin to address the broad boundaries of bargaining when they briefly acknowledge a cooperatively as well as proprietarily organized processing sector and the existence of an interdependence between the bargaining lCoddington, A., l968. 2carver, w.A., l964; Ladd, G.w , l964; Knutson, R., l968. 3Roy, Ewell P., l970. association and c addressing the org tune of bargainin organization and h suggestion of conf tions and cooperati 3 tbrahavnsen. Knuts environments where representing produc competing cooperati may result in a pri following quote by Acovmodity ba fruit or veget that it views attempt to bar cooperative ai proceeds above such a bargain It is reported 'infiltrated' tive in an eff GaMilan and Torgers Processing sector p, Garaven has spoken tion and the cooper x lHeimberger, p_ zitilliams. $.54, 3KMtSOn) R‘, I 4Abrahamsen, n. association and cooperatively organized processors.1 Williams, in addressing the organization of the milk industry, identifies the coexis- tence of bargaining and cooperative processing functions within a single organization and how this may result in conflicts of interest.2 A suggestion of conflict of interest between coexisting bargaining associa- tions and cooperative processors is also taken up briefly by Knutson and Abrahamsen.3 Knutson goes so far as to suggest that in bargaining environments where bargaining takes place between the association representing producers and the proprietary processor, the presence of competing cooperative processors who wield influence over the association may result in a price squeeze against the proprietary processor. In the following quote by Abrahamsen, another conflict scenario is developed: A commodity bargaining association, for example, may look upon a fruit or vegetable—processing cooperative in much the same way that it views any other processor. The result could be an attempt to bargain with such a cooperative. Since the operating cooperative already is committed to returning to patrons all proceeds above operating costs, obviously confrontation with such a bargaining group could be a very disruptive experience. It is reported, in one instance, that a bargaining association ‘infiltrated' the board of directors of an operating coopera— tive in an effort to achieve its price objectives. Garoyan and Torgerson have also acknowledged the presence of a cooperative processing sector within the boundaries of farmer bargaining activity. Garoyan has spoken briefly to interactions between the bargaining associa- tion and the cooperative processor in bargaining with proprietary 1Helmberger, P. and S. Hoos, l965. 2wamams, s.w., 1970. 3Knutson, R., l974, p. 904-9l2; Abrahamsen, M.A., l976. 4Abrahamsen, M.A., l976, p. 359. processors. ‘ Torg adual structure a California fruit i delineation of the has raised numerou of participant int specific attention its impact on the o tion sectors. Then of this study. Paralleling thn bargaining reflectec and discussion of ba Bargaining Conferenc industry contributor have raised question relationships in fan variability in the p nation of the exist biWhining environne mm“ the bargaini Messing sector. ]\ with, L, J TorSeason, p" in v. 1917 4 . l 115))“ 1980‘] Confer IFIIIIIIIIIIIII7TTTTTT__T___T__T__T________________—________ processors.1 Torgerson recognized this relationship earlier calling it a dual structure and noted its presence in the dairy industry and some California fruit industries. Most recently, Lang has contributed to a delineation of the boundaries of bargaining activity. In so doing, he has raised numerous questions about the nature, extent, and importance of participant interrelations in farmer bargaining. Lang has also given specific attention to the role of the cooperative processing sector and its impact on the competing proprietary processing and bargaining associa— tion sectors. The questions Lang has raised constitute part of the scope of this study. g Paralleling the evolution of sensitivity to the boundaries of wt bargaining reflected in the literature above has been the identification and discussion of bargaining issues within the framework of the National Bargaining Conference annual meetings. Dating from as early as l960, industry contributors, primarily in the fruit and vegetable industries, have raised questions and made arguments about the nature of participant relationships in farmer bargaining environments. Sensitivity to variability in the processing sector has been indicated by extensive mention of the existence and impact of a cooperative processing sector in bargaining environments. Numerous conferees have argued interdependencies between the bargaining association sector and the cooperatively organized processing sector. Some have contended that such interdependence lGaroyan, L., January l976. 2Torgerson, R., l970. 3Lang, M., 1977. 4National Conference of Bargaining Cooperatives, see Proceedings of l957-l980. strengthens bargai the impact of barg cooperative proces about the possibii sector attributablv and the cooper'a’civ1 also provided a for trends in the barge to the interrelatio The issues rai students of farmer pants and their intv research will focus experience in fanmei vegetable industries the structure of pa tournodity orientatio be generalizable to liven the breadth of jurisdiction of nati \ Illedlund, r., 1 2lilozbach, H. , l 3 .. Goldbe , R., I hlvce, B., T378; Kau 4 Garoyan, L. , i9 —7—""""wm-m_fiz strengthens bargaining with proprietary processors.1 Others have noted the impact of bargaining association activity on decisions of the cooperative processing sector.2 Recently concern has been expressed about the possibility of negative impacts on the proprietary processing sector attributable to close relations between the bargaining association and the cooperatively organized processing sector. The conference has also provided a forum for addressing structural change and emerging trends in the bargaining environment, some of which have been related to the interrelations suggested above.4 The issues raised by these observations and the perceptions of students of farmer bargaining argue the need for in—depth study of partici- pants and their interrelations. In order to respond to the above, this research will focus on those commodity environments having the richest experience in farmer bargaining activity, the processing fruits and vegetable industries, in order to afford the clearest identification of the structure of participant interrelationships. Notwithstanding this commodity orientation, much of the conceptualization and findings should be generalizable to other commodity groups. Generalization is desirable given the breadth of commodity populations that would be within the jurisdiction of national bargaining legislation. 1Hedlund, F., l963; Whybark, C., T965; Knutson, R., T974. ZKlozbach, w., 1950; Owen, R., 1973-, Collette, F., 1974. _ _ 3Goldberg, R., l97l; Bailey, J., l979; Lang, M. and Shaffer, l977; Filice, 8., l978; Kautz, J., T978. 4Garoyan, L., l96l; Filice, B., l978; Collins, R., T978. First. it '5 ceptual framework basis needs to be topic and sufficie application. M0? inquiry by offerin That is, the logic schema with which t conceptual framewor matter under anal ys of argument is impo Second, this ‘ describe interrelati l gaining environments interdependencies an dependencies. Suchi dynamic elements in ‘ change will enhance i informational basis ( The third object certain performance i coordination, account the issue of coordina economic signals prod as a performance i ssuo decision making mee1 A IIIIIIIIIII:————————----————————————___________“51”fl“mfi1g”_44W l.2 Objectives of the Research First, it is the objective of this research to construct a con- ceptual framework for addressing the subject matter. The conceptual basis needs to be sufficiently broad toaccommodatethe boundaries of the topic and sufficiently rich in scope to maintain its relevancy under ‘application. Moreover, the conceptualization should serve to guide the inquiry by offering a systematic representation of behavioral expectations. That is, the logic of action in the conceptualization should provide a schema with which to organize the empirical observations. Finally, the conceptual framework should be able to encompass permutations of the subject matter under analysis. Given the timeliness of this research, catholicity of argument is important. Second, this research is an exploratory effort. The objective is to describe interrelations among the primary participants in farmer bar- gaining environments. This requires probing the boundaries of participant interdependencies and exploring the responses of participants to inter- dependencies. Such exploration will permit the identification of dynamic elements in farmer bargaining systems. Attention to elements of change will enhance the study’s descriptive validity and will enrich the informational basis of ultimate conclusions and specified implications. The third objective is to organize the discussion of findings by certain performance issues. These issues may be broadly defined as coordination, accountability, distribution, and structure. Attention to the issue of coordination means relating observations to the content of economic signals produced by bargaining interrelations. Accountability as a performance issue means identifying which interests are served by decision making processes. This issue might also be called preference articulation.l Th primarily on the d asaperformance 1' acit decisions an These Woman“ findings. They in!“ sion; some Damn” versus longer term. Finally, this to aid participants hmng the reaSC (organizational extremely C05“ grain ratio. UT primitive, and behavior is bar As will be deve in Chapter Three, to environment, can be 1 our system may be : Whiting inquiry or localize. The rese atlooted to be cmpr The research beg torch has to gather T \ The P eh with" til? I‘ T‘l SW)“: H.) 1924! articulation.1 The distributional aspect of performance will focus primarily on the distribution of risk and revenues. Focusing on structure as a performance issue means identifying the impact of interrelations on exit decisions and organizational responses such as vertical integration. These performance issues will be selectively treated in the discussion of findings. They will also, when warranted, be combined with a time dimen- sion; some performance discussions will be qualified by short term versus longer term. Finally, this research will specify certain policy implications to aid participants and policy makers in farmer bargaining. l.3 Research Methods Among the reasons for the relative neglect of such studies (organizational decision making) . . . is that they are extremely costly and time consuming, with a high grist—to- grain ratio, the methodology for carrying them out is primitive, and satisfactory access to decision-making behavior is hard to secure. As will be developed in the conceptual framework to be presented in Chapter Three, the macro unit of observation, the farmer bargaining environment, can be envisioned as a political system. Furthermore, the macro system may be segmented into three or more subsystem processes. Attempting inquiry and analysis at either level is complex and challenging to realize. The research strategy of this study has nevertheless, attempted to be comprehensive in scope. The research began with a literature search. The intent of such a search was to gather background materials that could offer both a 1Shaffer, James D., “Preference Articulation and Food System Performance,” in Farris, P., forthcoming. 2Simon, H., 1974, p. 501. description of the directory data, an mre. perceptions into issue areas. empirically relevar subject matter. In ceptual formulation primary data collec Based on the c the web of pmcesse warranted a case st: inner workings of ti This meant looking a subsystems: bargai r prietary processors. the analysis of deci empirical relevance. The process use interviews in diffe decision makers from subsystem. Thus int associations, cooper Processor organizati description of the o Terticipant subsystem \ ‘saiter, L., 194 description of the environment and identify questions of interest. CenSus, directory data, and various statistical calculuses were reviewed. Further- more, perceptions of students of bargaining were catalogued and organized into issue areas. These efforts permitted the initial construction of an empirically relevant model describing the organizational process of the subject matter. In light of secondary empirical observations and con— ceptual formulations, a background was established on which to conduct primary data collection. Based on the compiled secondary information, it became evident that the web of processes and variables contained in the subject matter warranted a case study approach. Hence it was decided to focus on the inner workings of the various subsystems comprising farmer bargaining. This meant looking at the organization and behavior of three participant subsystems: bargaining associations; cooperative processors; and pro- prietary processors. The goal of such a focus was to bring detail to the analysis of decision making processes and thereby provide higher empirical relevance.1 The process used to collect primary data consisted of conducting interviews in different farmer bargaining environments with managerial decision makers from the units of analysis comprising each participant subsystem. Thus interviews were held with managers of bargaining associations, cooperative processor organizations, and proprietary processor organizations. The task in each interview was to obtain a description of the organization's interrelations with the other two participant subsystems in farmer bargaining. The content of each ISalter, L., 1942. interview correspo donating from the consistency in the In light of the fo there was also a hi Thus, a highly simi analysis with varia equivalent subject 1 The sample was from the researcher environments in whit Second, environments naturity. The state New York, and Pennsy nents selected for c also made of some pa also deemed desirabl in each participant Terms of trade for a Perennial crops were numerous varieties Trnultiple product accounting. In sampl third participant su Titerations were studi \ 1 1See Chapter Two coal and economic. 10 interview corresponded to hypothesized interdependencies and behaviors emanating from the conceptual framework. Therefore, there was great consistency in the interview process conducted within each subsystem. In light of the focus on interrelations among participant subsystems there was also a high degree of such consistency among the subsystems. Thus, a highly similar interview format was used with all units of analysis with variation being a functiOn of different perspectives on equivalent subject matter. The sample was selected on the basis of several criteria. First, from the researcher's vantage it was important to select bargaining environments in which the three participant subsystems were present. Second, environments were selected with varying degrees of bargaining maturity. The states of California, Oregon, Washington, Michigan, New York, and Pennsylvania constituted the primary bargaining environ- ments selected for cross sectional analysis.1 Limited observations were also made of some participant subsystems in Idaho and Virginia. It was also deemed desirable to select for variation in units of analysis with- in each participant subsystem. Thus bargaining associations bargaining terms of trade for annuals and those bargaining terms of trade for perennial crops were sampled. Cooperative processing organizations of numerous varieties were sampled including ones that were single product or multiple product and used single pool accounting or multiple pool accounting. In sampling the proprietary processing organizations as the third participant subsystem, both single state and multiple state operations were studied. Finally, a concerted effort was made to gain 1See Chapter Two for a description of state environments, both legal and economic. asample of New linkage arrangemem prover interests. Hithin each st associations, coope selected‘on the has managers of specifi contacted and the r association or coop: researcher. Only a refused to meet the successful in persua to agree to intervie These interviews wer personal attribution The individual. Man matter of the resear In summary, man lions, 25 cooperativ the population studi representatives of or views were conducted Tarspectives on farm hbinistrators of be knowledgeable observe 11 a sample of interviews from proprietary organizations engaged in vertical linkage arrangements, such as joint ventures or participation plans, with grower interests. Within each state bargaining environment a sample of bargaining associations, cooperative processors, and proprietary processors was selected on the basis of managerial self selection. This is to say that managers of specific organizations in these participant subsystems were contacted and the research was briefly explained to them. No bargaining association or cooperative processor managements denied access to the researcher. Only a few managers of proprietary processor organizations refused to meet the researcher. Thus, in general, the researcher was successful in persuading managers of respective participant organizations to agree to interviews that averaged one and one—half hours in length. These interviews were conducted with the understanding that no direct personal attributions would be made without the express permission of the individual. Many managers expressed avid interest in the subject matter of the research and a desire to offer their insights. In summary, managerial decision makers from l4 bargaining associa— tions, 25 cooperative processors, and l8 proprietary processors comprise the population studied. For many of the 57 organizations, several representatives of management were interviewed. Numerous other inter- views were conducted with individuals having a relationship with or perspectives on farmer bargaining. This group included grower—processors, administrators of bargaining rules, other industry interests, and knowledgeable observers. A total of ll8 different individuals contributed interviews to the during the six mon' all were recorded I Having conduci in the conceptual l organized. Hypothe into three areas of ships among the par l) Barga 2) Barga 3) Coope‘ Observations on first presented in a of pools are then pr the basis of l) hist 3) single versus nnnl state operations. Specific observ collapsing infomnati coding task. Info behavioral responses variability, assigne present or absent, y told to fair to 000‘”- of the attribute was \________ 1See Appendix f0 12 interviews to the study.1 The bulk of these interviews took place during the six month period from December l978 to May l979 and almost all were recorded on tape cassettes. Having conducted the interviews according to the issues developed in the conceptual framework, the aggregate information was similarly organized. Hypothesized interdependencies and behaviors were grouped into three areas of inquiry corresponding to the three basic relation- ships among the participant subsystems: l) Bargaining Association with Proprietary Processor 2) Bargaining Association with Cooperative Processor 3) Cooperative Processor with Proprietary Processor Observations on the units of analysis comprising each subsystem are first presented in aggregate pools. Certain stratifications or segmenting of pools are then presented. The segmentations are variable and are on the basis of l) history of experience with bargaining, 2) geography, 3) single versus multiple pool accounting, and 4) single versus multiple state operations. Specific observations on the units of analysis were organized by collapsing information into an attribute. This process constituted the coding task. Information relevant to certain interdependencies and behavioral responses was assembled and, according to a tolerance of variability, assigned a.coded form. SOme of these forms were of the present or absent, yes or no variety. Others exhibited a scale such as good to fair to poor. Reporting these coded findings within the context of the attribute was then done on the basis of numbers of respondents H 1See Appendix for a full listing. indicating a certa and coding system findings chapters. ‘ In addition tr statistical tests on l‘anufacturers2 and lndustries.3 These were used to gain 1' relevant to the r951 the beginning of cm The following 5 research process. C the legal and econom describes the variou systems. The chapte: Provides an overview Chapter Three is the for exploring the sat lsatheory of behavi The second is an appl litter is integrated \—— lchaliters Four an 2Cttnsus of Manufr ‘-———____ 3The Directory. \ 13 indicating a certain response or characteristic. The precise attribute and coding system for participant characteristics are contained in the findings chapters.1 In addition to reporting on findings from primary data certain statistical tests were conducted on secondary data from the Census of Manufacturers2 and The Directory of the Canning, Freezing, Preserving Industries.3 These tests were tests of differences between means and were used to gain indications of structural change in the environments relevant to the research. The findings from these tests are presented at the beginning of Chapter Five. l.4 Overview The following sequence of chapters corresponds to the actual research process. Chapter Two is primarily descriptive, emphasizing the legal and economic environments explored by the study. It also describes the various economic actors c0mprising the participant sub- systems. The chapter is based on both secondary and primary data and provides an overview of the bargaining environments under study. Chapter Three is the theoretic chapter and offers a conceptual framework for exploring the subject matter. It consists of two parts. The first is a theory of behavior with emphasis on the managerial decision process. The second is an applied conceptualization in which the general subject matter is integrated with the theoretical construct. Hypotheses about ———_—_—_ 1Chapters Four and Five. 2Census of Manufacturers, various years. 3The Directory, various years. interdependencies this applied conce Following the discussion of find‘ between the bargain which is proprietan The second (Chapter bargaining environn tive and proprietar findings and then 0 advanced perfonnanc Chapters Six an the penultimate chap cussion in the form of conclusions is a chapter consists of )lllll). warrant att ll) leaned central t l4 interdependencies and responses to interdependencies are generated from this applied conceptualization. Following the conceptual statement are two chapters of findings and discussion of findings. The first (Chapter Four) focuses on interrelations between the bargaining association and the two processing sectors: that which is proprietarily organized and that which is cooperatively organized. The second (Chapter Five) addresses issues of structural change in bargaining environments and the impact of competition between the coopera— tive and proprietary processing sectors. Each chapter first presents findings and then offers discussion of the findings according to selectively advanced performance issues. Chapters Six and Seven build on the earlier work. Chapter Six, as the penultimate chapter, presents first an integration of overall dis- cussion in the form of summary conclusions. Building on this statement of conclusions is a presentation of policy implications. The final chapter consists of related research topics that, on the basis of this inquiry, warrant attention. The appendix consists of supporting materials not deemed central to the text. a~—----IIIIIIIIIIIIIIIIIII% DESCRIPT need This chapter 0 research subject in and the environment The chapter will fir Sundry of the lega? three classes of par ‘ study. This an be both the economic i elll'lbnments. Such “Momma ill) be by state or CHAPTER TWO DESCRIPTION OF PARTICIPANTS AND ENVIRONMENTS Introduction This chapter outlines the major descriptive parameters of the research subject including the characteristics of the participants and the environments in which they perform their economic activities. The chapter will first outline the legal bases of bargaining. The summary of the legal bases will be succeeded by a description of the three classes of participants which constitute the population of the study. This will be followed by a presentation of information indicating both the economic importance and structural characteristics of bargaining Such information will be presented first in aggregations environments. These dimensions and then stratified by select geographic dimensions. will be by state or region. 2.1 Legal Bases of Farmer Bargaining 2-1-1 National Basis The legal basis for bargaining by farmers derives from specific legislation in the beginning of the 20th century directed towards per— mitting farmers to act as groups in various market activities. The varied and numerous organizations collected under the rubric farmer coogeratives, of which bargaining cooperatives are a variant, stem from these legislative edicts. The two statutes are the Clayton Act 15 fl of 1914 (38 stat.. agricultural organ 388, 7 U.S.CJl. 29 agricultural produ the Sherman Anti tr: where in the M trust exemptions ac acts, especially th of 1922, have produ the type of produce Talley suit settled cultural producer be €00iterative covered a fuller enuneration Cloleratives in gene fee the literature c 16 of 1914 (38 stat., 730, 731, 15 U.S.C.A., 17;) whose section 6 addresses agricultural organizations and the Capper—Volstead Act of 1922 (42 stat., 388, 7 U.S.C.A. 291-292). Both statutes provide limited exemptions for agricultural producer organizations from the antitrust laws contained in the Sherman Antitrust Act of 1911 (26 stat., 209, 15 U S C.A.) and else- where in the Clayton Act of 1914. Various legal challenges to the anti- trust exemptions accorded agricultural producer organizations in these acts, especially those exemptions contained in the Capper—Volstead Act of 1922, have produced case law defining the nature of the exemption and the type of producer organizations covered. Currently, the Treasure Valley suit settled in 1974 provides the clearest affirmation that agri— cultural producer bargaining groups constitute a form of producer cooperative covered by the jurisdiction of the Capper-Volstead Act.1 For a fuller enumeration of legal challenges to agricultural producer cooperatives in general2 and to bargaining—type cooperatives specifically see the literature cited below. Though not addressing bargaining type cooperatives directly, the Agricultural Marketing Agreements Act of 1937 (50 stat. 246, 7 U.S.C.A., 1937) has relevance for them. Among other things, the Agricultural Marketing Agreements Act provides for the control of volume of product 1Treasure Valley Potato Bargaining Association, et al., vs. Ore—Ida Foods, Inc. and J.R. Simplot Company, U.S. Court of Appeals for the Ninth Circuit on Appeal from the U.S. District Court, Idaho, No. 71-2742, April 11, 1974, p. 9. ZSee: U.S. Department of Justice, Report of the Task Group on Antitrust Immunities, January, 1977; Ibid, The Attorney General's National Committee to Study the Antitrust Laws, 1955; Federal Trade Commission, Staff Report on Agricultural Coopera- tives, prepared by the Bureau of Competition, September 1975. 3Lang, M. 1977. pp. 151-186. moving to market. by producers in th values can be atta' controls. As state Marketing orde control the we as to quality markets. orders and agr setting and pr tools, coopera producers. Th and bargaining Associations of pro also be exempted frt The Agriculture 7U.S.C.A., April It tive statement addre Its thrusts are to d discriminatory polic type cooperatives, t producer groups. Th been detailed at len tive effort have bee bargaining bill to r Misses: of 196 for the support of ha in 6372), the Amne 1itbraharnsen. “-4 2 United States V 3Torgersou. R. a IIIIIIIIIIIIIIIIIIIII:—""""""""""""""""""""’___'_"T___"" 17 moving to market. Such control can alter the value of product expected by producers in their transactions with buyers. Realization of enhanced values can be attained through collective action to complement supply controls. As stated by Abrahamsen: Marketing orders for fruits and vegetables and tree nuts control the volume marketed through specific provisions as to quality and size of produce authorized for fresh in most instances, after the marketing markets. . . . orders and agreements establish a favorable institutional setting and provide the necessary control and regulatory tools, cooperatives become the implementing agency of producers. Thus, the tie-in between market-order programs and bargaining cooperatives is very close. Associations of producers utilizing the provisions of this act would also be exempted from antitrust liability.2 The Agricultural Fair Practices Act of 1967 (Public Law 90-288, 7 U.S.C.A., April 16, 1968) is the next chronological explicit legisla- tive statement addressing bargaining activities by producer groups. Its thrusts are to declare illegal certain impediments, specifically discriminatory policies by buyers against producer members of bargaining— type cooperatives, to bargaining activity by cooperatively organized producer groups. The events leading to the promulgation of this Act have been detailed at length by ‘Torgerson.3 Succeeding this legisla- tive effort have been efforts to establish a more detailed national bargaining bill to remedy the shortcomings of the Agricultural Fair Practices Act of 1967 in providing adequate delineations and sanctions for the support of bargaining-type producer cooperatives. The Sisk Bill (HR 6372), the Ammerman Bill (HR 13869) and the National Agricultural lAbrahamsen, M.A., 1976, pp. 219—220. 2United States v. Borden Co., 308 US 188, 198 (1939). 3Torgerson, R., 1970. Barggining Act of are all highly si 1) delineating unfa 3) specifying procn producers; 4) specs retains; and 5) sti administration, and would also repeal t Paralleling na nent of bargaining- initiatives by indir specificity exist in Michigan, Minnesota, and llisconsin. Prop the states of New Yo review the state ini‘ California, Oregon , Fora fuller review tbllprehensive enumer 2.1.2 California has a dating from the Calif trendnent of 1974 (SB sihilities of the Di 1Lang, Mu £293.- 2 California A fit 18 Bargaining Act of the 96th Congress (HR 3535) introduced April 10, 1979 are all highly similar and are directed towards specifying the following: 1) delineating unfair practices; 2) defining bargaining in good faith; 3) specifying procedures for the accreditation of associations of producers; 4) specifying the assignment of association dues, fees, or retains; and 5) stipulating provisions for mediation and arbitration, administration, and enforcement of the act's provisions. The current act would also repeal the Agricultural Fair Practices Act of 1967. Paralleling national legislative efforts to promote the establish- ment of bargaining-type producer cooperatives has been a plethora of initiatives by individual state legislatures. State laws of varying specificity exist in the states of California, Colorado, Idaho, Maine, Michigan, Minnesota, New Jersey, North Dakota, Ohio, Oregon, Washington, and Wisconsin. Proposed state laws are currently being considered in the states of New York and Pennsylvania. The following section will briefly review the state initiatives in the states comprising the study's sample: California, Oregon, Washington, Idaho, Michigan, New York, and Pennsylvania. For a fuller review of state initiatives the reader is referred to the comprehensive enumeration by Lang.1 2.1.2 State Bases California has a tradition of state support for bargaining activity 2 dating from the California Agricultural Code of 1961. This and the amendment of 1974 (SB 1941) specify unfair practices, certain respon- sibilities of the Director of Agriculture and sanctions, and also impose good lLang, M., Sup a. 2California Agricultural Code. Chapter 2, Articles 1-3, 1961. faith bargaining s mfair practice fo tern of sale. com] other contract pron bargaining associai handler, distribute bargaining groups, have attempted to c funds with which to cent have meant the activity is questior in the cling peach a efforts can arise wi Hashington, Ore however, more limiter lashington State Coda weaken efforts of be Though the state cod legislative effort i lhellashin ton State States that: the intent of th of fair practice associations of tural products, l9 faith bargaining stipulations. Under good faith bargaining, it is an unfair practice for handlers to "refuse to negotiate or bargain for price, terms of sale, compensation for commodities produced under contract, and other contract provisions relative to any commodity which a cooperative bargaining association represents.“1 Handler is defined as processor, 2 Under this law some handler, distributor or agent of any such person. bargaining groups, called associations, have developed voluntarily and have attempted to conduct negotiations with handlers. The absence of funds with which to enforce the law and the lack of guidelines for enforce— ment have meant that the effectiveness of the legal basis for bargaining activity is questionable. However, the history of bargaining activity in the cling peach and bartlett pear industries indicate that bargaining efforts can arise without more explicit state support. Washington, Oregon, and Idaho also have state initiatives. They are, however, more limited than California's good faith bargaining law. The Washington State Code3 addresses discriminating practices by handlers to weaken efforts of bargaining associations to establish terms of trade. Though the state code is limited in scope, a much more comprehensive legislative effort is under consideration. The proposed bill, termed the Washington State Agricultural Marketing and Bargaining Act of 1979, states that: the intent of the legislature (is) to establish standards of fair practices that shall be observed by handlers and associations of producers in their dealings in agricul- tural products, to provide standards for the accreditation 1California Agricultural Code, Chapter 2, Article 2, Section 54431, (e). 2California Agricultural Code, Chapter 2, Article 2, Section 54432. 3Washington State Cod , Title 20 Commission-Merchants Ag. Products. until inurenkt for fine enfo Q— = The specific provi bargaining lau uni sane general state associations and n negligible.3 The : of association rev: legislation in pron theiess. has evolve comprehensive barga discussed are as f0 to provide for bargaining; to producers; to for adninistra allow the Dir have investiga Such state ini tiati little beyond natio bargaining associati IP rospo sed Washi Nag Section, Section ZDragon State S 3Lang, M., Su 1“ llIdaho code, ch 5pmposea Idaho 20 of cooperative associations of producers of agricultural products for the purpose of bargaining, to define the mutual obligations of handlers and associations of pro— ducers to bargain with respect to the production, sales and marketing of agricultural products, and to provide for the enforcenent of such obligations.1 The specific provisions of this act closely reflect the existing Michigan bargaining law which will be discussed below. The Oregon Code2 provides some general statements as to unfair practices with respect to bargaining associations and remedies for such practices. Its impact is, evidently, negligible.3 The state of Idaho has a law4 providing for the collection of association revenues but goes little further than existing national legislation in promoting bargaining activity. Bargaining activity, never- '4 theless, has evolved in the potato industry. Efforts to introduce a more comprehensive bargaining law have yet to be successful. Provisions being discussed are as follows: to provide for unfair practices; to provide for good faith bargaining; to provide for accreditation of associations of producers; to provide for final offer selection; to provide for administration of (the) act; to provide for independent enforcement authority; to provide for judicial review; to provide for enforcement; to provide for civil remedies; to allow the Director of the Department of Agriculture to have investigative powers; and to provide severability.5 Such state initiatives to promote bargaining association activity go little beyond national legislation. The result is that the success of bargaining association activity in conducting bargaining is more a function lProposed Washington State Agricultural and Marketing Act of 1974, MwSmtmn,Satmn1. 2Oregon State Statutes, 646., 515, 525, 535, 545. 3Lang, M., upra, p. 169. 4 Idaho Code, Chapter 39: 22—3901. 6. 5Proposed Idaho Agricultural Bargaining Bill. The state of bargaining bill iicbigan ban is t Actof 1972.1 It far beyond extant hicb bargaining a act are an exclusi offer arbitration g becooes the sole r: unit. Fees are pai stipulates a course trade if neither th decline to bargain ‘ binding arbitration to oversee the imp] holds hearings to d It also conducts gr breaches of good fa culminate in exerti To date, the ac Michigan Agricultura bhich is an affiliat been defined for app plexus. and potatoes . in all the above com 1Michigan Act N 21 of factors such as control of raw product supply than legal coercion. Such bargaining activity might be termed voluntary. The state of Michigan has enacted and promulgated a comprehensive bargaining bill to strengthen historical efforts of bargaining. The Michigan law is termed the Michigan Agricultural Marketing and Bargaining Act of 1972.1 It is by far the most specific state initiative and goes far beyond extant national legislation in designing the environment within which bargaining activity shall take place. The central provisions of the act are an exclusive agency provision and a compulsory, binding, final offer arbitration provision. In the former, an 'accredited‘ association ,§ becomes the sole representative of all growers in the designated bargaining L unit. Fees are paid to the accredited association. The latter provision stipulates a course of action for ensuring the determination of terms of trade if neither the accredited association nor the handler elect to decline to bargain within a specified period. This course of action is binding arbitration. The act also provides for an administrative body to oversee the implementation of the act. This board, among other things, holds hearings to determine accreditation and to define bargaining units. It also conducts grievance proceedings related to unfair practices and breaches of good faith bargaining. Such grievance proceedings may culminate in exercise of the binding arbitration provision of the act. To date, the accredited associations are all organized within the Michigan Agricultural Cooperative and Marketing Association (MACMA) which is an affiliate of the Michigan Farm Bureau. Bargaining units have been defined for apples, tart cherries, asparagus, cabbage, cucumbers, plums, and potatoes. Accredited associations have also been recognized in all the above commodities except for plums and potatoes. Bargaining ________*_____________ lMichigan Act No. 344, Public Acts of 1972. — reader the act cur and has seen one .‘ act in tart chem The Appalachi the study's sample there relies on na vania have proposa by Michigan's act. lieu York, Pennsylva in what might be to at best, information planters of respecti tion for apple mark have had very limith product. The bargaining eight states can be California, Washingt and gem bargaini also be noted that C hegon, and Idaho, h bargaining initiatiw dates its Agriculture and the Appalachian s “._.—.— 1w and Bar ainin Board Association (Red Tart Bargaining for tart c 22 under the act currently takes place in cabbage, apples, and asparagus and has seen one year of activity in tart cherries. Bargaining under the act in tart cherries and potatoes has been stayed by court action.1 The Appalachian states of New York, Pennsylvania, and Virginia in the study's sample have no state bargaining legislation and thus activity there relies on national legislation. However, both New York and Pennsyl— vania have proposals for state legislation and both proposals are influenced by Michigan's act. Notwithstanding the absence of state legislation, New York, Pennsylvania, and to a very limited extent Virginia, are engaging in what might be termed nascent bargaining efforts. These efforts are, at best, informational, the purpose being to disseminate information to members of respective bargaining associations. The Pennsylvania associa— tion for apple marketing does attempt to address handlers but its efforts have had very limited impact on determining terms of trade for raw apple product. The bargaining environments that constitute the study's sample of eight states can be grouped into three categories: voluntary, including California, Washington, Oregon and Idaho; mandatory bargaining in Michigan; and nascent bargaining in New York, Pennsylvania, and Virginia. It can also be noted that California and, by close proximity, Washington, Oregon, and Idaho, have the longest historical experiences with state bargaining initiatives. Moreover, California bargaining activity pre— dates its Agricultural Code. Michigan has the most recent state initiative and the Appalachian states have pending initiatives. Historical experience 1Michigan Canners and Freezers, et al., vs. Agricultural Marketing éfl§_§grggjning Board and the Michiggn Agricultural Cooperative Marketing Aééggigtjgg_(Red Tart Cherry Case — Court of Appeals No. 20750). Bargaining for tart cherries continues outside of the act. — with bargaining i behaviors in the All of the e transaction betwe of handlers but f handlers such as p exception is the l and grower process product volume of eluded. However, exclusion in the a used for awarding acted. Furthermon processors and gran ‘ imprecision in r litigation in Michi and participants un and-controlled" coo organization having organized has force tion of this questil the handlers are in of the organization: tens of trade? 0f not all handler orga it make? Estimates Processing sector, l 23 with bargaining activity may help explain differences in participant behaviors in the different states in the sample. All of the extant state initiatives concentrate on the raw product transaction between associations representing producers and a population of handlers but fail to delineate the precise role of producer controlled handlers such as producer cooperatives and grower processors. A partial exception is the Michigan Act where some mention of cooperative processors and grower processors is made; under P.A. 344, the Michigan Act, the raw product volume of cooperative processors and grower processors is ex- cluded. However, the precise meaning of this exclusion, e.g., does exclusion in the act pertain only to the determination of volume to be used for awarding accreditation to an association, is not clearly delin— eated. Furthermore, the precise obligations and definitions of cooperative processors and grower processors in the act are not well specified. Imprecision in regard to these issues has been the basis of current litigation in Michigan. A major question of concern to administrators of and participants under the Act is the meaning of the clause "grower-owned- and-controlled" cooperatives. The presence of a significant handler organization having components that are cooperatively and proprietarily organized has forced consideration of the meaning of this clause. Resolu- tion of this question could contribute to the very basic issue of who the handlers are in bargaining; that is, what are the characteristics of the organizations with whom bargaining associations shall bargain terms of trade? Of interest to this study is the following query: if not all handler organizations are bargained with, what difference does it make? Estimates of the relative importance of the cooperative processing sector, i.e., the sector that competes with the proprietary fi processing sector bargained between states observed i views in this cha Extant natio handlers with any further reflected federal. The resa is essentially sil processors and grc exploring this iss offera taxonomy 0 study and provide these environments 2.2 I Famaer bargain between agricul tura in this study, p representing an ag tocoamtervail1 th Purposes are the en beers and the elic Sectors. Such info duction and raw pro tionship in farmer lesbians. Jo 24 processing sector yet which is not formally bound to the terms of trade bargained between the association and proprietary processors, in the states observed in this study can be found in the separate regional over- views in this chapter. Extant national legislation also fails to address the population of handlers with any precision. This inattention and indiscrimination is further reflected in current legislative initiatives, both state and federal. The result is that the existing and proposed law in this area is essentially silent on such things as the relationship of cooperative processors and grower processors to bargaining activity. Before exploring this issue more at length in Chapter Three, this chapter will offer a taxonomy of participants in the bargaining environments under study and provide some indication of the economic characteristics of those environments. 2.2 Participants in Farmer Bargaining Farmer bargaining consists of the determination of terms of trade between agricultural producers and buyers, commonly called handlers or, in this study, processors. It is a collective effort by such producers representing an aggregation of raw product. It is a collective effort to countervaill the economic power of processor buyers. Among the purposes are the enhancement of economic returns to agricultural pro- ducers and the eliciting of information from the production and processing sectors. Such information is needed for planning agricultural pro- duction and raw product marketing decisions. Thus, the primary rela— tionship in farmer bargaining environments centers on the transaction lGalbraith, John K., 1952, Chapter 9. fi between processor transacting entii and outline i ts r 2.2.1 The structun as they address pl product is the bar sists of general 9 composed of grower general neubershi p tion is typically . There are cases of comadity though wi Michigan bargaining imperative Marketi in several connodit In regard to tl the bargaining asso partially in cash vertically integrat still, for various association. Gmwe fled in one cornmdit The directing c tlltuittee, the steer lfialbraith, Joh 25 between processors and producers. This section will first look at these transacting entities. It will then treat another entity, the cooperative, and outline its relationship with the primary actors. 2.2.1 Bargaining Associations The structure used for collective action by agricultural producers as they address processors in order to determine terms of trade for raw product is the bargaining association. The bargaining association con- sists of general grower membership, a directing committee such as a board composed of grower members, and management. Though the population of general membership may consist of diverse types of growers, the associa— tion is typically oriented toward the marketing of a single commodity. There are cases of bargaining associations that market more than one commodity though with each commodity being addressed separately. In the Michigan bargaining environment, for example, the Michigan Agricultural Cooperative Marketing Association (MACMA) encompasses bargaining activity in several commodities but each on a separate basis. In regard to the diverse characteristics of grower membership in the bargaining association, growers may, for example, market strictly or partially in cash markets for raw product; that is, growers may be vertically integrated into processing for all or part of their crop and still, for various reasons to be addressed later, belong to the bargaining association. Growers may also be multiple commodity producers or special- ized in one commodity. The directing committee, called variously the board, the bargaining committee, the steering committee, or the executive committee, works with lGalbraith, John K., 1952, Chapter 9. management of the This group may re Grower nembe The exception is under the state b. which constitute i association is als lation can oblige relevant populatio association or not 2.2.2 Facing the bar specifically, the p privately organized the production of pi bargaining environmr considerable variati of interest to the 5 Some proprietary pro rithin a single stat tions processing a f firms also tend to se is) they sell in undi litessors my be abl 26 management of the association to set policy and bargaining strategy. This group may reflect the diversity of the general grower membership. Grower membership in bargaining associations is generally voluntary. The exception is bargaining in the state of Michigan when it takes place under the state bargaining law. Submission of dues (marketing fees) which constitute the source of revenue for the operations of the bargaining association is also generally voluntary. In Michigan, bargaining legis- lation can oblige the payment of marketing fees by the legally defined relevant population of growers whether they are members of the bargaining association or not. 2.2.2 Proprietary Processors Facing the bargaining association is the processing sector, or more specifically, the proprietary processing sector. This sector consists of privately organized processing firms that use raw product as an input in the production of processed products. Since this inquiry is limited to bargaining environments in fruits and vegetables, it will constrain its exploration of proprietary processors to include only those involved in the processing of fruit and vegetable raw products. The proprietary processor sector in bargaining environments exhibits considerable variation in organizational characteristics. One variable of interest to the study is captured by the term geographic reach. Some proprietary processors procure and process raw product strictly within a single state. Many such firms are small manager-owned opera- tions processing a few fruits and/or vegetables. These single state firms also tend to sell processed products in private label markets; that is, they sell in undifferentiated finished markets. Other proprietary processors may be able to avail themselves of geographic reach; they procure and/or p geographic bound prietary process brand identity a Typically t tive of managemer (prior to produc: of trade, the ma; bargaining associ individual propri among the populat stipulations that environments. The bargainil constitute the pri other sectors, in sector consisting ilportant to barg 2.2.3 The cooperati Processing sector for sales of prose Processor sector i to abide by the te “Til: is a differen itietary processor 27 procure and/or process in more than one state and thus may exceed the geographic boundary of a specific bargaining environment. Many such pro- prietary processors have differentiated their processed products by brand identity and sell in brand as well as private label markets. Typically the manager of the bargaining association and a representa- tive of management of the proprietary processor meet prior to harvest (prior to production of annuals) to discuss and come to agreement on terms of trade, the major component of which is the transfer value. As the bargaining association tends to bargain terms of trade one on one with individual proprietary processors, there may be variability in said terms among the population of proprietary processors. There are no legal stipulations that uniform terms of trade shall prevail in bargaining environments. The bargaining association and the proprietary processor sectors constitute the primary components of the bargaining environment. However, other sectors, in particular the vertically integrated grower-processor sector consisting of cooperative and grower processors, may also be important to bargaining. 2.2.3 Cooperative Processors The cooperative processor sector is of interest to the proprietary processing sector because it competes both for raw product supplies and for sales of processed products. However, the competing cooperative processor sector is not bound, as is the proprietary processing sector, to abide by the terms of trade determined by bargaining. The result, then, is a difference in raw product input costs sustained by the pro— prietary processor in comparison with the cooperative processor. The coopera‘ association for role in processe influence relatii processors. Spe cometitive beha ness of propriet association. The bargain processor sector Such competition belong simultane processor. This tions for their The coopera appreciable vari tions consist of rent. The gene blisters having Matters of co production thro sore through th orsanitation me and non-member non-neuter prod within or beyon difference it 28 The cooperative processor sector is important to the bargaining association for several reasons. One is that because of its competitive role in processed product markets, cooperative processor behavior may influence relations between the bargaining association and proprietary processors. Specifically, proprietary processors‘ uncertainty as to competitive behavior of cooperative processors may influence the willing- ness of proprietary processors to bargain terms of trade with the bargaining association. The bargaining association may also be sensitive to the cooperative processor sector because it competes with it for grower member clientele. Such competition may resolve itself somewhat by virtue of growers who belong simultaneously to the bargaining association and a cooperative processor. This group of growers, called dual members, and the motiva- tions for their existence will be explored at length in Chapter Four. The cooperative processing sector consists of organizations exhibiting appreciable variability. However, all the cooperative processor organiza- tions consist of a general membership, a board of directors, and manage- ment. The general membership may be comprised of a diverse group of growers having various size production operations and producing variable numbers of commodities. Furthermore, grower members may market all their production through the cooperative or market some in cash markets and some through the cooperative. Similarly, the cooperative processor organization may process only member product or a combination of member and non-member product. The latter mix raises the question of whether non—member product that is processed by a cooperative organization is within or beyond the purview of the bargaining association and what difference it makes to the participants in bargaining. are represented Tire board of the cooperat and conduct rev independent of ization of the directors. There are processor organ commdity dive cessors are in such as SunMai are examples of more than one c: groups within t orientation. The accoun allocations is Wars of part Pool varieties. SEparately, inc returns. Such shared costs an 29 The board of directors of the cooperative processor organization may reflect the diversity of the general membership. Some boards are organized to ensure that all commodities processed by the cooperatives are represented. Others base board election on other criteria. The board typically has ultimate responsibility for the performance of the cooperative. It thus works closely with management to set policy and conduct reviews of managerial performance. Some managers are more independent of the board of directors than others depending on the organ- ization of the cooperative and the controls available to the board of directors. There are two other organizational characteristics of cooperative processor organization that are of special relevance to this study: commodity diversity and the accounting system. Some cooperative pro- cessors are involved in processing only one commodity. Cooperatives such as SunMaid Cooperative, Lindsay Olive Growers, and Red Cheek, Inc. are examples of single commodity cooperative processors. Others process more than one commodity. The result is the possible existence of interest groups within the cooperative processor organization aligned by commodity orientation. The accounting system used by the cooperative processor to determine allocations is another dimension of cooperative organizations. The systems of particular interest to this study are multiple pool and single pool varieties. In multiple pool accounting each commodity is handled separately, incurring its own processing costs and earning its individual returns. Such individual treatment poses problems in the allocation of shared costs and shared returns; when certain costs or earnings are not identifiab difficult. In parti a utilize a sing processing all sales of proc some accepted cadets, e.g., determine the returns. A ma can elucidate be the basis fo llhere Tri i There Qi is There 03‘ is lihere Pri i there Prj i lihere n is There TRj 1‘ Thus, each commo raw product valu as its own cash ment of raw pmdi Sin9le pool are r TePresentation , ' 30 not identifiable by commodity, their accurate distribution becomes difficult. In partial response to such difficulties, some cooperative processors utilize a single pool accounting system. In such cooperatives, costs of processing all commodities are co-mingled as are the various returns to sales of processed products. Disbursements are then made according to some accepted decision rule. For example, a raw product value from cash markets, e.g., the proprietary processor purchase price, may be used to determine the relative positions of commodities in reference to commodity returns. A mathematical representation of this particular decision rule can elucidate the distribution mechanism. Let the raw product price Pr be the basis for allocating net returns to each commodity then: TR,=_QLP_N'__ . TRj 1 TIM: .P . ' QJ r3 J arm :3 H J Where Tri is total net returns to commodity i. Where Qi is total quantity of commodity i delivered. Where Qj is total quantity 1 . . . n delivered including i. Where Pri is cash raw value per unit commodity i. Where Prj is cash raw value per unit commodity i . . . n including i. Where n is the number of commodities processed including i. Where TRj is total net returns to each commodity 1 . . . n. Thus, each commodity's share of'net returns will be affected by the cash raw product value of the other commodities within the single pool as well as its own cash raw product value. This interdependence extends to pay- ment of raw product input value as well in that net returns from the single pool are net of input payments. Thus, as in the above mathematized representation, Total Product Returns (TPR) to commodity i are as follows: economy. To do incidence and i in the national varieties: bar tions, and coo will be docrmren information on that comprise t market shares, n Presented in a s industries will will be outlined 2.3.1 In order to Tilting activity coupilations dev Tresented will b will be true for tion. 31 TPRi = QiPri + ——§lprl * ijl‘j TRj II.M :: 3=1 2.3 Absolute Economic Importance and Select Structural Characteristics This section of the chapter will provide descriptive information on the absolute and relative economic importance of the farmer bargaining economy. To do so it will present a series of tables indicating the incidence and impact of farmer cooperative fruit and vegetable activity in the national economy. This activity derives from two organizational varieties: bargaining cooperatives, commonly termed bargaining associa— tions, and cooperative processors. Their separate and combined incidence will be documented below. This section will also provide descriptive information on select structural characteristics of the individual states that comprise the sample of this study. Accordingly, certain data on market shares, number of organizations, and concentration ratios will be presented in a state by state treatment. Not all fruit and vegetable industries will be addressed; only those industries germane to the study will be outlined. 2.3.1 National Economic Impact In order to describe the national economic impact of farmer bar- gaining activity this section will draw on past compilations as well as compilations developed by this researcher. In some cases, the tables presented will be a combination of primary and secondary data. This will be true for the national information as well as for state informa- tion. Table 2'1 t has been develOF of product and avarietl' 0f mas? table the grand 27,687,500 tons These figures re From the so the geogralllllC 1 year. Table 2-2 by major corrodi There are 53 bar iiarketing Associ vegetable, lives there are 11 fru beet association identified in 19 (California, Ore and Virginia) re tion. Lang1 COHde Vegetables and '3. Table 2-3, is pri "WSW sources indicate the year i” that state. i “--~a‘_““‘ lLang, M. < , \ 32 A. Bargaining Association Activity Table 2-1 based on information applicable to the 1971 fiscal year has been developed from secondary sources. This table records the volume of product and absolute sales represented by bargaining associations in a variety of major fruits and vegetables, including sugar beets. In this table the grand totals for physical volumes and sales volumes equal 27,687,500 tons of product bargained at a sales value of $662,198,200. These figures represent commodities sold for processing. From the same secondary source used for Table 2-1 can be derived the geographic incidence of bargaining associations for the 1971 fiscal year. Table 2-2 lists the states with bargaining activity broken down by major commodity groupings of fruits, vegetables, and sugar beets. There are 53 bargaining associations including 29 American Agricultural Marketing Association (AAMA) bargaining entities involved in fruit, vegetable, livestock, or poultry bargaining. Out of these 29 entities there are 11 fruit associations, 8 vegetable associations, and 5 sugar beet associations, for a total of 24. 0f the total 53 bargaining entities identified in 1971, the 8 states of this study's research sample (California, Oregon, Washington, Idaho, Michigan, New York, Pennsylvania, and Virginia) represent 23 or approximately 43 percent of this popula- tion. Lang1 conducted a census of bargaining activity in fruits and vegetables and sugar beets for the year 1976. The following table, Table 2—3, is presented using information from the Lang study and other industry sources. Where available, dates have been included to indicate the year in which bargaining first appeared in that commodity in that state. Based on identified bargaining activity in 13 states,in lLang, M., Supra. Bargained C Asparagus Beans Beets Cabbage Cucumbers Potatoes Sweet Corn Tomatoes Other Subtotal Apples Berries Cherries Citrus Gra.Des Peaches Pears Prunes other SUthtal SUgar Beets Grand T0 SouIce: Fa ~11 33 Table 2-l Total Volume and Sales Represented by Bargaining Associations in Major Fruits, Vegetables and Sugar Beets for Processing: Fiscal Year l97l Physical Volume Source: Farmer Cooperative Service, USDA, Information 90, l973. Bargained Commodity ‘000 tons Asparagus 21.8 Beans 62.3 Beets l7.l Cabbage 37.7 Cucumbers 49.8 Peas 70.6 Pop Corn 12.8 Potatoes 2,34l 9 Sweet Corn 205.4 Tomatoes ’ 258.7. Other 2l.9 Subtotal 3,l00.0 Apples 265.4 ' Berries _ 3.8 Cherries 44.7 Citrus 283.6 Grapes 3T0.6 Peaches 402.7 Pears 88.5 Prunes 30.0 Other 7.2 Subtotal l,463.5 Sugar Beets 23,15l.0 Grand Total 27,687.5 Sales Volume '000 dollars 9,263.6 5,994.8 355.l 657.7 4,750.5 6,766.8 67l.8 90,304.0 5,240.6 5,3l0.6 l,565.6 l30,88l. ._.J l4,899. l,77l 8,573 l6,54l 22,92l 3l,033. lO,l46 9,000. 64l. \lOOONU‘I—‘OQ ll5,527. ._J 4l5,790.0 662,198.2 Table 2-2 §tat§s California Washington Florida Oregon Idaho Utah Illinois Colorado ft DakOta Michigan Texas Indiana Ohio Wisconsin Pennsyivania New York Virginia New JEFSey Maine Other SUbtotal Grand TOtal SOUtce: Farina 7' (Americ. mummy ifru 2/leen U009 Nate the Table 2-2 States California 6 Washington 3 Florida 2 Oregon Idaho Utah Illinois Colorado N. Dakota Michigan Texas Indiana Ohio Wisconsin Pennsylvania New York Virginia New Jersey Maine Other 0 Subtotal ll Grand Total Source: Fruit 34 Geographic Incidence of Bargaining Associations: Vegetable ._J.__l..—Jr\) Information 90, May 1973. Fiscal Year Sugar Beet 1 Farmer Cooperative Service, USDA, l97l AAMAL/ l w-—l-—J-—I_J_l.—l—_l-—l_.l—J.—l——l—J N—l K0 Total Number of 2 Bargaining Entities 8 6 3 2 2 l 2 2 2 2 2 l l l l l l l l 3 l l/AAMA (American Agricultural Marketing Association) is a multi- commodity (fruit, vegetables, livestock, poultry) organization. 2-/Given the multi-commodity nature of many AAMA organizations these numbers understate the total number of bargaining entities. 'aole 2-3 13mm; 39”; Lives tales hilt-"es o o .. n. ‘3'. . 2. es ‘ in .. U 49's ".4665 m-ze'“ as n Ni. .‘u “a 34m 393" U} «I Zasoage .5033 35 Table 2-3 Chino odity- -State Matrix on Current Identification Bargaining Ac:iv1tv.ooorative Pro ocessing lc: xv1tv. and Date or‘ Earliest Bargaining Err‘orts: Fru1ts,‘-:eoetaoles. Sugar Beets State 91 Q Q _I_N_ fig fl [411 E 911 9}: UT HA NI Conmodity — — ‘— Apricots 8.6? cp 1974 Cling Peaches 8.CP 1922 CF Freestone Peaches 3.6? c? 1960 Canning Pears B.CP CP B.CP 1953 1954 Raisins 8.6? 1967 Apples 6? 3.6,? C? CP 1961 19751/ Blueberries ‘ 3.6? C? . 1940 Tart Cherries B.CP CP B.CP 1958 19752/ Grapes CP BEL? 3 8,6? 1967- 1960 1963 Filberts BE Prunes B.CP 1968 Strawberries CP 6? BE.CP Red Raspberries CP 8 Sweet Cherries 5? CP CP 6? 6? Sugar Beets 3 B B C? B Broccoli ' 8.6? CF CP Popcorn 3 Beans 3.5? C? 8 8.6? CF Tomatoes 8.,CP 5 CP 3 CP 1974 Bush Beans SE Kraut Cabbage 3 CP 19367 1974./ Asparagus 6.6? 8. CP LCPE 1960 1967 1958 19743/ ' Lima Beans CP 5 GP Carrots CF 3'“ CP . 1967 Cauliflower 8 CP 5‘” Cucumbers B a Potatoes 3 cp a at? a s 3.6? 8 MP 2960 Beets C? C? Cabbage 3 C? Peas 3 3 B 8.6? 3.5? . 1960 Sweet C 3 a a 3.6? BJLP °'" 3 1967 Plums CP 8E,CP CP 6? Notati : So rces: Lan . 14.. 1977‘. on u Ga rgyan. L., andE . Thor. 1978'. B : Bargaining Activ Directory 0 anning.. Freezing. and Preserving C : Cooperative Processing Activity [naustries.a197_ 79' E: End of Act“ ty McMillan. '.. 1953. Industry Sources. Notes: 1/ - Bargaining since 1975 under Public Law 344. 2 —/Bargaining under Public Law 344 only in 1975. 3 Jaargi‘fllng under Public Law 344 since 1974. 1976 there We paring represen 55 active entit' Some recen' by bargaining 5‘ Table 2-1 above identified in a indication of t“: contracts. Tabl sources. Based there was a 77 p tables, and suga updated compilat' unequivocally the update is curreni Statistics, and 'C An additiona may be garnered t' NOduction of bar 0? those commodit consists of perce CANNON ties for p bargaining activi the tow Percenta bargaining by com 36 1976 thereluere33 commodities being bargained. If each state commodity paring represents a bargaining entity then this population consists of 55 active entities in 1976. Some recent information on the absolute value of commodities affected by bargaining activity in fruits and vegetables is presented in Table 2-4. Table 2-1 above presented absolute values for bargained commodities. identified in a study of fiscal year 1971. Lang1 has also provided some indication of the absolute value of commodities sold under bargained contracts. Table 2-4 is extrapolated from Lang data and other secondary sources. Based on these findings and the assumptions noted on the table, there was a 77 percent increase in the value of bargained fruits, vege- tables, and sugar beets for the period 1971 to 1974.2 Without doing an updated compilation of such commodity marketings it is difficult to argue unequivocally that percentage increases represent a continuing trend. An update is currently being prepared by the cooperative unit of the Economics, Statistics, and Cooperatives Service.3 An additional indicator of the impact of farmer bargaining activity may be garnered from a presentation of the relative importance of state production of bargained commodities compared to total U.S. production of those commodities. This information is summarized in Table 2-5 and consists of percentages indicating the percentages of total U.S. commodities for processing produced by various states in which there is bargaining activity. The aggregated stated percentages which represent the total percentage of national product originating in states with bargaining by commodity are presented in the end column of the table. Rh“ lLang, M., Supra, Table 3. 2Undeflated values. 3Update in process by Gilbert Biggs, ESCS, USDA. V luau a. p\—:- ..-—~ In». a a. .:‘.u crip. ..L. - .~ \11. .h.\ .a\.\ . 1...). v u I - J... . f... b .., .L. f... LL.-. _ - .33:.......:...c ..::..:: 32.... a...” inspire? co. .53.; -2. -L t. :C.......::...dx... .2... ...::..> 3.. 3323:; 331423.ch& 333.3) VIN Mad—wk 37 .\H :_ mcvucoamc Ran, mcr53mm<\w .m~m_ he: .om cowbeELOceH .cmm m>wumcmaoou macemwa “m wfinap .NNmH ..z .mcao ”aucaom "mwuoz 225.2; 25.3... mm :2 S 9833 $.33 em :2 R S . . e 3; m8 823 3 NE NN N 9.: New. AN ”2 N8 - :2 llllllnlllllllln Lum> on. me> mLm—FOU COO. "UmuLDamx mcowumwuow mLm-OU ODD. “v9.7.0 ma CSLO m mco H azflmrfimweu u a3; 5 865 a. -...< .8 .32 t 2:2, co 5.52823 36828 2:2, 53 55.8.95”??? 23» \u mummm Locum ecu mm amummm> use mquc ”muumcucos moc_ameem _w>Fuow__ou cmmca m_om nova—mnemmu mo m:_aD Lo :o_um_oawcuxm ecu .m:_e> cw mmcmco ammucmucmm .m:#m> vow m_nmp A. f - r3; Seans‘ S .iroifii «in o; 14 7» .s. 33 a . s... 3. . 3 a... \Iu - a. S I Ml 5.; Id ”1M rt ...ll n “as. a. A: \il‘k -) Rt “M. s FIE rl S Or» A: a In P. 3. r. i ‘1- Ns‘d ‘ n .d . Ins .\ ..:\J a: 3.“: In :51» pol “ a. a u s .6: 3 i, n n: n . . ~ 5 . V .3 3 r. no . I a. .1. r. i. .2 I «I. . . i~ N; no“ F1 l. -\ as . s an. \IM v . In . s .. K 3 .1" .u . w. .x. 2. r l I‘ c b at least A.- .~U but available es ‘7 rries .1 FEESiDFE Peach itiéhoerries :78 rrleS “irterts Dir ' ‘ i-aCS lCried) i3": Cherries .19 a l 38 Table 2-5 Total State_flduction of Commodities for Processed Use as a Percentage of Total U.S. Production or Commodities. ror Processed Usiror those States llavm An Bargaining hctivaty for [nose Commodities (Fruit. Vegetao es. Sugar Beets) ror t6e Year 1978 Aggrega te " U MI MN no 0H 0R UT M E Production State Q Q 19 L" E _ _ __ __ _ _ Commodity Sugar aeecsl’ 23.4 5.5 8.5 .a 33.1l/ Broccoli 95.3 95.3 Pop Corn N/A Snap Beans—V 2.3 20.7 N/A 23.0%, Lima Beans NIA N/A Cabbage N/A N/A N/A Asparagus 22.6 18.7 49.2 90.5 Carrots 16.1 19.1 Cauliflower 85.1 WA 85.19 Cucumber ’ 9.0 N/A 9.0* Potatoes (Fall)y 2.0 29.1 9.6 2.9 4.0 5.5 8.5 15.9 78.6—11 Beets 42.5 42.5 Peas 18.0 WA ”/71 2.‘ .7 23.6 67.1“ Sweet Corn 6.5 26.4 ll/A 13.2 N//\ 12.7 20.8 79.6+ Tornatoes 83.0 3.1 6.5 92.6 Apricots 97.7 97.7 Cling Peaches 80.1 80.1 Freestone Peaches 12.3 12.3 Canning Pears 63.9 24 7 88.6 Raisins 100 100 Grapes S 7.9 8 4 Blueberries 27.5 27.5 Strawberries 15.6 16.6 Red Raspberries 57.1 57 1 Filberts 97.6 97.6 Prunes (Dried) 100 100 Plums 64.1 64.11/ Tart Cherries 70.9 70.9 Sweet Cherries N/A Apples 12.1 12.1i/ NOCESi/ — ' ' l ' ' .‘ Based on 1977 Estimates. Sources. lonc16;3::F;udtst_gniualté1tgfiglgggl jggrgary. WA Notavailable. + : at least It is assumed t influenced dire be truer in sorn structure of ra ingly, not as a impact of barga processing ecom B. Processing 1‘ This sectic processing actii incidence of coo review certain a tively and propr Coogerative processing to be 1971 data comes from a combinati 1976-1977 tabula enurerate cooper of the extent of Some information also reported. Organizations in 1rcs, USDA, on. zrcs, USDA. nsearcher's data 39 It is assumed that all of the commodity produced for processing is influenced directly or indirectly by bargaining. This assumption will be truer in some market environments than others as a function of the structure of raw product markets. The percentages are offered, accord— ingly, not as a precise measure but as an indication of the relative impact of bargaining in the U.S. fruits, vegetables, and sugar beets for processing economy. B. Processing Activity in Fruits and Vegetables This section will look at the incidence of fruit and vegetable processing activity in the U.S. economy. It will first review the incidence of cooperatively organized processing, and second, it will review certain aspects of the total processing sector with its coopera— tively and proprietarily organized components. Cooperative Processing. The data on the incidence of cooperative processing to be presented here comes from several sources. The 1970— 1971 data comes from an earlier mentioned study1 and the 1976-1977 data from a combination of sources.2 By paring the 1970-1971 data with the 1976-1977 tabulation in Table 2-6 and acknowledging that both tabulations enumerate cooperative processors headquartered in that state, estimates of the extent of cooperative processing organizations can be obtained. Some information as to the numbers of cooperative processing plants is also reported. Whereas the total number of cooperative processing organizations in 1970 and 1971 was 50 and 47 in that order, the lFCS, USDA, Service Report 119, 1970; FCS, USDA, Service Report 123, 1971. 2FCS, USDA, Special Tabulation (B. Swanson), NCFC data, and researcher's data. m.v.:: ‘ xww. www¢ .d:.=.emgaa :a .3 :l . i . < 1411-..- ..::no§ .. .. . .-II.E: magnum .u w [Hiawqumdualmlum Manama mam» wawmqluuuluuluunmuuua w-~ ~_oub “'0! mmuczom 33.6:— K;— .2 .925 XEEEwaoou 9.2:: we 3258 223.52. .mw>.5m,.waoou 3:53 No 5538.5 ..:9 “Em . E 38— um 25.530: Ft .2553an 3.6me ”:3 .22. :02 x II 0 \MP II II «5:3; x II o \Mm II II 05:: x I. o \M» II II 2.22: x I- o \M_ -- -- WEE: :93 no x o m N— e e coumcwzmas A. x a v m m m 3.33.3:ch x N. m NF o o :omeo x i m 2 N N to» 52 x 1 _ N _ _ 3035...: x z: N m m m 535.: x m _ m _ _ 353233”: x .1. — N N N mama: x $ m : N a 820: x +2 .N z N. N, 258:8 oz mm; 3.87. 2332395 3:2; 2332555 m:o_um~.—=ma$ 323m fizz: 32:83 REIEB {flaw lg! =u_3 magnum 25» aqum ”33m 2 203885 m> mZmeNS «Em U.S.; No. wucmu._u:_ .,_ . wIN 22: 1976-1977 tabul 1971 tabulation the researchers under-estimates processing orgal for processing. Some indica processors in s; by Goldberg.1 1 processed commo processing excee called to raisin peaches, and pea environments of Total Proces processing organ reports of the C4 1977 and the ear is a widespread rents by state; numbers from 196 activity this de out bargaining th statistical testi 1 Goldberg, R 41 1976-1977 tabulation identified 67 such organizations. The 1970 and 1971 tabulations are based 0n respondents to questionnaires prepared by the researchers. Due to nonrespondent errors these numbers are likely under-estimates. The 1976-1977 data constitutes a census of cooperative processing organizations in the commodity groups of fruits and vegetables for processing. Some indications of the relative aggregate importance of cooperative processors in specific commodities may be garnered from a 1969 compilation by Goldberg.1 This table is reproduced here as Table 2-7. For several processed commodities, the market share accounted for by cooperative processing exceeds 20 percent of total industry volume. Attention is called to raisins, prunes, beans, peas, corn, apples, cherries, tomatoes, peaches, and pears because these commodities are relevant to the sampled environments of this study. Total Processing. Table 2-8 shows the distributions of canning processing organizations in fruits and vegetables based on preliminary reports of the Census of Manufacturers data for the most recent year 1977 and the earlier census years of 1972 and 1967. Revealed by the data is a widespread decrease in the number of canning processing establish— ments by state; in the aggregate there is a 26.2 percent decrease in these numbers from 1967 to 1977. In the reported states with bargaining activity this decrease is 24.2 percent and in the reported states with- out bargaining this decrease is 37.1 percent (see Chapter Five for statistical testing on this and other data). lGoidberg, R., 1971, p. 16. Table Z~7 Cottonseed Soybean pr: Dairy proce Livestock Frozen citr Canned citr Dried raisi Dried prune Dried figs Frozen gree Frozen com Frozen peas Frozen whitr All other fr Frozen apple Frozen cherr Frozen berri Frozen all c Canned green Canned corn Canned peas Canned tomat Canned whit All other ca Canned apple Canned cherr Canned peach Canned pears Canned grape All other ca Source: Fa ll Based upon volume, an Prepared by: 42 Table 2-7 Cooperative Processing Volume as Share of Total Volume: l969 l/ Commodity Cottonseed processing Soybean processing Dairy processing Livestock Frozen Canned citrus concentrate citrus and juice Dried raisins Dried prunes Dried figs Frozen Frozen Frozen Frozen green & wax beans corn peas white potatoes All other frozen vegetables Frozen Frozen Frozen Frozen Canned Canned Canned Canned Canned apples cherries berries all other fruits green & wax beans corn peas tomatoes white potatoes All other canned vegetables Canned Canned Canned Canned Canned apples cherries peaches pears grape juice All other canned fruit Source: l/Based upon volume data supplied by cooperatives, total industry volume, and the personal knowledge of FCS commodity specialists. Prepared by: Farmer Cooperative Service, U.S. Department of Agriculture Goldberg, R., l97l. Co-op Share of Industry Total (Percent) 9 0 7 6 0 .O 0 O O O AbLi‘w ~_ E u— m— numcaxL< x I: ma mu 2:5.— quZuq $2-32 .RE 22 $3 33m x «ME—3,39 aucogu «93:09.0... \N mum—“"03““ :3 N2..— 33 Spam 5. v: nouuam Law» 5:: wouauw Lao». 33.0230 opauu0m0> 6:: 6.3;“. 9:530 :u .3 mvN undo... .mLao Hue—0m nnDN U—M MOM-10¢. VflaLotoc .50.. nuCOEuwnélunm— fl€.mmn-U°Lk .mgmm> mzowga> .mgmgaaomuzccz we mam:wu / H.mm- ~.¢Nx N.o~u 43 x><><>< fixu_>wuu< mmmdvxmmn :szmmgoa mmzmgu mmaucmogua ;H_3 magnum auw>_uu< m:_:_memm acoummz “z mom oflv mom NH eva m ma mac mam mmofi m~ ow~ NM mm m m «H mm o~ Mn N“ IIIIIIIIIIIlI1IIIIIIIIIII1II1IIIIIlsIIIIIIIiIIIItIIIIIIIIIIIIIIIIIIIIIIIIIIIlIIPIIIIII Nmam ”cowawao: ”mmugzom mwe mom mmmg Roma "zuwumam If >u_>_uu< a:_:_mmgmm usozdwz magnum cw peach zu_>vuu< m:_:_mugmm :u_3 mmuaum :_ Punch Pouch stao __mza: a_=gou__mu :omwgo acum:_zmmz 2mg: oucgo_ou acct” mwxmh macaw—xo m:c_mw=oa mmmcaxg< macaw Low» x Axu_>puu< :_:_amgmm 5:; 9.33m Lam; mmow o—m .mgmo> Hum—mm magnum kugoawx you w» mxmm u c.4muomw> vcm “wag; m=_=:mu ;a_= :wazm__amumw a:_mmwuoga .mum5_umu mzmcou xgc:_a__wLL\M OH mm Ma Ma .N~¢~ ..z .m:54\w I}!!! mmafi ”mwuoz m asaac_< w wwmmmccmh mm a:_go_; mg mmeomo -- m:__OLmu .m NM u=__ogau .z x m*=_mg_> .3 oe m_:_m;_> mm ucapxgcz mfl wgazm_oa m mzo_ em agommccwz ~m :wmcoumwz mm cmmwcuvz wm m_o=____ me acm_u:_ mm ovao mm cwcm>P>mzcm¢ mm Awmgmw zmz mo” xLo> zwz m“ wuummazummmmz my m:_m= Roma macaw wlm mpamh based on data i mm] off state (Figure 2 canned or frozen majority of the: attempt is made by volume or sal C. Simultaneous Mm Table 2-3 at association actii lable 2-9 present with bargaining a activity, those 5 and the number of connodities. Evi activity and coop located in the im study‘s sample: New York. PennSl!I 44 A schematic representation of the distribution of canning and freezing plants prepared by the National Food Processors Association based on data in The Directory of the Canning, Freezing, and Preserving offers a very general view of numbers of processed plants by Industries1 state (Figure 2-1). This schematic representation includes all products Nevertheless, the No canned or frozen, not just fruits and vegetables. majority of these plants are processors of fruits and vegetables. attempt is made in this map to indicate relative importance of states by volume or sales. C. Simultaneous Presence of Bargaining Associations and Cooperative Processors Table 2-3 above documents the simultaneous presence of bargaining association activity and cooperative processing by specific commodities. Table 2-9 presented below summarizes this data by listing those states with bargaining activity, those states with cooperative processing activity, those states with simultaneous activity in one or more commodity, and the number of simultaneously bargained and cooperatively processed commodities. Evidenced is widespread simultaneous bargaining association activity and cooperative processing in the U.S., much of which is located in the important fruit and vegetable production states of this study's sample: California, Oregon, Washington, Idaho, Michigan, New York, Pennsylvania, and Virginia. lThe Directory, 1978-1979. N (I El 0; a g 0! 45 dd £3952, . . ... 3 3.53033 3338.: UGO”. :wco—um . . 2 he . . :«Auaou ‘5:lo and $55.30 on 3 .ngzom 35.: ”5.59....— IIID / , :5: 555.5 000° . o J .0 a t a v: o . :r.’¢.. .. . “Huaoowfaoe, a.» .. ,-v~‘-...3p <. 00 09:9. .30. a 06 ‘ III-alilnb cu I 0 lfllll cc 00000 n .0. .2. 430000030030 n 'u .- .nnoo. 899000 _: II . nauou I t ‘llil afiOuOOna t aunnons I .I C I I 091.0620 I.‘.Il "nu ozhsnnvoho 3 3!. I It a V urI—l’ fit... l°g,gacc i D .- s p n""v n" a a 950! a . och a ’ go" a 2* u“: ascend asrucv 4a. b tom \ 3a; 233 E 9;:um \w mmueaom 35 £65 ”:2 .z .95.. umwuezom :3. “zoom: 5 mm; \_ "mwaoz p o oz _ 2:238 P P am; F 38.8 .2 _ o oz c =3: _ m mm; m 528$: w a oz 2 53:23: ..o m e \No > z N 8 ea _ o oz m 339.5: N m mm; o 53:32 6 4 F — mm; ~ 053. «N 3 mm; 3 £53.25 333335 333$ 33:335.; 52.. 8.5Goas8 wmlovzli! vwcgmcmm 33m 9.338; 35.50253 we $2.52 .5 .25 E 3:52 338253 “.0 $9.52 28:335.; 3:: mmufim be $2.52 3333“; can 32.: 5 3253‘ ".5339... 352288 ES 3253‘ ”.558me magma—:55 its $23. a-~ m3"; 2.3.2 Str The prese area. This se turning to the Following this Description of Pennsylvania, . industry. Statistics fruit and vegei have been orgar Peaches, tomato all sold for or California com for the 7 Sampl handlers has be share accounted except in tomatv Comomtiess ex: national prodW him. lorimt Producer 47 2.3.2 Structural Characteristics of Select States The presentation of structural information will be by geographic area. This section will look first at the California environment before turning to the Northwest states of Oregon, Washington and Idaho. Following this will be a focus on Michigan fruit and vegetable industries. Description of the market structure of the Appalachian states of New York, Pennsylvania, and Virginia is limited to the apples for processing industry. A. California Statistics describing the structure of California markets for select fruit and vegetables relevant to the organizations studied in Calfornia have been organized in Table 2-10. These commodities are apricots, pears, peaches, tomatoes, grapes (raisins), plums (prunes), olives, and almonds all sold for processed use. Some statistics on a variety of other California commodities are presented as well. Table 2-10 indicates that for the 7 sampled commodities with active bargaining, the total number of handlers has been decreasing for the period of 1960 to 1978. The market share accounted for by cooperatives is generally greater than 40 percent, except in tomatoes, and is increasing except for prunes. In all of these commodities, except for freestone peaches, the California share of national production is large and uniformly above 60 percent. Apricots. Apricots for processing have been bargained by the Apricot Producers of California since 1974. In 1979, there were 12 canners of which 4 were cooperative processors. The canners dominate the processing with approximately 60 percent of the utilization in 1977-1978. There were also 6 freezer handlers and 28 drier handlers including 1 cooperative processor. In total, there were 46 handlers q 1 .....I.u.~\ :3... :. ........... . 7...... 7:352 :2... 3...... .1 3:... DUI-33 :43 : ,JJ. v..:.n..:..~ kmsiwqw 43.1; «rat J I: —:\.:.‘..q‘--:.-h \N» k..-=_:2 1...-» ..::...:..u :3. 3.4:un,oJD—Dn ..a§:ng~..1¢ \- -N. nih\~\\\§ 48 “mofla awe—-mm_ .3 .v .ocoz o.oo_ c.0op _.m: gwxm— :o_gu=uoca dong—5m >532: "o;au a. u.am~ .m. .g .N .o:o: .w~m~ ..4 .:azocau umwucacm mmn_u mmncu :zoc mm \NN_-c_ own—u 2: mm - mm :30? me o mouwu a: we ow m_umu neuvu :: mm 3 27% Sung .5 3-8 I mmneu a: mmimk 2 «Two Gang .5 2-3 :m-em meuwu a: so.mm loeeiaza seaeiifl flawlvlma..; .m.: o m. a» x mm ozzpo> m=_mmwu0cg co smmmwuoga a. .93 :Ecmasmz 7:5 53935259 33.25308 2:32, 5.28 :5 coco _o eacucaugoe aka— .m—am__w>m Ho: “5: .gmeo_ am We .c_om9_ eaeumm m:_mmuuoc: m>_auem:oou may we :o_¢ceu=ou:o€w .m:_:_aa;aa “ax Ho: .vm~w:uaco >_a=muue ._uzzou w>__o\m _ - - é - N - - m \flem — I v I I m-~ - i i a m - . <_z mmw N m_-o - a. «N N we ow n. _N w --oN mo KN .e e no me n. ow m v me _~ \fl_~ e No mm m. Nm m om-oQ - ~_ mm iflfll lim‘wfl.lllfl¢i_i- mama:— mcommuuoca zowaa_oomm< m:_:_nog~a mem_u=u: a>_umgmaocu Am swucmmwcaw: co conga: coaézz acgu omaucmucwa .com_\_ ”mugoz ozo: mu::E_< use: mo>__o -- gaze—.__:au -i mgwoa ecmam -- __ouo:;m .. mguaasu:u -- muaamdo; -- mzamm oom_ msmcecam< _cm_ .vo_;cv mazaca Nam. m:_m_az e~m~ muodaaok mm$_ memwm a:_::mu com. «ozone; accomowed Nwa» mmzoaw; a:__g e~m_ muoo_cn< .mcvzlmmmalmm .mfldamaaw be u:w>o< "mmflg_v9==ou cog; uuo w unm,Ua=_omuua!=o-wuwawfluaquuuuwum _ m "waaumuwa.wfl C aw wfiamb of which 5 we] processors are The dominant c are California change in the processor marl The assoc 0f the total t cooperative pr Hence dual men bargaining for 1978 report th The number of In 1978 t state crop or Cooperative pr. bargained With 0f the state c} dual membershii California Car” 50 Percent of The tW0 me and lri-Val ley 1976. The late 0n the Pro 25 pechnt 0f 1: 49 of which 5 were cooperative processors. The two dominant proprietary processors are Del Monte Corporation and Libby, McNeill and Libby, Inc. The dominant cooperative processors with 45 percent of the state tonnage are California Canners and Growers and Tri-Valley Growers. Structural change in the industry is marked by an increase in the cooperative processor market share and a decrease in the total number of processors. The association bargains for 40-50 percent of the state's tonnage. Of the total tonnage that the association represents, 60 percent goes to cooperative processors and 40 percent goes to proprietary processors. Hence dual membership volume accounts for 24-30 percent of state tonnage. Cling Peaches. The California Canning Peach Association has been bargaining for cling peach terms of trade since 1922. According to its 1978 report there were 13 processors including 4 cooperative processors. The number of processors is decreasing. In 1978 the association represented approximately 62 percent of the state crop or about 380,000 tons. Of this 380,000 tons, 150,000 was cooperative processor member tonnage. Hence, the association actually bargained with proprietary processors for 230,000 tons or 37 percent of the state crop and 150,000 tons or 24 percent of the state crop was dual membership tonnage. The association represents 85 percent of California Canners and Growers Cooperative‘s cling peach tonnage and 50 percent of Tri-Valley Growers Cooperative's cling peach tonnage. The two major cooperative processors, California Canners and Growers and Tri-Valley Growers, accounted for 37.7 percent of the state crop in 1976. The total cooperative processor market share is increasing. 0n the proprietary processor side, Del Monte Corporation purchases 25 percent of the California crOp, making it a substantial if not the largest proces three-firm cor crop. Several or multinatl0r M Reynolds Foods, Inc.; a Bordon, Inc. The current na ciation. The cessors of whi 13 canner DIOC of processors the state cann cooperative DD 40 percent of ‘ In the co and Growers Coc nately 45 perce is approximate? Processor marks account for the On the prc 0f the state cr Libby. McNeill, 0f the state cr accounts for an 50 largest processor of cling peaches in the state. Using this figure, the three-firm concentration ratio corresponds to 63 percent of the state crop. Several of the major proprietary processors are part of conglomerates or multinational firms; Nestle owns Libby, McNeill and Libby, 1nc.; R.J. Reynolds owns Del Monte, Corp.; Ogden Corporation owns Tillie Lewis Foods, Inc.; and Sacramento Foods, Inc. is a division of Borden Foods, Bordon, Inc. Bartlett Pears. Bartlett pears have been bargained for since 1953. The current name of the association is the California Canning Pear Asso- ciation. The association notes that in 1953 there were 26 canner pro— cessors of which 2 were cooperative processors. In 1979 there were 13 canner processors of which 4 were cooperatively organized. The number of processors is decreasing. The association represents 63 percent of the state canning pear crop. Of this 63 percent, 65 percent goes to cooperative processors. Thus, dual membership accounts for about 40 percent of the state canning crop. In the cooperative processing sector overall, California Canners and Growers Cooperative and Tri-Valley Growers Cooperative have approxi- mately 45 percent of the state tonnage though this varies year to year. As approximately 60 percent of the state crop moves through cooperative processor market channels the remaining two pear-processing cooperatives account for the remaining 15 percent. On the proprietary processing side, which accounts for 35—40 percent of the state crop, the big brand packers are Del Monte, Corp., and Libby, McNeill, and Libby, Inc. Libby accounts for about 15 percent of the state crop. Tillie Lewis Foods, Inc. as a private label packer accounts for another 15 percent, with Sacramento Foods of Borden, Inc. accounting to up the remain Leases. bargaining t8! association re aggregate oer: cessors. Henc the state cro; 75 percent of 27 processors, processors. 7 major processc of some of the Table 2-12. S in the numbers The percentage market channel terms 01“ trade of raisins of , processors has 42 Defiant of 1 Processors as t W haVi’lg an DIOdUctj 0" has 1978. 51 accounting for 5 percent. Several other proprietary processors make up the remaining percentage. Tomatoes. The California Tomato Growers Association (CTGA) has been bargaining terms of trade for raw product since 1974. Currently, the association represents 70—72 percent of the California tonnage. Of this aggregate percentage, approximately 29 percent goes to cooperative pro- cessors. Hence, the extent of dual membership is about 20 percent of the state crop of tomatoes for processing. CTGA represents approximately 75 percent of the 800 tomato growers in California and interacts with 27 processors, bargaining formally with the 23 that are proprietary processors. Table 2-11 presents a breakdown of tonnages processed by ( major processors based on 1978 data. The ownership and characteristics of some of the major proprietary processors in this list are noted in Table 2—12. Structural change in the industry is marked by a decrease in the numbers of processors and the proprietary processing market share. The percentage of raw product moving through cooperative processor market channels is increasing. Raisins. The Raisin Bargaining Association (RBA) has been bargaining terms of trade for raisins since 1967. There are 18 packers (processors) of raisins of which 2 are cooperatively organized. The total number of processors has decreased by 14 percent from 1960 to 1979. RBA represents 42 percent of the state production and none of this goes to cooperative processors as there is no dual membership. RBA represents 2,000 growers, each having an average acreage of 35 acres. The RBA share of state production has been decreasing from 46 percent in 1973 to 42 percent in 1978. Table 2-11 Hunt-Wesson F Campbell Soup California Ca nu. Heinz Co lri-lalley Gr: Contadina Fool tel Monte Cor Tillie Lewis . Clorietta Coo Pacific Coast Sungarten Stanislaus F0: Kern Foods Others \ 1 . Does no: Sum \ Table 2.12 Na Contadina s H 00C -J.Heinz Co. Campbell soup 091 Monte COI‘r s f \ 52 Table 2-11 1978 Processor Tomato Tonnages Tonnage Name 999 % Total Crop Hunt-Wesson Foods 900 16.4 Campbell Soup Co. 500 9.1 California Canners & Growers Co. 490 8.9 H.J. Heinz Co. 480 8.7 Tri-Valley Growers Cooperative 440 8.0 Contadina Foods 420 7.6 Del Monte Corporation 350 6.4 Tillie Lewis Foods 325 5.9 Glorietta Cooperative 300 5.5 Pacific Coast Prod. Coop. (PCP) 125 2.3 v Sungarten 125 2.3 is Stanislaus Food Products Co. 120 2.2 Kern Foods 110 2.0 Others 815 14.8 5,500 1001 1Does not sum to 100 due to rounding. Table 2—12 Processor Characteristics Name Owned By Hunt-Wesson Foods Norton Simon Contadina Foods Carnation Co. H.J.Heinz Co. H.J. Heinz Co. (multi-national) Campbell Soup Co. Campbell Soup Co. (multi-national) Del Monte Corp. R.J. Reynolds Industries Tillie-Lewis Foods Ogden Corporation Accordi (processors) and Packers, processor is production u is Bonner Pa Thus a two-i and the five cent (SunMai capperative m. in 1961 and state produc which includ. new entrants SunMaid Crow. Inc., a coop. has decrease. pmPl‘letary Table 2.13 Mayfa Valle. DE] Mi Thus the thn t3 abOUt 50 ‘ 53 According to industry sources, the largest proprietary packers (processors) are Del Monte Corp., Enoch Packing Co., West Coast Growers and Packers, Inc. and Bonner Packing Co. The largest cooperative processor is SunMaid Growers of California with 42 percent of the state's production up from 34 percent in 1973. The largest proprietary processor is Bonner Packing Company with about 11 percent of the state's production. Thus a two-firm concentration ratio corresponds to approximately 53 percent, and the five-firm concentration ratio for all processors is about 80 per- cent (SunMaid and the 4 largest proprietary processors). The total cooperative processor market share is about 42 percent of the state crop. Prunes, The Prune Bargaining Association (PBA) began bargaining in 1961 and currently represents between 6 percent and 12 percent of the state production. It bargains with 11 handlers out of a total of 16 which includes 5 cooperative processors. Recently there have been three new entrants into the industry: Bonner Packing Co., Tenneco West, and SunMaid Growers of California. The largest processor is Sunsweet Growers, Inc., a cooperative with about 43 percent of the state crop. This share has decreased from 52 percent in 1976 to 43 percent in 1979. The largest proprietary processor buyers are as follows: Table 2-13 Proprietary Processor Market Shares Mayfair with 25% of the state crop Valley View with 16% of the state crop Del Monte with 8-12% of the state crop Thus the three-firm concentration ratio for proprietary processors is about 50 percent and the industry four—firm ratio is about 90-95%. There are currently no dual members in the Prune Bargaining Association. M. for terms of cessor, Lind: abargaining oi the Olive ship represer is delivered Lindsay, accc production, 2 and markets E share of the processor in 15 Percent of share is abou decreased fro Oberti brand the competi to the olive ind Position in t Table 2.14 Lindsay Olive Emy Ca“for: hhertj 0f Tri. L”Pr. McNeill 54 Olives. The California olive industry currently has no bargaining for terms of trade of raw product and is dominated by a cooperative pro— cessor, Lindsay Olive Growers. However, there are efforts to organize a bargaining association. The efforts are being managed by A. Hester of the Olive Council. This nascent organization claims to have member- ship representing 20—25 percent of the state crop. Half of this 20-25 percent is delivered to cooperative processors, primarily to Lindsay Olive Growers. Lindsay, according to industry sources, has about 40 percent of the state's production, 25 percent of the California acreage, 425 members, 12,200 acres, and markets 80 percent of its product under its own brand. Lindsay's share of the olive tonnage is increasing. There is another cooperative processor in the industry, Tri-Valley Growers, with approximately 15 percent of the state tonnage. Thus the aggregate cooperative market share is about 55 percent and increasing. The total number of packers has decreased from 29 in 1965 to 7 in 1979. Lindsay's major competitors are Oberti brand of Tri-Valley Growers and Bell-Carter Olive Co. The rest of the competitors are quite small. The SAMI figures on market shares in the olive industry provide an indication of Lindsay Olive's relative position in the national industry: Table 2-14 SAMI Market Shares for Period 2/11/78 - 3/9/79 Processor Current National Market Share (%) Lindsay Olive Growers Cooperative 30.61 Early California 20.18 Oberti of Tri-Valley Growers Coop. 7.04 Libby, McNeill, and Libby, Inc. 1.93 Other 49424 100.00 Private Label 31.53 M five, The Ca bargaining i 55percent o In the early CACE's curre terms but a production i Other proces Processors: lable 2-15 dame Tenneco Buchet PEI, In. Continev (10 sma CAGE The majr Ihuston, Tex; challenging I CritiCl'Sms 01 Notwithstandi h'ke use, ,1 55 Almonds. The major processor in the almond industry is a coopera- tive, The California Almond Growers Exchange (CAGE). There is no bargaining in the almond industry. CAGE dominates the industry with 55 percent of the California crop and 30 percent of the world supply. In the early 19605 CAGE’s share was 70 percent of the California industry. CAGE's current share of 55 percent represents a larger volume in absolute terms but a smaller relative share given 300 percent growth in California production from 79 million pounds in 1965 to 313 million pounds in 1977. Other processors in the industry worthy of mention are all proprietary processors: Table 2-15 Almond Processors Namg_ Share California Crop (%) Tenneco Nest 20 Buchet 5 Pet, Inc. 3 Continental 3 (10 smaller entities) 14 CAGE i 100 The major proprietary processor, Tenneco Nest, owned by Tenneco of Houston, Texas, has recently embarked on a campaign to increase its market share of California production. It is doing so by directly challenging CAGE for growers. The challenge has taken the form of criticisms of CAGE's cooperative financing and payment mechanisms. Notwithstanding this criticism, Tenneco West's payment to growers are, like CAGE, also a function of the organization's performance in processing a Tenneco West 8. Northwes The bar: Oregon, Wash ton, pears ar presents a SL group studiec‘ and then Ida'n Washington Gr 1975. The be Ten years ago Six Processors Pmprietary pp Corp., Green C and Seabrook p Stayton Cannin Wm es. ”Mpg CIOSEly with l DFOduct terms ( “19}! Currently 0‘09 and 900 9? 67 Percent of t 56 processing and sales of processed products. Hence growers delivering to Tenneco West would share in the risk of Tenneco West‘s performance. B. Northwest: Oregon, Washington, Idaho The bargaining environments explored in the Northwest states of Oregon, Washington, and Idaho dealt with vegetables in Oregon and Washing— ton, pears and asparagus in Washington, and potatoes in Idaho. Table 2-16 .presents a summary of structural findings. In this section each commodity group studied will be reviewed looking first at Oregon, then Washington, and then Idaho: Oregon-Washington Vegetables. Bargaining activity by the Oregon— Washington Growers Association began in 1960 but has been defunct since 1975. The bargaining by the association was in beans and sweet corn. Ten years ago they dealt with ten processors. Currently there are only six processors, of which two are cooperative organizations. The major proprietary processors with whom the association bargained were Del Monte Corp., Green Giant Co., Stokely-Van Camp, Inc., Castle and Cooke, Inc., and Seabrook Foods, Inc. The two cooperative processors, Agripac and Stayton Canning Co., however, were the principle packers in these commodities. Washington Pears. The Washington Canning Pear Association works closely with its analogue in California and has been bargaining raw product terms of trade since 1954. According to association management they currently represent 50 percent of the total Washington and Oregon crop and 900 growers. This 50 percent breaks down into bargaining for 67 percent of the crop grown in the Hood River area, 61 percent of the crop grown in the Winatchee Valley, and 50 percent of the crop produced in the Yakima Valley. Bargaining takes place with six proprietary \N I ,5: . \~ Vt: FNq‘flh fiyphh nh—Nflsu c3. \M_:o-co .2 aka. :Na— Qua~ Ekm~ N :O.uU$$OL: ::.wwsUCLL tummcucLL wLaumoUC;L .UOmw< ata:_caLm= .m.: $3 aza:n kc >_O>—ach:Oou c>.¢ch:OCU X: age-3:6: atat‘moLfim umUISJLCZ :3.ucLuCOU£3$ 052.3) :CLU R Lbéizz tUaEOmeLQU: QDLU N CN a- u ml. l. _ 30:5.an Luv-.43 4 UC. CW 32.“. 3:... 63.; G: :0 m U .. .d M. .u 6.. mv; .~ .va~ CW k0 £30532 &0 URQ>D< ndmezasdxoz Q~IN uwsfisfih 57 43m: .33 “myocsom acumzvc_ m_ae_.m>e no: . mw>_umgmaoou oak ii \m~ .e_mmu_ couuom m:_wmoooca w>_gmcmaoou egg he :o_uecu=wo:oU\MM w~m~ cmuwxm aooo ummg\flm .:coo 1cm wcmma mmwucca NE 8:6 38 3.3% Accoogmozm .mmwm .mbcgceu .mcmwamawgv coco an a—nm_cm>\m mum—\m m.Omm_\M caum:_:mcz\m o:au. yo mgozogw cumuomxw cowum_QOmm< mecca scam zoum:_;maz .meuch\w memzocw mzomgmam< =oum:_:wnz\m aucaemu ”:o_uu¢uomm< mo_amawmm> coum=_;m~3-=omwcoxm :o_um_uomm< Lama :ommcoicoum:_;ma3\m uEm: .mzu .zcm=25m pm:::< muzz vzm mu—zcm mzcu_u:oz ”moczom ”mouoz m omu_o - ON e o . mcoc \mmmamcw ca ownFQ . oc-om m - . aco: \mmmpna< m - u xi 1 i i N Oe No 0 \o_ am we m_ ema— \mwmoumuom . - - o o \woaém m - $2 @285 ES 3 - 3% 3e o 3-3 m - $2 @2525 mm - u \mm . N i o \WN. oom— \Mcgou ucm mzmmm mN mmumu - mm m cm a \Nym cmm~ \M Lama mzwcccu mNaF \Mwao-ou __< wka~ mxafi amm— .x.:o_»u:sogm mcvmmwooca ummmwoocm mcommwuoca .uomm< acmcwmmgmm msmp m 2 mo ogmzm mo a_w>wucgmnoou w>wumcwaoou an mgupnca: acpapmmgcm umozcuccz =c_uagucau:ou wszpo> aocu u gwaasz wwucmmwgawz nogu a mo gmaszz km m=m>c< wkmfi "mw_u_u9;=oo cwzuo pom—mm use uw=_mmcmm :o mowum_uuum How—um ”amusgugcz e_-m o_aep processors: Cooke Inc., 1 west Packers. of 4 to 3 anu sane volumes . its area proc 31 processors three coupera The asso: processors, 0' about 25 pert: processing map in 1978. This Though the pea channels are 5 has been actiu geographic are above, Most 0 58 processors: Del Monte Corp., Libby, McNeill and Libby, Inc., Castle and Cooke Inc., Truitt Brothers, Inc., Independent Food Processors, and North- west Packers. Of this group Del Monte Corp. is the big buyer by a ratio of 4 to 3 and the others, though smaller purchasers, all buy about the same volumes. Del Monte Corp. bargains for approximately 50 percent of its area procurement.l In the 19505, the association bargained with 31 processors. Currently there are only nine processors, including three cooperatives. The association claims to work closely with the three cooperative processors, Diamond Fruit, Snokist and Rouge River. It estimates that about 25 percent of the crop (35,000 tons) moves through the cooperative processing market channel. Of this, Snokist canned 20,000 tons of pears in 1978. This represents about 16 percent of the total pear crop. Though the pear acreage is expanding industry sources feel that market channels are stable. Washington Vegetables. The Central Washington Farm Crops Association has been active in vegetable bargaining since 1966 but in a different geographic area than the Oregon-Washington Growers Association discussed above. Most of its activity has been in baby lima beans, carrots, green peas and sweet corn. The area relevant to the association is the North- west part of the Columbia Basin and the Kitikass and Yakima Valleys. The association represents 50—90 percent of the grower deliveries to the 1With a total processed tonnage of 126,344 tons in 1978 and the association representing 50 percent, the approximate percentage purchased by the major proprietary processor, Del Monte, can be calculated: with 6 proprietary processors and Del Monte Corp. being the largest user by 4 to 3, Del Monte's purchases about 10,000 tons from the association or about 8 percent of the total pear crop. If the other 50 percent of its needs are purchased outside of the association then Del Monte Corp. PEpresents about 16 percent of the Northwest pear crop. 5 proprietar tion represe The fiv are Northwes Twin City F0: in the releva industry sour small firms.“ Ham has been barg of the total processors. asparagus acri are the major tion's volume acreage.1 The aPproximatel y as a ba"gainin represents 50 . the prOdUCtion The associatpor ProceSSed Use. contract buyinc J'R‘ Slmplot c0 1\ This i pmdUCEd 1'n in: 59 5 proprietary processors in each of the 4 major commodities. The associa- tion representation in each of these crops is increasing. The five proprietary processors that the association bargains with are Northwest Foods, Libby, McNeill, and Libby, Inc., Del Monte Corp., Twin City Foods, and Cedargreen Foods. There are no cooperative processors in the relevant market area. The structural trend, according to an industry source, is towards concentration with “big firms buying up the small firms." Washington Asparagus. The Washington Asparagus Grower Association has been bargaining since 1958 and currently represents about 50 percent of the total state acreage. The association bargains with five proprietary processors. The number of proprietary processors is increasing as is the asparagus acreage. Del Monte Corp. and Birds Eye of General Foods Corp. are the major proprietary processors each taking 20 percent of the associa- tion's volume and thus each representing 10 percent of the total state acreage.1 There has been no cooperative processing of asparagus since approximately 1970. Idaho Potatoes. The Potato Growers of Idaho (PGI) have been active as a bargaining association since 1966. The association currently represents 50 percent of the growers in the state and about 45 percent of the production. Potatoes are sold for fresh, frozen, and dehydrated uses. The association represents 85-95 percent of the potatoes sold for processed use. It deals with 10 proprietary processors out of 15 contract buying processors. The french fry processors consist of J.R. Simplot Co. and Ore-Ida Foods, Inc. of H.J. Heinz Co., each with 1This is assuming 50 percent state acreage = 50 percent volume produced in the state. 30 percent, volume purc. french fry ' ln dehydrate market share increased si coooerati ve C. Michigan hichigal Bargaining is legal systems under the E (M. 344). V0luntary and (PEriodically the Provision: 0': these comm asparagus, 80C P'A' 344 Since for 1 1 growers ne90tiatjng pri rOOdS lnc. alsc W research the ta 60 30 percent, and Lamb Weston of Am Fac, Inc. with 15—20 percent of the volume purchased for french fry utilization. Fifty-five percent of PGI's french fry tonnage is sold to J.R. Simplot Co. and Ore-Ida Foods, Inc. In dehydrated potato utilization American Potato Co. has a 50 percent market share in the state. The concentration of potato processing has increased significantly in the last five years. There has been no cooperative processing in Idaho since 1972. C. Michigan Michigan is another bargaining environment explored by this study. Bargaining is currently active in five commodities but under different legal systems. Apples, asparagus, and kraut cabbage are being bargained under the Michigan Agricultural Marketing and Bargaining Act of 1972 (P.A. 344). Bargaining in tart cherries and potatoes for processing is voluntary and a function of the association‘s control of supply (periodically facilitated by the use of the Federal Marketing Order) and the provisions of the federal Agricultural Fair Practices Act of 1967. Of these commodities this section will concentrate on tart cherries, asparagus, and apples. Kraut cabbage bargaining since 1967 and under P.A. 344 since 1974 consists of setting the raw product terms of trade for 11 growers selling to the 1 processor, a proprietary processor named Vlasic and owned by H.J. Heinz Co. Potato bargaining consists of negotiating pre-planting contracts with the major processor, Ore-Ida Foods Inc. also owned by H.J. Heinz Co. An overview of the structure of the Michigan industry in these select commodities is afforded by reference to Table 2—17. Tart Cherries. Among the Michigan industries explored in this research the tart cherry industry has the longest history of bargaining I u . .- Lilli-tickle“- h5~h‘£‘fl~¥o\~fi~“‘ - .. a a : s. . n :5: — :> t). .. GLDQCCU >3 L 0 k0 m... czw .53.:021 : _ :m.. 33:52 :15 L02:52 30.2.2va10: :9»... N 502532 u 20>t< m\a~\=\3_ um._.d.:_€£U 805721: uUC-CH kc 33.4..7nUmC: :25. wU.d_—53..::CU €02.53qu3 :3 why—cuuucdh dUU-UW u.~n-w~.‘0az \~IN Q~Qfik 61 Ewan 3.553.522 3:96 mmmogzom 25.26.: 2.5: Jot—5.58 cm< :38 .a £qu "223;; eczfuo3< 9.33.5: meommoooai 355 B 3 2.3 do 3: mcemmmuoi 3385 ES .CBESPEGi 3.2—=53 uwoumnoéfi :3 85m 3m :3 £23. .695 mfifimmcmiw m3. 8:: 3A :3 :25 .595 meetatmfi 3333-23,. N moviucim 58 m2: as 3; 1 3a.. 33:.— ..EE: 353:: Stat“ 32:32. 25.22,} 3:22.08 _E:fi:oT.m< 535E ”moczom "mmuoz, - mmlmm . S m I mm .1 0 3:33-25: a - - o— m - ON 2 m. __ $263 - m4 . 3 2-2 x mm mm 3.3 __ 33.2380 - 3-8 . ov 3-3 «9.3 8 Ne 3-8 .8332; 332.38.; New: 3:. 32 oh: \mmbmg 3:. :2 22 M22 2... ES 22 :3 2&5me AR worm; < valillllix 3.235% 29:55 “875: 35$th - - o - _ :2 8333 - - o 2: _ $.83 $233 3?; 7.2 2-2 m mmxow R \MGS 32% 5”: 3-3 N em 2 \mmeg meaning mg: 3.8 a 3-8 \ma \ifimop .33 $235 fee . 3,685.8 ES 33 M33 3...; m3— :oEosuEa no.6 33m 3339:. 532 mffmmcmm 222;: 95.283 .m.: me we a me 9:32, $33308 3 mo . . mo 32m .5233: 3:23:52 2:: $9.52 “535332. Q96 & $9.52 :32 (f 2332; ”29:35 “more: goo—am mo 5333me «En $528.58 35$me :0 333:; 33mm ”53.2.3: Bow 3%.; dating fro: Marketing ( of the MC? began and c on the basi In 1975, an Since 1975 . The associa‘ to the M Complen Connittee ha order for th has been usa 1975-1976. } markEting Org been obtainea Product Supp] The tart COOperatjVe [3‘ these organize raw PrOduct te Prietary Pmce 0f the tart ch estimated 33—8. \ l . :l t R1Cks, D UnWerSIty‘ . 62 dating from the initial activities of the Great Lakes Cherry Producers Marketing Cooperative (1958-1966). In 1967 bargaining under the aegis of the Michigan Agricultural Cooperative Marketing Association (MACMA) began and continues to date. Since 1967 bargaining has been conducted on the basis of federal legislation, the Agricultural Fair Practices Act. In 1975, and only for that year, bargaining took place under P.A. 344. Since 1975 a court stay has obviated P.A. 344 bargaining in tart cherries. The association, called the Tart Cherry Marketing Committee, has returned to the Agricultural Fair Practices Act as its legal basis. ~12: :w'.‘ Complementing the bargaining efforts of the Tart Cherry Marketing Committee has been the periodic implementation of the federal marketing order for the stabilization of supplies. The federal marketing order has been used by the tart cherry industry two times, 1972-1973 and in 1975-1976. From the standpoint of growers, the use of the federal marketing order has resulted in stronger raw product prices than would have been obtained without the use of a storage pool for the control of raw product supplies being sold to processors. The tart cherry industry consists of numerous proprietary processors, cooperative processors, and grower processors as well as combinations of these organizational forms. The Tart Cherry Marketing Committee bargains raw product terms of trade with 22 proprietary processors. The pro- prietary processing sector is estimated to currently process 42 percent of the tart cherry crop. This percentage has been decreasing from the estimated 83—88 percent of the crop that was proprietarily processed in 1970 and is projected to be only 20 percent in the mid 19805.1 . lRicks, D. Departnent of Agricultural Ec0nomics, Michigan State University. The larges Sflverhhl' The fc in1979, cc Foods of Je equals 21 p plants in m Wilderness i Inc. Smelt; State preces The Tar OTMACMA, cl However, 50 Processor org aSSOCldtion 1 bElOngs t0 gr associatao,1 a comPetin thesgjng Set lnCludjng the ho Fac C0096i ina 30int ver Sun to a four. IVEr‘hl lef'iind t COurt for re] DlStric 2 Mlchs an Tart Cherrygl‘lay 63 The largest proprietary processor volume in 1979 was processed by Silver Mill Frozen Food. The four-firm concentration ratio for proprietary processor packs in 1979, comprised of the packs of Silver Mill Frozen Food, Wilderness Foods of Jeno‘s, Inc., Smeltzer Orchards, and Traverse City Canning Co., equals 21 percent. Of these four firms, Silver Mill Frozen Food with plants in more than one state has recently filed for bankruptcy1 and Wilderness Foods has been sold by Jeno‘s Inc. to Cherry Central Co-op Inc. Smeltzer Orchard and Traverse City Canning Co. remain as single state processors. The Tart Cherry Marketing Committee bargaining association, a unit of MACMA, claims membership representing 60-65 percent of the state crop. However, 50 percent of this production is delivered to cooperative processor organizations and is cooperatively processed. Based on association figures,2 this means that 30-33 percent of the state crop belongs to growers who are simultaneously members of the bargaining association and a cooperative processor organization (dual members). Competing with the proprietary processing sector is the cooperative processing sector consisting of nine cooperative processor organizations including two joint venture cooperatives. Cherry Growers, Inc., Pro-Fac Cooperative which is closely aligned with Curtice-Burns Foods in a joint venture, and the next 2 largest cooperative organizations sum to a four—firm concentration ratio among just cooperative processor 1Silver Mill Frozen Food, Inc. on January 4th, 1980 filed a petition for relief under Chapter 11 of the Bankruptcy Code in the United States District Court at Grand Rapids, Michigan. 2Michigan Agricultural Cooperative Marketing Association (MACMA), Tart Cherry Marketing Committee. organizati the tart c dons) has 1979. In ' mnietsnai to be 25 pe ventures is The gr own process accounts i0 .5 percent fins sector C00Perative Compooi are cooperai prOdUCt proc bought fer C result of co hons in tar bEyOnd the P is called ne‘ 64 organizations of 26 percent. The total cooperative processing share of the tart cherry pack (net of the packs of the 2 joint venture organiza- tions) has been increasing from 12-15 percent in 1970 to 29 percent in 1979. In the mid 19805 this figure is estimated to be 35 percent.1 The market share for joint ventures is currently 14 percent and is projected 2 The internal structure of joint to be 25 percent in the mid 19805. ventures is discussed at length in Chapter Five. The grower-processor sector, consisting of growers who own their own processing facilities but are not cooperatively organized, currently accounts for 15 percent of the tart cherry pack. This figure was .5 percent in 1970 and is estimated to reach 20 percent in the mid 19805. This sector competes in processed markets with both proprietarily and cooperatively organized processors. Compounding the organizational variety of processing organizations are cooperative processors who mingle their own production with raw product production of other growers. Such mingled raw product may be bought for cash or processed on some participatory basis. The net result of co—existing and competing varieties of processing organiza- tions in tart cherries is that a substantial percentage of the pack is beyond the purview of the bargaining association. In the industry this is called "excluded" product. The full extent of potentially excluded product is estimated to be approximately 50 percent of the Michigan 1Ricks, Supra. 2mm. 3mm. 3 tart cherr, this sectii is processe of processi Administrat order. A large Performed by QFOP, Inc. organized pr marketed pro iiilderness 3 firm concenti with access 1 Michigan MC 2 Organi zatio tart Cherry 9 mWflCture bargaining ass Paw PFOdUct te 1\ Moore, A: Jenos. 65 tart cherry pack.1 This figure approximates the figures reported in this section. A full enumeration of the market channels through which raw product is processed is presented in Table 2-18. This information, by variety of processing organizations in 1979, has been compiled by the Cherry Administrative Board operating under the aegis of the federal marketing - order. A large share of the marketing of processed tart cherry products is performed by a cooperative marketing organization called Cherry Central CO-OP, Inc. It consists of a grOup of both cooperatively and proprietarily organized processors and accounts for more than 25 percent of Michigan's marketed processed product. Recently this organization purchased the Wilderness Brand Label from an exiting proprietary processor.2 The two- firm concentration ratio in the marketing of processed products, both with access to brands, is now approximately 37 percent. Given that Michigan production represents about 70 percent of the total U.S. crop, 2 organizations account for 25 percent of national marketings of processed tart cherry products. The bulk of these marketings currently go to remanufacturers.3 Asparagus for Processing. The Asparagus Marketing Committee bargaining association, another unit of MACMA, has been bargaining raw product terms of trade since 1967 and bargaining under P.A. 344 1Moore, Administrator, P.A. 344. 2Jenos. 3For a full description and discussion of tart cherry marketing see Ricks, D., L. Hamm and C. Chase—Lansdale, The Tart Cherry SUbseCtor of U.S. Agriculture, North Central 117 Monograph, University of Wisconsin, Madison, forthcoming. at: ”29.598 “oxen: 578.5 :8- comwzomz me niece , V.-'.._7V.:__ .mwuczom Acumzvcw .co— m m cm .auzuoc i u om m>_~mcumwc_5c< zccmzu ”mmoezom commsoczq m_ xm vzm :o_uu:voca :zo m_ &m \_ "mmpoz m e_ mesucm> p:_ow ”w my \im_ cemmmoocm Lmzoxw _ m mm cemmmuoca m>w¢mcmaoou m_ . we commmuoea accumwcaocm iiiiiiiiiiiiiii mxmp mNm_ moeo Passage gmxcmz wuwum :w mcwmmeOLn— mpmam we N. mewpvcm: yo Looszz iiiiiiiliiiiiiiiiiiiillli .iiiiliiiiliiiiliiliiii since 197Z associatic remaining Sawyer Fru proprietar‘ 15 organiz. account f01 prietary pi Farms, and The number primarily o snnofm The ba 90 percent ( Goes to coo; Foods.2 Qua crop. The C00 Foods and 3a, 25'35 Percen i'e': beyond tary Processc ment that 1. t 9W“ prod 1\ Moore, - since 1974. Of the population of 17 processing organizations, the association bargains with the 15 that are pr0prietarily organized. The remaining two processing organizations are the cooperative processor, Sawyer Fruit and Vegetable CO-OP, and the joint venture cooperative- proprietary processing organization, Pro-Fac/Curtice-Burns. The 15 organizations constituting the proprietary sector are estimated to account for 65-75 percent of the processed pack. The 4 largest pro- prietary processors, Honey Bear Canning, Silver Mill Frozen Food, Chase Farms, and New Era, account for 35-45 percent of the processed pack.1 The number of proprietary processors has been stable and consists primarily of family owned processors processing raw product only in the state of Michigan. The bargaining association claims to have membership representing 90 percent of the state crop. Of this membership product, 15-20 percent goes to cooperative processors, principally 'U) Pro-Fac/Curtice-Burns Foods.2 Dual membership in this crop is thus 14-18 percent of the state crop. The cooperative processing sector consists of Pro-Fac/Curtice-Burns Foods and Sawyer Fruit and Vegetable CO-OP. Thus, approximately 25-35 percent of the Michigan pack is potentially ”excluded" product, i.e., beyond the purview of the bargaining association. If 1 proprie- tary processor, Michigan Quality, implements the joint-venture arrange- ment that it has under consideration, the percentage of potentially excluded product could reach 35-45 percent. 1Moore, T., Supra, and Foster, H., MACMA. 2Industry Source. deals associatic of trade 5 associatio tary proce: in 1970 am 1980s.l n owned by Pi account for prietary pr Food, and a The bar cent of the cent is c00p 0|” the state comprised of tive and pm; The tote Cooperative {3 cent. Cherry increagj mg I,“ __ ._l_ ,fiv _. , 68 Apples for Processing. The Michigan Apple Committee bargaining association, also a unit of MACMA, has been bargaining raw product terms of trade since 1961 and bargaining under P.A. 344 since 1975. The association bargains with 22 proprietary processors. The current proprie- tary processor share of the pack is 70—75 percent, down from 92-94 percent in 1970 and is expected to decrease further to 40 percent in the mid 19803.1 The 2 largest proprietary processing organizations, Speas Co. owned by Pillsbury Co. and Michigan Quality, owned by Quality Brands Inc., account for 32-34 percent of the Michigan pack. The four largest pro- prietary processors are Speas Co., Michigan Quality, Silver Mill Frozen Food, and Cherry Hill. The bargaining association claims membership representing 60-65 per- cent of the Michigan crop for processing. Of this percentage, 20-25 per- cent is cooperatively processed for a dual membership of about 14 percent of the state crop.2 The large majority of this dual membership is comprised of dual members belonging to the Pro-Fac/Curtice-Burns coopera- tive and proprietary joint venture. The total percentage of the state pack accounted for by the 5 cooperative processors (not including Pro-Fac/Curtice-Burns) is 12-17 per- cent. Cherry Growers, Inc., cooperative is the principle contributor to this share of the state pack. The cooperative processor share has been increasing from 8 percent in 1970 to 12—17 percent currently and is 1Ricks, D., Supra. 2Butler, T., MACMA, Manager Apple Committee. 3mm. expected of Silver Cherry Ce tive proci The r pack from jected sha cooperativ potentiall the purwie1 Apple We Proce: sauce, or ; canned sauc though noti Food, Com Processing volume, and indUStW are Quality OWne ”th Canney Coca-C016 CO 69 expected to rise to 40 percent in the mid 19805.1 The pending bankruptcy of Silver Mills Frozen Food and the purchase of Wilderness Foods by Cherry Central CO-OP, Inc. validate expectations of growth in the coopera— tive processor share. The grower-processor sector has also seen growth in share of the pack from a negligible share in 1970 to 5 percent currently and a pro- jected share of 10 percent in the mid 19805.2 In conjunction with the cooperative and joint venture sectors, industry sources estimate the potentially excluded raw product, i.e., that raw product which is beyond the purview of bargaining under P.A. 344, to be nearly 40 percent.3 Apple raw product being processed by the 27 proprietary and coopera— tive processors in Michigan is used for producing frozen slices, canned sauce, or juice. In 1979 there were 20 processors who sliced and 9 who canned sauce. Both figures have been stable in the last five years, though noting the recent application for bankruptcy by Silver Mill Frozen Food. Comprising the juice pack are about 14 processors. _The juice processing sector is sustaining an increase in numbers of processors, volume, and processing capacity. Included in this sector of the processing industry are such firms as Speas Co. owned by Pillsbury Co., Michigan Quality owned by Quality Brands, Inc., Gerber Products Co., Michigan Fruit Canners of the Pro-Fac/Curtice-Burns joint venture, Murch Co. of Coca-Cola Co., and numerous single state processing operations. 1Ricks, D., Supra. 21bid. 3Moore, T., Supra. $33.3:— The a channels a the state 20 percent brokers. of which t the cooper.- cent resper oi the ML Lam M for Process the New Yorl has been cor tive Marketi New York Far Censis'cs of in the 4 C00 The associat- infomation 1 1947 there we New YQrk Sta t were, "ESpec t in New Yolnk S \ l HEImberE 70 The accompanying Table 2—19 provides a representation of market channels accounted for by the 16 largest volume processors of apples in the state of Michigan. These figures are net of the approximately 20 percent of the Michigan crop for processing that is controlled by brokers. The top 16 volume processors account for 87 percent of tonnage, of which the proprietary processing sector represents 67 percent, and the cooperative and joint-venture sectors represent 4 percent and 16 per- cent respectively. The 4 largest proprietary processors process 35 percent of the volume. 0. Appalachia: Apple Industries of New York, Pennsylvania, and Virginia New York Apples for Processing. Bargaining activity in the apples for processing industry is conducted by an association operating within the New York Farm Bureau Marketing C00perative. Since 1977 this activity has been conducted under the aegis of the Michigan Agricultural Coopera- tive Marketing Association as provided for in its contract with the New York Farm Bureau Marketing C00perative. The New York association consists of approximately 270 apple growers or two-thirds of the growers in the 4 county area of Wayne, Monroe, Orleans, and Niagara Counties. The association activities are strictly informational, i.e., providing information to growers, with no current dealings with processors. In 1947 there were 40 plppp§_obtaining raw apple product for processing in 1 New York state. In 1965 and 1978, according to industry sources, there were, respectively 25 and 20 processors procuring raw product supplies in New York state. The number of processors thus declined by 25 percent between 1965 and 1978. The 20 current processors include 5 c00peratively 1Helmberger, P. and S. Hoos, 1965, p. 82. .mmm_ixmm_ not m_omca HM In \:A,\A\ lvFfl-ucanfi £Lm.:z :U uGXLmZ mcpmmmUOLQ wUMCCOh mmmmeok Lek mm~2Q< 2mm“ e co ooze tom: m~IN m~QML 71 A<2u . . cmm< mcvum cm wueemgoou .mg:p_:ovcm< camwuu_u "woesom r—ON m— {flail mew—vcm: mo Lonazz 0 PFC ._- LDQ‘OKOM’ M No mnm_-wmm_ mas—o> wwwpm mo R ~mpop Lmzwo mwczucm> pcwow mLOmmmuoca Legacw mLOmmmoocm m>_amemaoou “women; a mcommwuoca acmpwwcaoca iiiiiiiiiiiiiiiiiiiii mLOmmwoocm pmmmcmu mp Low m chcwfiu “av—Luz .mcpmmwuoca com aocu w .. :p we xom mpmzcm cows: wmmccob ommemxogm mo um mmmpimma_ so» mpmccago umxcmz mcwmmmuoca com mm_qa< :mm_;uwz zv m_-m m_amp organized cooperati' This woulv based on 2 two joint proprietar Curtice-Bu purchases The four-f 40 percent The 5' 0T Processc and preprie exllect the 3231;! CCollel‘ative activity in Strictly at the majOr pi 0f the six T Prietarily c area. TWO a INC. and MUS lee process 1\ Km ZPAan s 72 organized processors purchasing input in New York state. In 1978 the c00perative sector accounted for 24 percent of raw product purchases. This would represent about 5 percent of national processed production based on 1977 distribution.1 Within the total processing sector are two joint venture organizations, each consisting of a cooperatively and proprietarily organized component. These 2 joint ventures, Pro-Fac/ Curtice—Burns and Seneca/Agco, constitute about 18 percent of New York purchases and about 74 percent of cooperative processor purchases. The four-firm concentration ratio of all processors in New York is about 40 percent. The structural changes in the industry have been marked by a loss of processors during the 19505 and 19605. Currently, both the cooperative and preprietary sectors are increasing juice production. Industry sources expect the c00perative processor market share to continue to increase. Pennsylvania Apples for Processing. The Pennsylvania Agricultural Cooperative Marketing Association (PACMA) has been promoting bargaining activity in apples for processing for several years. This activity is strictly at the informational stage, with limited success in getting the major proprietary processors to even discuss market conditions.2 Of the six processors in Pennsylvania, three cooperatively and three pro- prietarily organized, the PACMA association has only four in its market area. Two are nationally known proprietary processors, Duffy-Mott Co., Inc. and Musselman Fruit Products, and two are nationally known coopera- tive processors, Knouse Foods Cooperative, Inc. and Red Cheek, Inc. 1Non-Citrus Fruits and Nuts, Mid Year Supplement, CRS, USDA. 2PACMA Source. Accov went for p national ; industry 5 between 60 of the pro- pack being Seveni cooperative 2l-25 perce even more u Virginia or ATillie Growe' Prietary ,Dr‘t 3M Musselma Awile COOpev In“) Purcha One Virginia ”93 0‘09 tn market chann. 12 Percent 0. 8 Percent of 73 According to USDA statistics, in 1977 64 percent of the state crop went for processed use with Pennsylvania representing ll percent of national processed production.1 Based on numbers provided by various industry sources the estimated percentage packed by cooperatives varies between 60 percent and 70 percent. This leaves a 30-40 percent share of the processed pack to the proprietary processors. The share of the pack being processed by c00perative processors is increasing. Seventy percent of the association‘s membership also belongs to cooperative processors. This means that dual membership constitutes 2l-25 percent of the state production.2 See Table 2-20. Virginia Apples for Processing. Bargaining activity in Virginia is even more undeveloped than in Pennsylvania or New York. In the Winchester, Virginia area about 20 percent of the crop is represented by the Virginia Apple Growers' Marketing Association. The association faces four pro- prietary processors (Bowman, ZerOpack, National Fruit Products Co., Inc., and Musselman Fruit Products), and three cooperative processors (Shenandoah Apple Cooperative, Inc., Knouse Foods Cooperative, Inc., and Red Cheek, Inc.) purchasing in the area. Shenandoah Apple C00perative, Inc. is the one Virginia based coooerative processor. The percentage of the Winchester area crop that is estimated to go through the cooperative processing market channel is l5 percent and increeasing. Virginia represents about l2 percent of the Eastern states‘ processing production and about 8 percent of the national processing production. 1Non-Citrus Fruits and Nuts, Mid Year Supplement, CRS, USDA. This assumes that % growers = % production. mnm_\wkmp ”XLamDU:~ 32pmmeOLa Lek mwpa1< we: :0 muwumwuwam uumpvm ”mm:m>~\4m::@& ONIN mine; 74 .mooeaom chmzucw ”Quezom mmi_~ a_;mcmasmz Page om Aucwommzv :o_umw00mm< mcwcwmmcmm 9 quoh m cuioo mLOmmwoocm m>wamcwaooo m ovvoM mcommmoocm hempwvcgoca ”am wmgcmmoenmz meommmooca ”Am commwoocm m_m::w;u “exec: gum; macaw & mo Lamazz gum; macaw N on_\wNmP ”xcumsu:_ mzwmmouoem Lem mmpaa< use so mu_pmwamum Humpwm um_:m>~>m::mm swim «Fame A_§[ apple ind Maryland, by indust: tive, Inc. constitute This perce ventures i joint vent productior sented 45 Appalachia 23 percent industry 5 Q9339 the impert National G 40‘50 Derc other C00pv in PennSylv Cooperatiw Ohio Produc for PT‘OCesg prietary pr 75 A Greater Appalachian Aggregate. Dione aggregate, the Appalachian apple industry covers the states of New York, Pennsylvania, Virginia, Maryland, West Virginia and North Carolina. Based on figures provided by industry sources,the 3 c00perative processors (Knouse Foods Coopera- tive, Inc., Shenandoah Apple Cooperative, Inc., and Red Cheek, Inc.) constituted 37 percent of the volume processed in l978 in this area. This percentage does not include the volumes processed by the 2 joint ventures in the Appalachian region.1 Aggregating the cooperative and joint venture volumes results in 49 percent of Appalachian processed production being cooperatively processed. These states in l977 repre- sented 45 percent of national processed utilization.2 Therefore, aggregate Appalachian c00perative processing, including joint ventures, accounts for 23 percent of national processed utilization. This percentage is said by industry sources to be increasing. Concord Grapes. Another crop of interest to this study because of the importance of the cooperative sector is the concord grape industry. National Grape Cooperative and its Welch Foods marketing arm has 40-50 percent of the national concord grape business. There are ten other cooperative processors nationally with the major ones being Keystone in Pennsylvania, Grower‘s Cooperative in Westfield, New York, and Valley C00perative in Yakima, Washington. In the New York, Pennsylvania, and Ohio production areas, c00peratives have 80 percent of the production for processing. The remaining 20 percent is accounted for by three pro- prietary processors. In Michigan, National Grape Cooperative is the only IPro-Fac/Curtice-Burns and Seneca/Ag. Co. 2Non-Citrus Fruits and Nuts, cns, USDA. c00perati one other 3 coopera' Grape, cov 35 perceni 2.3.3 The a graphic ar primary as and the pr be briefi y (l influencin volume in (2 diminution (3 pmpl‘ietary baTilained i itself Conc Vegetables. Some 0 Study are t or the frui 76 cooperative processor and controls 45-50 percent of the acreage. The one other processor is a proprietary processor. In the state of Washington 3 cooperatives, including National Grape, Valley Cooperative, and U.S. Grape, control 50 percent of the acreage with National Grape alone having 35 percent of the concord grape acreage. 2.3.3 Summary of Economic Setting The above sketches of conditions of market structure in the geo— graphic areas constituting the sample of this research indicate several primary aspects of the organization of grower-first handler transactions and the processing industry in fruits and vegetables. These aspects will be briefly summarized here: (l) Bargaining efforts by grower bargaining associations are influencing the terms of trade for a significant percentage of raw product volume in select fruits and vegetables; (2) The proprietary processing sector is undergoing a widespread diminution in numbers and a concomittant concentration; (3) The c00perative processing sector which competes with the proprietary processing sector yet which is beyond the formal purview of bargained terms of trade has substantial relative importance, is often itself concentrated, and is increasing its market share in fruits and vegetables. Some of the principle issues to be explored in the analysis of this study are the relations, if any, gpppg_these various structural aspects of the fruits and vegetables for processing industries. Introductiv The ii product sug understand gaining ass interacting in order tc member raw buy raw pro sell proces inputs frorn pl‘OdUCtS in N Stud. amaximizat chic deci: dlld coopera. TESponding . aSpeCl'l‘icai SUNNY Condj making is in godis, Where CHAPTER THREE A CONCEPTUALIZATION FOR ANALYZING PARTICIPANT INTERRELATIONS IN FARMER BARGAINING Introduction The introduction of farmer bargaining over terms of trade for raw product suggests a reordering of relationships among participants. To understand this reordering, a system can be envisioned consisting of bar- gaining associations, PPOPPietatv'processors, and cooperative processors interacting with one another as they respond to perceived opportunities in order to satisfy their various goals. Bargaining associations sell member raw product to prOprietary processors. Proprietary processors buy raw product input from associations at fixed terms of trade and sell processed products. Cooperative processors take raw product inputs from members at nonfixed terms of trade and sell processed products in competition with proprietary processors. A study of participant interrelations in this system might employ a maximization model with its assumptions of perfectly informed and mono- lithic decision making; bargaining associations, proprietary processors, and cooperative processors would all be cast as maximizing entities responding to a perfectly known market where the market is defined by a specification of rights of transaction in a context of demand and supply conditions. However, where the information available for decision making is imperfect, where the entity contains multiple and conflicting goals, where the entity is complex in its organization, and where market conditions may be endogeneous rather than given, the use of a 77 maximizati gaining is to inaccur l) the in making pro the bargai processors processing The p analyzing of a self- rather, to informatio genous mar the major Study, nee devel0p th. cesses of . 3.l.l The be With inter: “ml var' l'rlterestevd Components POnent COng DonentS All 78 maximization model to study participant interrelations in farmer bar- gaining is too unrealistic in its assumptions. It may thereby lead to inaccurate hypotheses about the issues of interest to this study: T) the impact of bargaining on the cooperative processor decision making process; 2) the impact of cooperative processor behavior on the bargaining transaction between the association and proprietary processors; and 3) the impact of bargaining on structural change in the processing industry. The purpose of presenting an alternative conceptual framework for analyzing participant interrelations is not to refute the maximizing of a self-interested objective function as a behavioral argument but, rather, to expand the argument to accomodate the presence of imperfect information, conflicting goals, organizational complexity, and endo- genous market conditions. Accordingly, this chapter will first outline the major characteristics of the participants that, in light of apriori study, need to be accomodated by the conceptual framework. It will then develop that conceptual framework by focusing on decision making pro- cesses of organizations with emphasis on management. 3.l Subsystems in Farmer Bargaining 3.l.l The Bargaining Association Subsystem The bargaining association can be envisioned as a political system with interest groups responding to goals and opportunities in a par- tially variable environment as they attempt to satisfy their self- interested objective functions. There are, typically, three major components to this system and, in one particular case, a fourth com- ponent consisting of an administrative authority. The three major com- ponents are association management, the primary decision committee or board, an: tends to | revenues 1 returns tr The genera ever, memi into groui i.e., the: such as cc may also c of farm or Giver be motivat may promot Dual membe conditions to Strengt variable 9 The a Of the bar and motiva All Adminig ma“egement eqUTvaTEnt \ l See i977. ' 79 board, and general membership of the bargaining association. Management tends to be a single individual with personal goals such as maximizing revenues to the association and organizational goals such as increasing returns to membership and expanding markets for member product.1 The general membership may also reflect these organizational goals. How- ever, membership and its primary decision committee, may be disaggregated into groups which have variable goals. An example may be dual members, i.e., those that have simultaneous membership in other farm organizations such as cooperative processors or grower processors. Product specialization may also delineate certain interests within the membership as may size of farm operations; Given diversity of goals, interest groups in the association may be motivated to influence organizational choice. For example, managers may promote courses of action to maximize revenues to the association. Dual members in the association may argue interpretations of market conditions to enhance their individual position in the cooperative or to strengthen the cooperative's competitive position. As a result of variable goals, the influences exerted may be toward competing ends. The addition of an administrative authority as a fourth component of the bargaining association subsystem introduces another set of goals and motivations to respond to opportunities in the bargaining environment. An administrative authority may be utilized by bargaining association management to serve bargaining association organization goals or, equivalently, the administrative authority may respond to opportunities that it faces by trying to influence the decisions of participants in 1See Lang for fuller enumeration of professed goals of management, l977. fanner bar components cases. In associatio the attend 3.l.2 The p organizati which may Manag primary de certaintie yield to s characteri decision m the divers graphic re 1‘e°sSTT')g dl'iferenti SUCh chara teSpongeS bargaining processorS \ Simo Class Of m 80 farmer bargaining. The inspection of characteristics of subsystem components may be relevant to comprehend certain behaviors in specific cases. In summary, a delineation of components comprising the bargaining association subsystem suggests the possibility of conflicting goals and the attendant behaviors to influence outcomes. 3.l.2 The Proprietary Processor Subsystem The proprietary processor can also be envisioned as a complex organization. This study will focus on some select characteristics which may affect decision making in farmer bargaining. Management of the processing organization is the organization's primary decision maker. In light of select market and financial un— certainties managerial responsibility to maximize expected profits may yield to satisfying behavior.1 There are also numerous production characteristics of the proprietary processing firm that may affect decision making by management. This study will draw on the following: the diversity of products produced by the firm; the number of geo- graphic regions in which the firm procures and processes raw product, i.e., single state or multiple state; and the extent of product differentiation, i.e., private label sales or branded product sales. Such characteristics will be addressed insofar as they influence the responses of participants to the interrelations created by farmer bargaining. For example, management of multiple product proprietary processors may find relations among its products affected by the activity of bargaining associations. Or, management with access to processing 1Simon, H., l954. This point will be developed below for the class of management in general. facilitie: imposed or those alt: degree of competitO‘ the barga different product ii is of int. affect thi to respon. bargaininr 3.l.3 In tl multiple l attwont n by these i and, ConSi assembled AS a a board 0' mhhhmshi; rEturns 0, (‘18 the int 0T genera‘ 'T'""' 81 facilities in alternative geographic areas may find that the costs imposed on it by farmer bargaining may be alleviated by recourse to those alternative resources. Similarly, management may find that the degree of product differentiation affects both its relationship to competitors in sales of processed products and its interrelations with the bargaining association. Along these lines, the possibility for differential costs of bargaining on a) proprietary processors processing product in one state as contrasted with b) multiple state processors is of interest. In summary, these organizational characteristics may affect the abilities of proprietary processors and other participants to reSpond to the exposures and opportunities afforded by farmer bargaining. 3.l.3 The Cooperative Processor Subsystem In the vein of the above, the c00perative processor consists of multiple groups contributing to decision-making as they simultaneously attempt to satisfy their goals. By focusing on the behaviors exhibited by these components, indications about control over the decision process and, consequently, which component interests are being served can be assembled. As a subsystem, the cooperative processor consists of management, a board of directors, and general membership. The goal of general membership is multifaceted but tends to be a combination of improving returns on the crop and having a secure home for raw product. As far as the incentives facing management are designed to serve the interests of general membership, management will be constrained to guarantee members a expected to which a function . tions) on The i infonmatil general ms influence an inquiry dominance among the of some ir dominate c control of Manag interests goals as s uative inf works to r contm] in- tated his/3 Wanting to Others may allocation rules, sucl l'nto the cc 82 members a home for their raw product and then to maximize the expected return on the sale of processed products; that is, the degree to which management behavior conforms to these interests will be a function of availability and control of evaluative information (sanc- tions) on the managerial process. The board of directors typically has closer access to sources of information relevant to the operation of the organization than does general membership. As a result, board members potentially have more influence over management decision-making. This suggests the need for an inquiry into the composition of the board of directors. Commodity dominance of multicommodity board or unequal distribution of authority among the members of the board can lead to policy decisions in favor of some interests over others. A specification of the interests that dominate decision making by the board may provide indications as to control of the cooperative. Management may have its own goals that diverge from either the interests of general membership or the board. Pursuit of such divergent goals as suggested above, will be influenced by the control of eval- uative information within the organization. For example, the manager who works to return members only as much as they could earn elsewhere may control information to persuade the board that market conditions dic- tated his/her own performance. Equivalently, a board interest group wanting to maximize the returns to one commodity at the expense of others may use information to influence management's sales and cost allocation decisions. Enumeration of select organizational decision rules, such as those used for accounting, may provide additional insight into the control of information and whose interests are being served. 3.2 l Sele provide i thread ti party (is De jure c as de fac cussion i the firm. by which performan the conte dition of imization given the lmperfect functions a“d other and have t decision-n "satisfici The idea (3 \ 1Ber] 2Simo 3min 83 3.2 The Process of Choice: A Look at Management in a Subsystem Select contributions to a body of theory termed theory of the firm provide insight to the decision-making process of organizations. The thread that will be pursued at this juncture is decision-making by the party (ies) that have de facto or de jure control of the organization. De jure control warrants attention given the potential for its emergence as de facto decision—maker. This distinction is an allusion to the dis- cussion in this literature of the separation of ownership and control of the firm.1 The manager of the firm is the central figure; the process by which goals are established, strategies of choice developed, and performance assessed concentrates on the motivation of management and the context in which decisions are made. The general behavioral con- dition of management has been summarized as constrained profit max- imization. However, an assumption of maximizing behavior may be misleading given the introduction of decisions made over time under conditions of imperfect information, organizational complexity, conflicting goal functions, and endogenous market conditions. H. finmn,2 Oliver Williamson3 and other economists have probed the assumption of profit maximization and have contributed alternative conceptualizations of firm and managerial decision-making. Simon's important insight was that of management "satisficing" as it devised goals and strategies to achieve those goals. The idea of satisficing suggests management discretion in making decisions, as well as management goal functions which may not align with 1Berle and G. Means, l932. 2Simon, H., 1959. 3Williamson, 0., 1975. those of m Build greatly ex and March. the discre‘ developing ating proce adopted by is a means of imperfec this view, The se to a noti or Opportunity function. decision ma existence 0 the need to HOWEVer, th invites DOC to have fle this caPaci Cvert 84 those of maximum profit seekers. Building on the concept of "satisficing" decision-making and greatly expanding the understanding of the process is the work of Cyert and March.1 Cyert and March explored the notion of satisficing, and the discretion in decision-making that it suggests by, among other things, developing the idea of standard operating procedures. Standard oper- ating procedures, commonly referred to as SOPs, are set responses adopted by management to address certain conditions. The use of SOPs is a means of addressing the imperatives of choice under conditions of imperfect information and bounded rationality. Management is, in this view, less than the all-knowing, profit maximizer. The satisficing arguments of Simon and Cyert and March contribute to a notion of organizational looseness: the presence of slack or opportunity for inserting subgoals into the organization's goal function. Such slack is the result of two major elements. One is decision making in an imperfectly known environment. The second is the existence of conflicting interests within the organization and, hence, the need to delegate authority in order to reduce decision costs. However, the delegation of authority under imperfectly known conditions invites pockets of discretion in decision making and permits management to have flexibility in making allocative decisions. The results of this capacity are two: 1Cyert and March, 1963. 3.2.l Lei by posed by : maximizing ditions UI strategies of view of revenues. Leibe choice is efficient Efficiency \ The developed At an Sideri 0f pry sector PUblit assumi and ti and d5 mechar . zit sf mat of ar lintertain e JUStment CC 3Leibe 41bid. fi_ “:7“ ,, ,, 85 l) Management can use slack1 to influence internal organizational conditions affecting decision-making; and 2) Management can use slack to affect the organization's relation to conditions external to the organization.2 3.2.1 The Origins of Non-Profit Maximizing Behavior Leibenstein's article of l966 takes the satisficing thread pro- posed by Simon and builds upon the possibility of less than profit maximizing behavior in firms.3 He offers an explanation of the con- ditions under which managementaof a firm may elect to pursue goals and strategies that result in less than optimal behavior from the point of view of maximizing a certain goal function such as profits or revenues. Leibenstein suggests that the presence of suboptimal allocative choice is due to environmental conditions which fail to motivate efficient behavior on the part of management.4 Tight ”motivational efficiency,” as Leibenstein terms it, means closer attention of management lThe notion of slack bears some similarity to the idea as developed by Hirschman, 1962. At any point of time, an economy's resources are not to be con- sidered as rigidTy fixed in amount, and more resources or factors of production will come into play if development is marked by sectoral imbalances that galvanize private entrepreneurs or public authorities into action... The crucial, but plausible assumption here is that there is some 'slack' in the economy; and that additional investment, hours of work, productivity and decision-making can be squeezed out of it by pressure mechanisms. 2It should be noted that some slack can be elemental to the sur- vival of an organization by allowing it to withstand the costs of some uncertain events; slack can provide insurance thereby reducing ad- justment costs in light of unforeseen events. 3Leibenstein, H., l966. 4mm. to certa' efficient allocativ allocativ ization w which sha If a woul< and v timal vatec The actual issue that by adJ'ustm 3.2.2 In l9} 0r96nizatio he points 0 holds and f should be d' Process, L mOlecular ec 0f"‘anagemen and d"Ewes ‘t mflXimze the atomic Part‘ ll \ ILeibens LGTbens 86 to certain, say organizational, goal functions. Looser motivational efficiency suggests discretion on the part of management in making its allocative decisions. The question then becomes how to alter management allocative discretion. Remedies based upon the Leibenstein conceptual- ization would derive from adjustment of the environmental conditions which shape management's discretionary arena. If a suboptimal disequilibrium exists at any time, then it would seem reasonable that under proper motivations managers and workers could bestir themselves to produce closer to op- timality, and that under other conditions they may be moti- vated to move farther away from optimality. The actual definition of those optimal conditions is the more primary issue that, although unaddressed by Leibenstein, can also be altered by adjustment of environmental conditions. 3.2.2 Management's Concern for Constraints In l976, Leibenstein tenders a further contribution to a theory of organizational decision making.2 In pressing for precision in focus, he points out that whereas conventional micro theory envisions house- holds and firms as decision units, that in fact these units can and should be disaggregated to reveal the actual basic units of a decision process. Leibenstein summarizes by calling for an atomistic rather than molecular economics and gives his attention to the situational calculus of management in a firm context. With this focus, Leibenstein identifies and argues the possible existence of management choice that does not maximize the utility of the organizational unit. The possibility for atomic particle behavior that fails to maximize the utility of the 1Leibenstein, H., 1968, p. 398. 2Leibenstein, H., l976. molecular into thre ganizatio efficienc efficienc by the us organizat termed eX' the term . of the eX' factors ii applicatic not always Separatior by changes Valuation ducing, f0 Marc 0f organiz and Privat inleidual Categories Rober 87 molecular unit is shaped by four elements which can be readily divided into three which are internal and one which is external to the or- ganization. The internal elements are: l) individual motivational efficiency, 2) nonmarket input efficiency, and 3) intraplant motivational efficiency. An emphasis on internal factors suggests the role played by the use of information, insofar as it has authority, within the organization. The external element that Leibenstein focuses on is termed external motivational efficiency. For purposes of this essay the term competition or more generally, regulation, captures the content of the external element. Thus, there is separation of motivational factors into those that are internal and those that are external. In application to the subject matter of this study, the separation will not always remain so clear nor will it be desirable to maintain such separation. Internal information flows, for example, can be affected by changes in external market conditions. Similarly, nonmarket input valuation can influence competition in the external environment pro- ducing, for example, change in market structure. Marc Roberts advances a similar argument in addressing the evolution of organizational choice processes in comparing the behavior of public and private companies.1 Roberts divides the factors that influence individual choice and collective action in companies into the categories of: l) external environmental variables, 2) organizational structural variables, 3) control system variables, and 4) individual 1Roberts, May l975. objectiw categorie environme impact of currently External c How 0' To answer which migh' Leibenstei r the calcula ends given both the i n' individuals Pressure and Notwithstand dECiSTon-mak by Pressure 5 the very goal 88 objectives and beliefs.1 Over time, he argues, the latter three categories of variables change in response to the changes in the external environment. This study's conceptualization envisions not only the impact of external factors on internal management behavior but, con- currently, the possible impact of internal behavior on external factors. External conditions can become endogeneous to the organization. How do internal and external elements affect managerial choice? To answer this, Leibenstein presents his theory of Selective Rationality which might also be termed a theory of constraint concern. Briefly, Leibenstein observes the behavior of the decision unit and argues that the calculatedness or tightness of the decision techniques in achieving ends given certain means is a function of the pressure contained in both the internal and external environment. In general, representative individuals "would like to move toward lower levels of anticipated pressure and toward more casual (less calculated) decision making."2 Notwithstanding the proclivity of the individual to seek discretionary decision-making, this can be altered (constraint concern can be enhanced) by pressure signals from within or without the decision unit. Moreover, the very goals that management is pressured to respond to can be similarly altered; environmental variables do more than set the pressure 1The identification of individual objectives and beliefs, call them ideology, can be especially relevant to organizations based on ideological tenets. All organizationshave ideological foundations and such foun- dations may be crucial to the functioning of organizations and, in democratically constructed organizations such as farmer cooperatives, may plan an important role in determining control of the organization. An inquiry into the ideological basis of organization may yield insights as to organizational process and outcomes. Roberts (Ibid) has argued the value of such inquiry. ZLeibenstein, H., l976, p. 74. levels the toward whe 3.2.3 Hirsc of organiz tofinm, of deterio The sugges and less tl recognizes more Specii deteriorati the respons an organiza efficiency might be ad ”0t, offerei to as the e; is the Dolii T0 resc member OUtputs Which 0 t0 Chan affairs managem with th VariOUS 89 levels that Leibenstein restricts his attention to. They also decide toward what ends the pressure will be applied. 3.2.3 Voice and Information Hirschman has also developed some arguments about the inner workings of organizations.1 His emphasis is on certain responses of consumers to firms, members to organizations, and citizens to states in light of deterioration of the product, service, or benefits of the organization. The suggestion of deterioration implies less than perfect information and less than perfect decision-making in the organization. Hirschman recognizes the possibility for lapses in management performance or, more specifically, lapses in maximizing behavior which result in a deterioration of quality. The questions then are two: l) What are the responses to deterioration in, say, services from membership in van organization or product quality; and 2) What is the comparative efficiency of the responses as mechanisms of recuperation or, it might be added, improved performance? The market option, to buy or not, offered by the presence of competing firms is what Hirschman refers to as the exit mechanism. Appeal to complaints or filing of grievances is the political option termed the voice mechanism. To resort to voice, rather than exit, is for the customer or member to make an attempt at changing the practices, policies, and outputs of the firm from which one buys or of the organization to which one belongs. Voice is here defined as any attempt to all to change, rather than escape from, an objectionable. state of affairs, whether through individual or collective petition to the management directly in charge, through appeal to a higher authority with the intention of forcing a change in management, or through various types of actions and protests... 3 IHirschman, A.0., l970. 2Ibid., p. 30. 0f releva recuperat communica this cont respect t exit will such case sanctions the marke The cept of v voice bec making pr constrain Voic can do sc Procedure affect ir make mane interests VOiCE bEC deCiSTOn. Howe be rm'Sgui naive. 1 managemer \ 1Ib‘l \ 90 0f relevance to the efficiency of either mechanism as a motivator of recuperation is the informational content or the force of the sanction communicated by the response and the concern of the decision-maker with this content. Thus, for example, where demand is highly inelastic with respect to quality demanded, the revenue losses from the practice of exit will be small and management will receive weak signals.1 In such cases, the voice mechanism, insofar as it can impose stronger sanctions, may bea more effective initiator of recuperation than the market mechanism. The Leibenstein conceptualization can embrace the Hirschman con- cept of voice by viewing it as a pressure creating condition. Thus voice becomes a factor of the internal environment of the decision- making process. Similarly, exit can be viewed as an external factor constraining the decision making process. Voice within the organization can alter management behavior. It can do so by checking management discretion and challenging operating procedures. A heightening of voice within the organization can affect internal motivational efficiencies by presenting sanctions that make management more concerned for certain constraints or organizational interests over others. In this Leibenstein and Hirschman integration, voice becomes a key to the workings and performance of the organization's decision-making process. However, voice on the part of membership in an organization may be misguided. This is to suggest that voice may be powerful and yet naive. Ignorant voice can do damage to organizational goals by modifying management discretion in ways that do not enhance the quality of IIbid. , p. 129 organiza to purSL or even Fur sub-grOt to their will af‘ may con‘ marketi' input i- input i can beg parity Pa the dis the mar offer c Respons noted 6 informs izatior l°0nns1 3.2.4 G . be ask. 91 organizational choice. Ignorant voice may, for example, lead management to pursue short run ends that defeat longer run goals of the organization or even of the source of voice. Furthermore, information may be impacted; management or certain sub-groups in the organization may control the distribution of information to their own ends. Control of information is a property right that will affect internal motivational efficiencies. For example, management may control information in an organization to shift the risk of poor marketing choices onto ownership. Similarly, where ownership has an input identity, some input interest groups may impose costs on other input interest groups. Using a Leibenstein-Hirschman synthesis, one can begin to explore means to endow nonmanagement groups with informational parity with management or with other interest groups in the organization. Paralleling the intra-organizational distribution of information is the distribution of information in the external environment: e.g., the market. An impacted distribution of information in the market may offer competitive advantages to some market participants over others. Responses to impacted information may take several forms. Some, as noted earlier, may be internally directed such as in the control of information on managerial performance. Others may be extra-organ— izationally directed such as in the development of new organizational forms1 or the exercise of a legal process. 3.2.4 Organizational Complexity Given the argument of extra-organizational repsonses, it can be asked how organizational combinations affect the internal and external IGalbraith, J.K., l967, and o. Williamson, Supra. environn constrai Leibenst appelhtia emphasiz view of l principa' gain from cipal-pri Leit developed erence fo faced by 0i one ag are at iEi can be tré facing one to its pri 0f certa i n 3.2.5 In sur concern, ti and decisjc COblblne t0 LETbe 92 environments facing bgth managements, e.g., what happens to managerial constraint concern as one organization is combined with another? Leibenstein offers a conceptualization of agent-agent exchange. This appellation is a response to the general micro-theory approach which emphasizes exchange between principals with mutual gain. The Leibenstein view of management as an agent preferring discretion in responding to principal interests, suggests that principals may not necessarily gain from the interaction of organizations. The assumption of prin- cipal-principal exchange is replaced by a model of agent-agent exchange.1 Leibenstein's model of agent-agent exchange can be further developed to probe the effects of the interaction of managerial pref- erence for discretion. Where one agent can influence the pressure faced by the other agent, i.e., impose sanctions, then the decisions of one agent may be directed by another. The results of such influence are at least two: l) any sources of discretion utilized by one agent can be transferred to the other; and 2) where the environmental pressures facing one agent are controlled by another, the farmer‘s accountability to its principal is confounded. These results may be the very goals of certain organizational combinations. 3.2.5 Summary In summary, management‘s preference for relief from constraint concern, the constraint concern enhancing effects of internal voice, and decision-making under conditions of imperfect information can combine to form a web of goals and behaviors in the organization. It is 1Leibenstein, H., Supra, p. l6l. expecte in meet by the not ide i.e., t managem the int on in o and res conditi: Th bargain in this at inte' Associa' Process: devote : coopera' the Pri! a“d ana' Intf The The tbta _ . _ _ , . ._.. _..7-- -_..Afi._~ -_.... _-. -~ ~ v» r 93 expected that management will behave in ways to increase its discretion in meeting organizational goals. Management behavior can be modified by the existence of voice in the organization. Where interests are not identical, voice may be used to attempt to modify such behavior, i.e., threaten sanctions, for preferential ends. The collection of management responses to its organizational environment will reflect the interaction of competing interests. Areas of inquiry to focus on in order to understand this interaction are operational procedures and responses by the organization and/or its components to external conditions. 3.3 Areas of Inquiry This section will reconstruct the tripartite system in farmer bargaining environments and will draw on the conceptualization developed in this chapter to probe participant interrelations. It will first look at interrelations between each pair of participants: Bargaining Association - Proprietary Processor; Bargaining Association - Cooperative Processor; C00perative Processor - Proprietary Processor. It will then devote some discussion to organizational responses involving proprietary- cooperative linkages. The effort in all these discussions is to identify the principal interrelations and participant responses to be explored and analyzed in empirical work. 3.3.l Bargaining Association-Proprietary Processor Interrelations and Accommodations to these Interrelations The principal interrelation between the bargaining association and the proprietary processor is to set prices for raw product transfer. The total bargaining process, however, embraces terms of trade generally and dea transfe As interes the mos in barg trade t for raw faces i those i fear is buyers should informe Process He SUbsys interes Proces: with 3; Intere: [Mypw Proces: PTOduC' exampl. diVErs 94 and deals with a spectrum of nonprice and price issues of raw product transfer between growers and processor handlers. As outlined earlier, the bargaining association consists of interest groups, of which the executive committee and management are the most important. The interests of these influence their behavior in bargaining. Typically the unifying goal is to establish terms of trade that maximize returns to members in light of an elastic demand for raw product. A primary uncertainty that association management faces is in correctly assessing market conditions, including those in competing markets, and in assessing proprietary claims. A fear is that terms of trade that are too severe will put proprietary buyers at a competitive disadvantage. Given these uncertainties, one should expect to find associations concerned with having sufficient information with which to participate in the terms of trade decision process with proprietary processors. Having noted the existence of interest groups in the association subsystem with each manifesting an objective function based on self- interest, a diversity in goals entering the terms of trade decision process is expected. Association management is concerned not only with serving membership interests but also in preserving its job security. Interest groups represented on the association executive committee may pursue their own goals as they participate in the terms of trade process. Such competition among interest groups may coalesce around production and organizational characteristics of the membership. For example, mono-crop producers may have goals that differ from those of diversified producers. Similarly producers who are all or in part vertically integr. integra decisii proces: Tl such a: of con? of goa' to inf' ship w‘ the suc proprie threats Given i tain ct multipl persuas themsei can USE 3.3.2 Th cooper, Price t involve 0t such that co 95 integrated into processing may have different goals than nonvertically integrated producers. Such differences may manifest themselves in the decision process that determines raw product terms of trade with pr0prietary processors. The proprietary processor organizathmosatiSfiCESto certain goals such as achieving a target in rate of return and/or attaining a level of control over input and output markets. Uncertainty as to the realization of goals may motivate the proprietary processor management to attempt to influence if not control its environment. Insofar as the relation- ship with the bargaining association is a partial determinant of the success of the proprietary processor in attaining its goals, the proprietary processor may be motivated to use means, such as informational threats, to persuade the bargaining association of market conditions. Given the variability in the structure of proprietary processors, cer- tain characteristics, such as whether the processor is a singlev “moo .muOP mmmcm>< a Auox_dv “mou_~cuop mmmco>< w mam .flam mo_ca vommmuoca commmuoca m>_uacwaoou cemmmuoca xcaum_ca0bm ”wuumms_ m>_uacmzsou ~.m mc:m_u mm>c=u “mow cammmUOca m>_uecmgoou mzmcm> xcmam_caoca processor may The impa< is different. cooperative ca value of raw l can pass losse the short run by drawing on grower resourc exit from the Such exit wil? to evaluate tk alternative me The force structure of 1 Presented in r Processing org the Opportunit Opportunities The conse will be analyz PPODrietary or the Chhhdinati a diminishjng \. UNder CC expected, C00; the” 1hp“: de Costs, hiOPrie 102 processor may be sufficient to put the processor out of business. The impact of the supply increase on the cooperative processor is different. Under loss conditions, as Pr1 drops to PrZ, the cooperative can lower its average total cost curve by adjusting the value of raw product inputs downward. Similarly, the cooperative can pass losses onto membership by drawing on member capital. In the short run, such adjustments may keep the cooperative in business by drawing on grower resources. In the longer run, the use of grower resources to support loss operations will encourage grower exit from the cooperative and perhaps from raw product production.1 Such exit will depend on grower access to information with which to evaluate the performance of the cooperative and ability to find alternative market outlets. The force of these advantages may produce changes in the market structure of the processing sector. The descriptive information presented in Chapter Two notes a general decrease in the number of processing organizations. Such change may have occurred because the opportunity cost of remaining in processing is too high given opportunities in other markets. The consequences of exit decisions by proprietary processors will be analyzed in this research. If resources are freed by proprietary organizations, different distributions result. Similarly, the coordination of supply and demand decisions may be affected by a diminishing proprietary processing sector; insofar as cash 1Under conditions in which processed prices are higher than expected, cooperative growers will share in the larger margins as their input deliveries are valued more highly. With invariate input costs, proprietary processors enjoy higher profits. transactions of bargaining reflect marke mouse The hypo by the compet processor com explanations. the number of processor mar tables. Any is forcing th of cooperativ hypothesis ma bargaining as ascertain its byPOtheses f0 bargaining en 0” two bYPes as organizati faCing PPOPri Etary Process hS Profitabi ations are be 9X1 t frOm pi‘O 103 transactions between growers and handlers diminish, the effectiveness of bargaining as a mechanism for determining terms of trade that reflect market conditions may be altered. A. Proprietary Processor Transformations and Linkages The hypothesis that proprietary processor exit can be explained by the competitive impact of farmer bargaining and/or cooperative processor competition is one argument to be studied against alternative explanations. 0f similar interest to this study is the increase in the number of cooperative processors and the increase in the cooperative processor market share of the processed market in fruits and vege— tables. A hypothesis to explain these trends is that farmer bargaining is forcing the exit of proprietary processors and obliging the formation of cooperative processing organizations to replace them. This basic hypothesis may be advanced as a critical argument against farmer bargaining as a market institution and thus merits close analysis to ascertain its validity. To achieve such an analysis several variant hypotheses for proprietary processor organizational responses in bargaining environments might be advanced. They will concentrate on two types of organizational responses, transformations and linkages as organizational accomodations to the opportunities and exposures facing proprietary processors. Transformation of Ownership of Processing Facilities. Propri- etary processor management behaves, it has been assumed, to satisfy its profitability requirements. Where proprietary processor oper- ations are performing poorly, management may make decisions to exit from processing and pursue investment opportunities elsewhere. The national supports such terms of trad taneous incre to grower nee transition of processors. ' just represen: with little re Transitic processor recc to it and thus recognition ma to respond to bUy out manage buyout strateg. a debendent re Such as orchar. returns to gm acquisition pr' from grower in, OUtiets’ EHO ir In SUCh 0T gmh’e" Capital of Processing. ]\ The national downward trend in numbers of processing establishments supports such an explanation. The existence of farmer bargaining over terms of trade may serve to hasten the exit decision. The simul- taneous increase in the cooperative processor sector may be due to grower need to maintain an outlet for their raw product. However, transition of ownership does not guarantee the viability of cooperative processors. Vertical integration into processing by growers may just represent a shift of processing costs onto the grower sector with little renumeration on capital investment. Transition of ownership may also be motivated by proprietary processor recognition of the fixed assets of growers that deliver to it and thus the severity of adjustment costs facing growers. Such recognition may encourage management of the proprietary organization to respond to poor performance by forcing its grower suppliers to buy out management's (or stockholder) investment. An alternative buyout strategy, it can be hypothesized, is to involve growers in a dependent relationship by encouraging them to invest in fixed assets, such as orchards and specialized machinery, and then decrease returns to growers until growers' marginal value product is below acquisition price but above salvage price. Such extraction of rent from grower investments may, depending on alternative outlets, end in an easily accomplished transfer of ownership.1 In such organizational responses by proprietary processors, grower capital is replacing proprietary capital to finance the costs of processing. Insofar as proprietary interests reallocate their freed 1This point has been argued elsewhere by James D. Shaffer, Ag. Economist, Michigan State University. investments t processed fru be attained b. now under gror and yet mainte offer such mei merchandizers. of ownership i Linkages such as joint cooperative in by Proprietary function of th from bargainin and risks betw Based on Preference for ”111 he l'PPelli external envirr between organiz available to me hheanization me cretion in daci cretion contain hhuanizationxs. organiZation IS Processor manag investments to higher return activities such as merchandizing processed fruits and vegetables, their processed product needs may be attained by contract specifications with the processing organization now under grower ownership. The ability to free low return investments and yet maintain product quality through contract specifications may offer such merchandizers competitive cost advantages over other merchandizers. Advantages provide incentives for more transformation of ownership in the processing industry. Linkages Between Proprietary and Cooperative Interests. Linkages, such as joint ventures or participation plans, between proprietary and cooperative interests are other varieties of organizational responses by proprietary processors. Their relevance to this study is a function of the following: l) their relation to, i.e., motivation from bargaining; and 2) their consequences for the distribution of costs and risks between the grower and proprietary sectors. Based on a model of self—interested management motivated by a preference for discretion in meeting organizational goals, management will be impelled to seek out and control sources of discretion in the external environment. Such control may manifest itself in linkages between organizations which make the resources of one organization available to management of the other. For example, proprietary organization management may be able to advance its desire for dis- cretion in decision—making by taking advantage of sources of dis— cretion contained in a cooperative organization. The use of another organization‘s potential discretion can result if control of that organization‘s management can be realized. By influencing cooperative processor management‘s incentives in a linkage agreement,management of a proprietary member capitz the cooperat' accorded grov linkage with interests are on that capit inputs, and t the inherent competitive a may be of suf that is, entr cooperative l exposure to l dividend. Institul can also inf' interests. 5 would lend 1'1 ization of ti research, the sUbsumed Uhdi l r—___fle 106 a proprietary organization may be able to: l) use cooperative grower member capital at low cost; 2) influence internal transfers within the cooperative; and 3) benefit from certain legal opportunities accorded grower organizations.1 The cumulative resources that . linkage with a cooperative organization can provide to proprietary interests are lower cost capital and, perhaps, extraction of rent on that capital, a guaranteed (controlled) supply of raw product inputs, and the shifting of risk to the grower membership by controlling the inherent discretion within the cooperative organization. These competitive advantages over non-linked proprietary processor organizations may be of sufficient weight themselves to encourage such linkages; that is, entry barriers may be achieved. The fact that proprietary- cooperative linkage can also exclude the organization from direct exposure to farmer bargaining activity may be no more than an additional dividend. Institutional lenders such as the Bank for Cooperatives system can also influence interrelations between proprietary and cooperative interests. Study of the role of institutionallenders in bargaining would lend itself to a participant subsystem conceptual- ization of the type advanced above. However, for the purpose of this research, their role will be selectively treated and, essentially, subsumed under the rubric of grower resources. 3.4 Summary In summary, this chapter has developed a conceptual framework envisioning participant interrelations and accommodationsto interrelations ~—__.__ 1Those accorded Capper-Volstead Cooperatives. in farmer bar thesizing par afforded by n In addre responses to groups, and p influence the One specific fluence the t In order between barga cooperative p made of a cor aigued to hav to seek such concern could to the organi was hYPothesi terms 0f trad C00Pel‘ative c this Process. be dirECted t afforded by b aSSOCiation w Seetor in way The trea between C00pe 0n POSSibie C 107 in farmer bargaining environments. Emphasis has been given to hypo- thesizing participant responses to various opportunities and exposures afforded by market and financial conditions in bargaining. In addressing bargaining association and proprietary processor responses to interrelations,it was hypothesized that these participant groups, and perhaps subgroups within, would respond by attempting to influence the terms of trade decision process to their advantage. One specific behavior hypothesized was the use of information to in— fluence the terms of trade determined by bargaining. In order to address interrelations and accommodations to interrelations between bargaining associations and cooperative processors and between cooperative processors and proprietary processors, much use was made of a conceptualization of managerial behavior. Management was argued to have a preference for relief from constraint concern and to seek such relief. It was also argued that management constraint c0ncern could be influenced by variables that are internal or external to the organization. Management of cooperative processing organizations was hypothesized to be both sensitive and responsive to the bargaining terms of trade determination process. Other interest groups in the cooperative organization were also hypothesized to be responsive to this process. The responses of all these groups were hypothesized to be directed towards seek advantage among the opportunities and exposures afforded by bargaining. Similarly, interest groups in the bargaining association were hypothesized to respond to the cooperative processing sector in ways that would promote their interests. The treatment of interrelations and accommodations to interrelations between cooperative processors and proprietary processors focused first on possible competitive advantages between the sectors. It was hypothesized cooperative p by proprietar advantages ar in bargaining relationship and resource Having d principal par in light of o variability a Differences 3 variable barg variability i basis of rese. Chapters Four treatment wil Fourwm rep in this chaptr On in Chapter be treated as thesi zed behav fl , ..e._«.,_--.4. 108 hypothesized that competitive advantages, i.e., lower costs for cooperative processors, produced by bargaining and the recognition by proprietary interests of the rights and resources upon which such advantages are based could explain various changes in market structure in bargaining environments. Emphasis was given to hypothesizing a relationship between proprietary-cooperative organizational linkages and resource availability in the grower sector. Having developed the primary interrelations among the three principal participant subsystems and having hypothesized responses in light of opportunities and exposures in farmer bargaining, some variability as a function of institutional differences can be expected. .“ Differences such as history of interrelations, the structure of markets, variable bargaining frameworks, and accounting rules may introduce ‘x variability in the empirical observations that will constitute the basis of research findings to be presented and discussed in Chapters Four and Five. In these succeeding chapters, selective treatment will be given to such institutional differences. Chapter FouTwill report on the first two sets of interrelations treated in this chapter. The third set of interrelations will be reported on in Chapter Five. These three sets of interrelations will each i be treated as areas of inquiry and will be guided by the major hypo- l l thesized behaviors generated in this chapter. Introduction This chap which correspc Study: 1) 51¢: tions and pro; between bargai tation of find thesi zed behav wfll be report \ stratified obs Following each will discuss t will be given to tbe coordine SUCh as risk, ( Structure. The third 0T" participants Chapter Five. 4.1 A As develop the primary int CHAPTER FOUR FINDINGS AND DISCUSSION Introduction This chapter will present and discuss findings from the research which correspond to two of the three areas of inquiry addressed by this study: 1) accommodations to interrelations between bargaining associa- tions and proprietary processors; and 2) accommodations to interrelations between bargaining associations and cooperative processors. The presen— tation of findings within each area of inquiry will relate to the hypo- thesized behaviors developed in Chapter Three. Furthermore, findings will be reported first by pooled observations and, when relevant, by stratified observations in order to identify variability in responses. Following each presentation of findings by area of inquiry, the study will discuss the findings by select performance dimensions. Attention will be given to the following: 1) the flow of information as related to the coordination and planning of decisions; 2) distributional issues such as risk, equity, and accountability; and 3) impacts on industry structure. The third area of inquiry comprising the study, structural responses of participants, will be addressed separately and in like fashion in Chapter Five. 4.1 Accommodations to Interrelations Between gargaining Associations and Proprietary Processors As developed in the applied conceptualization in Chapter Three, the primary interrelation between the bargaining association sector and 109 the Prop” eta ProcesS in W product Price supply and de motive, It wa validity 0" U incompatibm. between the S‘ the subject of findings PW sector by repo 2y differential associatio”; a Next, the sect by the PI‘OPrie transmittal of alternatives if terms of trade of findings wi I address the HO substitutabil it 4.1.1 Respon ll. lnves ‘ orient Bargaining gathering and us trade determi nat they invested in 110 the proprietary processor sector is the terms of trade determination process in which each faces incompatible interests with respect to raw product price. This incompatibility is complicated by uncertainty as to supply and demand conditions for finished products thereby providing a motive, it was proposed, for each sector to persuade the other of the validity of the asking or offer price. Accordingly, the result of such incompatibility and uncertainty would be to produce a flow of information between the sectors. The presence and characteristics of this flow are the subject of this first section. The section will first address findings pertaining to uses of information by the bargaining association sector by reporting on: 1) investment in market intelligence; 2) differentiation in treatment of proprietary processors by the bargaining association; and 3) association interest group uses of information. Next, the section will address findings pertaining to uses of information by the proprietary processor sector by reporting on: I) proprietary transmittal of information to the bargaining association; 2) proprietary alternatives in procurement; and 3) proprietary recognitiOn of uniform terms of trade as a benefit from bargaining. Following these statements of findings will be an integrative discussion. This discussion will address the flow of information, uniformity of terms of trade, and substitutability in procurement. 4.1.1 Responses of the Bargaining Association Sector A. Investment in Market Intelligence and Scope Bargaining association management was questioned at length on the gathering and uses of information by the association in the terms of trade determination process. All association management reported that they invested in market intelligence in order to perform their bargaining function. Ir was given 8 o mentioned tha such as carry investment in such as expec‘ by the 7 of IE analysis, ment variable to be have mentioned a certain scop managers is sue If this da variability. 1 managers i nterv This respondent Northwest data California. In mentioned marke. with proprietam Sdillple 0f three mark“ a"bb’si s Pmprietary proc the reverse; the survival but Sta- markets. t This pa l0ll from nearby I I i i | 111 function. In discussing the market level or levels to which attention was given 8 of the 15 association managers interviewed voluntarily mentioned that attention was given to processed product market conditions such as carry-over stocks, consumer preferences, and rate of return on investment in processing, as well as to raw product market conditions such as expected production and grade. This finding is largely paralleled by the 7 of 15 association managers who, in discussing their market analysis, mentioned the survival of proprietary processors as a relevant variable to be concerned with. Though more association managers might have mentioned such concerns if specifically asked to by the researcher, a certain scope of market analysis that is deemed relevant to association managers is suggested by these findings. If this data is stratified by geographic region there is some variability. In the Northwest data set, only one out of five association managers interviewed mentioned attention to processed market conditions. This respondent was one of two perennial associations interviewed in the Northwest data set and works closely with its commodity analogue in California. In the California sample, all five associatiOn managers mentioned market analysis of processed markets and, specifically, concern with proprietary processor survival, as a relevant variable. The Michigan sample of three was split with two association managers mentioning market analysis of processed markets but not mentioning concern with proprietary processor survival. The remaining association manager reported the reverse; that is, he mentioned concern with proprietary processor survival but stated that he did not give attention to analysis of processed markets. This particular respondent faces significant geographic competi- tion from nearby states of New York, Pennsylvania, and Virginia. .. .,...._.,_ As furt bargaining a we The character Mtom tion, variabi 0f the Califc three charact terizing it a characterizat Processors ch terized it as information b Processors wh. tion indicatei than they did 8. ' . Mm Some Spec mark“ a"alvsi bargaining ass 6550“.“th ma ment of PY‘Opri their differen as tolerating In Cdilfo hon manager We 112 As further indication of the quality of information brought to the bargaining arena by bargaining associations, managers of proprietagy processors were asked to characterize the quality of this information. The characterizations were evaluated according to a gradient scale of oooo_to adoouate to ooof, By stratifying the sample by geographic loca- tion, variability in proprietary processor characterization was revealed. Of the California sample of five proprietary processors interviewed, three characterized the association information as oooo with two charac— -terizing it as adeguate. The Michigan sample of 13 proprietary processor characterizations produced a different distribution: 2 proprietary processors characterized the association information as 9999; 6 charac- terized it as adeouate, and the remaining 5 characterized association information brought to the bargaining arena as oooo, All proprietary processors Who characterized association interpretation of market informa- tion indicated that the associations interpreted the information differently than they did. B. Differential Treatment of Proprietary Processors Some specific uses of information by associations that went beyond market analysis were also mentioned by select respondents. Two of five bargaining association managers in California and all three bargaining association managers in Michigan mentioned differentiation in their treat- ment of proprietary processors. The Michigan associations characterized their differential treatment of proprietary processors as 'favors' such as tolerating less than immediate payment of bargained prices at delivery. In California the differential treatment revealed by one associa- tion manager was the threat of higher prices to be settled as the calendar pros signatories v California as price-quantii association i year, sliding C. Interest Evidence along commodi fruit crops, to raw produc dependence ex- straints. A5 California Car get too high] In the Ni asubstitute r cessors Purcha although some belonoed to th by COmnodjty w t“Pugh all ma marketing appa Association (a Proprietary PH *~\1~“‘\““ l Associats 113 calendar progressed for late signers of bargaining agreements. Early signatories were promised most—favored—nation status. Three of the five California associations either used or were working on negotiating a price-quantity sliding scale with proprietary processors. One annual association in California was trying to negotiate an indexed, multiple year, sliding scale as a basis for setting terms of trade. C. Interest Group Competition in the Association Sector Evidence was found of inter-bargaining association competition along commodity lines. California bargaining association managers of fruit crops, especially those used for fruit cocktail, were very sensitive to raw product substitutability. The general perception was that an inter- dependence existed as a function of proprietary processor budget con- straints. As stated by an association manager, the manager of the California Canning Peach Association ”can sell the hell out of me if I get too high.”1 In the Michigan sample the two fruit associations also acknowledged a substitute relationship and revealed a perception of proprietary pro- cessors purchasing under a fruit-input budget constraint. However, although some 90-100 grower members of the Tart Cherry Association also belonged to the apple association, no,internal competition of interests by commodity were evident to either association manager. Furthermore, though all Michigan associations are housed under the same commercial marketing apparatus, the Michigan Agricultural Cooperative and Marketing Association (commonly called MACMA), no joint strategizing to deal with proprietary processors buying multiple raw product inputs was evidenced. M lAssociation Manager, California. The apple as strategizing There it on the overa' sentation is. of some membe Managerial dc representatic multi-commodi in 1976, acco (the steering board (as to course.“2 4'1'2 Res; The conce an intei‘dbPenc mittal of i nfc Suggested that mfiEtaVY Proce 0‘" absence of sector to the \ l Notw1 Stratenginbhi: 2 IDdUStry 114 The apple association management, in particular, denied any such joing strategizing against proprietary processor buyers.1 There is, however, inter—association competition for representation on the overall administrative board of MACMA. The purpose of such repre- sentation is, according to one association manager, to prevent the use of some membership fees to subsidize the needs of other commodity programs. Managerial desire to be in control of revenues can be served by such representation. Moreover, there is precedent for influence from the multi-commodity overall MACMA board on individual commodity groups: in 1976, according to association management, the association subcommittee (the steering body) ”got a tremendous amount of pressure from the big board (as to price offers) but we had no choice but to continue on our course.”2 4.1.2 Response of the Proprietary Processor Sector A. Transmittal of Information The conceptual work on how proprietary processors would respond to an interdependence with bargaining associations hypothesized the trans- mittal of information for the purpose of persuasion. It was also suggested that this response would vary as a function of certain pro- prietary processor characteristics. In order to establish the presence or absence of a flow of information from the proprietary processor sector to the bargaining association sector, proprietary processor managers were asked whether they transmitted information to the bargaining 1Notwithstanding these findings, the existence of such joint strategizing is contended by informed sources. 2Industry Source. association. tion CODtT‘TDl In the 11 stated the did not and c so. PT‘OPT‘TEI conmunicatior These answers 21 respondent communication it as £0.03- Stratify llest Coast, M Prietary PT‘OC tlbbisl Opera resPOlldents c1 CESandents, . as 9M with ,I MIChigan Sampl 6"esPonded tr 5added that t because It was who contribute As to Cbbracte none 01° the 12 it as BLT, an. 0f fOUl“ reSpOm 115 association. No attempt was made to assess the veracity of the informa- tion contributed; see Table 4—1. In the total sample of 20 proprietary processor respondents, 11 stated that they did contribute information. Nine stated that they did not and of these nine, five indicated that it would be useless to do so. Proprietary processor managers were also asked to characterize the communication they had with the association(s) with whom they dealt. These answers were applied against a scale of oooo, {gig and oooo. Of 21 respondents who offered a characterization, 3 characterized the communication as oooo, 4 characterized it as foio, and 14 characterized it as £5531. Stratifying these 2 sets of responses by geographic regions of West Coast, Michigan, and Appalachia reveals that 5 out of the 11 pro- prietary processor managers who contribute information to the associa- tion(s) operate in West Coast bargaining environments. All West Coast respondents contributed information. Furthermore, of these five respondents, three characterized the communication with the association as oooo_with the remaining two characterizing it as foio. In the Michigan smnple the responses were different; of 11 Michigan respondents, 6 responded that they did not contribute information and of these 6, 5 added that they did not contribute information to the association because it was useless to do so. Two of the respondents in Michigan who contributed information also felt their contributions were useless. As to characterization of the communication in the Michigan sample, none of the 12 respondents characterized it as oooo, 2 characterized it as foio, and 10 characterized it as oooo. The Appalachian sample of four respondents, which included three respondents also purchasing h“! m; _... d Table 4-l West Coast Michigan Appalachia Total \— Nest Coast MlChlgan APPalachia Total .___________ NOtes: l/ 116 Table 4—l Proprietary Processor Manager Responses on Whether or Not They Contributed Market Information to the Bargaining Association(s) Stated That They Stated That They Total Did Contribute Did Not Contribute Respondents West Coast 5 O 5 Michigan 5 6 ll Appalachia _l g _£ Total ll 9 my Characterization By Proprietary Processor Managers of Communication With the Bargaining Association(s) Good Fair Poor Total Respondents West Coast 3 2 5 Michigan D 2 TO 12 Appalachia o_ 9_ _fl _3 Total 3 4 T4 211/ Notes: 1-/Includes 3 proprietary processors with experience in purchasing raw product in both Michigan and Appalachia. raw product specific res relationship sectors in M They throw t. to use the s; and 4) "Procv As an ac information t asked to com the communica respondents a Pr0prietary p information. the Michigan ) and PennSylva, Of CONNUnicati findings above it as 9% wit a” five Calif SamPie of thre one characteri AppaIaChlan Sdl m. Cdthn as \ 1 117 raw product in Michigan, tended to reflect the Michigan responses. Some specific responses by proprietary processor managers indicated a poor relationship between the association and the proprietary processor sectors in Michigan and Appalachia: 1) ”Processors won't communicate. They throw their hands up and give up;” 2) ”Processors have not tried to use the system;“ 3) ”The industry has not adapted yet to bargaining;” and 4) ”Processors underinvest in information.”1 As an additional indicator of the presence or absence of a flow of information between the sectors, bargaining association managers were asked to comment on the receipt of information from and to characterize the communication with the proprietary processing sector. Out of 15 respondents all indicated getting at least some information from the proprietary processing sector with 4 stating that they received little information. These four respondents were the Potato Growers of Idaho, the Michigan Apple Association, and the apple associations in New York and Pennsylvania. The bargaining association managers' characterizations of communication with the proprietary processing sector reflect the findings above; of the five Northwest associations, four characterized it as oooo with the Potato Growers Association characterizing it as 2921; all five California respondents characterized it as good; in the Michigan sample of three associations, one saw it as oooo, one saw it as foip, and one characterized it as foip_to poo_; the two respondents from the Appalachian sample, New York and Pennsylvania, characterized the communi— cation as poor. These findings are summarized in Table 4-2. M lIndustry Sources. rue Table 4-2 Mest Coast Northwes Califorr Michigan Appalachia Total \ \ West Coast Morthwes Californ MlChlgan Appalachia Total \ 118 Table 4-2 Bargaining Association Managers‘ Responses on Receipt of Information From the Proprietary Processing Sector Recieved Did Not Receive Total Information Information Respondents West Coast Northwest 5 O 5 California 5 O 5 Michigan 3 O 3 Appalachia _o o _g Total T5 0 TS Bargaining Association Managers' Characterization of Communication With the Proprietary Processing Sector Good 5213 L09: W West Coast Northwest 4 O l 5 California 5 O O 5 Michigan l T T 3 Appalachia _Jl Q 3. .3 Total lO l 4 l5 B. Alternat Data wa tive geograp prietary pro processors m procurement remaining in Four of the ‘ ates dCCOT‘dTl tobacco proc: all (14 of 1! sources of re Product proc1 market condii Stratify of four respc 0i geographic APPdlachian 5 reach. Thef reach are Cha 501911 1' n Mic Competj ti ve d The i'ilChigan were buying a state because ._.. 1.0 \l U _.. ‘5 (D r) ('1' \. Torch p 119 B. Alternatives in Raw Product Procurement Data was also gathered on proprietary processor access to alterna- tive geographic operations, such as plants in other states, and on pro- prietary processor conglomeration. Of 19 respondents, 15 proprietary processors managers said that they had access to geographic reach in procurement of raw product needs or benefited from conglomeration. The remaining four respondents were single state, single line operations. Four of the respondents in the total sample of the study were conglomer- ates according to a recent compilation of statistics on food and tobacco processing firms by University of Wisconsin economists.1 Almost all (14 of 15) of the respondents having geographic reach to alternative sources of raw product stated that they would avail themselves of raw product procurement in alternative geographic areas in response to market conditions affecting availability of raw product. Stratifying this data by geographic region revealed that three out of four respondents in the West Coast sample stated that they made use _ of geographic reach in procuring raw product. In the Michigan and Appalachian sample, 11 out of 15 respondents indicated use of geographic reach. The four respondents who stated that they did not use geographic reach are characterized as single line privately owned firms operating solely in Michigan. These four commonly felt that they were at a competitive disadvantage as compared with multi-state food processors. The Michigan sample also revealed that numerous firms processing apples were buying a significant amount of raw product needs outside of the state because of bargaining in Michigan. Some specific explanations 1Directory of the 200 Largest U.S. Food and Tobacco Processing Firms, .2215, North Central Regional Project 117, SpeCial Report No. 2. given by so: 1) ”Me want 2) The New Y marketing cc weaken the a C. Price Un Out of uniformity, bargaining w‘ a benefit. 1 Pr0prietary 5 from bargaim‘ acknowledging frbm bargaini that in its F were circulat stated by thi BarPaini Perception th as a benefit that this was resPondents rm leg“ Sanctiol enfochd. Acc argued the deg association if given by such Michigan proprietary processor managers are as follows: 1) "Ne want to be able to get along without Michigan supplies;” 2) The New York plant has been geared up to relieve us of Michigan marketing conditions;" and 3) ”We might buy outside of that state to weaken the apple association." C. Price Uniformity as a Benefit Out of 15 proprietary processor respondents on the issue of price uniformity, 9 acknowledged that price uniformity was a benefit from bargaining with the remaining 6 not acknowledging price uniformity as a benefit. Of the five West Coast respondents representing four different proprietary processors, all acknowledged price uniformity as a benefit from bargaining. The Michigan sample of nine respondents contained four acknowledging and five not acknowledging price uniformity as a benefit from bargaining. The one respondent from the Appalachian region explained that in its processing industry price lists of prices paid to growers were circulated among processors to encourage parallel pricing. As stated by this respondent, "We are competitors not enemies.“ Bargaining association managers were also asked if it was their perception that uniform prices were recognized by proprietary processors as a benefit from bargaining. All nine respondents to this issue argued that this was their perception. Furthermore, several association respondents mentioned that proprietary processors had threatened to use legal sanctions against the association if uniform prices were not enforced. According to one manager, a proprietary processor specifically argued the desirability of uniform prices and said it would "sue the association if we allowed one proprietary processor to break its contract “ _ __:-"fl E and buy at a paralleled b proprietary bya competi react ”viole tion which fa processor has Growers Assoc pricing formc product. The to this mecha Proprietary p among Process alternative tl 4.1.3 ThlS Seci information ob intersectoral cation by @6309 uses of inform Sectom. Alei A. W LOOklng at ””anllabie or 121 and buy at a lower price.” Such reports by association managers are paralleled by some responses from proprietary processor managers. One proprietary processor, in light of a participation plan being implemented by a competitor in the tomato industry in California, stated that it would react ”violently and legally“ to any discrimination by the tomato associa- tion which favored its competitors. This particular proprietary processor has also worked very closely with the California Tomato Growers Association to develop an indexed, sliding scale, multiple year pricing formula to serve as a basis for setting terms of trade on raw product. The understanding between the two parties was that commitment to this mechanism was contingent on its acceptability by other large proprietary processors in the industry. Hence, uniformity of treatment among processors took priority over the certainties offered by an alternative terms of trade determination mechanism. 4.1.3 Discussion of Findings This section will discuss the characteristics of the flows of information observed and reported above. First it will address the intersectoral flow of information in general terms with some stratifi- cation by geographic area. Then it will focus on some of the specific uses of information observed by both sectors or groups within the two sectors. Again stratified discussion will be developed where relevant. A. General Results of the Transmittal of Information Looking at bargaining associations and proprietary processors as two groups one can begin by saying that a pooling of information from both sectors has been observed. Thus information that was previously unavailable or unorganized is being contributed to the terms of trade decision pri carry the ec of productic in this proc expected to terms of tra The gen have been an gaining by Pl under the rut meanings have and mm Knutson' basic thrust welfare econo curve to a po WlUlmotion a is termed by ( imPacts might 0? marketing m in COPSumer SU or in rlISk ana \ liadd. 19 26 dY‘Ver3 3 KHUtSOn, 4 Ladd, 3 U GdrVEr, S 122 decision process. The terms of trade produced should be better able to carry the economic information necessary for coordination and planning of production, processing, and marketing decisions by the participants in this process. In summary, a pooling of economic signals can be expected to move the participants to the bargained transaction closer to terms of trade that reflect accurate demand and supply conditions. The general results of the pooling of information addressed above have been argued, though briefly, in the literature on collective bar- gaining by producer groups. These results have been grouped by Ladd under the rubric Opponent-Gain type results.1 Terms with similar meanings have been coined by others: see, for example, inductive impacts2 and integrative effects.3 Knutson‘s explanation of the term integrative effects captures the basic thrust of all the above terms. He describes such effects in welfare economics terminology as movement from a point off the contract curve to a point on the contract curve. This movement is contrasted with motion along the contract curve. Motion along the contract curve is termed by others as Opponent-Pain4 and Coercive.5 Such aggregated impacts might also be demonstrated through the theoretical apparatuses of marketing margin analysis where the supply curve shifts downward, in consumer surplus analysis with a similar shift in the supply curve, or in risk analysis. In the latter, for example, one type of risk to lLadd, 1964. 2Garver, 1964. 3Knutson, 1968. 4Ladd, Supra. 5Garver, Supra. both produce price, Pric Where the ei possibility be reduced a As to 5 literature, costs1 and d collective b More current coHective b impacts. Mei dEpendable st luprovement c bargaining, 5 lowest costs, savings fr0m saVanS from how tanner ba Mans and, th and hanaierS \ 1 Ladd, :fl 2 3 Ladd, 3L 4 Gal‘Ver, 123 both producers and processors is the risk of a change in raw product price. Prices to producers will be discounted to reflect this risk. Where the effect of a bargained transaction on risk is to reduce the possibility for and degree of a price change, the discount factor can be reduced accordingly to the benefit of both producers and processors. As to specific integrative impacts identified in bargaining literature, some are more general than others. The reduction in marketing 1 and diminution of risk of price change2 that can be effected by costs collective bargaining are phrases used to capture aggregate impacts. More current work by Ladd3 and contributions of other students of farmer collective bargaining offer more precise breakdowns of the integrative impacts. Mentioned are such effects as the establishment of stable and dependable supplies and outlets, the standardization, uniformity, and improvement of product quality, the per unit costs of administering bargaining, savings from the performance of services by the party with lowest costs, the potential for pooling the costs of merchanization, cost savings from improved scheduling, hauling, and routing, and the cost savings from direct sales.4 These represent more specific examples of how farmer bargaining can influence cost considerations and investment plans and, therein, the risks and uncertainties faced by both producers and handlers in their production and handling decisions. 1Ladd, §gpr§, 2Dahl and Hammond, 1977. 3Ladd , m. 4Garver, Supra} Roy, 1970; Ladd, I974. Helmbe closely to handlers in production negotiation can offer a the produce' run impacts longer run, handling car of both pro< In gene bargaining f decision mat Helmberger g A resul introdt 0f the account Process notions regiona both gr Possibl the dec are bag and on Ships t \ l HElmbe ZHElmbe 124 Helmberger and H005 in their seminal work of 1965 address themselves closely to the coordination impacts of bargaining on producers and handlers involved in bargaining in perennial crops.1 In perennial crop production and processing, many of the costs are incurred prior to the negotiation of bargained terms of trade. What bargaining in such crops can offer are both short run cost effects, as in administrative costs for the producers and transaction costs for the handlers, as well as longer run impacts on costs and investment considerations. For example, in the longer run, reduced procurement costs, guaranteed supplies, and guaranteed handling can induce cost reducing adjustments in the investment decisions of both producers and handlers. In general, the pooling of information process that can result from bargaining interrelations results in a potential for terms of trade decision making with a higher informational endowment. As stated by Helmberger and H005: A result is that the participants in the market, through the introduction of cooperative bargaining, are made more aware of the economic relationships which should be taken into account in price negotiation and determination. Growers and processors become acquainted with and more appreciative of notions of demand, supply, elasticities, substitutes, inter- regional competition, and so forth, as well as problems facing both growers and processors, their underlying causes, and possible solutions. As a result of cooperative bargaining, the decision making processes which determine the grower price are based more on analysis of economic-marketing information and on a greater understanding of relevant economic relation- ships than would otherwise be the case.2 1Helmberger and H005, 1965. 2Helmberger and H005, Supra, p. 179. pm indicate a l ment in marl information differences differences approach ac: Looking information prietary prc of the com paralleled t Contrasted w proprietary with the ass good. The A tion as poor The Wes gaining acti from an envi The Appalach primarily of spread in ch by the varia: negative ind Michigan and 125 Geggraphic Differences. In aggregate terms this study's findings indicate a pooling of information in light of both association invest- ment in market intelligence and proprietary processor transmittal of information. However, if the results are stratified by geographic region, differences in the pooling of information are evidenced and, accordingly, differences in the ability of the terms of trade decision mechanism to approach accurate market value can be expected. Looking first at the West Coast data the study found a flow of information to the bargaining association sector indicated by all pro- prietary processor respondents. Proprietary processor characterization of the communication with the association sector as generally good was paralleled by the association characterization of such communication. Contrasted with this were the findings in the Michigan sample where the proprietary sector characterized the communication as adequate to poor with the association sector characterizing it generally as less than good. The Appalachian association sector characterized the communica- tion as poor. The Western sample is characterized by the longest history of bar- gaining activity and voluntary bargaining. The Michigan sample comes from an environment manifesting recently introduced mandatory bargaining. The Appalachian sample reflects only evolving bargaining efforts primarily of an information collection and dissemination nature. The spread in characterizations of communication may largely be explained by the variability in experience with bargaining. The essentially negative indicators of communication between the sectors in the Michigan and Appalachian sample argue less progress in attaining the benefits of by the West B. Varietii The gel specific ati We generally ga have been di stress gover information making. Thi attention to association processed pr processors, i thus, concom tolonger rm By stra' tion in the l was a perenn- inputs associ well as this \N— 1Lang , 1 2 Garoyar 3MacMi ll 126 benefits of a good pooling of information discussed above and manifested by the West Coast sample. B. Varieties of Informational Sigpplg The general conclusions stated above can be augmented by discussing specific attention to and uses of information reported in the findings. Difference in Scope of Association Analysis. The types of information generally gathered and analyzed by the bargaining association sector have been discussed by Lang,1 Garoyan,2 and MacMillan.3 These authors stress government publications, in-house market research, and handler information as the resources tapped for conducting terms of trade decision making. This study‘s findings suggest some evidence of poor association attention to their system environment. With only half of the bargaining association manager respondents voluntarily indicating concern with processed product market conditions and survivability of the proprietary processors, one c0uld argue inattention to the system environment and thus, concommitantly, more myopic analyses with insufficient attention to longer run issues of system viability. By stratifying these findings, the study found that the only associa- tion in the Northwest sample voluntarily indicating such system attention was a perennial association. The higher immobilities of production inputs associated with perennial production may explain this finding as well as this association‘s link with its well established predecessor “._— 1Lang, 1977, p. 105. 2earoyan, L., 1976, pp. 13-28. 3MacMillan, w., 1958, p. 32. in Cali forn appreciatio system attei recent than beyond the ‘ run consequr stance taker content and process. @333 terms of tr; findings can accompanies processors i "chicken'1 ‘ also serve i the legal w: current barg own ini ti at' Act of 1967: there is sui ment of Jus‘ discriminatt shown: U_._S_. HUNil 127 in California. The California associations all evidenced a system appreciation whereas the Michigan sample indicated some variation in system attention. Of course, bargaining activity in Michigan is more recent than that in California. Where associations attend to conditions beyond the raw product market one can expect to see appreciation of long run consequences as well as short run consequences. The length of run stance taken by association management will affect the informational content and the coordinating impact of the terms of trade decision process. Threat of Differentiation in Treatment. The presence of differential terms of trade bargained with proprietary processors documented in the findings can have several effects. Insofar as the uncertainty that accompanies the threat of differential treatment disciplines proprietary processors to participate in the bargaining process, such behavior can 'thicken'1 the market transaction. However, differential treatment can also serve to offer selective competitive advantages. This could invite the legal wrath of proprietary processors in the bargaining process. No current bargaining legislation, either in the several states with their own initiatives or in federal legislation (The Agricultural Fair Practices Act of 1967) contains mention of discriminatory practices. However, there is sufficient case precedent to argue the interest of the Depart- ment of Justice on antitrust grounds if sufficiently anticompetitive discriminatory behavior by cooperative bargaining associations can be shown: U.S. Associated Milk Producers, Inc. Civ. Nos. SA 72CA49 and lHurwicz, L., 1969. 74CV 80-W-l M., 362 Des—ira by the tota price argue differentia willing to Michigan an bargaining negative re the histori differences be develope the differe‘ Other . in uniform ' of uniform l prietary pf‘l uniform trei could serve my proces: M existence 0i \— 1Shaffl 128 74CV BO-W-l (4/30/75) and Maryland and Virginia Milk Producers Association y_gp§,, 362 U.S. 458, (1960). Desirability of Uniformity in Treatment. The general interest shown by the total proprietary processor sample in uniformity of raw product price argues the sensitivity of the proprietary processing sector to differential treatment by associations. The West Coast sample was willing to credit the bargaining sector for uniform prices. However, the Michigan and Appalachian samples were more negative about crediting the bargaining association sector with producing uniform prices. The more negative response from this latter sample may largely be explained by the historical recency of bargaining efforts there. However, structural differences such as the role of the cooperative processing sector as will be developed in later areas of inquiry may also provide explanation for the difference in these findings and the actual extent of price uniformity. Other authors have also argued a proprietary processor interest 1 in uniform raw product prices. It might be noted that the existenCe of uniform raw product prices can contribute to a uniformity of pro- prietary processor behavior. This is to suggest that the presence of uniform treatment of proprietary processors by bargaining associations could serve to promote active or tacit collusion of those same proprie- tary processors in raw and processed product markets. Substitutability in Input Procurement. The data also document the existence of substitute inputs as pressures that discipline the bargaining 1Shaffer, James D., 1974, p. 87 and L. Garoyan, Supra, p. 24. association findings ar The fu in substitu productstra prietary pri control a Cl revealed in bargaining i The canning part in the contact witt competitive. bargaining a relationship within MACMA Pennsylvania to develop in processors b The sugi not new. Hot di na ted comm NM 1Lang, i 2The. pri association i cussed in u" 3Hoos , 5 PP- 99-100. 129 association‘s stance in the terms of trade decision process. These findings are generally supported by those of Lang.l The fundamental competitiveness manifested by bargaining associations in substitute products suggests the alternative of coordinated or joint productstrategies by the bargaining associations in regards to pro- prietary processor buyers. Though no internal control or attempts to control a commodity bargaining association by another commodity were revealed in the data reported above,2 the potential for joint raw product bargaining is suggested by virtue of some inter-association relationships. The canning pear association in California works closely with its counter- part in the Northwest. In California, the associations, though in close contact with one another, are administratively separate and quite competitive. In the apple industries of Michigan and Appalachia, the bargaining associations are in close contact by virtue of a close working relationship between the Michigan Apple Committee bargaining association within MACMA and the evolving bargaining associations in New York and Pennsylvania. Conceivably such administrative unity could be utilized to develop multiple product bargaining strategies with proprietary processors buying multiple inputs. The suggestion of bargaining raw product inputs as joint bundles is not new. Hoos, Torgerson, and Roy have all advanced the idea of coor- dinated commodity bargaining rather than product by product bargaining.3 lLang, M., Supra, p. 107. 2The presence of such internal influence as a result of bargaining association and cooperative processor linkages will be reported and dis- cussed in the second area of inquiry. 3Hoos, s., 1962, p. 23; Torgerson, R., 1970; Roy, E., 1970, pp. 99-100. A Bundle ap Furthermore its potenti allocative approach mig processors v are single-s face more pr nonuniform i M on the barga issue of geo by proprieta proprietary tion sensiti proprietary present use sample of pr threat felt markets when Geograp to geographi: tion can ser' decision mecl beet indus tr: 130 A Bundle approach would reduce competition among bargaining associations. Furthermore, it would necessitate a redefinition of commodity authority; its potential for creating inter-commodity transfers means that an allocative decision rule would have to be formulated and current associa- tion managers would have to relinquish absolute commodity control in light of new boundaries of the raw product community. Such a bundle approach might also consider differentiating the treatment of proprietary processors with multi-state alternatives in procurement from those that are single-state Operations. Under uniform treatment the latter would face more pressure on profit margins than the former as a function of nonuniform input procurement alternatives. The Influence of Geographic Reach. A further disciplining pressure on the bargaining association sector reported on in the findings is the issue of geographic reach, i.e., alternatives for raw product procurement by proprietary processors. The widespread willingness and ability of proprietary processors to use geographic reach and the indicated associa- tion sensitivity to such reach is a general characteristic of the total proprietary processor and bargaining association samples. Much of the present use of geographic reach, especially as evidenced by the Michigan sample of pr0prietary processors, was in response to the competitive threat felt by those processors procuring product in the Michigan apple markets when competitors were processing in Appalachian apple markets. Geographic reach in procurement can also serve other ends. Access to geographic reach beyond the jurisdiction of a given bargaining associa- tion can serve to impede the utilization of a bargaining terms of trade decision mechanism. As stated by Jackson in his studies of the sugar beet industry: Helmberger impacts of producing a those that area.2 The ex statistics 1 of geograph wreak damagi possible for prices for a by raising i commensurate can be used argued by st reach is cle shown by cro lJackso 2 3 Helmbe Filice 131 Bargaining strength of the parties to a sugar beet contract varies widely, and depends primarily on the alternatives available to each party . . . A regional bargaining associa- tion probably is in its strongest bargaining role when negotiating with a single-plant company which competes with other single plant companies in its territory. It is weakest when negotiating with a multiplant company having factories located in an area where there is no competition with other companies, or with a multiplant company with factories both inside and outside the association's territory, so that the processor can substitute acreage in one area for that in another.1 Helmberger and H005 make the same argument in noting the difference in impacts of bargaining deadlocks between large national and regional canners producing a variety of goods in numerous plants around the country and those that are essentially small processors specialized in crops and area. 2 The existence of thin cash markets as documented in the descriptive statistics on West Coast states presented in Chapter TWO may invite use of geographic reach to influence the bargaining process and thereby wreak damage on competitors; that is, thin cash markets may make it possible for a proprietary processor with geographic reach to pay high prices for a small percentage of its raw product needs in one area, there- by raising input costs to competitors in that area who do not enjoy commensurate alternatives in procurement. That such geographic reach can be used to influence bargained terms of trade to this end has been argued by students of western bargaining environments.3 Geographic reach is clearly playing a role in the Michigan apple market, both as shown by cross hauling and increased out-of-state processing. lJackson, D., 1962, p. 6. 2Helmberger and H005, Supra, p. 71. 3Filice, B., 1978; L. Garoyan, 1976, p. 25; and other industry sources. As ar access to processor and argued with propri elsewhere a one should operations C. Summary In the association may result Attention w differences prominent. may explain Specif tions and p the scope 0 different c1 geographic v Disciplininq tutability i discussed. these issue: between sin: pressures f: 132 As argued above and indicated by the data, proprietary processor access to geographic reach is not uniformly present. Four proprietary processor respondents indicated that they did not use geographic reach and argued that they were at a competitive disadvantage in comparison with proprietary processor competitors who could purchase raw product elsewhere at lower cost. Insofar as these competitive advantages obtain, one should expect to see this sector sustain losses in numbers of operations at a greater rate than the multi-state Operations. C. Summary_ In the discussion of responses tO interrelations between bargaining associations and proprietary processors, the pooling of information that may result and the impacts on coordination and planning were emphasized. Attention was also given to variability in such pooling behaviors with differences between the West Coast and Michigan samples being most prominent. It was suggested that differences in bargaining experience may explain much Of the variation. Specific types and uses Of information revealed by bargaining associa- tions and prOprietary processors were also addressed. It was argued that the scope of system analysis used by the association sector would have different consequences in the short run versus the longer run. Again, geographic differences seemed to correlate with historical experience. Disciplining pressures from recognition of raw product input substi- tutability and access to geographic flexibility in procurement were discussed. Findings tended to parallel other student's discussion of these issues. Emphasis in discussion was given to the differences between single-state and multiple-state processing operations. Certain pressures for structural change were also indicated. In co pants in pants are ment. Rati ship, they of which se 4.2 Bag As dev are potenti tion and cc on evidence of bargaini sector. Ir ment respor identifying and interna ment. This responses 1 of trade de of the grow Second association DT‘OCESSOY‘S . management 133 In conclusion, findings support the general argument that partici- pants in the bargaining environment would respond to opportunities offered therein through the transmittal of information with persuasive intent. The bargaining association and proprietary processor partici- pants are not passive respondents to conditions in their market environ- ment. Rather, depending on the evolved state of the bargaining relation- ship, they will attempt tO modify such conditions in various ways, some Of which serve the informational and participative needs of bargaining. 4.2 Accommodations to Interrelations Between Barggjning Associations and Cooperative Processors As developed in the applied conceptual work in Chapter Three, there are potential areas Of interdependence between the bargaining associa- tion and cooperative processor sectors. This section will first focus on evidence of the impact of the terms of trade determination function of bargaining associations on the goals Of the cooperative processing sector. In order to do so, it will look at cooperative processor manage— ment responses to the terms of trade decision process. This will entail identifying both external (toward the extra-organizational environment) and internal (within the cooperative organization) responses Of manage- ment. This section will also explore other cooperative interest group responses to the existence Of a bargaining association-influenced terms of trade decision process. Some attention will also be given to the role of the grower-processor sector. Second, this section will focus on responses of the bargaining association sector to perceived interdependencies with cooperative processors. Principally it will look for evidence of association management responses to the cooperative processor sector such as efforts to enlist processor Given motives of This area being mani discussion formance i change in treatment and then, 4.11 A. Sensit Quest managers i tion activ The underl respond to goals with would respi relieve it gpppp sensitivit prices, co function a: 8 without normal 134 to enlist cooperative processor support or to enjoin certain cooperative processor behaviors. Given the presence of some linkages between the two sectors, the motives of responses and the interests being served become complex. This area of inquiry will attempt to sort out the primary responses being manifested, to explain their impetus(es), and finally, in the discussion section, to comment on their various meanings for such per- formance issues as coordination of decisions, distribution, and structural change in agricultural markets. As in the previous area of inquiry . treatment in this section will first report findings in aggregated pools and then, where relevant, by stratifications. 4.2.1 Responses of the Cooperative Processor Sector A. Sensitivity Of Copperative Processor Management Questions were addressed to a sample Of cooperative processor managers in order to ascertain the meaning for them Of bargaining associa- tion activity and the nature of their responses, if any, to such activity. The underlying argument guiding the inquiry was that management would respond to external factors that altered its discretion in meeting its goals with both external and internal responses; that is, management would respond extra-organizationally and/or within the organization to relieve itself of challenges to discretion. Cooperative Management Goal Function. In order to ascertain the sensitivity of cooperative processor management to bargained raw product prices, cooperative processor managers were asked to state their goal function as managers. All 24 cooperative processor respondents including 8 without past or current bargaining activity in their area stated that their performance was evaluated in reference to the raw product cash price and over raw pl margin beti was a prime of the com processor i asked whetl emanating ' indicated ' Severe of a perfor show relat‘ example, ll returns try, a raw prodi Processor n 360 per tor Performance two are big looking 90c returning l ment 0f one has recent] C0hnodity, ti0n thougr \ 1 . Refer 135 price and indicated that their goal was to maximize the percentage return over raw product cash price. This response means that the difference or margin between raw product cash value and the final returns to growers was a primary indicator of management performance in serving the interests Of the COOperative processor organization. Moreover, when cooperative processor management having experience with bargaining activity was asked whether there was a basis for conflict with the pricing decisions emanating from the bargaining association sector, all 16 respondents indicated that such a basis did exist. Several respondents demonstrated candor by explaining the existence Of a perfonmance illusion; they noted that management performance could show relative improvement but absolute decline from year to year. For example, in year one the cooperative processor might return to growers returns totalling 120 percent of the cash market raw product price with a raw product price Of $50 per ton. In the next year the cooperative processor may return only 110 percent based on a raw product price Of $60 per ton. Using percentages as an indicator shows poorer relative performance in year two than in year one while absolute returns in year two are higher. The possibility Of cooperative management performance looking good as regards a relative percentage but simultaneously returning poor or inadequate returns to grower members was raised by manage- ment of one mono-commodity cooperative processor, Lindsay Olive, which has recently seen very low cash market prices being Offered. This commodity, incidentally, does not have a coexisting bargaining associa- 1 tion though one is being organized. Two other mono—commodity cooperative processors in the sample, the California Almond Exchange and the National —_‘_1 1Refer to Chapter Two: California Olives. Grape Coope reference i tions are i derived frc responses 1 below. i. Ba management cooperative cooperative samples fro cooperative In order tc bargaining to characte activity, Six as a threat to resPondents a threat to View evolve cessor mama in the Nort Vegetables The three 0 Characteriz The remains; 135 Grape Cooperative, also face a non-bargained raw product cash price reference for calculating management performance. These three organiza- tions are interesting to analyze by virtue of their use of cash prices derived from commercially thin non-bargained cash markets. Some of their responses to the movement of such reference prices will be discussed below. i. Bargaining Association Corroboration. Bargaining Association management was also questioned in order to determine sensitivity Of the cooperative processing sector to bargaining association impacts on cooperative terms of trade for raw product. All 11 respondents covering samples from the Northwest, California, and Michigan contended that cooperative processor management was sensitive to raw product cash prices. In order to corroborate the validity of relating such sensitivity to bargaining associations activity, these association managers were asked to characterize the cooperative processor management's view of bargaining activity. These characterizations are presented in Table 4-3. Six association respondents characterized the view as perceiving a threat to cooperative processor management performance. Of those respondents, three noted that bargained activity was initially viewed as a threat to cooperative processor management performance but that this view evolved to a more positive one for most of the cooperative pro- cessor managers with whom they dealt. These three respondents are located in the Northwest sample which has had some past bargaining activity in vegetables as well as current bargaining activity in pears and asparagus. The three other respondents constitute the Michigan sample. They characterized the view as perceiving a current threat to performance. The remaining five respondents, all from California associations, 137 mi m .m. m .5922: m o o .m e_:goe_~eo m m o o pmmzzpcoz ,iiiiiiiiiiiiiiiiiiiiiiiiii mpcmvzoammx Homage < names» ucmccsu m>wpvmom umcowumwoomm< mcwcwamcmm PGHOP mcv>mmogwm a m:_>_wocm¢ mm zow> mzp xppmwu_:H mm 3mw> mm zmw> asp cmNPLmuomcmzu mzu umNPcmuumcmzu nmNVLmuomcmzu xaw>wgo< mcwcwwmcmm so 3m_> .macmsmmccm: acmmmuocm m>wumcmuoou we m:o_umwuomm< acwcwmmcmm ao mcmmmcmz >5 :o_um~pgmuumcm;u mic mFQm» characteri; nature of t processor n pated. New cooperative M the validii in the cone at length a i. 9' being asker levels, be' respondents characteri. contact wi‘ definitely C0Operatiw (a Michigan Associatioi If th Variabilit“ that they Very Cf‘lti. C°0Perativi as Paing t negatiVe t. characterized the view as positive. Given the strictly informational nature Of bargaining activity in the Appalachian sample, cooperative processor management sensitivity to bargaining activity was not antici- pated. Nevertheless, indications Of such sensitivity were found in cooperative processor managements’ external responses to their environment. Externally Directed Behaviors of Manggement. In order to ascertain the validity of hypothesized externally directed behaviors as developed in the conceptual chapter, cooperative processor managers were questioned at length about their responses to bargaining association activity. i. Direct Management to Management Communication. In response to being asked whether they communicated directly with bargaining association levels, being determined by the bargaining process, 13 out of 21 respondents indicated that they did. Some comments by these respondents characterize the nature Of this type Of communication: "We have close contact with association management" (a Northwest Cooperative); "We definitely have an influence on the association” (a major California Cooperative); and ”I'll get on the phone and scream at the association“ (a Michigan Cooperative); ”We communicate closely with MACMA, the N.Y. Association, and PACMA” (an Appalachian cooperative). If this sample of respondents is stratified by geographic region, variability is revealed. Two out of three Northwest respondents indicated that they communicated directly. The One negative respondent related a very critical view of bargaining association activity. This particular cooperative was characterized by the relevant bargaining association as being tightly run by a dominant producer interest and consistently negative towards the association. In the California sample of multi- commodity cooperative processors, all four managers indicated direct contact wi organizati: decisions 1 of their i California communicati The two Ca cated no d and the ot: In thi manager re: tion manag. cated havii in that st. communicate single-crol relative 5' the Michigg cation flog not be am Other condl aSSOClatloi 1ndlcated < larger hes; In an management tion manage w—y— .__,_. -~ 139 contact with the association management. The two larger cooperative organizations acknowledged their potential influence on association decisions while the two smaller organizations questioned the strength of their influence. In the aggregate, six out of seven Northwest and California multi-commodity cooperative processor manager respondents communicateddirectly with the relevant bargaining association managers. The two California single-commodity cooperative processor managers indi- cated no direct communication, with one revealing significant antipathy, and the other citing communication through the marketing order. In the Michigan sample, five out of seven cooperative processor manager respondents indicated that they communicated directly with associa- tion management. Several of the cooperative processor managers also indi- cated having played influential roles in promoting bargaining activity in that state. The two respondents who indicated that they did not communicate directly with the association management are essentially single—crop cooperatives processing tart cherries. However, given the relative stature of the managers of these cooperative organizations in the Michigan Tart Cherry industry, it is hard to believe that no communi- cation flows between them and association management. Though there may not be direct communication there does exist, as will be seen below, other conduits of communication between these two respondents and the association sector. Of the Appalachian respondents, one out of four indicated direct communication with association management. One of the larger respondents was emphatic about not having direct communication. In an attempt to corroborate the presence Of direct management to management communication between the two sectors, bargaining associa- tion management was asked to report on such direct communication. All associatior processing these respc management markets wil agreat dea sectors: ' provided ti complicatic valuable ir Co-op manac pricing exp and ”The me to the assc doing." Ir some direct two associe The two Apt Closely wii C0mmunicat1 ii. 1 Processor n Other CQndL W1 th the be 1“ Califorr aSSOClatlor aSSOCldtior 140 associations with bargaining experience in markets having cooperative processing activity cited at least some direct communication. Two of these respondents indicated an evolution to positive management to management communication. The four California associations dealing in markets with multi-commodity cooperative processing activity indicated a great deal of management to management communication between the sectors: "The relationship with the cooperatives was very good; they provided the association with insights as to their costs and market complications;” ”We sit down with co-op management and they give us valuable information on costs, expected movements, and finished prices. CO-Op management sends the association information to influence our pricing expectations;” ”Bob Gibson will also just call me on the phone;“ and ”The management of cooperatives is motivated to provide information to the association and to be concerned with what the association is doing." In Michigan, though all three association managers indicated some direct communication from cooperative processor management, two association respondents indicated that such communication was light. The two Appalachian apple association respondents, both of which work closely with the Michigan apple association, also indicated some direct communication from management in the cooperative processing sector. ii. Indirect Management to Management Communication. Cooperative processor management was also asked to specify the existence and use of other conduits Of communication through which they could communicate with the bargaining association sector. Several respondents, notably in California and Michigan, noted that they could communicate with association management through their members which also belong to the association. Such members are commonly called dual members and may be of two typi cooperativv they are 5 either or i shall be cl grower is . organizatii respondent: conduit. in Michiga Again informatio other soon All releva Specified anall/ses f associatio t“Pugh ess who is wil The n member con. the Califo TOmato Gro Legal Cal 0 141 i of two types: either they are simple simultaneous members in both a cooperative processing organization and a bargaining association, or they are simultaneous members who also hold a position of influence in either or both of the organizations. This latter type Of dual member shall be characterized as a principal dual member meaning that the grower is a member of the board of directors in at least one Of the organizations. The three California cooperative processor manager respondents on this issue indicated that dual members did serve as a conduit. Three out of four cooperative processor manager respondents in Michigan indicated similar use Of dual members. Again, for an indication of corroboration of inter-sector flow of information, bargaining association management was asked to indicate other sources Of communication than direct manager to manager communication. All relevant Northwest, California, and Michigan association managers specified the receipt of information about cooperative processor market analyses from dual members. The most activeAppalachian bargaining association, PACMA, likewise indicated such receipt of information though essentially only from the one cooperative processor in the region who is willing to communicate with the association. The nature Of such inter—sector communication by means Of the dual member conduit is exemplified by the comments of a dual member with both the California Canners and Growers Cooperative (Cal Can) and the California Tomato Growers Association (CTGA). As to interacting with the association: Legally, Cal Can sits back and takes it. But in practice, Cal Can becomes a two-way pipeline. Cal Can has a sort Of neutral position yet CTGA has direct access to Cal Can via me, and thus Cal Can has an input into the bargaining pro- cess far beyond what you can measure. Cal Can will respond as quickly as proprietary processors to schemes by the asso- ciation. If we tried to get too high a price, Cal Can would respond. Anoth management letter cam processor the apple from membe bargaining 80 growers through it in the app Pro-F dual membe try to mak serve as a Pro-Fae.” to the "MA has referr PrO-Fac's , topic of t 0l‘BElnized . to the app ill. document ti (20"th n1 Cat. Sectors in \ 1s . W n tmnfm‘m 142 Another example of use of dual membership by cooperative processor management to influence a bargaining association's decisions is a letter campaign used by a multi-commodity, multi-state cooperative processor Operating in Michigan, Pro-Fac Cooperative. Management Of the apple bargaining association within MACMA reported receipt Of letters from members of Pro-Fac Cooperative "telling us to be cautious about bargaining. The letter asks us to be responsible. This letter from 80 growers is a means Of Pro-Fac management tO communicate with MACMA "1 (The letter and management's cover letter appear through its growers. in the appendix.) PrO-Fac management readily admitted its interest in and use of dual members to communicate with respective Michigan associations: "We try to make these dual members aware Of the market situation. They can serve as a voice-piece for Pro-Fac to MACMA as well as from MACMA to Pro-Fac.” Pro-Fac management stated that it paid particular attention to the ”MACMA commodity committeemen in Pro-Fae,” or what this section has referred to as principal dual members, arguing that it is in Pro-Fac's self-interest to have its views represented in MACMA. On the topic of the letter campaign, Pro-Fac management indicated that it was organized to communicate Pro-Fac's concern with apple market conditions to the apple association. iii. The Incidence of Dual Membership. In order tO more precisely document the importance of dual members as a potential conduit Of communication between the cooperative processing and bargaining association sectors in the total national sample, the following chart, Table 4-4, has . 1Source on the Michigan Apple Committee, the bargaining associa- tion for apples within the MACMA structure. cwsmecaw—L ~55 umLammwucLQ m>3§5=ooo vcm mcomu.w.p00mm< m:w:wmmme :.p n:~.mLmaE.uE LOZOLG mzomcm..::E.pm to utmuxm of? whack. ma N# N mfi 4<~Ob NW. NW. d1. NW. m_;um_mqq< o m o o :mmEuE o v N v mwccoeWFmo m . m o m ammchcoz m 380 at: i. mucwncoammm Lemmmuocm coquN_:amco moonsmz _e:o uzosu_3 mcmnamz _m:a sow: w>vumamqoou _moop coguwm :_ cowuwmom mcommmooca w>wumgwaoou mcommwuoca w>wumgmgooo venom a v_o: on: wcmnEm: pezo co_3 mcommwooca w>wumcoaoou awsmcwnawz Fez: ”mgommwooLg o>pumgmaoou use mcowpm_oomm< mcwcwmmgem cw a_;mgmnEmz szocw mzowcmu_:swm co uzmpxm vie m—ach been assemi and of wha' both sector As Tai California in the nase sample. De and Michiga and in two members, i. and coopere members in commodity < cooperative 40-45 perce The dc the Presenc he extent associatio: Simple and spread and C0Operative 0f the Pere that are Cc 1130 been g anothey. inc linkage bei 144 been assembled. The indications of presence or absence of dual members and Of what variety, simple or principal, are based on data gathered in both sectors. As Table 4—4 reports, dual membership is widespread in the Northwest, California, and Michigan samples. Some dual membership is also present in the nascent bargaining environment of Pennsylvania in the Appalachian sample. Documentation of principal duality is also evident in California and Michigan. Moreover, in two large California cooperative processors and in two Michigan cooperative processors there are principal dual members, i.e., dual members who hold board positions in the association and cooperative processor simultaneously. In California there are dual members in all bargained commodities processed by the four multiple commodity cooperative processors. California Canners and Growers cooperative as the largest California cooperative processor states that 40-45 percent Of its members are dual. The documentation is not presented as exhaustive identification of the presence of duality and principal duality. However, it does reveal the extent of duality between cooperative processors and the bargaining associations in the various geographic samples. The presence Of both simple and principal duality is, based on these findings, quite wide- spread and represents non—trivial conduits of communication between the cooperative processing and bargaining association sectors. Estimations of the percentage of volume belonging to bargaining association members that are cooperatively processed as Opposed to being cash sales have also been gathered and organized in Table 4-5. These percentages are another indication of the extent of dual member volume and thus the linkage between the bargaining and cooperative sectors. Table —_ Bppgp Califl Calif APri o Calif Michi Mi chi Michi PACMA \ 145 Table 4-5 Select Percentages of Bargaining Association Member Volume That is Cooperatively Processed: 1978/T979 Bargainipg Association Name California Canning Peach Association California Canning Pear Association Apricot Producers Of California California Tomato Growers Association Michigan Asparagus Committee Michigan Tart Cherry Committee Michigan Apple Committee PACMA Apple Committee % 25-30 65 60 29 15-20 50 20-25 70 ' T-I‘P- - ' TEE”... l a iv. cooperativ feasibilit sector age exerted th arriving : proprietar cooperativ commodity California The other strat low i and d good and w cash Price thus then Bener So I marke Bains their And t again was i take lesso multi much a con These 1.ntET‘hdl a mitigate t \ l Indu 146 iv. Price Squeeze Strategies Against Proprietary Competitors. Select cooperative processor managers were asked whether they recognized the feasibility of a price squeeze orchestrated by the cooperative processor sector against the proprietary processor sector by means of influence exerted through the bargaining association. Such a squeeze would work by applying price increasing pressure on the association in order to raise proprietary processor raw product input costs above those that the cooperative processor would pay for its inputs. Of the five multiple commodity cooperative respondents, with two each for the Northwest and California and one from Michigan, only one felt the strategy was possible. The other four respondents argued that: We would not be able to perform in the pools; A price strategy is difficult to pull off. I can try to influence low input prices and hence make good returns on processing and distribute this to members. This makes the co-op look good but would be a difficult strategy to implement. and we would see a greater tonnage in co-ops (moving from cash outlets to co-Op outlet). Or we would pay as high a price as possible and force Del Monte's input price up, thus dissatisfying its stockholders with low returns. But then my financial institutions would be on my back for not generating sufficient profits for capital improvements. SO I have restraints both ways. As to increasing (your) market share by such a strategy 1 might make short run gains but not in the long run. Everyone is very jealous of their market share and making inroads is very expensive. And there would be retaliation: At firm X we retaliated against firm Y by cutting price in deep brown beans, which was important to them but not to us, when firm Y tried to take our fruit cocktail market away. This taught them a lesson about pricing in fruit cocktail; and (That in the multiple commodity single pool cooperatives) there is too much (inter-commodity) competition to get participation in a conspiracy.1 These findings argue the presence of disciplining pressures both internal and external to the cooperative processor organization that mitigate the potential for price squeeze strategies. However, some H.— 1Industry Sources. proprietar; The propri: as follows are r priet and, into i coope coope satis cesso incre These conc respondent Barga were as fo possible i tion manag by coopera One Michig market Wit APPdlachia strategies Inter the TmPosi directed b aCC0mmodat \ 11mm 2Indu 147 proprietary processor managers revealed sensitivity to the potential. The proprietary processor manager respondents from California argued as follows: I am suspicious that dual directorship (principal duals) are resulting in price inflating pressure that will put pro- prietary processors like (us) at a competitive disadvantage; and, A big problem is dual members because this translates into dual board positions as well. . . . Due to dues paid by cooperatives, association management becomes a client of the cooperative interests. The Association may face pressure to satisfy cooperative interests rather than proprietary pro- cessors. This (becomes) truer as the cooperative channel increases. These concerns were also reflected by proprietary processor manager respondents from the Michigan and Appalachian samples. Bargaining association managers essentially felt that such influences were as follows: unlikely or impossible in the California sample, and possible in the Michigan and Appalachian sample. The California associa- tion manager respondents argued that the need for competitive performance by cooperative processors disciplines management against such strategies. One Michigan respondent stated that: "Cooperatives can help make a market without committing themselves legally to a price.”2 The two Appalachian associations in apples conceded the possibility of such strategies. Internally Directed Behaviors of Management. Earlier conceptual work suggested that cooperative processor management would respond to the imposition of external constraints on its goal functions by internally directed behaviors. One type of behavior, it was mentioned, was to accommodate the external constraint. Accommodation would be exemplified lIndustry Sources. 2Industry Source. by the ace decision r in light c to exercis the pressc evidence c As re that their price for a focus or great majc Michigan 5 performanc also enume respond tc characteri ”Oted: mg i. C C00PErativ by Commodi returns ar Tater disc STStems. Separately In the lat ATlocatior Where the 148 by the acceptance or integration of the constraint as the basis for a decision rule in the organization. An alternative type of behavior in light of such challenge to managerial discretion is for management to exercise other sources of discretion in order to relieve itself of the pressure from external constraints. The findings above present evidence of both types of internal responses to external constraints. As reported earlier, all cooperative manager respondents indicated that their performance was assessed by reference to the cash market price for raw product. Where such cash prices are produced by bargaining, a focus on bargained prices as the performance reference obtains. The great majority (14 out of 16) of respondents in the California and Michigan samples indicated acceptance of the bargained price levels as performance references. However, many of these accommodating respondents also enumerated sources of internal discretion utilized by management to respond to bargained prices. Before reporting these, an organizational characteristic of the cooperative processors in the sample needs to be noted: multiple versus single pool accounting. i. Choice of Accounting Rule. In multiple Eool accounting the cooperative attempts to maintain cost and return accounting commodity by commodity. In single pool accounting, on the other hand, costs and returns are co-mingled. What is of most interest to the findings and later discussion is the allocation of returns under the two accounting systems. In the former, commodity costs and returns have been accounted separately and, hence, are allocated according to commodity accounts. In the latter, costs have been aggregated and returns have been aggregated. Allocation is then based on some decision rule such as a percentage basis where the percentage is a function Of raw product values as each commodity is introd in the st for examp products cash pric returns 0 by bargai value and price lev ii. processin medfiir such as t the “poll tried to Bnbracing managers, Single po meMda allocativ alternati formance In 0 manage,“En 149 is introduced to the pool. All multi-commodity_single_pool cooperatives in the study allocated returns according to the entry value of raw product: for example, if apples represent 50 percent of the value of all raw products delivered to the cooperative processor based on estimates of cash prices, then apples will be allocated 50 percent of the total net returns of the organization.1 Where the raw product values are determined by bargaining, then each commodity‘s total returns (raw product input value and share of net return) will be partially a function of bargained price levels. ii. Alternative Sources of Discretion. Several managers of processing cooperatives, namely those in the California sample, indicated the desirability of having.easily identifiable raw product cash values, such as those produced by bargaining, in order to avoid what was termed the ”political mess” that would otherwise result as competing commodities tried to influence the allocation of costs and returns in the cooperative. Embracing bargained.prices as the decision rule could serve to relieve managers, it was argued, of otherwise difficult allocative decisions in single pool multi-commodity organizations. Notwithstanding this argument, the widespread accommodation to bargained prices as performance and allocative reference points was accompanied by mention of access to alternative sources of internal discretion with could relieve the per- formance pressure attendant to such accommodation. In order to identify the internal sources of discretion which management might avail itself of in responding to an externally imposed performance constraint, cooperative processor management was asked to . 1The study's data set contains observations on nine multi-commodity Single pool cooperatives and five multi-commodity multiple pool coopera- tives. specify wi In the tow Some manag of cash pi and Appala also ment' post cond‘ managenen‘ product va allocativ: of four ma adjustmen‘ cooperati» of these ‘ in referei Michigan a raw Produ< by severa‘ IEtained i its DerfOI dents men' 0? Stabil- 150 specify what recourse it had if it felt bargained prices were too high. In the total sample, numerous sources of internal discretion were mentioned. Some management argued that it could educate the board as to the validity of cash prices. This finding was prominent in the Northwest, Michigan, and Appalachian samples but not in the California sample. Management also mentioned that it could adjust ex-ante raw product values after ex- post conditions were known: “We can adjust ex-post to cover mistakes in management estimates."1 The mention of ex-post adjustment of the raw product values used by cooperative organizations as a performance and/or allocative basis was most apparent in the Northwest sample where four out of four managers responded accordingly. No mention of such ex-post adjustment was made by managers of the four California multiple commodity cooperative processors in the sample, although the most recently formed of these four was organized with explicitly low performance expectations in reference to bargained price levels.2 Several respondents in the Michigan and Appalachian samples also mentioned ex-post adjustment of raw product values or use of alternative sources of flexibility. Noted by several of these respondents was use of a reserve fund financed by retained earnings which enabled cooperative processor management to meet its performance reference points. Three of the four Appalachian respon- dents mentioned current use of such a fund, called a reserve, contingency, or stabilization fund. One cooperative processor manager in the Michigan sample mentioned that if it were too constrained to abide by IIndustry Source. 2Glorietta, see formal statement of intent in prospectus, appendix. bargained a reserve Coope access to quality l' sample. tive proc: 0the responses single p0 bargainin non-barga cooperati to the ba commoditi in the co indicated this pres Itw lliterdepe t0 respon S”ggested According 1) grower \ 1Ind 151 bargained price levels it would create a reserve fund. Subsequently, a reserve fund has been instituted in this cooperative.1 Cooperative management was also asked to comment on whether it had access to supply controls. Answers revealed that both quantity and quality limitations were widespread throughout the cooperative processor sample. This finding contrasts with the common presumption that coopera- tive processors guarantee acceptance of all member product. Other sources of managerial flexibility were also manifest in the responses of cooperative management. Management of multiple commodity single pool California cooperatives was asked whether the existence of bargaining served to focus its attention on bargained commodities over non—bargained ones. The three respondents representing the three major cooperatives provided indications that they did give primary attention to the bargained commodities in the cooperative; however, the bargained commodities also tended to be the most important commodities by volume in the cooperative. Finally, certain cooperative processor managers indicated pressure from institutional lenders and the possible impact of this pressure on meeting performance references. 8. Sensitivity of Other Cooperative Processor Interest Groups It was hypothesized that cooperative processor interest groups' interdependence with bargaining association activity would motivate them to respond according to their individual interests. The responses suggested were externally directed ones as well as internal ones. Accordingly, cooperative processor management was questioned as to: l) grower member interest group interdependence with association activity lIndustry Sources. and 2) gr dependenc 5333! sensitivi function the sensi levels wa prices to their lev dual memb members, pressure decision The Partial f and barga are embra cooperati interdepe membershj i. ascertain the barga were aSke frmn Such responden menbets: 152 and 2) grower member interest group responses in light of such inter- dependence. Grower Member Interest Group Interdependence with Bargaining, The sensitivity of cooperative processor members to bargaining activity is a function of the impact of this activity on their interests. Earlier, the sensitivity of cooperative processor management to bargained price levels was documented. Insofar as grower members make use of bargained prices to measure management performance, they also have an interest in their levels. Such interest offers partial explanation for the,extensive dual membership found in all geographic samples. That is, some grower members, as revealed by this dual membership, appreciate the performance pressure on cooperative management that can be produced by an autonomous decision process. The presence of and motivation for dual membership should also be a partial function of the relationship between copperative member returns and bargained price levels. Where, as reported earlier, bargained prices are embraced as the allocative basis in multi-commodity single pool cooperatives such a relationship is clear. The existence of grower member interdependence with bargaining provides motivation for the use of dual membership as a conduit of influence. i. Impact of Dual Members on Bargained Prices. In an attempt to ascertain the impact of c00perative commodity interest group influence on the bargaining association sector, managers of bargaining associations were asked to characterize the direction of price pressure communicated from such interest groups. The three California bargaining association respondents indicated neutral or upwards pressure on price from dual members: Ff 1) D and memb gain aggr An upward stated by Furt dual memb had perso I) I (coo cess am a be a 2)1 (bar grow A pe co-o mark the mark expe comp and ils lS a mark tend prie ll. Further e eVidenced 153 1) Dual members are on the high side; 2) The difference is fine; and 3) Influence from the cooperatives comes due to grower dual member interest and appreciation of need for a strong bar- gaining association. This makes the co-op grower even more aggressively in support of the association than cash growers. An upwards pressure from dual membership on raw product pricing was stated by managers of all three Michigan bargaining associations. Further insights into the origins and impacts of influence from dual membership are provided in the following quotes by growers who have had personal experience in exercising such dual membership: 1) I think I am different than a cash grower due to Cal Can (cooperative) being my home. But this is good; the pro- cessor can't threaten to withdraw my acreage. Because I am a Cal Can grower I can't be unduly pressured . . . I can be a little above the battle because I grow for a co-op; 2) I have also been on the asparagus MACMA committee (bargaining association) and at the same time a (cooperative) grower. I honestly think there is a conflict of interest. A person belonging to a bargaining committee who sits on a co-op board is going to view the pressure he puts on the market place stronger (sic) than a non co-op member because the very nature of a co-op allows that person to push the market high, and even if the co-op doesn't meet that expectation that year he really hasn't hurt himself or his company that bad (sic). I think it is an unfair advantage and I have served in that capacity in Michigan; and 3) Some of our members are on the MACMA committees. There is an influence as to price level. We channel our marketing knowledge to the price discovery process. We tend to have a position between cash growers and pro- prietary processors. ii. Commodity Interest Group Competition Within the Cooperative. Further evidence of grower member sensitivity to bargained prices is evidenced in the pervasive documentation by managers of single pool multi-com of commod manifeste managemen responden processor cessors, get manag support 0 Several q 1) c get affe mana its the on c 1Int mnako Used for flexibili encourage by One bc Speaking Say Prur $35( $50, and take You ltc 99% coo; Such fle) Only for tIVe Who 154 multi-commodity cooperative processors of internal conflict over issues of commodity returns.1 One way that internal interest group competition manifested itself was through interest group pressure on cooperative management to respond to the external environment. Numerous managerial respondents, notably those of the two largest California cooperative processors and those of several of the major Michigan cooperative pro- cessors, indicated the presence of commodity interest group pressure to get management to address bargaining associations directly either to support one association's pricing efforts or to control another's. Several quotes from cooperative managers are illustrative: l) Commodity groups in the cooperative definitely try to get management to refrain aggressive commodities since it affects the allocation of the pool. And association management would like to be responsive to us but it has its own closer pressure from its membership; 2) Due to the single pool, commodity groups want to exert influence on cooperative management to influence the association; 1Internal conflict or competition among commodity interest groups can also occur in multiple pool cooperatives as a result of the basis used for allocating costs. Where the basis provides for managerial flexibility in allocating costs, commodity groups may be motivated to encourage selectively advantageous assignment of cost. As reported by one board member of a large Michigan cooperative processor in speaking of his past experience, internal transfers did occur: Say ybu have $500,000 worth of overhead to spread on cherries, prunes, apples, and juice. You start out in the spring with $350,000 allocated to cherries, $100,000 to apples, and $50,000 to something else. You get to the end of the year and find that doesn't work. You find your apple deal could take $150,000 and prunes cost you $50,000 so you switch over. You have a bottom figure at the end of the year. You make it come out right by making the necessary changes . 99% of the growers had no idea what was going on inside the coooerative. That would have opened up a can of worms. Such flexibility in allocating costs can be a source of discretion not only for management but also for select interest groups in the coopera- tive who can influence the internal decision process. and ‘ price The only < the nascei pressure ( processor use Growl processin dependencl impact of markets. and coope are beyon. their own value the meet the Same associati cherry an Currently tart cher These fig in the ne Don 155 and in Michigan, 3) I get pressure to support the MACMA price from strong MACMA growers in the cooperative. The only cooperative processor in the Appalachian sample which works with the nascent bargaining association there did not evince interest group pressure on management to support the association. This cooperative processor does, however, have a significant number of dual members. C. Interdependence Between Bargaining Associations and Grower Processors Grower processors, or growers who are vertically integrated into processing without using a cooperative structure, also have an inter- dependence with bargaining activity. This interdependence is due to the impact of bargained prices on expectations of returns in processed product markets. These grower processors are in competition with proprietary and cooperative processors. Yet, like cooperatives, grower processors are beyond the jurisdiction of bargaining associations for valuation of their own raw product production.. They thus have the flexibility to value their raw product input at whatever level they care to in order to meet the competition in processed markets. Some of these grower processors maintain membership in bargaining associations. In the California tomato industry and the Michigan tart cherry and apple industries there is grower processor dual membership. Currently, grower processing in Michigan accounts for 15 percent of tart cherry processing volume and 5 percent of apple processing volume. These figures are estimated to increase to 20 percent and 10 percent in the next 5—10 years.1 lDonald Ricks, Agricultural Economist, Michigan State University. 4.2.2 Luau In tl managemen‘ processing of such a relations co-existil tion in C. order, sa them esta Northwest associati asparagus due to mi When cooperati against a findings in Callfo Character resPonden fees to t in Cdllfg \ l Fre Process c admlnlstr 156 4.2.2 Responses of the Bargaining Association Sector A. Attempts to Enlist Cooperative Processor Support for Bargaining In the conceptual work it was suggested that bargaining association management would be motivated to enlist the support of the cooperative processing sector in its bargaining efforts. To explore the presence of such a response, association managers were asked to describe their relations with the c00perative processor sector. All associations co-existing with cooperative processors, except for the raisin associa- tion in California which works with cooperatives through the marketing order, said that they solicited information from cooperatives to help them establish price levels. This sample included the four relevant Northwest associations, five California associations, three Michigan associations, and the two nascent Appalachian associations. The asparagus association in Michigan explained little activity in this regard due to minimal cooperative processing of asparagus. When association managers were asked to characterize the extent of cooperative management support for bargained prices, the findings, applied against a scale of good, some, pgor, were variable: see Table 4-6. These findings indicate generally mixed support in the Northwest, good support in California, and moderate support in Michigan and Appalachia. The characterizations tended to correspond to those association manager respondents who mentioned free riders in regards to payment of marketing fees to the association; mixed mention in the Northwest, little mention 1 in California, and general mention in Michigan. In California, the lFree rider here means benefiting from the terms of trade decision process conducted by the bargaining association without sharing in the administrative costs of that process. Table 4- West Co. North Calif Michiga A.Dpalac Total \ .. -.~_ 4 Table 4-6 Bargaining Association Characterization of Extent of Cooperative Processor Support for Bargained Prices Good Some Poor Total Respondents West Coast Northwest l 2 l 4 California 5 0 O 5 Michigan 0 l l 2 Appalachia g _l_ _l_ __2_ Total 6 4 3 l3 largest c< cooperatil marketing gffgi Earlier wc avoid barg Select evi In Ca a cooperat played out prietary i implemente alternativ In Mi Associatic Agricultur the again dEnyinq it bargaining Under the time Judge COOPEY‘a’ti v as was arg BUIHS, Inc MACMA Fac COODer SUlt SUCCEI 158 largest cooperative processor pays the marketing fees. All other cooperative processor manager respondents indicated that payment of marketing fees was a voluntary decision of the dual membership. Efforts to Enjoin the Use of Cooperative Processors as a Haven. Earlier work hypothesized that the use of a cooperative structure to avoid bargaining would elicit some response from the association sector. Select evidence of such use and response was found in the data. In California, a suit by an association to challenge the use of a cooperative-type structure to avoid bargaining is currently being played out between the California Tomato Growers Association and a pro- prietary interest named Tillie Lewis Foods. Tillie Lewis Foods has implemented a partial payment participation plan with growers as an alternative to guaranteeing bargained raw product payments. In Michigan, the Michigan Agricultural Cooperative and Marketing Association (MACMA) entered itself as a co-defendant with the Michigan Agricultural Marketing and Bargaining Board in a suit by Pro-Fac coopera- tive against the Board for denying it cooperative status and thereby denying it freedom from bargaining obligations under that state's bargaining law. Central to the original denial of cooperative status under the Michigan bargaining law and to the defense of this administra- tive judgement in the ensuing court case was the argument that Pro-Fac cooperative is not a producer owned and controlled cooperative. Rather, as was argued, it is controlled by a proprietary interest, Curtice- Burns, Inc. MACMA, as the bargaining association for cr0ps processed by Pro- Fac cooperative, stood to lose claim to marketing fee revenues if the suit succeeded. Thus, MACMA's participation was largely motivated by its interl associatil from the ' non-payme process c was agree payment 0 4.2.3 Disc between t will stre sources 0 used in r Processor responses tion res; all findi within ti we The Challenge In that . 0V9? whic \ 1s e: 159 its interest in maximizing marketing fee receipts by the bargaining associations operating within it. Insofar as Pro-Fac membership benefited from the terms of trade process conducted by MACMA bargaining associations, non—payment of marketing fees that would help defray the cost of that process constituted free riding. Recently an out—of-court settlement was agreed to in which legal action was dropped and MACMA settled for payment of claimed marketing fees.1 4.2.3 Discussion of Findings Discussion of the inquiry into accommodations to interrelations between the bargaining association and cooperative processing sectors will stress the impacts on coordination of decisions, distribution, and sources of structural change in markets. Corresponding to the sequence used in reporting findings, the discussion will first address c00perative processor management responses, thenwcooperative commodity interest group responses, grower processor presence, and, finally, bargaining associa- tion responses. Each section will discuss the significance of the over- all findings and, where relevant, will stratify by certain characteristics within the sample. A. Cooperative Processor Management The earlier conceptual work on general managerial behavior in the firm hypothesized that management would be sensitive to factors that challenge its discretion in meeting organizational and personal goals. In that the existence of bargained prices offer a performance indicator over which cooperative management may have little control, it was argued 1 See Chapter Five, Re§ponses to Bapgaining. that such ment. The informatic its inter: Such beha' article: Performan' the hypot over info represent Alge cooperati indicator perceived performan tive proc t0 the pe tion, and PErformar an evolut In that c the short Preceded C00Perati 160 that such a challenge to managerial discretion would be felt by manage- ment. The implicit suggestion is that without external performance information, management will control information on performance to serve its interest in preserving discretion and relieving constraint concern. Such behavior has recently been addressed by Salamon in an aptly entitled article: “Corporate Control and Management Misrepresentation of Firm Performance.”1 Salamon's purpose in conducting such research was to test the hypothesis that management controlled firms attempt to exert control over information contained in annual accounting reports so as to mis- represent firm performance. Salamon's results support his hypothesis. Altering Managerial Discretion. This study‘s results document cooperative management sensitivity to bargained prices as a performance indicator. The findings also indicated variability in the degree of perceived threat that bargained prices pose to cooperative management performance. This variability showed the California sample of coopera- tive processor managers being the most accommodating in their responses to the perfonmance threat, the Northwest sample mixed in its accommoda- tion, and the Michigan sample being the least accommodating to the performance threat of bargained prices. Such variability may indicate an evolution in bargaining association and cooperative processor relations ‘ in that California has the longest history of bargaining and Michigan the shortest. In California, the bargaining association framework also preceded the cooperative processing framework whereas in Michigan cooperative processing preceded the current form of bargaining activity. l Salamon, G.L., 1979. The p redistribu One result (cost of I noted by a relations, managerial findings a managerial The i crop coope activity. indicator of raw pr Processed Californig recognize The ( desirable Single pol thOUPh al 13 eXtern. COllllhodlty threat to \ 1Stu 2Ebe 161 The presence of an autonomous performance indicator serves to redistribute information within the cooperative processing organization. One result of such a redistribution is to shift more performance risk (cost of performance) from c00perative membership onto management. As noted by a student of bargaining association and cooperative processor relations, the presence of bargaining can induce a reorientation of 1 The sensitivity of management noted in this study's managerial goals. findings and recognized by others elsewhere2 supports the conclusion that managerial discretion is being altered by bargaining association activity. The total sample of cooperative processors also includes three single crop cooperative processors operating in the absence of any bargaining activity. It can be argued that the absence of an external performance indicator affords management considerably more discretion in valuation of raw product and maximizing the margin between raw product value and processed prices. Current activity to form a bargaining association in California olives offers evidence that cooperative processor members recognize the costs to them of such discretion. The presence of bargained prices was, in some cases, extremely desirable to cooperative management; As documented by observations of single pool multiple commodity cooperatives, especially in California, though also in the Northwest and Michigan, raw product valuation which is external to the cooperative processor freed management from inter- commodity conflicts within the cooperative. In such organizations the threat to discretion from external constraints was preferable to threat 1Stuckman, N., 1974. 2Ebert, H., 1974. to discrel be conclu< commodity Cooperatii same grour Hence, maI valuation Ngdi; i. Flow. The respond bl temn ofi multiple « west coOp. the Appal. Such dire. The docum. t0 bargai: Communica Caliform‘ Conduit, incidence The COOperatg. to that ll \ Lan 162 to discretion from internal conflict. Based on these findings it can be concluded that cooperative processors having single pool and multiple commodity organizational characteristics will be supportive of bargaining. Cooperative processors with multiple pool accounting do not have the same grounds for inter-commodity competition as single pool operations. Hence, management there will be less in need of external raw product valuation and thus will be less receptive to bargaining. Modification of Constraints Through Use of Influence. i. Externally Directed Protective Behavior Produces an Information Flow. The findings document that cooperative processor management does respond both directly and indirectly to bargaining associations. In terms of responding directly to bargaining association management, all multiple commodity California cooperative managers and some of the North- west cooperative managers did so. In the Michigan sample, most and in the Appalachian sample, only one out of four communicated directly. Such direct channels of communication have been reported by others.1 The documented responses of management on whether and how they responded to bargaining associations also indicated use of indirect channels of communication, e.g., use of dual members. Managerial respondents from California and Michigan were most explicit in their use of duality as a conduit. The extent of dual membership documented indicates widespread incidence and, potentially, widespread use of such a conduit. The importance of both direct and indirect communication between cooperative processor management and a bargaining association is similar to that noted in the earlier discussion of communi cation between lLang, M., 1977, pp. 42-44; L. Garoyan, 1976; R. Knutson, 1974. bargainin flowing. flows to informati The follo Barg prio outl PTOP beco of t pric the mark If t to r dent the agre pric It c Processor which ser that are tive proc lPPUt, mo lmPeded. In 3. tecting i titan from The lncen reSUlt in \ lMar 2Knu 163 bargaining associations and proprietary processors: information is flowing. In the aggregate, cooperative processor sector information flows to the bargaining association sector thereby increasing the informational endowment from which bargained terms of trade originate. The following version summarizes one view of the process: Bargaining and marketing cooperatives1 will sit down together prior to the bargaining season to analyze market situation and outlook. Bargaining between the bargaining association and proprietary processor determines a base price. This base price becomes the market price as long as the operating experience of the marketing cooperative demonstrates that the bargained price was neither too high nor too low. If this is demonstrated, the marketing cooperative becomes an active price force in the market by raising or even lowering the price to its producers. If the price is raised, the proprietary processor will be forced to raise the price to the bargaining association and indepen- dent producers to retain its volume the following year. If the price is lowered, the bargaining association makes an agreement with the marketing cooperative about the appropriate price reduction. It can be argued that the information communicated by cooperative processor management will be self-serving information rather than that which serves to move the bargaining process towards terms of trade that are representative of demand and supply conditions. Where coopera- tive processor influence is heavy by virtue of significant informational input, movement toward the representative market value ideal may be impeded. This point will be developed more at length below. In summary, the self interest of cooperative management in pro- tecting its performance discretion serves to elicit a flow of informa- tion from the cooperative sector to the bargaining association sector. The incentives that induce a flow of information from all sectors result in a higher informational endowment with which to produce terms lMarketing Cooperative is a cooperative processor. 2Knutson, W.J., 1960. of trade group . . for the pi value ofl thin marke not respo: one shoulc bargaining ii. Risk. In light of p possibilit discretior redistribu fivemmme manaSement Urgency to a1W8 has Silt its lo Numer Which were a“ externa samPles in. \ lnot. 2Hurw- 3York 164 of trade decisions. As noted by one observer of the process, “each group . . . can serve as a check and balance on the other and insure for the producer as nearly as possible that he will receive the true ”1 Such aggregations can also 'thickenl2 otherwise value of his crop. thin market terms of trade decisions. Where cooperative managers are not responsive either directly or indirectly to the bargaining sector one should expect a commensurately poorer informational endowment for bargaining. 1i, Internally Directed Protective Behavior Redistributes Performance Risk. In addition to hypothesizing externally directed responses in light of perfonmance interdependencies, the study also argued the possibility of internally directed responses to preserve managerial discretion. Such behaviors would have the result of spreading or redistributing performance risk from cooperative management to coopera- tive membership. As noted by one student of cooperative processor management behavior: ”The proprietary company . . . has a sense of urgency to make a profit as opposed to a cooperative that feels it always has an available relief valve by turning to its members to off- set its losses."3 Numerous and widespread sources of management discretion, some of which were used by management explicitly in response to bargaining as an external constraint, were revealed by the data. All geographic samples indicated sources of discretion that management could make use lKlotzbach, w.a., 1960. ZHurwicz, L., 1969. 3 York, J.C., 1973. of. The histories than Cali with thei ability t member co Californi commoditi of some c commodi til nonbargai Thoul necessari it can se or from St reduce the Sources 0- pF-‘Y‘TO l‘manr 1955 accor raference tion, redi 01 OWnersi arPuments as to enha iii. COPPeratn COmpetj tlh 165 of. The Northwest and Michigan respondents, as samples having shorter histories of bargaining and less aggregate cooperative processing activity than California, argued that they can counter bargaining information with their own information and, if necessary, adjust input values. Such ability to defuse threats to discretion indicates management rather than member control of the cooperative organization. The priority given by California cooperative management to the performance of bargained commodities suggests another impact: constrained discretion in treatment of some commodities may be relieved by exercising discretion in other commodities. The result can be a redistribution of performance risk onto nonbargained commodities in the multi-commodity cooperative. Though exercise of sources of managerial discretion has not necessarily been linked to performance pressures emanating from bargaining, it can serve to shift performance risk from management to membership and/ or from some membership groups onto others. The aggregate result is to reduce the accountability of management to membership goals. Nevertheless, sources of managerial discretion existing in the absence of external performance pressure such as that produced by bargaining would mean even less accountability. Thus, it can be argued, external performance reference points are desirable insofar as they reduce managerial discre— tion, redistribute the risk of performance, and mitigate the separation of ownership and control of the cooperative processor. These constitute arguments for cooperative processor members' support of bargaining so as to enhance member control over performance of the cooperative. iii. Price Squeeze Strategies. Another hypothesized behavior of cooperative processor management was use of influence to prodUCe competitive advantages. Envisioned were attempts by c00perative managemel propriet. traced t: Such str. reblendi more for types of bidding A r mar The int mil ope Gra pla 'ri par zat pay pra sup mar IY‘c coc ext plc the are to vic A5 Summa “98d nol Prietarg through 166 management to influence raw product price levels to the disadvantage of proprietary processor competitors. The origin of this notion can be traced to various reports of pricing strategies in the dairy industry. 1 Such strategies, as documented by Boynton and Williams involve use of reblending rights which result in either proprietary competitors paying more for raw product than cooperatives or internal transfers between types of cooperative producer members resulting in cooperatives under- bidding proprietary competitors: A rather unique type of behavior is sometimes found within markets in the region in areas of very dense milksupplies. The practice involves coops with both Grade A and Grade B intakes which serve both as manufacturing coops and as fluid milk suppliers. The particular conduct is based on the co- operative's ability to shift revenues among Grade A and Grade B producers. Several possibilities exist. Where pool plant requirements are sufficiently low, a cooperative can 'ride the pool' by shipping only enough milk to handlers to participate in the distribution of monies out of the equili- zation fund. This increases the price the cooperative can pay for milk even though most of it is manufactured. This practice involves a transfer of funds from regular fluid suppliers to producers who primarily are supplying milk for manufacturing use. Another possible practice is that of 'robbing B to pay A.l Through repooling receipts, the cooperative can enhance payments to Grade A shippers at the expense of Grade B shippers. This practice has been em- ployed to attract and keep large shippers, by encouraging them to convert to Grade A even though Grade A suppliers are not needed. A cooperative doing this could offer milk to bottlers at lower prices than competitors and still pro- vide Grade A shippers a competitive net return.2 As summarized by Boynton, because of reblending rights "cooperatives need not return the order blend price to their members, while pro- prietary handlers must pay independent producers or c00peratives through the order pooling procedures the equivalent of the order blend 1Boynton, R., 1978; s.w. Williams, et al., 1970. 2Williams, S.W., et al., Supra, p. 80. . lll price. "Alcoa C The strategi infonnat provides process. in the C. explaine industrii the Nortl dominant thpg motivate though 0( The first dePendenc Strong CE faces in AS arQuec \ 1Boy 2 KnL 0f Vertic Vertical] 1nput COS Ref 167 1 price." R. Knutson has referred to such pricing strategies as an ”Alcoa Case“2 price squeeze. The study's findings did not reveal intentional price squeeze strategies. Nevertheless, the presence of significant infusions of information from the cooperative sector throughout the national sample provides a means to introduce price enhancing signals to the bargaining process. Proprietary processor sensitivity to this issue was most evident in the California and Appalachian samples. This can be partially explained by the high degree of dual membership in fruit and vegetable industries of these regions. Moreover, in both regions, as opposed to the Northwest and Michigan, the cooperative processing sectors have dominant market shares in most processed products.3 B. Other Interest Group Influences Dual Membership: Motives, Results. There are two factors that motivate dual membership of cooperative growers and both are interrelated though not extant for all cooperative processors in the national sample. The first is that cooperative members perceive a beneficial inter- dependence between bargaining and their returns from the cooperative. Strong cash prices affect the opportunities the cooperative organization faces in processed markets in that competitor's input costs are affected. As argued by an observer of the Michigan industry: 1Boynton, R., Supra, p. 263. 2Knutson, R., 1974. The Alcoa Price Squeeze refers to the ability of vertically integrated firms to implement a price squeeze against non- vertically integrated competitors. This is accomplished by increasing input costs to the competitor and then cutting price in finished markets. 3Refer to Chapter Two: Economic Impacts. Meml (thi raw cool act‘ esta SECI prices as associat‘ to deterr for dual first, ti values, 1 x; and, n compared intercomm the algov Pool coo; two motiv TPRl hher Wher hher Wher Nher Stu 168 Members of processing cooperatives generally believe that (the bargaining association's) role in establishing realistic raw product values works to the advantage of their processing cooperative and that they receive a higher return from joint activities of the two organizations. The raw product price established sets a floor for the industry. Second, for single pool multi—commodity cooperatives using bargained prices as a basis for allocation of returns, access to a bargaining association is a means of competing with other commodity interest groups to determine shares of cooperative proceeds. In fact, the motivation for dual membership by members of single pool cooperatives has two parts: first, the higher the bargained price of x in relation to the other input values, the larger percentage of net returns that will be allocated to x; and, more importantly given the relative size of raw product value a s" 4 -<'.M‘A-.. compared to net returns, is that net returns are pooled and thus provide intercommodity guarantees that bargained prices will be paid. Study of the algorithm representing total returns to a commodity in a single pool cooperative reveals that there exist two sources of income and thus two motivations to support bargaining activity: TPRi = QiPri +4491— * gong — ngPrj —9 j=l j=l QJ'PrJ' 1 II'M : J Where TPRi isTotal Product Returns to Commodity i. Where Qi is total quantity of commodity i delivered. Where Oj is total quantity 1 . . . n delivered including i. Where Pri is cash raw value per unit commodity i. Where Prj is cash raw value per unit commodity 1 . . . n including i. -——~—.___ 1Stuckman, N., Supra, p. 20. Whe Whe Whe Thus gro net is d increase returns allocate- entire n such com! membersh' respond ' them. I] ment of - bargaine( Some br0ught - tended tt Wlth dSS( Stand the 1" inceni COOperatj growers a demanded his been 169 Where n is the number of commodities processed including i. Where Grj isgross returns from sales of processed commodities 1 . including i. Where C isother costs. n n Thus gross returns ( z GRj) will be diminished by z QjPrj before the i=1 i=1 net is distributed. This means that if commodity i's raw valuation increases, say through higher bargained prices, all other commodities' returns are diminished to pay off QiPri before any net returns are allocated. Each commodity thus finds itself competing to drain off the entire net returns from sales of processed products. As documented, such competition leads to externally directed behaviors through both dual membership and internal pressure on cooperative processor management to respond to other commodity bargaining associations in order to restrain them. Inter—commodity competition also serves to strengthen the commit- ment of the cooperative organization to value its raw product inputs at bargained price levels. Some association managers reported that the direction of pressure brought to bear on raw product price by the population of dual members tended to be upwards. These findings come principally from interviews with association managers in California and Michigan. In order to under- stand the source of such pressure on raw product price, the difference in incentives facing the cash grower population as opposed to the cooperative grower population needs to be delineated. In the former, growers are dependent on cash demand. If prices move upwards quantity demanded by proprietary processors is likely to decrease unless there has been a commensurate shifting in demand. Growers belonging to 3‘ it“s-sis... . cooperat processo cooperat restrict function noted ab by the a commodit The based on bargaini: confound disadvan' move the bY demanc More imPact or First, pr Taducing lose VOlu VErticall processor gained pr PTIEtary result in \ 1Gol. 170 cooperative processors do not share this interdependency with proprietary processors. C00perative growers, rather, have an assured home in their c00perative organization insofar as management does not impose delivery restrictions. Moreover, cooperative growers expect returns that are a function of value added in processing as well as raw product value. As noted above, the cooperative grower's calculus may be further influenced by the accounting system used for allocating costs and returns among commodities in multiple commodity cooperatives. The result of dual membership, then, is to send economic signals based on incentives that differ from those facing cash growers to the bargaining association. Such combination of economic calculuses can confound economic signals to the advantage of some groups and to the disadvantage of others. The consequence of this combination may be to move the terms of trade produced by bargaining away from those warranted by demand and supply conditions. Moreover, mixing the incentives of cash and cooperative growers can impact on the structure of raw product production and processing industries. First, proprietary processors will respond to higher input prices by reducing purchases. Producers selling to proprietary processors thereby lose volume. These producers may try to protect their outlets by vertically integrating into processing. Second, insofar as cooperative processors are not pressured to value their raw product inputs at bar- gained price levels, cooperative processors may price lower than pro- prietary competitors in sales of processed products. Under bidding can result in, as Goldberg has suggested, reallocation of market shares between the proprietary and cooperative processing sectors.1 Such reallocation lGoldberg, Ray, 1971, p. 18. mmnsir the long tively c Rea economie the purs force be gaining accordin processi Con sector t differem come, fo‘ discussic Prietary between i Processor C0"lPeti ti Hence, ti Surrender Notk Structura Pressures a580ciati \ 1 . Eri Persona] 171 means increased volumes for members of the cooperative processor and, in the longer run, concentration of production and processing in the coopera- tively organized sector. Reallocation can also serve the interests of those who wish to exploit economies of scale in both production and processing. As argued by Thor,1 the pursuit of efficiencies in production and processing is a driving force behind the participation of cooperative processor growers in bar- gaining associations. The long run result of such participation will be, according to Thor, the alignment of economies of scale in production and processing. Considering for a moment the response of the proprietary processing sector to the structural forces suggested above, one can expect a difference in the length of run, though not necessarily the ultimate out- come, for single state versus multi—state processors. As argued in the discussion of interrelations between the bargaining association and pro- prietary processing sectors,a lesser ability to subsidize internally between markets or to find substitutes in procurement by single state processors in comparison with multi-state processors should mean more competitive pressure from dual membership on the former than the latter. Hence, the single state processing sector should manifest a faster surrendering of market share than multi-state proprietary processors. Notwithstanding the tendency of dual membership to promote such structural changes, there are other factors that may compete with pressures from dual membership. One of these is that the bargaining association receives conservative pricing pressure from management of 1Eric Thor, Agricultural Economist, University of California, Personal Interview. cooperat uses a s intercon and exte accounti can expe multiple reflects Ano structur tive pro associat voice1 a Product adherenc accounti undersel share, ‘grg ProceSSO' achieving Of this - ProceSSOI t0 achie‘ ~._~__~‘ lIn ex“: as a 172 cooperative processors. This is especially true where the cooperative uses a single pool to account for multiple commodities; the existence of intercommodity competition produces disciplining pressures both internally and externally. In cooperatives organized according to multiple pool accounting, such commodity discipline does not obtain. Arguing thus, one can expect the economic signals coming from management of single pool multiple commodity cooperatives to contain information that more closely reflects accurate denand and supply conditions. Another factor that competes with dual member influence: toward structural change is the role of dual membership in adhering the coopera- tive processor to bargained prices. Dual membership between the bargaining association and cooperative processing sectors strengthens grower member voice1 and enhances the pressure on cooperative management to value raw product inputs at bargained price levels. The production of such adherence, as is especially true for cooperatives with single pool accounting, mitigates the possibility of cooperative processor management underselling proprietary processors and thereby increasing its market share. Grower Processors and Structural Changes. The role of grower processors in bargaining is influenced by their economic interest in achieving economies of scale in production and processing. Satisfaction of this interest under current market conditions requires grower processors to increase their market share of processed product. One way to achieve such an increase is to use dual membership to influence high 1In conjunction with the impact of strengthened member voice is the threat of member exit. Dual membership, however, is an alternative to ex1t as a system of grower control. bargaine processo grower p prietary tion anc margins summary, redistri Lens fig} Califorr Califorr Process value of monetari on those Lar gaining tual woy the use rldershi and reSF m t] ga t5 173 bargained prices. When cash producers lose their volumes as proprietary processors decrease their purchases in response to high raw product prices, grower processors can increase their own production and undersell pro- prietary processor competitors. A combining of scale economies in produc- tion and processing permits lower raw product values and/or processing margins to be recouped in lower production and/or processing Costs. In summary, grower processors have an economic interest in stimulating a redistribution of production and processing market shares to themselves. C. Bargaining Association Interdependencies Revenues from the Cooperative Sector. Characterizations from the California sample of bargaining association managers indicate that California cooperative processors value the terms of trade determination process conducted by bargaining associations. Nevertheless, where the value of this determination process is enjoyed but not supported monetarily by cooperative processors, these cooperatives are free riding on those who do pay for the products of bargaining activity. Lang, in his exhaustive research into the characteristics of bar- gaining associations, discusses free rider issues drawing on the concep- tual work at Olson's inclusive and exclusive goods.1 Lang focuses on the use of exclusive informational goods as one factor mitigating free 2 ridership. This study has revealed cooperative grower cognizance of and response to interdependencies with bargaining activity which can also mitigate free ridership. This cognizance seems especially acute, as 1Lang, M., 1977; M. Olson, 1965. 21bid., pp. 40-42. evidence tive prc Whe cooperat process are not terms 0‘ product: in cost: i. manager: of lega and bri might b avoid t identif both st associa attions transac in Cali associa applies and not prOCESS \ 11 174 evidenced by the extent of dual membership, in multi-commodity coopera- tive processors using single pool accounting. Where bargaining associations are supported monetarily by the cooperative processing sector, the costs of the terms of trade decision process are spread over a larger population of growers. Where such costs are not spread, then one sector bears all the costs of producing the terms of trade products while the other sector can still enjoy the products without defraying the costs. In the long run, such differentials in costs may translate into competitive advantages between sectors. i. Challenges to Association Jurisdiction. Bargaining association managers in select environments were also revealed to avail themselves of legal sanctions to modify responses to bargaining. Suggested by Lang and briefly probed in this research was the possibility that raw product might be channeled into the cooperative processing sector in order to avoid the constraints of bargaining.1 Forms of such diversion have been identified in the sample observations from California and Michigan. In both states legal sanctions have been advanced to serve the bargaining associations’ interest in preserving jurisdictional authority over trans- actions between growers selling to proprietary interests. Where such transactions can be subsumed under a cooperative organization or, as in California under a participation plan, the authority of the bargaining association may be diminished. This is because bargaining explicitly applies only to transactions between growers and proprietary interests and not to transactions between growers and cooperatively organized processing organizations or between proprietary interests and growers lIbid., p. 41. organiz associa diction as the foreclo D. Sum Di bargain ramific bargain and cor Some ge 1) and a c tive pr 2} pool, f incenti communi 3] grated with ti tion u 1A the 1‘. be dddi 175 organized under participation plans. The willingness of bargaining associations to invite legal sanctions in order to preserve their juris- diction can contribute to a reduction of the rights of former free riders as the opportunities for avoiding the constraints of bargaining are foreclosed.1 D. Summary Discussion of findings on the accommodations to interrelations between bargaining associations and cooperative processors has developed the ramifications of participation of cooperative interest groups in the bargaining process. It has also given central emphasis to the co-existence and conflicts of interest of different grower interest groups in bargaining. Some general conclusions were suggested: 1) The simultaneous membership of growers in a bargaining association and a cooperative processor can serve to integrate and commit the coopera- tive processor to bargained terms of trade; 2) The choice of accounting system, i.e., multiple pools or single pool, for multi—commodity cooperative processors produces variable incentives for cooperative grower members and their managements to communicate with bargaining associations; 3) The combination of economic incentives facing vertically inte- grated grower groups (cooperative processor growers and grower processors) with those of growers selling raw product through the bargaining associa- tion to proprietary processors can produce confounded economic signals in the bargaining process and pressure for structural change. These 1The performance ramifications of some organizational forms will be addressed in the following chapter. results vertice place a gaining 42 process sector. organi; associa open tc process actions organiz 176 results are magnified according to the relative importance of the vertically integrated grower sector in markets where bargaining takes place and the extent of communication between this sector and the bar- gaining association; and 4) Bargaining associations solicit support from the cooperative processors, have problems with free riders in the cooperative processing sector, and may solicit legal sanctions to deter the use of cooperative organizational forms when used to circumvent the jurisdiction of bargaining associations. These association behaviors mean that the association is. open to influence from the cooperative sector, that some cooperative processors enjoy cost advantages over parties to bargained cash trans- actions by virtue of free riding, and that certain uses of cooperative organizational forms invite the costs of legal challenge. Introdu< Th‘ coopera‘ and exp‘ suggest: to exple gaining. cessor e Percent; market < Process< PtOprie' another in the < directet cessors linkages 0f varia processi the Hnl CHAPTER FIVE STRUCTURAL RESPONSES OF PARTICIPANTS: FINDINGS AND DISCUSSION Introduction This chapter will concentrate on the interrelations between cooperative processors and proprietary processors and the identification and explanation of responses by these organizations to their interrelations suggested in the applied conceptual work. Accordingly, it will attempt to explain structural responses by these participants in farmer bar- gaining. The structural responses of interest are proprietary pro- cessor exit from fruit and vegetable processing and a rise in the percentage of raw product moving through cooperatively organized market channels. The chapter will first look at reasons for proprietary processor exit from fruit and vegetable processing as recorded by prOprietary processors. Following this, the chapter will look at another type of structural response termed "organizational responses” in the conceptual work. The reporting of these findings will be directed towards addressing both the transition of proprietary pro- cessors to cooperative ownership and the development of organizational linkages. The latter area will emphasize the case of joint ventures of variable forms where, essentially, the risks of price movement of processed product are spread onto the grower population involved in the linkage. 177 Fo ganized structu as in t. and set enumera' 5.1.1 0n« served 7 vegetab' Proce55i explore sources I) there states i no diffs gaining data was exit frr A~ Sec: Twc IEIatlor prOCeSsi fIrSt, C 178 Following the presentation of findings will be a discussion or- ganized around performance issues of distribution, coordination, and structural organization of markets. The intent of this discussion, as in the prior two areas of inquiry, will be to highlight conclusions and set the stage for an integrative concluding chapter and enumeration of select policy implications. 5.1.1 Motivation For Proprietary Processor Exit One of the hypotheses guiding this research was that the ob- served reduction in numbers of processing establishments in the fruit and vegetable industries could be partially explained by the pressure on processor margins attributable to farmer bargaining. In order to explore this hypothesis, data was compiled from both secondary and primary sources. The secondary data was used to test two null hypotheses: l) there is no difference in the rates of processor exit between states with bargaining and states without bargaining; and 2) there is no difference in the rates of processor exit between crops with bar- gaining and crops without bargaining in the same state. The primary data was compiled to document proprietary processor explanations for exit from processing. A. Secondary Data Two tests of hypotheses were performed to explore a causal relationship between farmer bargaining and diminuation of numbers of processing establishments in fruits and vegetable industries. In the first, data from the Census of Manufacturers was compiled for the years l967, l9 establis for each groups, the peri other of I test 0‘ ducted tc with some Test for the t that ther states wi a test wi l967~l977 change f0 leiect th \ 1% 2Lang 3 Status bar WI th=B, Statlstics ean x Varianc Sample I calcu H0! Mea d f , ~ :/ result 179 l967, l972,and l977.1 Percentage change in total number of processing establishments for Canned Fruits and Vegetables (SIC 2033) was calculated for each state listed. These percentages were stratified into two groups, one of states manifesting bargaining partially or wholly during the period in any fruit or vegetable as identified by Lang,2 and the other of states not evincing any bargaining activity. Using the Student T test of differences in means of percentage change, tests were con- ducted to test for significant difference in means between those states with some bargaining activity for the period and those without. Test results indicated the inability to reject the null hypothesis for the periods l967-l977 and l972-l977 at the .Ol level of significance that there is no difference in rates of processor exit between those states with bargaining and those states without bargaining. Furthermore, a test with the percentage change weighted by a factor of two from l967-l977 in states with bargaining compared to unweighted percentage change for those states without bargaining also resulted in inability to reject the null hypothesis at the .Ol level of significance.3 1Census of Manufacturers, 2033 SIC, l967, l972, l977 preliminary. 2Lang, M., 1977. 3 Sample Parameters l967-l977 l967-l977 l972-l977 Status bargaining: (weighted*2) with=B,without=NB B NB B 8 NB Statistics Mean (i) 2 -l9 -25 -39 -l4 -l3 Variance (o ) l80 5l8 722. 32 289 Sample size (n) 8 l5 _ ~ 8 l5 T calculated .65 l.259 .l5 Ho: mean B=Mean NB d.f. = 2l result (.Ol) not reject Ho: not reject Ho: not reject Ho: F nation proces bargai percen centag T and_f§3 of com: Data we Michiga the res level c differe bargain \- 1T l968-ID 2 S 180 For the period l967-l977, the Census of Manufacturers shows a national percentage change in numbers of canned fruit and vegetables processing establishments of -26 percent. For those states with bargaining activity during this period, the percentage change is -l9 percent. For those states listed without bargaining activity the per- centage change is -32 percent. Tests performed with data from The Directory_of Canners, Freezigg, and Preserving Industries were similarly structured and compared samples of commodities with and without bargaining activity in the same state.1 Data were sufficient to perform such tests for the states of California, Michigan, Oregon, Washington, and Wisconsin. For each of these states, the researcher was unable to reject the null hypothesis at a .Ol level of significance that for the period l968-l978, there was no difference in the percentage change in numbers of firms processing bargained commodities versus those processing non-bargained commodities. 1The Directory of Canning, Freezing, and Preserving Industries, l968-l969, l978-l979. . 2See following page. E2 .omwz CE W— GE 2 .oco .:o_z mLMumEML mm m FQEMW 181 o: pummwc Ho: 0: guowmc go: o: pummwc go: o: pomflmc go: _o: pumnmc.ucc “_o.v ppzmmm m_ o_ N_ RN mm .e.o mzmummuo: cm. 0mm. no. em._ mm._ empepsa_mu H N. m m a a. m _N m . a, PP Acv anew a_asam was. ma~ Nmoe o_mN ommm mmmm me_m m_o_ on_ mam Amov moca_ee> mm- _N- ea. or- mm- mm- mm- mm. P- mm- “xv cam: ma_pmwpapm i. ii. i. mzupsogpwz .mu;p_z mm .m .ma .m .mz .m .mz m m2 m madcwawaam mzoapm .UWFE .cmez .aao .;a_z .ewpau mcmumEmme mpaamm There that r Direc found proce no si barga same 00 _U findi in al exit for s the f Proce citec listi C0mmr commc ls as that this by C( betwe 182 There are certain limitations affecting the use of this data, however, that may challenge the meaningfulness of any findings.1 In summary, using data from the Census of Manufacturers and The_ Directory of CanningggFreezing, and Preserving Industries, the study found that: l) there is no evidence that the rate of processor exit in a sample of states with bargaining was greater than the rate of processor exit in a sample of states without bargaining; and 2) there is no significant difference in rates of processor exit from a sample of bargained crops compared with a sample of nonbargained crops in the same states. B. Primary Data Explanations Primary data was generated in an attempt to provide more precise findings than those contained in secondary sources. Proprietary processors in all geographic regions studied were asked to cite reasons for proprietary exit from processing in their raw product procurement area. The method for soliciting explanations for proprietary processor exit was to ask the following open question: ”How do you explain the exit of proprietary processors from fruit and vegetable processing?" Several reasons were cited, of which two interrelated ones are displayed in Table 5-l. 1When the directory identifies a firm by state in its commodity listing, this does not necessarily mean that the firm processes that commodity in that state. The directory does not provide a listing of commodities processed by firms by states. Thus in using this data one is assuming for major commodities that the firms listed by state under that commodity do in fact process that commodity in that state. Though this assumption can lead to certain mis-estimates of the numbers of firms by commodity by state, these mis-estimates are likely evenly distributed between the segmented populations of firms. .wpaaem cmm_;o_z mg» cw kuz_uzw Auwzcd _mcowumz vzm .cwspmmmzz ..ou .m< \auaeam .ppoz scenes \H .:mmw;uwz :_ panacea 3a; m:_c:ooca muzmwcmgxw g_m:p op mocmcmmmc cw uwwpamc oz; mLOmmwoocQ e do amz\H 183 vmzmp>cmgc_ _epoh a? emu:_uxm mLOmmmoocg v mch\M ”mmpoz NP mpmou uzacm panacea 3mm gaze; m>e= mm>_ueemaoou mp _ b. mmmwpce>n< m>_u_pmmaou m>e2 mm>Pamgwaoou _wpop «_coe_maa< :mmv;u¢z a_:toew_eu mesmmmoocm xgwawwgaoca >3 p_xu :wm_gxm ch mcommmoocm xeapmpcaoca xn umu_u mcommmz poo_mm pim m—nmb viewe owner l2 of of or propr advan cited which 0f th reaso lach state advan Speci other who a teaSOI were - maior Proce: 184 Cogperative Advantgges. Out of 23 proprietary processors inter- viewed (including 2 processors recently transformed to cooperative ownership),1 l3 cited cooperative processor competitive advantages with l2 of these l3 stating that these competitive advantages consisted of or included lower raw product input costs. Of this population of 23 proprietary processors,3 out of 4 California processors cited these advantages and 8 out of l6 total processors with experience in Michigan cited these advantages. The Appalachian sample of 7 proprietary processors included 5 which had experience in the Michigan bargaining environment as well. Of these 5, only 2 cited cooperative competitive advantages as a reason for proprietary processor exit decisions. Within this Appa- lachian sample of 7, 3 had themselves exited from processing in the state of Michigan. And of these 3, only l cited cooperative competitive advantages as a reason for exit. Furthermore, only l of these 3 specifically cited bargaining as the reason for its exit.2 The other 2 argued that bargaining was only a partial explanation.3 Notwithstanding the large percentage of proprietary processors who argued the competitive advantage of cooperative processors as a reason for proprietary processor exit, when asked whether cooperatives were the responsible party for price cutting in finished sales, the majority of respondents (9 out of ll) indicated that the cooperative processor sector is no more responsible for price cutting in sales of 1Bay View Orchards, Sawyer Fruit and Vegetable Cooperative. 2Seneca. 3 Duffy Mott, Musselman. fini. procl (COUI tran: exple barge respc asses was j corre devel only they sampl Michi the e Opera c00pe Michi 0f th of th to pr 185 finished processed products than were proprietary processors. Bargaining Pressure. The other principle reason cited by proprietary processors to explain exit was bargaining. Of 23 possible respondents (counting the 2 firms that used to be proprietary but who have recently transformed to cooperative ownership),1 l8 cited bargaining as an explanation for processor exit. Responses as to the importance of bargaining were variable. Hence, an attempt was made to enumerate these responses according to a gradient in order to provide a more accurate assessment of proprietary processor observations. The gradient used was yes, partial, uncertain, and did not cite. These terms approximately correspond to the answers of respondents. This gradient was used to develop Table 5-2. In the California sample of 4 proprietary processors, only 2 cited bargaining as a possible explanation and both indicated that they were uncertain as to its explanatory force. Turning to the sample of l6 proprietary processors with processing experience in Michigan, 4 out of 16 indicated that, yes, bargaining did constitute the explanation for processor exit. Of these 4, 3 were single state operations and 3 have transformed themselves to partial or total cooperative status. Eleven out of l6 possible respondents from this Michigan sample indicated that bargaining was a partial explanation. Of those indicating partial, 8 are multi-state operations. Thus out of the total Michigan sample, only T proprietary processor failed to present bargaining as an explanation of processor exit. Bay View Orchards, Sawyer Fruit and Vegetable Cooperative. 186 . .cmmv;u_z cw ummmgocsa m>ms Lo :mmwzuwy :_ omesucsa om_m oz: mwgom_maa< cw cmcmgcmsccmm: mcommmuoca zcmpm_caoca match \fl ”mmpoz mm m m HM m _muop Iml TM. lot Tm: lHI 1.3 \H :90 as H o SH a seawea_z a m N o o mwcc0d_~mu .mwcmccoammm comemm < :omemm < mm cemmmm :Ommma m_awmmo¢ mo m< “H mu_o u~ cogpmzz _evpcma.< mm pa < mH a“ .mm> canssz _eUOH poz sea op m< cweptaaes mLOmmoooca acmumpeaoca an “_xm do» :ommmz < m_ m:_:wamcmm cmcpmgz co mcmmecez commmooca acmumwcaoca an mpcmssou mum mpnwh tour with cess in b will Shed 187 Combined findings as to reasons for processor exit from Table 5-l and 5-2 indicate that though the California sample either did 393 git§_or cited with uncertainty the role of bargaining, that 3 out of 4 California respondents cited cooperative advantages due to lower input costs. In the Michigan sample where the attribution of exit to bargaining was more apparent, 8 out of l6 respondents cited cooperative advantages, and 8 out of l6 cited both explanations simultaneously. Other Reasons. Various processors also cited the existence of alternative explanations for proprietary exit from fruit and vegetable processing. Of the 23 total processors in the sample with proprietary processing experience, l4 mentioned that there were other reasons than bargaining or Cooperative competition which could explain decisions by proprietary processors to exit from the industry. Of these l4, 2 were from the California sample of 4 and l2 were from the Mich- igan sample of l6. Some of the alternative explanations offered were environmental regulations in disposal of waste, managerial problems, estate planning, desire to consolidate operations closer to certain markets, unacceptable variance in rates of return in fruit and vegetable processing, and high opportunity costs of capital investments. Of course, these latter two explanations may be influenced by interrelations with bargaining associations and cooperative processors. Several pro- cessors specifically mentioned the unacceptable distribution of risks in bargaining: "when push comes to shove," cooperative processors will value inputs at lower levels than proprietary competitors thus shedding the risk of too high input prices.1 Other processors made 1Industry Sources: California, Michigan. certain posi business;” " who had exit of cooperati product valu sales); and There are ot they haven't because of b they did? P reasons for is why they St. Louis ani These finding and cooperat. As an a< (9 out of 23: Variable. Lc well document 9 respondents Dietary Droc eXpllCltly. 5‘1-2 Trans This sec ]\\ Industr 2See Tou 188 certain positive statements such as: "Michigan is a good place to do business;” "We may come back to Michigan," (this comment was by a processor who had exited from Michigan citing bargaining and competitive advantages of cooperatives as partial explanations but also noting that raw product value represents a small percentage of final value of processed sales); and ”I don't think any processor has exited due to bargaining. There are other cost reasons. If processors do respond this way it means they haven't used the bargaining tool they have. If Duffy Mott left because of bargaining why didn't they try to use bargaining more than they did? Processors just roll over and play dead. There are other reasons for exit. Musselman was faced with management problems. That is why they left (from Michigan). It was a corporate decision in St. Louis and Musselman wasn't entirely happy with the decision.”' These findings provide varied indications of the impact of bargaining and cooperative competition on proprietary processor exit. As an addendum it might be noted that many processors in the sample (9 out of 23) cited inadequate rates of return as the exit decision variable. Low rates of return in fruit and vegetable processing are well documented by Touche and Ross accounting reports.2 Of these 9 respondents, all were multi-state operations. No single-state pro- prietary processing operations developed the rate of return explanation explicitly. 5.l.2 Transition in Ownership of Processing Facilities This section will report some findings on the process of transition 'Industry Sources. 2See Touche and Ross, Appendix. from propri The intent the increas several bar transition processor p fruit and v production. A. Proprie Proprh of processi from proces: indicated 51 out of 20 p1 and Michiga; attempts by shifting r15 explained by 0f grower pi H but of a callfornia e Perience, E 4 mUitl~stat \ 'See Cf The Mi operate 1 n A 189 from proprietary ownership to cooperative ownership of processing capacity. The intent is to present findings that can illuminate the forces behind the increasing cooperative processing market share being evinced in several bargaining environments.' The suggested argument is that transition of ownership may be partially explained by proprietary processor perception of and responses to illiquid grower investments in fruit and vegetable production which make growers reluctant to tenninate production. A. Proprietarngerception of Resource Availability Proprietary processors were asked to cite reasons for the transition of processing to cooperative ownership upon proprietary processor exit from processing. The responses from the proprietary processor sample indicated sensitivity to the adjustment costs of growers. Fifteen out of 20 proprietary processors from the combined samples of California and Michigan acknowledged that: l) the transition was a function of attempts by proprietary interests to utilize grower resources including shifting risk onto growers; and/or 2) the transition was partially explained by proprietary interest recognition of the adjustment costs of grower production investments. The first explanation was cited by ll out of a sample of 20, breaking down to 2 out of 5 addressing the California experience and 8 out of TS addressing the Michigan ex- perience. Of the Michigan sample, 4 single state operations and . 2 4 multi-state operations constitute the 8 respondents. 'See Chapter Two: Economic Impact. The Michigan respondents included 4 organizations that also Operate in Appalachia. The se 20 propriet and 7 out that TS out of resource California i multi-state sector reso: with propri: operations l Proprh is suggeste< terests. Me indicating i a transformz All 5 proce: sample made follows; lj out Of DFOWE 30int ventur 5) ”We may entry barrie large natior m \ l Indusi 190 The second and closely related explanation was cited by ll out of 20 proprietary processors. The breakdown was 4 out of 5 from California and 7 out of TS from Michigan. Combining the explanations indicates that 15 out of 20 proprietary processors were sensitive to the existence of resources located in the grower sector. The breakdown was 5 for 5 in California and TO for l5 from the Michigan sample. Single state and multi-state processors both showed sensitivity to the grower sector resources: in Michigan, 2 out of 5 single state processors with proprietary processing experience and 6 out of To multi-state operations revealed such sensitivity. Proprietary processor perception of accessible grower resources is suggested by various comments from this sample of proprietary in- terests. Many respondents, l4 out of 20, made explicit comments indicating their perception that going cooperative, i.e., effecting a transformation of ownership, was a readily available alternative. All 5 processors in the California sample and 9 out of TS in the Michigan sample made comments to this effect. Examples of such comments are as follows: T) "We could get bailed out by growers;" 2) ”A buy out of growers is a feasible strateQY;" 3) "We are thinking of going joint venture;" 4) "We are considering imitating cooperativesg” 5) "We may have to respond;” (to the use of competitive advantages or entry barriers).' The public comments of the chairman of the board of one large national proprietary processor in response to a question also manifest sensitivity to accessible grower resources: Question: These marginal areas are areas that you would just 'Industry Sources. This partic processing Pacific Coa The re appreciatio Some of the resources m resources m have been i sampled to ma Cooper. the transit Their regpo to protect v. Processor m; PTOCESsor m, \ l Alfrei 191 as soon dump, can you unload them on somebody, or do you just let them go? Who's going to take something that's not very profitable? Chairman: I think for the business we're in, we've set some fairly ambitious goals. There are alot of others in the in- dustry that don't have, perhaps, the same number of requirements on return on investment that we have. I think one example is cooperatives, that enjoy certain financial relationships and certain packaging relationships that make our numbers attractive to them. Cooperatives are certainly an area that we would look to in the disposal of1assets, or whatever it is that doesn't fit into our guidelines. This particular processor has recently disposed of some of its California processing facilities to a grower cooperative organization called Pacific Coast Producers. The responses from the proprietary processor sector indicate an appreciation of grower resources in the form of cooperative organizations. Some of the comments are more explicit than others in stating how these resources might be used. In order to gain more insight into how grower resources might be utilized by the proprietary sector, interests who have been involved in transition of processing facility ownership were sampled to ascertain reasons for such transition. These findings follow. B. Cooperative Management Perspective Cooperative Processor Management was asked to cite reasons for the transition of the processing sector to cooperative ownership. Their responses essentially reflected grower distress and the need to protect grower investments. All 4 multiple commodity cooperative processor managements in California and 5 out of a sample of 7 cooperative processor managements in Michigan indicated the illiquidity of grower 'Alfred J. Stokely, Chairman of Stokely-Van Camp. investments production, A DUMDi transformat' proprietary perception ( processors a cooperative facilities l on the trans l) The prt spi pri Th' wi‘ 2) The bug mis 3) The tel clc ius 4) We as fel he' So the to In Sum" appGar to be in the Proce \ l Indust 192 investments, which results in the reluctance of growers to terminate production, as being an explanation for the transformation of ownership. A number of cooperative processor managers also perceived the transformation of ownership to be motivated, at least in part, by prOprietary interest in gaining access to grower resources. This was the perception of 3 out of the 4 multiple commodity California cooperative processors and 5 out of the 7 Michigan cooperative processors. Several cooperative processor managers who were previously managers of the facilities under proprietary ownership provided some interesting comments on the transformation process: l) The growers in Glorietta had no choice but to pick up the processing costs... Tillie Lewis (a proprietary processor) is spreading the risk onto growers. When you can't be sure of profitability, you take growers in to share in the risk... This offers Tillie Lewis competitive advantages that others will study; 2) The sale of Elk Rapids Packing Company to growers was a forced buy out with old management running it. This was a grower mistake having put themselves in a dependent position; 3) The trend in the fruit industry is that one day the processor tells the grower to either buy them out or the plant will be closed down. Bargaining isn't the reason at all. This is just a transfer strategy to get growers to pick up the costs; 4) We went coop in T974 because we felt the risk of doing business as a proprietary processor (in Michigan) was too great. We felt (that) risk needed to be spread back to the grower if he'd accept it. We also wanted to avail ourselves of farm credit. So growers now bear all the risk and growers share in all the potential gain. My growers'also had no alternative but to accept the c00perative transformation. In summary, the immobilities of grower investment in production appear to be an important explanation for the transformation of ownership in the processing sector. The proprietary processor sensitivity to 'Industry Sources. .M—.—_..._-L opportuniti immobilitie sector. Tr motivations transition motivated l sector. 5.l.3 Develo interests w sources of contained i presented h In dis organizatio Processors the two sec Processors Resources m to Spread r '0 cooperat Cited IOY‘ I) identified resource av. It has Processing 193 opportunities, i.e., resource availability, as a function of these immobilities has elicited strategic responses by the proprietary sector. These responses are similarly apparent in the findings on motivations for organizational linkages to be explored next. Indeed, transition of ownership and linkages between the sectors seem to be motivated largely by appreciation of accessible resources in the grower sector. 5.l.3 Proprietary Linkages With Growers Developed in the conceptual work was the idea that proprietary interests would respond to market and financial conditions by seeking out sources of discretion. Envisioned were behaviors to merge the resources contained in both the proprietary and grower sectors. The findings presented here explore the incorporation of grower resources. In discussing the motivations for the transformation of proprietary organizations to cooperative ownership reported on above, many proprietary processors were also addressing the motivations for linkages between the two sectors. The explanation for linkages generally cited by proprietary processors was the desire to utilize resources in the grower sector. Resources mentioned were the availability of grower capital, the ability to spread risk onto growers, and the institutional resources available to cooperatively organized producers. By looking at the motivations cited for both the transition and linkage of sectors, the study has identified a widespread, almost unanimous proprietary appreciation of resource availability in the grower sector. It has been suggested by students of structural change in the processing industry that other proprietary motivations for linkages (integrati of raw pro raw produc marketing linkages, prietary h costs may I to such in: Managers 01 tribution i Extens volved in l ”participat the Tillie other linka between a p PWEN/Cur manifested linkages 5w I“Pacts. A: Processop; TO us QEtting Share. Associa to it! Plan... dEIiver The fact the 194 (integration) with grower interests are the ability to ensure availability of raw product input supplies and the ability to control quality of raw product in order to conform raw product input characteristics with marketing needs. Insofar as these motivations are realized through linkages, the planning uncertainties faced by both the grower and pro- prietary interests may be alleviated, and reduced risks and lower costs may be obtained. Nevertheless, the distributions attendant to such integration remains a fundamental aspect of linkage arrangements. Managers of proprietary interests are expected to desire a risk dis- tribution that enhances their discretion in managing. Extensive interviews were held with 3 organizations currently in- volved in linkage arrangements with growers. One was a so-called ”participation plan" organized and currently being implemented by the Tillie Lewis Foods, Inc. division of Ogden Corporation. Two other linkage arrangements studied are so—called ”joint ventures” between a proprietary interest and cooperatively organized growers: Pro-Fac/Curtice-Burns and Seneca/Ag Co. The general interest being manifested by the proprietary processing sectors in organizational linkages suggests some structural as well as distributional impacts. As argued by management in one major California proprietary processor: To us the Tillie Lewis plan means that Tillie Lewis is getting product cheaper. This will eventually challenge our market share. So I tell the association (California Tomato Growers Association) not to let their barrier down. Don't ever agree to it! If CTGA agrees to Tillie then we‘d have to drop our own plan...We can play this game of promising a lot and never delivering also. The fact that several proprietary processors stated that they had studied such linka major proc right moms to trace 5 next secti joint vent A. Partic Comme apple indu fixed inpu tial discr 0n ou full fit w claus Nothh they I Comments m to those qi In our at the cover share Samp1e5 of in the aPpe TheSe PESOUrCe f0 \ 1SiIVe 195 1 such linkages also portends structural trends. Management of one major processor in the Michigan sample says it is just waiting for the right moment to implement its own joint venture. In an attempt to trace specific motivations for linkages of the above varieties, the next sections will look at findings concerning participation plans and joint venture organizations. A. Participation Plans Comments by a processing organization operating in the apple industry indicate that a participation plan can substitute for fixed inputs costs and therein more closely resemble some of the poten— tial discretion afforded management in cooperative processor organizations: On our participation plan the Open pricing clause gives me full flexibility in allocating costs and deciding how pro- fit will be shared. The growers have to trust me. I put a clause into the contract to ensure myself Capital payments. Nothing protects the growers but me. Growers sign because they need a home for product. Comments by management of Tillie Lewis Foods, Inc. show a similar intent to those quoted above: In our tomato participation plan, the growers put up the tomatoes at the going price and we put up the other costs. If we cover costs plus we split the profit according to grower share in total costs of producing and selling the product ... As to equalizing our status in competing with cooperatives, the coops can lay lOO% of profit or less on growers and we can lay only 25% which is (approximately) the grower contribution to full costs...we are after a smoothing effect in returns. . Samples of the agreements on which such pflans are based can be found in the appendix to this study. These two participation plans are seeking to utilize growers as a resource for spreading risks involved in the processing industry. 1Silver Mill, Michigan Quality Foods, National Fruit Products. Both plan and the p is, unlik Thom such plans coerces pi while com; cost flexi Inc., Till thevcompei In su terests in This desir able resour sector. T are as fol for raw pri meeting ca: 3) discret- Pf0prietam Provide pc 0f Processi \ Thoug bisl's With Vlsgino, p that will a are ContY‘O] 0" cornrnents Ibid \9 196 Both plans present a cooperative type relationship between growers and the processing organization. However, the control of the organization is, unlike the cooperative analogue, firmly held by proprietary interests. Though relief from bargaining may not be the specific target of such plans, bargaining is, arguably, a relevant factor insofar as it coerces proprietary processors to sustain fixed raw product input costs while competing cooperative processors may exercise raw product input cost flexibility. As argued by the president of Tillie Lewis Foods, Inc., Tillie Lewis is trying to match perceived competitive advantages of the competing cooperative processor sector. In summary, participation plans are motivated by managerial in- terests in increasing their discretion in meeting performance goals. This desire has impelled proprietary management to seek out the avail- able resources and such resources have been located in the grower sector. The major resources being utilized in such participation plans are as follows: l) use of grower capital by means of deferred payment for raw product inputs; 2) input price flexibility by not guaranteeing meeting cash market value being paid in the surrounding market; and 3) discretion in the sharing of profits and losses by means of proprietary-controlled allocative decision-making. These resources provide potential input price flexibility and a spreading of risks of processing and marketing. The demonstrated willingness of growers to 1Though the Tillie Lewis plan is seeking to achieve a c0mpetitive basis with cooperative processors in California as stated by George Visgilio, President of Tillie Lewis Foods, Inc., the decision processes that will define and allocate costs and determine management performance are controlled by the proprietary interest. See Appendix for transcript of comments. 21bid. l accept suc of proprie for market Tomato Gro Lewis part and, there also noted creases th to its jur attempted by both am Tillie Lew citing int lative eff The j proprietar was argued grower res below, wil 30int Vent Significan \\ 11h 9 Offer Grow marketing 197 accept such linkages attests to either a grower desire to bear the risk of proprietary discretion in decision making or to limited alternatives 1 It is the perception of the California for marketing raw product. Tomato Grower Association that growers sign up under the Tillie Lewis participation plan in order to protect a home for their raw product and, therefore, to protect on-farm production investments. The Association also noted that the transition to participation plan transactions de— creases the volume of raw product that is bargained. Faced with a threat to its jurisdiction, the California Tomato Growers Association has attempted to enjoin such behavior in the proprietary processing sector by both amending the state bargaining statute and bring suit against Tillie Lewis Foods, Inc. under the California bargaining statute, citing interference with membership of an association.2 The legis- lative effort was unsuccessful and the litigation remains unsettled. B. Joint Venture Case Study The joint venture is a variant of organizational linkages between proprietary interests and the grower sector. Earlier in this study, it was argued that a joint venture organization was a means of subordinating grower resources to proprietary use. The findings to be presented below, will explore this argument by focusing on a case study of two joint venture organizations. Inasmuch as both of the joint ventures are significantly identical, the section will not treat each separately 1In growth markets, like apple juice currently, participation plans offer growers an opportunity to share in value added in processing and marketing without making investments in processing facilities. 2 Inc. Bill Thomas, Counsel CTGA., Exec. V.P., California Food Producers, other tha of the jo venture p this sect this merg The a grower interest is a fanm proprieta The coope Proprieta raw‘produ The growe element w‘ tonnages Proprietal by an ele< directors \ 1Agwe Processing [Her-men} bet 0f stock c class 8 st 0f 70% of Fac by ‘ i av Fac COOPer Aguay. Hc lesg than PrO‘FdC Cc 198 other than to draw on the pool of managerial responses. Given that one of the joint ventures is modeled on the other and that many other joint venture plans present in the processing industry are similarly modeled, this section will use one organization as the principal paradigm for this merging of proprietary and grower resources. The joint venture addressed here is an organization comprised of a grower interest (Pro-Fac Cooperative) and a proprietary public stock interest (Curtice—Burns Foods). The grower interest is a farmer cooperative vertically integrated into processing and the proprietary interest provides the management and marketing expertise. The cooperative owns the processing facilities, rents them to the proprietary arm, and supplies, according to well specified agreements, raw-product to be processed and marketed by the proprietary firm. The growers' relationship with the organization is to supply the cooperative element with a specified volume of product according to contracted tonnages which, in turn, are a function of the marketing needs of the proprietary firm. The growers are represented in their cooperative by an elected board of directors which works closely with the board of directors of the proprietary organization.1 1Agway, a farmer cooperative directly engaged in product manufacturing, processing, distribution, wholesale purchasing, and marketing for its far- mer-members, owns approximately 33% of the combined shares of both classes of stock of Curtice-Burns. It also owns 96% of Curtice-Burns' outstanding class B shares which have the exclusive right to vote for the election of 70% of the directors of Curtice-Burns. Agway. by virture of Pro— Fac by-laws, also is entitled to nominate one of the directors of Pro— Fac Cooperative. Neither Pro-Fac nor all Pro—Fac growers belong to Agway. However, if all Pro—Fac growers did belong, they would constitute less than T% of the over l22,000 members of Agway. (See Prospectus, Pro-Fae Cooperative, Inc., p. lOZ). The series of agreement transfer is define processor open mark cooperatt and proce: with their bargaining and commoc Pro-Fac Cc representi and market ative for also has t cOOPEr‘ativ may PCOdUCI Section wj‘ trade that m IIIIIIIIIIIIIIIIIIIIIIIIIIIIII:—__________————f—————————————————————+—+——————r————+——???———w— 199 The terms of trade between the two organizations are specified in a series of four agreements: a lease, a loan agreement, a management agreement, and a marketing agreement. Specifically, there is a guaranteed transfer value of raw product, called Commercial Market Value, which is defined as ”the weighted average of the prices paid by other commercial processors for similar crops sold under pre-season contracts and in the i open market in the same or competing market area." Inasmuch as the cooperative is a single pool multi-commodity organization which procures and processes raw product in 6 states including New York and Pennsylvania with their nascent bargaining efforts and in Michigan with ongoing farmer bargaining, there exist numerous interdependencies among regional and commodity interest groups. Profits or losses on sales of finished Pro-Fac Cooperative products are split 70%/30% with 30 percent representing the commission to the proprietary arm for its processing and marketing services.2 The proprietary arm pays a rent to the cooper- ative for the use of the plant and equipment.3 The proprietary interest also has the right to defer payments to the cooperative and to utilize cooperative capital sources. Given that the joint venture agreement may produce sources of managerial discretion in performance, the next section will review certain components of the aggregate terms of trade that link the two organizations. Terms of Trade Determination. Of perhaps central interest is 1pm., p. 9-10. Ibid., p. 69. 3Rent equals Pro-Fac's depreciation, interest and other costs which are associated with the operation of the facilities and, since l977, an adjustment (which may be positive or negative) based on profitability of all products sold by Curtice-Burns. Ibid., p. 27. 2 the proc cial mar in the j committe In makin basis of prices f solicite as reflei commodit: by Curtic Curt was the was Burn for reso true subs mean Anot timing; 51 noted by - Curt: CMV i My gr manag make . The PrO‘FaC’ a 200 the process for determining the raw product transfer value, termed commer- cial market value or CMV, between Pro-Fac and Curtice-Burns. As stated in the joint venture prospectus, CMV is determined by the joint CMV committee, consisting of representatives from Pro-Fac and Curtice—Burns.1 In making the CMV determination, ”the joint CMV committee acts on the basis of data supplied primarily by Curtice-Burns concerning open market . . 2 . . . prices for various crops." Though market information is also solicited from commodity committees in Pro-Fac, decisions as to CMV are, as reflected in the following comments by a past member of one of the commodity committees, primarily a function of market analysis performed by Curtice-Burns: Curtice—Burns management has control of information. This was evident when I worked on the commodity committee for the tomato growers. A big part of the committee's work was to establish CMV. But we were dependent on Curtice- Burns management to collect information. It was difficult for us to refute their argument. We had no independent resources to assess management information. This is still true today. When the company is so large that it has a substantial percentage of the market, the CMV has little meaning. Another aspect of the CMV price determination process is its timing; CMV is established ex post. This price following stance was noted by the Pro-Fac grower quoted above: Curtice-Burns plays no role in establishing CMV. It just responds. CMV is established after the fact so it is safe for management... My gripe with the CMV is that it doesn't put the monkey on management's back. Management won't have to work very hard to make CMV back to Pro-Fac. _ 1The joint CMV committee consists of two members appointed by the chairman of Curtice-Burns, two members appointed by the president of Pro-Fac, and a fifth member appointed by the other four. 2Ibid., p. 52. In The simL manager over the product Gro don Ag 1 men« CMV veti Co. nege thus Rela supply co In both j sunply cu a 20% cut growing pi 0f Up to ' by stock 1 Permanent President If we says makin 1” resP0ns \ 1Don 1 2Plot 3HU9h 201 In the Seneca/Ag Co. joint venture, a similar process takes place. The simultaneous president of Seneca, the proprietary arm, and general manager ong Co., the cooperative arm, candidly admits his control over the CMV decision process and his ex post stance as regards raw product valuation: Growers aren't able to collect information themselves; they don't have resources. If there is disagreement about CMV the Ag Co. board has final say though they ask me for my recom- mendations. When I disagree with the commodity committee on CMV, I just ask them to prove their position. I don't have veto power but in the management agreement I am manager of Ag Co. and this gives me a lot of flexibility...Growers are negative about the fact that we merely reflect cash1price and thus do not help strengthen it. We do just follow. Related to the CMV process, it can be argued, is the influence of supply controls that may be implemented in the joint venture organization. In both joint ventures, the proprietary arm has the right to dictate supply cutbacks. In Seneca/Ag Co., management has the right to dictate a 20% cutback with 60 days notice which is less than an annual crop's growing period. In the Pro-Fac/Curtice-Burns organization, cutbacks of up to lOO% may be effected with one year's notice and are accompanied by stock repurchases by the Pro—Fac organization if the cutback is a permanent one.2 As stated by an individual who is simultaneously vice president of Curtice-Burns and general manager of Pro-Fac: If we have a consistent loser, Curtice-Burns is the one who says ‘we don't want to continue running peas if we aren't making any money.‘ In response to the question of whether any cutbacks had been challenged 1Don Naeye, Seneca/Ag Co., Interview. 2Pro—Fac Cooperative Prospectus, p. 50. 3Hugh Hill, Pro-Fac/Curtice-Burns, Interview. by the c been mad back had waiting 1 even more such supp advanced Thou shall pay ability t organizat emphasis ( mean that losses inc the procee an insuran Plemented Proceeds a Proceeds, to PreserVi board membe Stabilizati 100k compet \ 1Pro-F SihCe SEY‘VeS the IIIIIIIIIIIIIIIIIIII:________________________________________________________________________________'"rinfiffiiz"x 202 by the cooperative, this individual said that such challenges had been made but that no Curtice—Burns recommendation for a supply cut— back had ever been denied. It was also noted that the one year waiting period may be waived by Pro-Fac to let Curtice—Burns adjust '5 even more quickly. It might be suspected that the power to dictate such supply controls would mitigate any upwards CMV price pressure advanced by the cooperative interest in the joint venture. Though the joint venture agreement guarantees that Curtice-Burns shall pay the CMV to the cooperative organization, the concommitant ability to share profits or losses with the cooperative organization lessens the risk of such a guarantee. Moreover, the l -; ~__a.;.i«;}..e—: ’ emphasis on a guaranteed CMV does not, as explained in the prospectus, mean that grower members will receive CMV from the cooperative. Rather, losses incurred by Curtice-Burns will be spread onto Pro-Fac thus reducing the proceeds available for distribution. In response to this possibility, an insurance mechanism called the CMV stabilization fund has been im- plemented in Pro-Fac to, in effect, put away some of the allocable proceeds above CMV in 'fat' years in order to make up deficient allocable proceeds, i.e., below CMV, in 'lean' years. The primary result is to preserve the integrity of the guarantee on CMV.2 Comments by a board member of the joint venture indicate that the purpose of the stabilization program is to allow Curtice-Burns management to still look competitive in poor profit years. 1Pro-Fac Cooperative Prospectus, p. 56. 2Since l978, the stabilization fund has been amended but still serves the same function. Ibid., p. 55-56. Th to coope Coopera' conduit funds av same rat for C00; The allocati of singl affords, transfer: culate.1 crop orge terms of interdepe to manage for such relative flict amo: ber 0f the running 01 I agi forms grout \ . . Pr0p ln 1”terna ProcessorS 203 The joint venture arrangement also gives Curtice-Burns access to cooperative sources of capital through loans from the Bank for Cooperatives system. Hence, the cooperative organization serves as a conduit for cooperative funds to reach proprietary uses. These funds are loaned by Pro-Fac to Curtice—Burns at essentially the same rate of interest at which the monies were loaned by the Bank for Cooperatives to the Pro-Fac organization. The cooperative arm is organized“ on a single pool basis with allocations to commodity groups made on the basis of CMV. The result of single pool accounting for multiple commodity Organizations affords, as described in chapter four, opportunities for internal transfers, the degree of which is probably unclear and difficult to cal- culate.1 However, the possibilities for transfers in a 6-state, l5- crop organization are numerous and mean that crop performances in terms of patronage to growers are interdependent. In spite of these interdependencies, Pro-Fac members do not tend to be aware, according to management, of relative crop performance. Management's explanation for such ignorance was that management purposely does not disseminate relative profit and loss performance information in order to avoid con- flict among commodity and/or regional groups. As argued by a board mem- ber 0f the jOIntventure, controlling such information makes for a smoother running of the joint venture: I agree that growers would like to know such comparative per- formance information but we don't have near as homogeneous a group of people as when they aren't informed. As long as the 1Proprietary processors accounting for multiple crops also results in internal transfers in the same sense as described here for cooperative processors. at. ’2‘: _— tot Such pat performa conseque has been pools in organize< An 2 proprieta grower se organizat Cooperati because ti ognizes tl managemem mobility 1 structure. Pro-Fae ma reduced ri these 903] drawing on management taneously n Should be r maintain St ment costs \ 1 Based 204 totals are right we aren't concerned with the above. Such paternalism serves to protect the insurance benefits of pooled performance but can also be expected to conceal the distributive consequences. Curtice-Burn's preference for single pool accounting has been reaffirmed by its refusal to accept grower demands for separate pools in the recent purchase of Comstock Foods which has also been organized on a cooperative basis. An additional aspect of the joint venture which may impact on proprietary management discretion as it taps the resources of the grower sector are issues of control over management of the cooperative organization. In the Pro-Fac/Curtice-Burns joint venture, the Pro-Fac Cooperative management serves at the behest of Curtice-Burns. This is because the management team which constitutes Pro-Fac management rec- ognizes that its career lies with the proprietary organization. The management structure of Pro-Fac Cooperative is limited and upward mobility is perceived to lie within the Curtice-Burns management structure.1 This perception can impact on the responsiveness of Pro—Fac management to select Curtice-Burns management goals such as reduced risk, stable rate of return, and less constraint concern. As these goals are served by shifting risk onto the Pro-Fac organization and drawing on the resources of grower membership, the obligation of Pro-Fac management to serve grower interests and proprietary interests simul- taneously may be contradictory. In the long run, Pro-Fac management should be rendered accountable to its grower membership by the need to maintain supplies of raw product. However, in the short run, the adjust— ment costs faced by growers and the lack of information on which to 1Based on interview with Pro-Fac Management. evaluate the conc The case stui PY‘O- FaC, deteriore of Agway' Agway and growers w contribut arm in co he argui commodity management The T A9 C0. coc venture an Being and l desir guy.. reIUC' going PCOtet Stockl State In ‘SUH Venture org and SUPPiie \ 1Don N 205 evaluate management's performance impede mobility of resources and the concimitant discipline on management. The original motivations for the two joint ventures in this case study are also illuminating. As recounted by a director of Pro-Fac, Agway Cooperative in the early l960's was concerned with the deterioration of the canning industry because it meant a deterioration of Agway's market as a supply cooperative. To protect outlets for both Agway and growers, a joint venture concept was developed wherein growers would contribute capital and a proprietary organization would contribute the management expertise. The desire to have the proprietary T Viki-m1 arm in control of the organization is attested to by another director when he argued that part of the original intent was to control selfish commodity interest groups; ”We wanted management (Curtice-Burns management) to be a disciplining force.“ The president of Seneca-Marion Foods and general manager of Ag Co. cooperative is candid in articulating both the intent of his joint venture and the reluctance of the grower members to join: Being a joint venture offers consistent supply, better financing, and low cost capital...our motive for going joint venture was a desire to expand and that we saw bargaining hurting the little guy...honestly, 50% of the growers accepted the joint venture reluctantly...we knew growers wouldn't have a real choice about going (with a) joint venture cooperative. We felt that we had to protect our stockholders, including myself as the third largest stockholder in S. . Pierce, the parent company, from state by state bargaining. In summary, the benefits to the proprietary arm of the joint venture organization center around control of raw product prices and supplies and access to low cost grower capital through grower 1Don Naeye, Personal Interview. investme been ex; Officer Poi venture warrant guarante to manag from mar however, presente: Res; findings, and joint Seneca Fo with Ag C to the in tenns of - bargained as itsei arrangemer If bargain The P l'ntroducti \ 1See 1 Ibid 206 investments and Bank for Cooperative capital. These benefits have been explicitly touted by Hugh Cummings, President and Chief Executive Officer of Curtice-Burns.1 Potential benefits accruing to grower membership in a joint venture organization of the Pro-Fac/Curtice-Burns variety also warrant enumeration. As noted by Hugh Cummings, growers enjoy a guaranteed outlet for their raw product production, they have access to managing and marketing expertise, and share in pre-tax earnings from marketings of products with brand identities.2 These benefits, however, need to be qualified by the issues raised in the findings presented above. Responses To Bargaining. Before turning to a discussion of these findings, some observations on the relationship between bargaining activity and joint venture organizations will be noted. As mentioned above, Seneca Foods, a proprietary processor before it devised a joint venture with Ag Co. cooperative, maintained that it left Michigan in response to the introduction of bargaining over raw product terms of trade. Management stated that it feared the constraints that bargained terms of trade would impose on small proprietary processors such as itself. In addition, management explicitly saw a joint venture arrangement offering protection from the constraints of bargaining if bargaining were to be introduced in New York state. The Pro-Fac/Curtice-Burns joint venture has responded to the introduction of bargaining in the state of Michigan by claiming 1See H. Cummings Speech in Appendix. 2 Ibid. coopera' bargain‘ obligat‘ It also of trade An Assis T975 aga 344. Th is the a the Assi: exempted Fac Coop: producers in the be suit agai Cooperati Michigan Additiona in the su Recei PPO-Fac Ct Agricultu; Pro-Fae Ct to MACMA a —_..______ ICase 2mm Kraut Cabb law, P.A. 207 cooperative status for Pro-Fac Cooperative, Inc. under the Michigan bargaining law, P.A. 344. Such status frees cooperatives from the obligation of paying marketing fees to the bargaining association. It also frees them from handler status and the obligation to bargain terms of trade for raw product with a properly accredited bargaining association. An Assistant Attorney General of Michigan, however, decided in August, 1975 against the request of Pro-Fac Cooperative for exclusion from P.A. 344. The Michigan Agricultural Marketing and Bargaining Board which is the authority for administering the act, accepted the decision of the Assistant Attorney General and denied Pro-Fac Cooperative, Inc. exempted status under P.A. 344. The basis of the denial was that Pro- Fac Cooperative, Inc. was not a cooperative owned and controlled by producers in the jurisdiction relevant to the bargaining law, i.e., in the bargaining unit. In response, Pro-Fac Cooperative, Inc. filed suit against this administrative authority, citing that Pro—Fac Cooperative, Inc.was a cooperative association as defined under the Michigan bargaining law and thus qualified for exempted status. Additional issues, including Constitutional questions, are also raised in the suit.1 Recently, an out of court agreement has been reached between Pro-Fac Cooperative, Inc. and an intervening defendent, the Michigan Agricultural Cooperative Marketing Association (MACMA),2 whereby Pro-Fac Cooperative, Inc. will remit its delinquent marketing fees to MACMA and MACMA will accept the Pro—Fac organization as a Cooperative 1Case No. 75-28l9—CZ, Circuit Court for the County of Berrien. 2MACMA is the bargaining association for Tart Cherries, Apples, Kraut Cabbage, Asparagus, and Potatoes under Michigan's bargaining law, P.A. 344. organiza' Inc. is a a coopere by this s a means c The resul below. The ‘ exploring will begii cessors. ownership in essenti for PPOpri grower and 5.2.l The f- eXPianatior and Vegetat ”0 evidence these findi was a PETev certainty 0 contIt'ilSted i State OPera‘ 208 organization. The agreement does not argue that Pro—Fac Cooperative, Inc. is a grower owned and controlled cooperative, merely that it is a cooperative organization. Relevant to this study are issues raised by this suit in regards to the use of joint venture organizations as a means of incorporating the cooperative institution and its resources. The results of such incorporation, if it obtains, will be discussed below. 5.2 Discussion The following discussion will amplify the above findings by exploring some ramifications of structural responses. The discussion will begin by focusing on simple exit responses of proprietary pro- cessors. This will be succeeded by discussion of transformation of ownership in the processing industry. Transformation will be treated in essentially two parts: I) simple substitution of grower ownership for proprietary ownership; and 2) organizational linkages between grower and proprietary interests. 5.2.l Proprietary Exit Responses The findings reported above indicate that there are multiple explanations for decisions by proprietary processors to exit from fruit and vegetable processing. The secondary statistical analysis found no evidence that bargaining influenced rates of exit. Notwithstanding these findings, proprietary processors generally argued that bargaining was a relevant variable influencing exit decisions. The marked un- certainty of California respondents as to the importance of bargaining contrasted with Michigan respondents where both multiple and single state operations argued generally that bargaining was at least a partial explana bargain in adap' bargain‘ Amc vironmer that drc as only consider bargaini planatio: in both i peting cc advantage The was preva commodity gained pr Planation: '5 failing 1) single dual membe aSSociatjo PIESented ment's abi processors Second, it 209 explanation. The difference in sensitivitybetween the two major bargaining environments in the study's sample suggests a difference in adaptation to bargained terms of trade. The historical recency of bargaining in Michigan has been developed elsewhere in this study. Among the sample of three real 'exitees' from the Michigan en- vironment,only one argued that bargaining was the primary constraint that drove them from the state. The other two presented bargaining as only a partial explantion with one of these two saying it was considering returning to Michigan. The variation in emphasis given to bargaining as the impetus behind exit responses suggests other ex- planations. Indeed, the great majority of the sampled population in both California and Michigan cited competitive advantages of com- peting cooperative processors. These respondents tended to focus on advantages in input costs arguing that those of cooperatives were lower. The perception that cooperatives have competitive advantages was prevalent in California even though the California multi- commodity cooperatives evidenced single pool accounting and used bar- gained price levels as the allocative basis. Their are some ex- planations for this emphasis. First, proprietary processor management is failing to appreciate the impact on cooperative management of: l) single pool inter-commodity competition; and 2) the widespread dual membership between the cooperative processing and bargaining association sectors. These factors, as documented in the data presented in chapter four, can reduce if not negate cooperative manage- ment‘s ability to exercise competitive advantages over proprietary processors by valuation of raw product inputs below bargained price levels. Second, it can be argued that proprietary sensitivity to cooperative flexib' subvalt periodi ability can off are con reduced advantaq commodi‘ where S? as a bas advantag be great of Michi bargaini from Cal' Sen: environme Processir in Michig by the co Prietary . Who lack . PFOprjeta, Competitic The e meESSlng 210 flexibility in input valuation is not due to a perception of yearly subvaluation but to the ability of cooperative management to shed periodic price risks onto the grower population. The potential ability of cooperative processors to be free of certain price risks can offer them competitive advantages over proprietary processors who are constrained to honor bargained input prices without recourse to reduced or delayed payments to growers. However, such competitive advantages should be less available to cooperatives that are multiple commodity in composition and use single pool accounting. In Michigan where single pool accounting and the use of bargained price levels as a basis of decision making have lesser incidence, the competitive advantages of the cooperative sector over the proprietary sector should be greater. This helps explain the apparent heightened sensitivity of Michigan proprietary processors to the constraints imposed by bargaining than is demonstrated by the proprietary processor sample from California. Sensitivity to competition from cooperative processors in both environments is exacerbated by the relative importance of the cooperative processing sector. Where as in California and in select commodities in Michigan, the cooperative processing market share is large, decisions by the cooperative sector have accordingly larger impact on the pro~ prietary processors. Furthermore, single state proprietary processors who lack the alternatives in procurement enjoyed by multiple state proprietary processors should be commensurately more impinged upon by competition from the cooperative processing sector. The enumeration of other arguments for proprietary exit from processing compound the explanation of structural change in bargaining environ: proceSS' exit fr< more prc change i explanai We nun in act and org In change i responde: to barga' Of this i reallocai competiti cooperati Valuation attention focusing mention w to shed p. will be d‘ adVantage prOCESsinS ..1‘____- 1Barn 211 environments. Some respondents emphasized that rates of return in processing were inferior to rates of return in marketing and that exit from processing was a function of reallocation of resources to more profitable areas. Garoyan and Thor in a recent study of structural change in the California bargaining environment also offered several explanations: We must be careful not to attribute structural changes in the number of producers and their scales of operations, and of changes in processing and marketing firms directly or entirely to activities of bargaining cooperatives. There are many economic and technological variables at work which impact on industrial organization.1 In summary, the presence of multiple forces eliciting structual change in bargaining environments have been argued by proprietary respondents in the sample. It can be concluded that factors attributable to bargaining are contributing to exit by proprietary processors; some of this exit may be because marginal investments in processing are being reallocated elsewhere. The emphasis given by the industry to competitive advantages of the cooperative processing sector, where cooperative management is disciplined to embrace bargained prices for valuation of raw product, is unwarranted. However, the widespread attention given to competition from the cooperative sector argues for focusing more closely on use of grower resources in this sector. Above mentiOn was made of the ability of cooperative processor organizations to shed periodic price risk onto growers. This and other resources, as. will be developed below, can constitute sufficient competitive advantage regardless of bargaining to elicit proprietary exit from processing. 1Garoyan, L., and E. Thor, l978, p. l43. 5.2.2 It respons process of proc Th grower or as a This CD! Califori and muli response partiall grower s The integrat farm pro. investmei outlets, a"d low r advantage want to r Grow excess Ca; contro] 0. in PurSui1 EVldence c 212 5.2.2 Transition in Ownership of Processing Facilities The discussion above developed explanations for discrete exit responses by proprietary processors. However, exit by proprietary processors may, as has been shown, also involve changes in ownership of processing facilities. The findings document proprietary processor cognizance of available grower resources whether as a client to buy out the processing investment or as a resource over which to spread certain risks of processing. This cognizance was manifested by proprietary processors in both the California and Michigan environments and, in Michigan by both single and multi-state operations. Thus, proprietary processor structural responses to opportunities and exposures in markets with bargaining is partially explained by a motivation to capture resources located in the grower sector. Such responses can be motivated regardless of bargaining. The willingness of growers to use their resources to vertically integrate into processing is an indication of the immobilities of on— farm production investments. Short run immobilities of production investments encourages the grower sector, when faced with loss of market outlets, to integrate into processing and thus assume the costs, risks, and low returns to capital invested in processing. This is to the advantage of owners of processing facilities or to marketing firms who want to reallocate capital to its most valued use. Grower immobilities can, in the short run, serve to maintain excess capacity in the processing industry. Moreover, with grower control of processing facilities, volumes processed may be increased in pursuit of combined scale economies of production and processing. Evidence of such behavior is offered by recent vertical integration of tomato contrit shares. Ir proprie grower process being r serve t. in proc: proceSS' these re grower c control duction by annua Producti in pereni 5.2.3 The was furtf Several 3 m0“ VG f0 kEting 0n Jacl Goidberg’ 213 tomato processors in California. These behaviors can be expected to contribute to a reallocation of production and processing market shares. In summary, there is evidence that structural responses by proprietary interests are motivated by access to resources in the grower sector. Several results of the transformation of ownership of processing have been mentioned. First, the costs of processing are being redistributed to the grower sector. Second, grower immobilities serve to discount the economic signals carried by low rates of return in processing. Moreover, the vertical integration of production and processing introduces a new scale economy calculus. In the short run, these results mean a preservation of processing capacity but now under grower ownership and control. In the longer run, this ownership and control will contribute to a redistribution of market shares of pro- duction and processing. Such results are, arguably, somewhat variable by annual versus perennial crops. This would be true insofar as crop production investments are less immobile in annuals like tomatoes than in perennial crops like peaches or apples. 5.2.3 Proprietary Participative Linkages With Growers The incorporation of growers' resources in the proprietary realm was further explored by studying participation plans and joint ventures. Several students of participation plans have previously noted that the motive for such linkages is to spread the risks of processing and mar— keting onto the grower sector.1 For example, by basing returns to l Jackson, D. l962; M.A. Blum, T964; E.P. Roy, T970; Roy A. Goldberg, l97l; E.H. Squire, l973. growers change sector sugar t share w This di to allo plans, : to assu: covered plans ge processe assesses Provides their ef The others a: Plans; b3 Prietary Should be to afford cessing a than effi POtentiai \ l Jacl 2Blun 3 Jack 214 growers on returns to sales of processed products, the risk of price change is spread among both the grower sector and the proprietary sector according to the allocative rule. In participation plans in the sugar beet industry of the l950's, as studied by Jackson, the grower share was approximately 58% of the net while they bore 75% of the risk.1 This distribution reflects the ability of the proprietary interest to allocate the distribution of risk to its advantage. Other participation plans, such as those of the Florida citrus industry, may be designed to assure the proprietary processor that its cost and commission are covered before a net is allocated to producers.2 In participation plans generally, grower returns are a function of returns to sale of processed products less whatever costs the proprietary interest assesses against total returns. Such guaranteed coverage of costs provides little or no incentive for proprietary processors to increase their efficiency in processing and marketing.3 The motives for organizing participation plans suggested by others are reflected in this study's inquiry into participation plans; by engaging a grower population in a participating linkage, pro- prietary interests can shed risks of processing, marketing, and it should be emphasized, raw product valuation. The aggregate result is to afford proprietary interests discretion in performing their pro- cessing and marketing function. Such discretion may reSult in less than efficient processing and marketing decisions thereby reducing potential returns to the grower participants. Growers often have 1Jackson, 0. l962, pp. 12-l5. 2Blum, M.A., T964. 3Jackson, D., l962, p. l5. little I Indeed, commiSS‘ result ' tributic returns l) behav haviors W As Ag Co.,. arise as By sharil Poor mane by having internal of raw pr strengthe further e areas of summary, reduces ti Preprjeta, m Joint vent rate 01: re 215 little means other than exit to discipline the proprietary interest. Indeed, replacing a fixed terms of trade transaction with a cost—plus- commission guarantee to the proprietary interest can be expected to result in exercise of sources of discretion. The result of the redis- tribution of risks under participation plans will be to reduce grower returns to the extent that managerial exercise of discretion produces:- l) behaviors that increase costs applied against total returns; and 2) be- haviors that reduce the absolute value of total returns. A. Joint Venture Case Study As documented in the study of Pro-Fac/Curtice-Burns and Seneca/ Ag Co., joint ventures between cooperatives and proprietary interests arise as a means of gaining access to and controlling grower resources. By sharing losses as well as profits, the risks of price change and poor managerial performance are shared by the grower partner. Moreover, by having control of delivery levels, the proprietary arm can influence internal terms of trade such as the valuation (commercial market value) of raw product inputs. Grower dependence on proprietary information strengthens such influence. If grower resources are immobile, this further enhances the ability of the proprietary management to exercise areas of discretion in its transaction with the cooperative arm. In summary, the ability to spread risk over an additional set of resources . reduces the risks of conducting processing and marketing operations for proprietary management. Managerial Performance. Proprietary management's behavior in a joint venture is influenced by its obligation to achieve a satisfactory rate of return. This obligation produces the following results. First, costs W' of prof‘ conflic1 functior value) 1 reasons Second, performa rate of flects n from yea ability ' variabil managemei tect its 2) the at the wealt manageria reducing g§§_ growers' Several. PFOprieta; Second, tl an illusi( that growe would be s 216 costs will be minimized where possible in order to increase the margin of profit. Cost minimization puts the proprietary arm in direct conflict with the c00perative arm which, corresponding to its goal function, wants the raw product input value (the commercial market value) to be as high as possible. The pressureon this margin, for reasons listed above, is clearly in favor of the proprietary interest. Second, insofar as management is either evaluated on the basis of stock performance or itself owns stock, it will have an interest in reducing rate of return variability. This is because stock performance re- flects not only the absolute rate of return but also its variability from year to year. A joint venture affords the proprietary arm the ability to shed price and cost risk onto growers and thereby mitigate variability in stock performance. The effects of a joint venture on management, then, are as follows: l) proprietary management can pro— tect its performance by exerting downward pressure on input costs; 2) the ability to shed risk onto the cooperative partner can enhance the wealth of stockholders; and 3) insofar as the joint venture increases managerial discretion, certain inefficiencies in management may result reducing the potential returns to participants in the joint venture. Use of Grower Capital. The joint venture also serves to channel growers' capital resources to the proprietary partner. The means are several. First, growers may be making low or no cost loans to the proprietary partner by virture of deferred payments for raw product. Second, the existence of a stabilization fund can be used to construct an illusion about managerial performance; it can create the illusion that growers are always doing as well in the joint venture as they would be selling in cash markets. Such a fund may constitute an intergel of grow« allowing grower a means pi gig generall dustry. advantag advantag For thos the comp survive the comp not only prolifer. Some tomato ii competit‘ Inca the l6.4% of the l978 bases ex; COOPErati contracts 217 intergenerational loan among growers as well. Third, capital resources of growers are being tapped to pay for investments in processing thereby allowing proprietary capital to seek higher valued use. Finally, grower access to capital resources through their c00perative status means prOprietary access to the same resources. Structural Consequences. Joint ventures,or participative linkages generally,have implications for the structure of the processing in- dustry. The incorporation of grower resources can provide competitive advantages in input costs, capital costs, and performance risk. Such advantages have variable impact on the p0pulation of competing processors. For those processors unable to mimick these competitive advantages, the competitive pressure will result in exit. Those competitors who survive the competitive pressure will be those who respond in kind. Thus, the competitive advantages attendent to participative plans induce not only concentration of the processing industry but also the proliferation of this variety of organizational structure. Some recent actions by proprietary processors in the California tomato industry are bearing out the prediction that these sources of competitive advantage will be responded to in kind. Hunt-Wesson Foods, Inca the largest purchaser of tomatoes for processing with an estimated l6.4% of the l978 state crop and Contadina Foods, Inc. with 8% of the l978 state crop have both announced new raw product procurement bases explicitly directed at mimicking the procurement basis of cooperative processors and proprietary processors with participating contracts. As stated by Hunt Wesson Foods, Inc. of Norton Simon Company: cor Using th procured 24.7% 0 market c could be Particip ductions and mark. .Lnfl 1impact or This is 1 decision Ca" Spree \ l See fornla To 23ee 218 To protect Hunt-Wesson and our growers for the long term, we must purchase tomatoes on some form of participation in growing profits as well as processing profits, which will reduce the CO-OP and "participating contract" cannners' advantage of being able to pay less than the full raw product price, to make deferred payments, and negotiate for high raw product prices to give them flexibility in finished product selling prices. The alternative to such a concept might be joint ventures with growers, or selected company farming ventures.) And as noted by the president of Contadina Foods in a letter to the executive vice president of the California Tomato Growers Association: It has now become apparent to us at Contadina that we have to be competitive with the other proprietary members of the industry as well as with the CO—OPs. We sell a significant amount of our tonnage in competition with CO-OpS and smaller canners who we anticipate will be offering participative types of contracts providing protectionzto them should the industry continue to have excess supplies. Using the l978 crop percentages, and including the 5.9% of the crop procured by Tillie Lewis Foods on a participation plan basis and the 24.7% of the crop that was processed in the cooperative processing market channel in l978, a total of 55% of the California tomato cr0p could be processed on a non-cash basis. These actions to substitute participation plans for bargained terms of trade portend further re- ductions in the cash market channel and further concentration of processing and marketing of fruit and vegetable products. Information Impaction. Participative plans and joint ventures also impact on the ability of decision processes to communicate information. This is true for both the organizational decision process and the market decision process. In the participative organization, proprietary management can spread the risk of performance in processing and marketing onto 1See appendix for full text: Hunt-Wesson: "Index Pricing," Cali- fornia Tomatoes, l2/l2/79. 2See appendix for full text, Contadina Foods, Inc. l2/l8/79. the gro of the ineffic of the - ability follows tributi< unable l ineffiC‘ In procedur raw proc This lag the SEED to raw p content Moreover tenns of diverge ex post ' slgnals I extent tl \. risk ige: 2m; C0Operati 3For see N.c‘ February, 219 the growers. Thus proprietary management, though it may bear control of the organizational decision process, does not bear full cost of inefficient behaviors. The growers on the other hand, bear a portion of the cost of managerial performance inefficiencies but have little ability to exert control over the decision process. The result is as follows: by failing to conform to the distribution of risk, the dis- tribution of control in participation plans and joint ventures is unable to provide the informational feedback that corrects managerial inefficiencies; growers bear the cost of managerial discretion.1 In relation to the greater market decision process, the standard procedure of participative linkages such as joint ventures is to conduct raw product input valuation after competitors have valued their inputs.2 This lag in valuation removes proprietary management‘s information from the cash terms of trade determination process; that is, by responding to raw product valuation ex post rather than ex ante, the economic content of price signals produced in cash markets has a thinner basis. Moreover, the absence of managerial informational inputs to the cash terms of trade determination process can result in cash values that diverge from those actually warranted.3 In the context of bargaining, ex post valuation has two primary effects. First, the economic signals carried by bargained terms of trade are thinned, and to the extent that this biases the economic signals, their ability to reduce 1See Marion, B.w., 1976, for an attempt to chart distributions of risk in joint ventures. 2This is also the input valuation procedure generally used by cooperatives. 3For a discussion of issues related to thin market price determination, see N.C. Project ll7, Monograph # 7, University of Wisconsin, Madison, February, l979. the ris Second, economi ditions linkage risks t: 5.2.4 Thi in barga and ende organiza gaining is barga is the c. of coopei to offer are less accountir bargainec organizat Other gro pl‘ollrieta 0i owners eheWhere responses and grower 220 the risk in production, processing, and marketing decisions is hindered. Second, by adopting bargained prices ex post, any source of bias in economic signals is reaffirmed rather than corrected. Under con- ditions of bias, reaffirmation can exacerbate the bias. As participation linkages proliferate, these tendencies are magnified increasing the risks to the residual participants in cash markets. 5.2.4 Summary This examination of structural responses by proprietary processors in bargaining environemnts began with a focus on simple exit decisions and ended with a study of close alliances between grower and proprietary organizations. It was found that structural change in farmer bar— gaining environments is motivated by multiple factors, one of which is bargaining. However, more important than bargaining it was revealed, is the competitive coexistence with cooperative processors. The ability of cooperative organizations to draw on grower resources was perceived to offer significant competitive advantages. Such advantages, though, are less forceful where the cooperative organization uses single pool accounting with multiple commodities and thereby becomescommitted to bargained terms of trade. Nevertheless, the ability of cooperative organizations to spread performance risk onto growers and to draw on other grower resources united to elicit an imitative response by the proprietary sector. The first response studied was a transformation of ownership whereby proprietary investments are made liquid and flow elsewhere while growers assume the costs of processing. The next responses studied were participative linkages between proprietary and grower interests whereby grower resources could be incorporated while proprietary control was maintained. Grower willingness to accept sector Se tributi environ grower compens Incorpo advanta kind. linkage: of prod: 221 accept the consequences of such structural responses by the proprietary sector is explained largely by immobilities of grower resources. Several performance issues were raised regarding aspects of dis- tribution of risk and returns, structural changes in bargaining environments, and the coordinating impact of economic signals. The grower sector was seen to be sustaining increased costs and risks as compensation for channeling its resources to prOprietary utilization. Incorporation of such resources was argued to be affording competitive advantages and inviting other proprietary interests to respond in kind. Finally, the economic information present in proprietary-grower linkages was said to be impacted and thereby jeopardizing the accuracy of production, processing, and marketing decisions. ‘Sunmar T imposi market process partici Ct farmer Oregon, The com decreas in frui showed, farmer l revealec bargaini ln conjt of raw p findings one bein 1" marke CHAPTER SIX CONCLUSIONS AND POLICY IMPLICATIONS Summar This research analyzes the market interrelations created by the imposition of farmer bargaining. It does so by focusing not only on market interrelations between bargaining associations and proprietary processors but also on the market interrelations between these two participants and cooperative processors. Chapter Two offered a descriptive overview of all states with farmer bargaining with special attention given to the states of California, Oregon, Washington, Idaho, Michigan, New York, Pennsylvania and Virginia. The compiled structural data in Chapter Two indicated a 26.2 percent decrease nationally in the number of canning processing establishments in fruits and vegetables between 1967 and 1977. Statistical tests showed, however, no evidence of a higher rate of decrease in states with farmer bargaining than in states without farmer bargaining. Data also revealed the market share of the cooperative processing sector in farmer bargaining to be above 40 percent in many industries and increasing. In conjunction, these data indicated a decreasing and often low percentage of raw product moving through cash market channels. These structural findings presented many issues to explore in the research, the major one being causality between interrelations in farmer bargaining and change in market structure. 222 T of the Three relati to off a mode prefen condit' Us among l the cor and wil Th associa and eXp influen nationa exhibit. market ( tion prc differs, terms of determir 223 The description information on the legal and economic characteristics of the subject matter presented in Chapter Two was followed in Chapter Three by the presentation of a conceptual framework for studying inter— relations in farmer bargaining. The conceptual framework was designed to offer a systematic representation of participant behaviors. It used a model of organizational behavior stressing the notions of managerial preference for discretion, organizational slack, endogenous market conditions, and interest group competition. Using this framework, Chapters Four and Five analyzed interrelations among the participants in farmer bargaining. Chapter Six will summarize the conclusions developed in the discussion sections of previous chapters and will specify certain policy implications. 6.1 Conclusions 6.1.1 Area of Inquiry: Bargaining Association— Proprietary Processor Interrelations and Accommodations to Interrelations This area of inquiry was based on the proposition that bargaining associations and proprietary processors would respond to the opportunities and exposures created by farmer bargaining by using infbrmation to influence terms of trade to their individual advantage. The aggregate national sample of bargaining associations and proprietary processors exhibited this response. The result is a pooling of information on market conditions. It can be argued that this aggregation of informa- tion provides the potential for generating terms of trade with a different informational content and, accordingly, closer affinity with terms of trade that reflect demand and supply conditions than would be determined in the absence of farmer bargaining. . tion ' of bar teriza prieta limite of suc an evo COTTllllU Tl A. $9 I commun Bargai' condit' indica' sugges: interes Stratil more cc this va be exp] Califor tions, with pr tiOn, As 224 Stratification of the sample by geographic location suggested varia— tion in the pooling behavior outlined above; areas with a longer history of bargaining activity, such as the West Coast, revealed better charac- terizations of communication between the bargaining association and pro- prietary processor sectors than Michigan and Appalachia with their more limited histories. Insofar as historical experience is an explanation of such variation, bargaining environments can be expected to manifest an evolutionary process in moving from weak to strong intersectoral communication. A. Specific Uses of Information The findings also indicated some specific varieties of intersectoral communication related to content and strategic use of information. Bargaining associations generally manifested limited attention to market conditions beyond raw product markets: only 50 percent voluntarily indicated concern with processed product market conditions. This finding suggests a narrow and short run focus that may not serve the longer run interests of bargaining association members and prOprietary processors. Stratification by location showed California associations to evince a more complete system view than other associations in other states. Again, this variation can be explained by historical experience. It can also be explained by the existence of close working relationships between California cooperative processors and the respective bargaining associa- tions. This relationship channels processor concerns, e.g., concerns with processed product and consumer markets, to the bargaining associa- tion. As to strategic use of information, the existence of differential terms of trade bargained between an association and the respective propri 0n the in bar used a compel F intere terms propri from b would differ a func tive p cooper associ. trade, alignm. Where i out the reducti Tl to disc Provide 0n assc argumen Terms 0 225 proprietary processors was revealed to have widespread national incidence. On the one hand, differentiation in treatment can encourage participation in bargaining by proprietary processors insofar as differentiation is used as a threat to late signers. However, it can also produce select competitive advantages and may invite legal challenges. Related to differential treatment by associations is the general interest shown by proprietary processors in uniformity of raw product terms of trade. Stratification by location revealed that West Coast proprietary processors perceived input price uniformity to be a benefit from bargaining while Michigan and Appalachian proprietary processors would not credit bargaining with producing price uniformity. This difference can be a function of historical experience. It can also be a function of the difference in the extent of involvement of the coopera- tive processing sector in bargaining. For example, California cooperative processors are generally more closely aligned with bargaining associations and, accordingly, more committed to bargained terms of trade, than are cooperative processors in Michigan and Appalachia. Such alignment serves to produce input price uniformity among processors. Where uniformity in raw product terms of trade does not obtain through‘ out the processing sector, bargaining may not be capturing the potential reduction in procurement risk to participating processors. The data also revealed that bargaining associations were sensitive to disciplining economic pressures. For example, the national sample provided evidence of the disciplining impact of input substitutability on association behavior. Such association sensitivity dilutes the argument that bargaining offers associations the opportunity to dictate terms of trade with impunity. F associ of pro Inform in sev variat i.e., proces prieta among 1 expecti advanta 6.1.2 Th groups share 1 the coo: activiq Willing] bargains W35 the ness, ar with bar 226 Related to the disciplining force of substitute opportunities on association behavior in advancing terms of trade is the varying ability of proprietary processors to avail themselves of such competitive force. Information presented in the findings and in Chapter Two indicates that in several states, especially in California and Michigan, there was variation by ownership, i.e., conglomerateness, and by geographic reach, i.e., multiple versus single state operations, among the proprietary processing population. Consequently, uniformity.of treatment of pro- prietary processors by bargaining associations can exacerbate inequality among proprietary organizations; that is, uniform terms of trade can be expected to afford some proprietary processor organizations competitive advantages over others with concomitant structural impact. 6.1.2 Area of Inquiry: Bargaining Association- Cooperative ProceSsor Interrelations and Accommodations to Interrelations The primary proposition in this area of inquiry was that interest groups in the cooperative processor and bargaining association sectors share interdependencies and would respond to them. A. Cooperative Management Focus on cooperative processor management as one interest group in the cooperative sector showed management to be sensitive to bargaining activity. However, within the total sample management showed variable willingness to be constrained by this sensitivity, i.e., to recognize bargained terms of trade as a performance goal. Management in California was the most willing, with that in the Northwest mixed in its willing- ness, and that in Michigan being the least willing. Again, experience with bargaining activity appears to be an important explanatory variable. Howev tion i adapt by mu' will I accour from i accour l manage the or alters mance to a 1 tion 0 on man order intern; II in the characi associa ment vj tYPES c sTmulta Such co 227 However, the predating of cooperative processing by bargaining associa- tion activity in California can also help explain the more accommodating adaptation there. Moreover, the general use of single pool accounting by multiple commodity cooperative processors in California tended, as will be more fully addressed below, to render cooperative management accountable to bargained prices as a performance reference. The samples from Michigan and Appalachia showed less incidence of single pool accounting for multiple products than the California sample. The import of such sensitivity on the part of cooperative processor management is that it reflects a redistribution of information within the organization; that is, bargaining produces performance indicators, alters managerial discretion, and serves to redistribute risk of perfor- mance to management. However, the process of managerial accommodation to a lessening of discretion does not necessarily end with a redistribu- tion of risk and the accompanying heightening of performance pressures on management. Rather, management, it was posited, responds further in order to relieve itself of performance pressures through externally and internally directed responses. The findings first revealed externally directed responses, especially in the sample from California and Michigan. The responses assumed the character of direct, i.e., cooperative processor management to bargaining association management, and indirect, i.e., cooperative processor manage- ment via dual membership growers to bargaining association management, types of communication. (Dual membership consists of growers belonging simultaneously to a cooperative processor and bargaining association.) Such canmunication produces a flow of information from the cooperative processing sector to the bargaining association sector. This can enhan such Appal Furth marke envir: aSSOC' proces ( access cooper insura commod counte perfor intere ship. reduce PErfom Ii bargair Prietar in the Various 0T new Neverth GCOAOmi 228 enhance the infbrmational endowment of bargained terms of trade. Where such flows of information are less apparent, as in the Northwest and Appalachian samples, a lesser informational endowment is expected. Furthermore, where the cooperative processing sector is prominent in its market share of raw product processing, as was the case in all bargaining environments sampled, the informational pool used by the bargaining association to bargain terms of trade can be biased toward cooperative processor interests. Cooperative management in the sample also, it was revealed, had access to internal responses by which to shift performance risk back to cooperative membership. Widespread access to supply controls, internal insurance reserves, and selective treatment of commodities in multiple commodity organizations offers management the means by which to partially counter performance pressures. The result is not only to shift risk of performance back to membership, and not necessarily uniformly among interest groups, but also to reduce managerial accountability to member- ship. It can be suspected, however, that such ability to shift risk and reduce accountability is less where bargaining is present as an external performance reference point than where it is absent. It was also posited that cooperative management might try to influence bargained terms of trade in order to win competitive advantages over pro- prietary competitors. No explicit evidence of such behavior was found in the sample of association and cooperative processor respondents. Various disciplining factors such as single pool accounting, the threat of new entrants, and retaliation were mentioned as deterring such behavior. Nevertheless, arguments can be advanced to question whether or not the economic signals communicated by the cooperative processing sector serve to pri enhan< produc Le C lines, gainin sensit cooper commod coopen in cool exercis to be 5 restrai was a c multipl §g on coop associa Sectors comm um PPOVldir is Press Points. aCtI VI ty 229 to promote cash grower or cooperative grower interests and thereby enhance or distort the ability of bargaining to accurately coordinate production, processing, and marketing decisions. 8. Cooperative Members Other cooperative processor interest groups, e.g., by commodity lines, were also postulated to respond to interdependencies with the bar- gaining association. Responses were argued to be motivated by grower sensitivity to the impact of bargaining on 1) total returns to the cooperative, 2) member returns from the pool for single pool multiple commodity cooperatives, 3) member or commodity representation within the cooperative organization, and 4) competition. Commodity interest groups in cooperative processor organizations were revealed to respond by exercising dual representation and/or by prodding cooperative management to be supportive of their bargaining association and, in some cases, to restrain other commodity bargaining associations. This latter behavior was a common characteristic of the California sample with its single pool multiple commodity cooperative organizations. Some Consequences of Dual Membership. Dual membership and pressure on cooperative management to act as agent in relation to bargaining associations contribute to further the flow of information between the sectors. This communication can mean cooperative support for and commitment to bargained terms of trade; with the bargaining association providing content for cooperative member voice, cooperative management is pressured to respect bargained terms of trade as performance reference points. For multiple commodity copperatives, the presence of bargaining activity can also provide a basis for allocating returns. This is espec metho basis sect0' in th: there to a t more < l respor behavi c00per a diff especi multip sugges the ba to det deem will r. reallol Sector by Gas) Proprie l'lllpact than or Michiga dWei‘si 230 especially desirable for c00peratives utilizing a single pool accounting method rather than a multiple pool accounting method. Once this allocative basis is accepted, the inducement to flows of information between the sectors is stronger. It should also be noted that where not all commodities in the cooperative have bargaining voice, i.e., a bargaining analogue, there may be distributional consequences as cooperative management responds to a diminution of discretion in servicing some commodities by exercising more discretion in servicing others. An additional issue to raise in summarizing cooperative member responses to bargaining associations is to ask what the impact of this behavior is on raw product price levels. The pressure on price from cooperative members is upwards. This is explainable by recognizing a difference in source of revenues facing cash versus cooperative growers, especially for those cooperative growers belonging to a single pool multiple commodity organization. A difference in source of revenues suggests different goals and thus divergent economic signals entering the bargaining arena. Divergence has import for the association‘s ability to determine terms of trade with coordinating force, i.e., which reflect demand and supply conditions. An upwards pressure on raw product price will reduce proprietary processor purchases and, over the long run, reallocate production and processing market shares to the cooperative sector as l) cooperative members expand production to replace that lost by cash growers and/or 2) cooperatives are formed to replace existing proprietary processors. Moreover, such pressure will have different impact on single state proprietary processors and their producer suppliers than on multiple state proprietary processors. The fruit industries of Michigan and Appalachia are especially characterized by such geographic diversity of proprietary processing organizations. tion proc: tive: is di other Such COllllllC of in proce: dual r the Ti scale it is Proces t0 the intere grower member: 231 Moderating these impacts are other factors. The bargaining associa- tion may have its own source of information independent of the cooperative processing sector. Moreover, in single pool multiple commodity coopera- tives, at least, upwards pressure on raw product price from dual members is disciplined by the influence of cooperative management as agent of other commodities competing for the guarantees afforded by the pool. Such inter-commodity discipline does not occur in multiple pool multiple commodity organizations nor, ipso facto, in single commodity organizations. C. Grower Processors Related to the impact of cooperative member behavior as a function of incentives that vary from those of cash growers is the role of grower processors. Grower processors were also revealed by the study to share dual membership with the bargaining association of their interest. Given the incentives of these growers as, primarily, a function of matching scale economies in production and processing and combining profit centers, it is in their interest to induce a reallocation of production and processing market shares to themselves. Accordingly, economic signals to the bargaining association from grower processors will reflect this interest. As with cooperative dual members, variable goals among grower groups will produce divergent interests within the association membership. D. Association Management The conceptual work also argued that management of the bargaining association would respond to interdependencies with the cooperative processing sector by trying to enlist support from that sector for bargained terms of trade. All association management in the sample _‘;_.I_. varioi sector Prepri cooper Prepri tive p forces exPlan 232 solicited information from the cooperative processing sector. However, not all cooperatives were responsive; stratification by location indicated that the responsiveness of the copperative processing sector to solicita- tion, as characterized by association management, was gggg_in California, mixeg_in the Northwest, and moderate in Michigan and Appalachia. Variability in responsiveness can be explained by historical experience and/or whether bargaining or cooperative processing came first. The incidence of single pool accounting in California contributes significantly to the quality of responsiveness there. 6.1.3 Area of Inquiry: Structural Responses of Participants and the Case of Cooperative-Proprietary Linkages The inquiry into structural responses of participants explored various reasons for and varieties of structural change in the processing sector in farmer bargaining. Specifically, it looked at 1) simple proprietary exit, 2) the transition of ownership from proprietary to cooperative interests, and 3) select organizational linkages between proprietary and cooperative interests. It was hypothesized that competi- tive pressures and proprietary recognition of resource availability were forces influencing structural change. Both elements were found to have explanatory validity. A. Proprietary Exit It was postulated that the constraints imposed by bargaining for terms of trade for raw product could explain decisions by proprietary processors to exit from processing. Proprietary processor respondents generally identified bargaining as one variable explaining exit responses. However, when stratified by geographic location the causality attributed to ba were proce parti from out t impor advan: lower those incluc to the pressu functi accoun raw pr cessor still onto 1- absorb' PFOpri¢ (bargai that p5 to keep In the process 233 to bargaining was less clear. In the California sample, respondents were equivocal about the relation between bargaining and prOprietary processor exit. In Michigan, respondents argued that bargaining was a partial explanation. Generally, more emphasis was given to competition from cooperatives; competition from the cooperatives was noted through- out the national sample, especially in California and Michigan, as an important cause of proprietary processor exit. The argument generally advanced was the ability of cooperative processors to value inputs at lower levels by virtue of their freedom from fixed input prices such as those set by bargaining for raw product. It can be concluded that the pressures contained in bargaining, including competition from the cooperative processing sector, contribute to the forces inviting proprietary processor exit. However, these pressures should be less important in areas like California where, as a function of heavy dual membership and single pool multiple commodity accounting, cooperative management finds itself pressured to value its raw product inputs at the same bargained prices that proprietary pro- cessors pay. Notwithstanding this pressure, the cooperative organization still has the ability to shift risk of price changes and performance onto its grower membership by adjusting transfer prices. This risk absorbing resource likely constitutes the real competitive threat that proprietary processors, who face fixed raw product transfer prices (bargained terms of trade), are so sensitive to. (It is worth noting that part of Unemotivation for collective bargaining by growers has been to keep proprietary processors from shifting this risk onto growers.) In the bargaining environments studied in this research, the cooperative processing share is substantial. Insofar as cooperative processor organ' residi elici' coope: incra proce: propr' propr‘ The 5' spreac trans‘ such < and pr willir their 1 be lis the re 65 thi exPanc tion u can re the ve recogr 234 organizations shift risk onto growers, the competitive impact on the residual proprietary processing sector may be substantial enough to elicit exit. B. Transition in Ownership This area of inquiry also explored the proposition that grower and cooperative organization resource availability was contributing to an increase in the cooperatively organized market share of raw product processing. It was hypothesized that this increase was a function of proprietary responsiveness to opportunities in its environment, i.e., proprietary responsiveness to usable grower and cooperative resources. The study's sample of proprietary processor management revealed a wide- spread recognition of and desire to utilize such resources. Where transition of ownership of processing facilities occurs as a result of such desire, the costs of processing are shifted onto the grower sector and proprietary investments are freed for allocation elsewhere. The willingness of growers to accept these costs tends to be a function of their need to protect outlets for the products of on-farm investments. The results of transition of ownership of processing facilities can be listed. First of all, the grower-need to protect outlets results in the retention of processing capacity at grower expense. Second, insofar as this transition in ownership occurs, growers will be inclined to expand production in order to coordinate the scale economics in produc- tion with those of processing. Over the longer run, this coordination can reallocate raw product production and processing market shares to the vertically integrated grower sector. In summary, proprietary recognition of available resources invites transition of ownership of proce produ C) I... to gr betwe being manage source partic intere are nu Propri be spr tary a 3) gror conseqr Constii Raising 10int v Se arrange from th Tncenti 0f inef Standar‘ 1.mcoi‘mai IIIIIIIIIIIIIIIIIIllllllllllIIIII:————————————-----——————————————————————————eeU_ I ,__e2_2____12_r_7,. 235 processing facilities and can lead to concentration of raw product production and processing in the vertically integrated grower sector. C. Linkage Arrangements Related to the hypothesized responsiveness of the proprietary sector to grower resources was an exploration of select linkage arrangements between proprietary and cooperative interests. The underlying proposition being tested was that such linkages were a manifestation of proprietary management efforts to relieve itself of constraint concern (expand its sources of discretion). Upon examination, linkage arrangements such as participation plans and especially joint ventures, showed proprietary interests seeking sources of discretion. The results of such linkages are numerous. First, certain redistributions are affected by virtue of proprietary-cooperative linkages; this is because 1) performance risk can be spread onto the grower population; 2) the goal functions of the proprie- tary and cooperative parties to the linkage may be antithetical; and 3) grower resources are channeled to proprietary utilization. The net consequence of redistributions is to offer competitive advantages that constitute entry barriers to non-linked proprietary and grower interests. Raising entry barriers invites concentration of markets in the hands of joint ventures and participation plans. - Second, certain aspects of coordination are affected by the linkage arrangements examined above. The distribution of risk appears separated from the distribution of control inviting distortions in economic incentives; that is, the proprietary interest may not bear the full cost of inefficient behavior. Moreover, the ex-post input valuation as a standard operating procedure characterizing these linkages removes market information from cash transactions. In light of bargaining activity, such barga signa ments the r gaine« marke incree 236 such removal deteriorates the economic information contributed to the bargaining process and impedes this process’ ability to produce economic signals that accurately reflect demand and supply conditions. Third, the removal of market information from bargaining environ- ments serves to thin the bargained transaction and increase the risks of the residual prOprietary processing and cash grower markets. That bar- gained transactions are already thin or thinning is attested to by the market structure statistics presented in Chapter Two. In the longer run, increased risk will invite further attempts to shed risk. 6.2 Policy Implications 6.2.1 The Bargaining Process This research has explored the responses of bargaining associations and cooperative and proprietary processors to interdependencies in farmer bargaining. Farmer bargaining has been shown to elicit the aggregation of market information from these participants. Accordingly, farmer bar- gaining provides a means for determining terms of trade that reflect demand and supply conditions. The consequences, then, of bargaining as a process for determining terms of trade are several. Inasmuch as growers and processors partici- page in the process, bargaining provides a means for modifying the distributive outcomes which would exist in the absence of bargaining. Furthermore, by providing a framework for organizing arguments about market conditions, bargaining can coordinate economic signals. It can do so by assimilating the aggregate signals contributed to the process and summarizing that information in the terms of trade produced. Additionally, and related to the ability of bargaining to coordinate economic signals, is its ability to respond to dynamic market conditions by p: chans enhan means |?=' gaini under modif assoc of pri 0f rel specii be use can in member market versus Promot. eXplor‘ Process not be handlir ttansac Pricing 237 by providing a basis for articulating and arguing the ramifications of change. The findings of this research suggest some means by which to enhance farmer bargaining's ability to produce these consequences. These means will be outlined below. A; Processor participation in the information pooling process of bar— gaining can be expected to evolve over time as participants come to understand their interdependencies in bargaining and how these can be modified by use of bargaining. Certain actions taken by the bargaining association can promote the development of such understanding on the part of proprietary and cooperative processors. Education. Bargaining associations can promote the participation of relevant groups in bargaining by providing educational products that specify interdependencies and demonstrate ways the bargaining process may be used to respond to these interdependencies. For example, associations can induce participation from cooperatives by providing to cooperative members comparative information on the past performance of alternative marketing channels, e.g., raw product marketing through proprietary versus cooperative channels. Similarly, bargaining associations can promote the participation of the proprietary processing sector by exploring and explaining the full range of terms of trade determination processes that can be accommodated by bargaining. Such processes need not be limited to price and quantity but may also address the innumerable handling, quality, and timing considerations attendant to raw product transactions. Moreover, adjustments for future contingencies and formula pricing can be incorporated in bargaining to reduce sources of risk to propri varies serve I associ proces favore contra late s differ advani differ be ofi advani tive r input Pmcm discos access reliei their tion - not or hETp 5 and/or to Pdl 238 proprietary processors. Presentation of the broad range of decision variables and processes that bargaining may be used to address would serve to more fully inform relevant groups about bargaining opportunities. Instrumental Differentiation in Bargained Terms of Trade. Bargaining associations can bargain differential terms of trade with proprietary processors in order to induce their participation. For example, most- favored-nation treatment can be accorded early signatories of bargained contracts. Such treatment imposes the threat of higher input costs on late signatories. Participation can also be induced by bargaining differential terms of trade which negate or at least diminish competitive advantages attributable to geographic reach and brand finished product differentiation. For example, single state processing operations could be offered discounted raw product prices to remove the competitive advantage to those processors who have processing operations in alterna- tive raw product production areas. Such equalization of raw product input costs reduces the incentive for multiple state operations to procure raw product beyond the purview of bargaining. Similarly, equalizing discounts could be offered to those proprietary processors who do not have access to value added through product differentiation. This would relieve the competitive pressure on private label packers and encourage their continuation as processors. In short, the instrumental differentia- tion in terms of trade bargained with proprietary processors can reduce not only competitive advantages attendant to nonparticipation but can help stem the exit of proprietary processors without geographic reach and/or brand product differentiation. Stemming such exit is fundamental to participation in bargaining. a far page stitL can a proce count being ment. coulc bend} a bar bring diffi incen respo goals inclu accep } WT tho: 0? no- trade condi‘ pPOdu( 239 Input Substitutability, Input substitutability has been shown to be a factor affecting the willingness of proprietary processors to partici- page in bargaining. Where raw product inputs being bargained have sub- stitutes in other raw products or in other regions, proprietary processors can attenuate their need to utilize the bargaining process for input procurement by drawing on the substitute. Accordingly, a strategy to counter such substitution would be to define the boundary of raw product(s) being bargained so as to negate the incentive for substitution in procure- ment. For example, raw product x and its substitute, raw product y, could be marketed under the aegis of a bargaining association as an input bungle_rather than marketed in competition with one another. Equivalently, a bargaining association in product x could expand its membership to bring substitute production areas in x into the association. Some difficulties in implementing this suggestion lie in overcoming the incentive to free ride on bargaining, i.e., enjoy the substitute price response without defraying the costs, and in subordinating individual goals to group goals. Moreover, the larger the number of interests included in the association the more difficult it becomes to find an acceptable common denominator. These difficulties may not be overcome without recourse to changes in the distribution of rights to participate or not to participate. B;_ Bargaining associations can promote the production of terms of trade which accurately reflect both present and future demand and supply conditions by investing in market information that goes beyond raw product markets. invo fina' fach proce atter of SI semir facil marke issue raw p oppor gaini 240 Informational Initiatives. The assessment of economic signals involves consideration of conditions in institutional and retail and final consumer markets as well as conditions in raw product markets. All factors which impact on the profitability and, hence, survivability of the processing sector are relevant to the bargaining process and warrant attention by bargaining associations. To further promote the consideration of such factors, bargaining associations could jointly sponsor outlook seminars with processing, institutional, and retail market groups to facilitate a two-way informational exchange as a means of identifying market issues and eliciting responses from the groups impacted by those issues. Those bargaining associations which restrict their analysis to raw product market conditions may fail to exploit the coordinating opportunities afforded by the interdependencies created by farmer bar- gaining. 6.2.2 Bargaining and Cooperative Processors This research has documented conditions under which c00perative processors are pressured to use bargained prices as their values for raw product deliveries of members. Such pressure can serve to commit coopera- tive management to bargained prices as a performance reference. The consequences of this commitment have import for both the distribution of patronage returns and competition between proprietary and cooperative processors. Several strategies for creating cooperative processor commitment to bargained price levels as both raw product input values and performance references are suggested by the research. A. Dual Membership Simultaneous membership by growers in a bargaining association and cooperative processor creates linkages between the organizations. Such link of p ship perf proc attel refer the n ment faces that resea membe Proce A Sim who a assoc' Proces dual n Pestri associ Insofa terms rePres dCCUra 241 linkages provide for a two-way flow of information and hence communication of performance concerns between the organizations. Moreover, dual member- ship offers cooperative processor members the means to construct performance references that are beyond the direct control of cooperative processor management. To the extent that cooperative processor management's attention can be focused on bargained price levels as a performance reference, bargaining can offer cooperative members a means of rendering the managerial process more accountable to member interests. Though dual membership serves to elicit cooperative processor commit— ment to the terms of trade incumbent on the proprietary sector, it also faces association management with the task of sorting out price demands that originate from different economic calculuses. As argued in the research, bargained raw product prices based on the cooperative processor members' economic calculus can promote a contraction of the proprietary processing sector and an expansion of the cooperative processing sector. A similar result is signaled by the economic calculus of grower processors who also belong to the bargaining association. To modify pressure toward structural change yet also produce an association-cooperative processor alliance that commits the cooperative processor to bargained prices, association management could cultivate dual membership yet control its influence. One means of control is to restrict dual members from holding influential positions in the bargaining association or in the cooperative processor such as board positions. Insofar as board positions offer incumbents more influence over bargained terms of trade, it is desirable that these influences accurately represent demand and supply conditions in the bargained commodity. Such accurate representation can be confused by the mingling of grower inte barg cond boar to ba SYSte impel: exle single Prices Pool a gained commOd In SUm 242 interests. However, the ability of the mingling to je0pardize the bargaining of terms of trade which accurately reflect demand and supply conditions can be reduced by excluding cooperative processor growers from board positions in the association. While dual membership has developed spontaneously in the various bargaining situations studied in this research, there is not complete dual membership between cooperative members and respective bargaining associations. Thus, not all growers are supporting the administrative costs of bargaining. One means of spreading these costs to growers who have not voluntarily shared in them is to use public policy to bestow on all growers the obligation of membership in the bargaining association. Such a rule, of course, imposes unwanted costs on a segment of growers. In the absence of such a rule, however, some growers benefit from the products of bargaining without sharing in their production cost. B. Accounting Rules An alternative means of producing cooperative processor commitment to bargained prices is for cooperative processors to use an accounting system which, by virtue of its need for an allocative decision basis, impels the c00perative to adopt bargained prices. This research has explored the comparative inducements of cooperative processors using single pool or multiple pool accounting to embrace cash raw product prices as the allocative decision basis. Cooperatives using single pool accounting for multiple commodities are more likely to adopt bar- gained prices. This likelihood derives from the structure of inter- commodity competition which results when costs and returns are_pooled. In summary, cooperative processor commitment to bargained prices can be pro and lo pric comp sect to c coop comm pool tive commt coope tive growe tion Proce coope Barga- COOpe making would cOntir c0-min Utiliz 243 produced by structuring cooperative organizations to be multiple commodity and to use single pool accounting. C. Bargaining with Cooperatives A third means of eliciting cooperative commitment to bargained prices and thereby increase managerial performance accountability and competitive equality between the cooperative and proprietary processing sectors in regards to raw product input valuation is to expand bargaining to cover grower transactions with cooperative processors. Bargaining with cooperatives would be a more direct means of achieving cooperative commitment than efforts to expand dual membership and introduce single pool, multiple commodity accounting. Moreover, bargaining with coopera- tives is consistent with dual membership and single pool, multiple commodity accounting. Bargaining with cooperative processors serves the interests of cooperative growers by strengthening management accountability to competi- tive performance indicators. It serves the interests of association growers by inducing the cooperative sector to contribute market informa— tion to and compete for raw product at definite prices in the bargaining process. It serves the interests of proprietary processors by putting cooperative competitors on an equal basis regarding per unit input costs. Bargaining with cooperatives does, however, impose more constraints on c00perative management thereby limiting managerial discretion in decision making. Under the imposition of such constraints, cooperative management would be expected to exercise alternative sources of discretion such as contingency reserve funds, supply controls on member deliveries, and co-mingled costs and returns to facilitate internal transfers. Utilization of these sources of discretion would not necessarily be in coni This sour of m asso perfi effi barga perfr to ac guara susta passe will This barga' basis Perfor constr COMPEI 6.2.3 struct Bargai 244 conflict with the interests of cooperative or association membership. This will depend, of course, on whether management avails itself of such sources to serve its own goals, to serve selectively advantageous goals of membership groups, or to serve general membership goals. Under conditions whereby cooperative processors bargain with an association to establish the transfer value of raw product, managerial performance becomes referenced to bargained prices. Accordingly, the efficiency of managerial performance is evaluated more in light of a bargained price rather than on the basis of some managerially controlled performance criterion. The net result of bargaining with cooperatives is to accord members more control over their cooperative organization. Notwithstanding the above, bargaining with cooperatives does not guarantee successful operations; the cooperative processor can still sustain losses due to uncontrollable market outcomes and these will be passed onto membership. Even the most efficient processor management will fall short of desired performance under some market conditions. This is true for proprietary as well as cooperative management. However, bargaining with cooperatives puts c00perative processor management on a basis that is more comparable to that of proprietary processors; the performance of both varieties of processing organizations would then be constrained by fixed (bargained) raw product costs. Hence, a source of competitive advantage is attenuated. 6.2.3 Bargaining and Structural Change in the Processing Sector This research has revealed both structural change and forces inducing structural change in the fruits and vegetables for processing industries. Bargaining as a source of input price pressure and cooperative processing as for exp tivI mot‘ uti' char role '5" and orga to p effe that Howe' by wl in me One h condi intrc with Barga towar advan this Compe 245 as a source of competition in sales of processed products are among the forces causing structural change in these processing industries. Also explored by the research were structural changes in the form of coopera- tive-proprietary linkages that are, in part, the result of proprietary motivations to incorporate grower resources in order to share risks and utilize sources of discretion. Questions as to whose interests these changes serve have been variously addressed in earlier discussions. The role of bargaining given these structural changes is the issue here. A. Cooperative Saturation All of the states studied in this research evidenced substantial and often times increasing market shares under control of cooperatively organized processors. When cash transactions, i.e., raw product sales to proprietary buyers, represent a small fraction of deliveries, the effectiveness of raw product bargaining in producing terms of trade that accurately reflect demand and supply conditions can be questioned. However, such structural change does not negate the need for a process by which transfer values are established. Accordingly, bargaining, even in markets saturated by cooperative control, can still play a role. One means of utilizing bargaining to produce transfer values under conditions of cooperative saturation is, as presented earlier, to introduce bargaining between cooperatives and the association., Bargaining with cooperatives can thicken otherwise thinning raw product transactions. Bargaining with cooperatives is also a means of stemming the trend towards a decreasing proprietary market share insofar as competitive advantages for cooperatives are thereby attenuated. An alternative to this suggestion would be to offer proprietary processors the same competitive advantages. An example would be to let proprietary % pro< In a per‘ coo; gair proc trar prod with to c with chan into by 9‘ Tram: small in th that Dmce argue Contr use t the h processors defer payments to growers as is done by cooperative processors. In addition, bargained terms of trade could be made contingent on the performance of the cooperative processing sector. For example, if the cooperative processing sector returned less than 100 percent of the bar— gained price to cooperative growers, final payments by proprietary processors to growers could be discounted to reflect this shortfall. Another possibility is to use the bargaining process to establish transfer values at the processed level. Such bargaining for processed products would raise numerous issues related to the definition of buyers with whom bargaining would take place, the allocation of joint returns to commodity groups, and the responses of groups having interrelations with bargained transactions for processed products. One possible result of processed product bargaining would parallel the current structural change in ownership of processing capacity by inducing further vertical integration into remanufacturing and marketing of fruits and vegetables by growers using either a coooerative or noncooperative organizational framework. B. Participative Plans and Joint Ventures This research has also explored the bases for and noted the as yet small but increasing incidence of participation plans and joint ventures in the fruits and vegetables-for-processing industries. It has concluded that these linkages are largely motivated by a desire of proprietary processors to utilize grower resources. This research has further argued that these methods for bringing grower resources under proprietary control raise entry barriers, offer competitive advantages to those who use these methods, invite concentration of the processing industry in the hands of joint ventures and participation plans, and reduce the PTOP from coop base does inte exam atter the r is be Proce tors growe vOlum Vertt enlan COntrr PMCo 247 amount of market information available for bargaining. These results can be partially alleviated by keeping the raw product transfer valuation process in participation plans and joint ventures within the purview of bargaining by obliging managements in such linkages to bargain. In the absence of bargaining to determine valuation in these linkages, the allocation of returns will be a function of management agreements between the grower and proprietary interests. Where such agreements produce proprietary dominance, grower resources are likely to be transferred away from growers. For some organizations claiming the right to exercise cooperative property rights, transfer of control contravenes the legal bases of those rights. For example, to the extent that grower control does not exist in joint ventures between cooperative and proprietary interests, utilization of Bank for Cooperative financing and antitrust exemption can be challenged. Such challenges may produce case law attenuating the motivation for joint venture organizations. C. Grower Processors In certain fruit and vegetable industries studied in this research, the non-cooperative grower processor sector is increasing. This sector is beyond the jurisdiction of bargaining but enjoys the benefits of a processed price umbrella which results from having proprietary competi- tors committed to a fixed raw product input value. The inducement for grower processors to undersell this umbrella in order to increase their volume is facilitated by the combination of profit centers and the vertical integration of scale economies. The result may be not only an enlarging of market shares of production and processing under the control of grower processors but also the production of lower cost processed product. a P par ces spr of 1 dis: have to r to \ only may the more prie 248 Some grower processors process the raw product of other growers on a participation plan basis. The results noted above in reference to participation plans also apply here: growers delivering to grower pro- cessors on a participative basis may have little control over the spreading of performance risks and the disposition of returns from sales of processed product; and, such processing organizations, though disciplined in the short run by the threat of exit of grower raw product, have competitive advantages which raise entry barriers and contribute to concentration of the processing industry. These results are likely to vary according to the makeup of the participating population. Where only neighbors are involved, positive rewards to participating growers may be produced because of the person to person relationships between the manager and growers. However, where the participating population is more anonymous, the grower processor is likely to resemble the pro- prietary participation plan. 6.3 Final Summary This research has examined the interrelations among bargaining associations and processors that are produced by the imposition of bargaining over terms of trade for raw product. To do so, it has gone beyond an inquiry into interrelations between bargaining associations and proprietary processors to include an analysis of interrelations between both of these groups and cooperative processors. What has been revealed is an intricate web of interrelations and responses to inter- relations which have import for 1) the ability of bargaining to produce terms of trade which accurately reflect demand and sopply conditions, 2) the ability of cooperative processor members to control their COC Spe sup tio imp by on dif PTO farr ian Suci stre memt Putt rega barg memb comm acco prOCI Prop] tribL TACre 249 cooperative organization, and 3) the structure of the processing industry. Specifically, the research showed that: 1) farmer bargaining elicited market information about demand and supply conditions from all three participant groups. Bargaining associa- tions can promote this aggregation of information and the subsequent improved coordination of production, processing, and marketing decisions by conducting industry seminars, disseminating comparative information on past performance of alternative marketing channels, and bargaining differential terms of trade with a nonuniform population of proprietary processors; 2) numerous cooperative processors actively participate in farmer bargaining and as a result, become obliged to value raw product inputs at the same price as their proprietary processor competitors. Such obligation can serve c00perative processor member interests by strengthening the accountability of the cooperative organization to its members. It also serves the interests of proprietary processors by putting cooperative processors on a more similar competitive basis regarding input costs. Commitment of cooperative processors to farmer bargaining can be enhanced by: a) encouraging cooperative processor members also to belong to the bargaining association representing their commodity interest(s); b) introducing single pool multiple commodity accounting in cooperatives; and c) bargaining formally with cooperative processors as is currently done with proprietary processors; and 3) market interrelations, primarily that of competition between proprietary and cooperative processors in farmer bargaining, are con- tributing to the decline of the numbers of proprietary processors, the increase in the market share of the cooperative processing sector, and org as inc tral and to 1 pol beer frui sour agri tof 250 organizational linkages between proprietary and grower interests such as joint ventures and participation plans. These structural changes can be attenuated by: a) expanding the formal purview of bargaining to include all processors; b) in the absence of a), bargaining terms of trade that are contingent on the performance of nonbargaining processors; and c) insofar as these structural changes are transferring grower resources to proprietary control, challenging their existence on legal and public policy grounds. By more fully probing the impact of bargaining, this research has been able to identify sources of change and sources of control in the fruits and vegetables-for-processing economy. Many of these identified sources are likely generalizable to other commodity economies and other agricultural organizations. It is hoped that these findings contribute to future initiatives by participants and policy makers in agriculture. my rese Chap the 7.l. on k hand' potei done assoc barga gaini infer that Provi may f and/o CHAPTER SEVEN FUTURE RESEARCH SUGGESTIONS Introduction This section will consist of two parts. The first will address research which would be useful to the policy implications listed in Chapter Six. The second will speak to broader research issues that, on the basis of this study, warrant further inquiry. 7.l Research to Complement Policy Implications 7.l.l To assist bargaining associations in making decisions that are based on knowledge of system ramifications beyond the immediate grower-first handler transaction, research should be conducted to identify extant and potential sources of relevant market information. Some studies have been done on the secondary informational sources used by existing bargaining associations.1 However, in light of partial analyses conducted by bargaining associations and potential growth in the incidence of bar- gaining interrelations, research to identify the extent of the available informational infrastructure is warranted. Such research may ascertain that the incentives to pool information as documented by this study provide a sufficient informational basis for decision making. Research may find, alternatively, that this informational pool is insufficient and/or needs to be augmented by other informational sources. 1Lang, M., T977. 251 7.l. enti neec sing priv esti for prie 7.l. have of r. will Resea centi the L barga Proce effor argue to so Pear, for d resea 0i ut 7.1.2 In light of documentation that bargaining associations apply differ- ential terms of trade to a variable proprietary processing sector, research needs to be conducted to estimate: l) raw product procurement costs for single versus multiple state operations; and 2) revenues from sales of private label processed products versus brand processed products. These estimates could then be used to construct a systematic pricing structure for differentiating the terms of trade bargained with a nonuniform pro- prietary processing sector. 7.l.3 To implement bargaining for groups of raw product inputs, algorithms have to be developed as bases for pricing strategies and the allocation of revenues among the various inputs. Utilization of such algorithms will necessitate estimates of own and cross price elasticities of demand. Research on both the construction and,utilization of such algorithms is central to implementation of group bargaining strategies. Related to developing algorithms for group bargaining strategies is the use of indexed bargaining, multi-year bargaining, sliding scale bargaining, and combinations thereof. The interest of the proprietary processing sector in these bargaining methods is not well known. However, efforts by select industries in California to implement such methods argue a need to evaluate the interest and, if warranted, to develop means to satisfy the interest. Current efforts by the cling peach, bartlett pear, apricot and tomato industries to bargain deterministic algorithms for defining some terms of trade would provide a starting point for research into the desirability, feasibility, and performance ramifications of utilizing such algorithms. pro at bao org pem onlj and, tran in t for and the and the retu: dime gain Depa, East 7.l.4 Research on comparative performance of competing processing organi‘ zations, both cooperatively and proprietarily organized, would be useful to bargaining associations to help them compile and disseminate performance profile information for cash and cooperative growers. A research group at Purdue University is currently attempting to develop comparative bases for evaluating cooperative organizations against proprietarily organized analogues in select industries.1 In conducting research on the performance of cooperative organizations, attention has to be given not only to final returns to growers but also to the distribution of risk, and, more fundamentally, interest group control within the organization. 7.2 Related Research Issues 7.2.l The relation between rules for allocating shared costs and patron transfer prices is an area of interest to students of and participants in the cooperative economy. It is suggested that the accounting methods for allocating such costs have impacts on: T) production, processing, and marketing efficiencies; 2) the distribution of returns and risks in the cooperative; and 3) the cooperative's competitive position in input and finished product markets. Such impacts could be studied by analyzing the various allocative rules in use according to their impact on patron returns and the reSponses they elicit from patrons and management. Another dimension of this relationship to explore would be its import for the bar- . . . . 2 gaining assoc1ation sector. 1Department of Agricultural Economics, Purdue University, Lafayette. 2Chase-Lansdale, C., ”Allocation of Shared Costs and Transfer Prices,” Department of Agricultural Economics, Michigan State UniverSity, East Lansing, forthcoming. age con pro Att arn stn stai Cap; deci this deci For or p Simi‘ resei manag need COOpe from dffeC the m 254 7.2.2 The spreading incidence of participative arrangements (called link- ages in this study) between proprietary and grower interests argues for more case study research into their performance ramifications. The conceptual model of managerial behavior utilized in this study could provide the necessary theoretical construct for organizing observations. Attention should be given not only to the distributive impacts of such arrangements but also to their impact on competitive conditions and market structure. In addition to an economic inquiry, a legal inquiry into the status of such arrangements within the Sherman Act, Clayton Act, and Capper-Volstead Act should be undertaken. 7.2.3 Institutional lenders often play a central role in influencing the decisions of cooperative organizations. Though not reported at length, this study found evidence of institutional lender influence on the decisions of both bargaining associations and cooperative processors. For example, the imputed values which serve as a basis for pre—production or pre-harvest loans may set a floor value for bargained raw product. Similarly, lenders may apply certain demands, such as the creation of a reserve-insurance fund, or influence retain policies and thereby alter managerial performance in cooperative processors. These sorts of impacts need to be better understood; their significance for the performance of c00perative organizations warrants delineation. Furthermore, influence from institutional lenders may extend beyond a specific organization to affect interrelations among organizations. Such impact is exemplified by the motives of proprietary interests documented in this study for entering int war beh gai iza res 7.2 org: us: the orga regL coo; betw an ' expl orga VGPS 7.2- stud; 255 into linkage arrangements with growers. Research on this topic is warranted in order to understand the relation between institutional lender behavior and participant interrelations and hence performance in farmer bar- gaining. The conceptualization developed in this study provides an organ- izational, behavioral, and performance scheme that could serve such a research effort. 7.2.4 Complementary to a behavioral construct for studying cooperative organizations as developed in this study would be the addition of internal organizational ideology as a variable affecting decision making. Ideology is relevant insofar as its characteristics impact on the performance of the organization. Roberts has produced evidence of a relationship between organizational ideology and control and decision costs in publicly regulated industries.1 An 'ideology variable' could be applied to cooperative organizations in order to test the hypothesis of a relation between it and certain dimensions of performance. Moreover, insofar as an ‘ideology variable' has explanatory power for organizational performance, exploration of its role could contribute to comparisons of alternative organizational forms for producing select outputs, e.g., cooperative versus proprietary. 7.2.5 A recent GAO report2 and numerous participants in the sample of this study have expressed interest in the liquidity of member investments in 1Roberts, M., l975. ZFamily Farmers Need Cooperatives--But Some Issues Need to be Resolved, GAO Report to the Congress of the U.S., CED-79-l06, July 26, l979. 256 c00perative organizations. A research program to explore the status of liquidity, the feasibility of liquidity, and the impact of liquidity on such organizations is warranted. This issue could be addressed within the conceptual framework developed in this study. In conducting such research, attention should be directed towards exploring the impact of liquidity on managerial decision making and, ultimately, the performance of the organization. It is tentatively suggested that illiquidity of member investments relieves management of the disciplining pressure of mobile resources. It may also result in intergenerational transfers. Related to a focus on liquidity of member investments as a variable affecting managerial decision making would be a more general identification of internal organizational variables affecting management choice and, hence, the performance of the cooperative. Such variables as quantity and quality controls on member deliveries, retain policies, and reserve funds can alter managerial performance as has been argued in this study by providing sources of discretion. Organizational variables of this variety do not necessarily work to the detriment of cooperative performance by virtue of the slack in decision making that they afford; sources of slack can serve to permit adjustment to unexpected costs and changes in market conditions. On the other hand, these variables may serve interests other than general cooperative membership. Accordingly, research is invited to catalogue the various sources of managerial discretion existing in cooperative organizations and to explore their function and, ultimately, their impacts on general performance issues of distribution, account- ability, coordination, and structural change. 257 7.2.6 This study has raised the issue of deteriorating economic signals (thinning markets) taking place in bargaining environments: an expanding vertically integrated grower sector with a concurrent contraction of the cash sector. Within such environments, market infbrmation is becoming more and more impacted. Research attention needs to be given to devising means of dislodging impacted market information necessary for the coordina- tion of production, processing, and marketing decisions. Expanding the bargaining decision process to include new and currently excluded partici- pants could induce a dislodging of such information. The task for the researcher is to decide what participants to include and how to include them in a process that will elicit a pooling rather than thinning of market information. This research suggestion is a function of recognition of the evolving structure of interrelations in farmer bargaining environments. 'Others have also recognized this evolution and have called for alternative pricing mechanisms including bargaining directly with large food retail firms.‘ Thinning market conditions argue for research on alternative transfer pricing methods. One mechanism that may offer some remedy to the problems of valuation and coordination in thin and/or thinning markets is a forward deliverable contract market system incorporating desirable contingency provisions. This system could be used by cooperative processors to establish transfer values with buyers such as merchandizers. It could also be used by bargaining associations to establish transfer values with the proprietary processors and/or with merchandizers. Forward l Garoyan, L., l970; p. l0; and Garoyan, L. and E. Thor, l977. 258 deliverable contracts between bargaining associations and merchandizers could further involve custom packing contracts between bargaining associations and processors, of either the proprietary or c00perative variety, in order to meet the processed product requirements of merchan- dizers. Some advantages of a system of forward deliverable contracts are as follows: l) they can elicit information about future market conditions, thereby serving coordination and valuation needs of all participants; 2) they are a mechanism for bargaining the allocation of risk among market participants in the vertical market sector and could be implemented under the auspices of a bargaining association; and 3) they can accommodate both sales of processed and raw products, e.g., the bargaining association could have as clients cash growers as well as cooperative processors as it bargains forward deliverable contracts. APPENDIX A GLORIETTA FOODS CLORIETTA FOODS Glorietta was incorporated in California on November ‘23. 1977 as an agricultural marketing c00perative. Its temporary address is P. O. Box 50040. San Jose, California (Zip Codc: 95150). Glorietta intends to acquire certain assets of NCC Food Corporation. a California corporation ("NCC Food'). If this transaction is consummated. Glorietta intends to continue the fruit and vegetable canning business of NCC Food on a cooperative baSis. Membership is limited to bona fide residents of California actively engaged in the growing of agricultural products which are to be marketed through Glorietta. The initial offer of membership and marketing agreements is being made primarily to growers Who sold products to NCC Food in 1 7.“. Purchase of the assets and operation of the processing and marketing business would be financed by a combination of capital supplied by growers. long- and short-tenn bank financing (possible combination of long-term bank and other lender financing). a long-term purchase obligation to .\'CC Food and certain initial short-term financing available from National Can Corporation (“National Can") in connection with can purchases. The principal crops to be processed and marketed include tomatoes. cling peaches. pears. apricots. grapes, freestone peaches. asparagus and spinach. These products are highly seasonal. Partly for this reason. Glorietta presently intends to continue to pack and market dry beans and to market oveueas its own and a variety of other food products. Glorietta Would continue to manufacture a variety of canned fruit and vegetable products from the crops received. These products would be distributed to various consumer markets throughout the United States and to a limited extent overseas. Distribution would be primarily under its customers' brands and also under brands to be acquired from NCC Food. The growers initially being offered membership and marketing agreements supplied approximately 80”} of the raw agricultural products used by NCC Food in its fruit and vegetable canninc operations in 1977. As a condition of becoming a member of Glorietta. a grower must agree to enter into an agree- ment to market through the Cooperative specified products for at least five crop years, commencing in 1978. In addition. the grower must make an initial contribution equal to 1557 of the estimated established'value (based on 1977 commercial prices) of products to be marketed through the Cooperative in 1978. Thereafter the grower must continue to make annual additional contributions by retains from amounts otherwise payable to him. The amount members will receive for products they deliver will depend on the net proceeds realized by Glorietta from all agricultural products delivered by patrons under cooperative marketing agreements. The total net proceeds will be combined in a single pool and apportioned among patrons in proportion to the established value of the products each delivered. From the amount so determined. Glorietta will initially retain 1091457? of the established value and 50‘1— of the net proceeds in excess of established value. if any. These retains will be allocated to members but not paid in cash until the board of directors determines that the Cooperative is financially able to do so. SPECIAL RISK FACTORS TO BE CONSIDERED Mcmbers' Share Of Proceeds Less Than Commercial Market Value The purchase price for raw products to be paid by Glorietta is based on the overall results of operations of the Cooperative from bGsincss With patrons on a cooperative basis. There can be no assurance that payment to a member for his crops from the net margins of Glorietta will be equal to or greater than the price he could have received had he sold his crops under prc-season contract to another processor or in the open market. : Mk...“ I 260 NCC Food's Canning Business operated at a loss in 1975. 1.976 and the first nine months of 1977. See pages 29-33. including in particular Note A. There is no assurance that such losses Will not continue. Moreover, Glorietta will have substantially higher interest expense and somewhat higher depreciation expense than reflected in the Statement of Operations of NCC Food. See page 9. THERE IS A SUBSTANTIAL RISK THAT THE TOTAL AMOUNTS TO BE PAID TO MEMBERS FOR THEIR RAW AGRICULTURAL PRODUCTS (IN CASH AND RETAIN ALLO- CATIONS) WILL BE LESS THAN ESTABLISHED VALUE (COMMERCIAL MARKET VAI UI-I). Retention of Proceeds by Glorietta In addition to the risk that the member's share of total net proceeds will be less than established value of the products he delivers. from this share not less than 10“? of established value must be retained each year. (See pages 7.1-13 for description of commitment to retain and limits on rt‘tJllls.) Glorietta would initially need to realize net proceeds of at least 120”} oi established value of the agricultural products delivered before the member could receive cash proceeds tprior to redemption of allocated credits) equal to established value of his crops. Thus. there is a high risk that a member will not. receive cash payments equal to established value at least until Glorietta builds up member contributions equivalent to a mature cooperative. BECAUSE OF THIS HIGH RISK. A CROWER SHOULD NOT APPLY FOR MEMBERSHIP UNLESS PREPARED TO RECEIVE CASH PAYMENTS OF LESS THAN ESTABLISHED \'ALL'E FOR AT LEAST THE FIRST FIVE YEARS. Inclusion of Proceeds in Taxable Income Each member of Glorietta must include in taxable income for federal income tax purposes his entire share of the net proceeds of Glorietta. whether paid to him in cash or retained and allocated to his account. For example. if Glorietta realized net proceeds equal to 100?} of commercial market value. the member would receive not more than 90F} of established value in cash {prior to redemption of allocated credits) but would include in his tavable income the full 100?} of established value. Advantages of Competitors Glorietta will be committed to purchase not less than 65"} of its can requirements from National Can for at least three years. These cans will be purchased at prices and on terms competitive with those available to other canners in Northern California who buy on term contracts from the four major can manufacturers. HOWever. a number of competitors of Clonetta have their own can manufacturing facilities or other arrangements for acquiring cans on terms that are believed to be materially more favorable than those which Glorietta will initially receive. The proposed initial capital of Glorietta (approximately 34 million) is substantially smaller as a percentage of sales (4'7; of 1976 sales of $100 million) than that of most of its competitors. The additional working capital required must be supplied by borrowed funds. Such borrowings will increase interest costs to Glorietta. This increased expense will adversely affect the returns of Glorietta to growers in comparison with mature competing e00peratives. Additionally. certain data available to the Growers Committee. although subject to diiierinu interpretations. suggests that in recent years a trend has (lL'VelOde that certain maior cooperatne competitors of NCC Food may have been able to reduce the financial impact of adverse economic conditions in the industry more effectively than NCC Food. See page ' 261 Transferabilit)’ of Membership and Retains Membership and allocated credits arising from retains may only be transferred with the written consent of Glorietta. Transfer will be strictly limited. The consent of Glorietta is also required for the transfer of retains. This consent will also be limited. See pages 213-24. Thus, there is not and cannot be any market for sale of memberships or retains. Possible Discontinuance or Reduction of Marketing Entitlement Glorietta intends to continuallv review the ability of its members to produce a high-quality crop and the abilitv of the Cooperative to eil'ectix eh market the products therefrom. if Glorietta determines to cease marketing all or a portion of a particular crop the Cooperative ma\ reduce or eliminate its rivht and obligation to market specified products on written notice to members during .\overnber ot an) iear enective as to all following crop years. (See B} Ians Section "JD-ill) Uncertainties Regarding Closing and Terms of Acquisition The letter of intent to acquire .\'CC Food's Canning Business is not binding. The full terms of loans necessary to the proposed acquisition and operations are not presently known. For these and other reasons. material terms of the proposed acquisition may be changed or added. The transaction may not close if the parties are unable to agree on definitive agreements or if satisfactorv financing is not available. in addition. it will not close unless. prior to closing. \‘arinuv factual assumptions are warranted or verified and othtr conditions of closing are Fulfilled to the satisfaction of the board of directors of Glorietta. B\ applving for membership. each member delegates to the board of directors of Glorietta discretion to agree to additional or different terms. to deCide whether or not to execute binding agreements and to decide whether or not to conclude the proposed acquisition. If the transaction is not concluded. the member will not be entitled or obligated to market products through Clonetta. Even though the transaction is not concluded. the deposit accompanying the Application Will be used to defray expenses of Glorietta. including prc-incorporation expenses. See page 20. ADVANTAGES 0F MEMBERSHIP Possibie advantages of membership include the following: I rimarv advantage is that the member obtains a market for the specified pomon oi his products in advance of the crop season. '2. A member can participate in some benefits of crop and geographical diversity through the single pool concept. though under this concept the member also shares in certain risks related to commodities other than those he delivers. 3. Should Glorietta determine after completion of the initial membership signup that it can ellectively process and market additional products. it is contemplated that members would be given the first opportunity to prOVide these products. 4. if the overall cooperative marketing operations are successful. he may receive more than commercial field price for his products. though as previously discussed there is a substantial risk. particularly in initial years. that he may receive less than such value. See page 2. APPENDIX B TOUCHE ROSS AND COMPANY 262 FINANCIAL PLANNING FOR COOPERATIVES Gail N. Brown Touche Ross 6r Co. San Francisco At the annual meeting of the Council a few years ago in Freeport, The Bahamas, I spoke to the Legal, Tax and Accounting Committee of the Council on the subject of the importance of adequate financial reporting to cooperative members and the responsibility of the Board of Directors for that reporting. In preparation for that presentation and with the cooperation of the Council's staff, a study of 14:5 large cooperatives, representing 57 percent of total U.S. cooperative volume, was made of how they reported to members on their financial affairs. The study indicated that 14 of the cooperatives did not publish an annual report to their members. Further, 53 did not include in any type of report to their members a complete set of financial statements, including an opinion of independent public accountants. Seven of the 57 largest companies did not give their membership the complete set of financial statements. Subsequent to that study, although no formal survey has been made, based on personal knowledge, the situation has improved somewhat. Although there appears to be improvement in the reporting of financial matters, it has become increasingly apparent that cooperative members want, and indeed expect, improved reporting of the financial affairs of their cooperative. In fact, surveys made on a national basis by the American Institute of Cooperation and in California, under the auspices of the Far Western chapter of the National Society of Accountants for Cooperatives, indicated that inadequate communication of financial matters was among the greatest concerns of cooperative members. Why are members of agriculture cooperatives becoming so concerned about the financial affairs of their cooperative? increasingly, farmers are a vital and closely integrated part of a highly organized food production-processing- distribution system. This trend has particular financial management implications for two reasons. First, as farmers get more involved in the total marketing process, they must invest in marketing facilities and processed product inventories. As an indication of what is happening, investments per farm in cooperatives by farmers increased over l,000 percent between l950 and l976. This represents some $3.5 billion that had to come out of cash flows of the members of these cooperatives. Second, in this change in marketing and distribution beyond the farm '.' whether through cooperatives or not - the farmer has to continue to finance his inventories with payment being received over a longer period or time. . This creates liquidity problems that must be understood by all - the farmer, his cooperative, and the distributor, as well as financing agencies that must deSign new and different financing methods for all three. Financial Problems of Cooperatives Cooperatives also have financial and liquidity problems fueled both by real growth and inflation. The American business system is a capitalistic system. Cooperatives are definitely part of that system, and a capitalist without capital is -in trouble. Business needs substantial funds, a illustrated in the follmving statistics: - Business used 1.6 trillion dollars in capital between 1965 and 1974. - in the next decade, it is estimated that over 4.5 trillion dollars in new capital funds will be needed. This will have to come from personal savings and profits of business. - This need for capital means that we must raise capital at a compound rate of nearly 9 percent annually as compared with a rate of 6.7 percent during the last ten years. - Debt to equity ratios have been deteriorating. In 1965, business had $.91 in total liabilities for every dollar of equity. In 1974, the $.91 had doubled to $1.39. - Debt provided 38 percent of new capital obtained in 1965; in 1974, it provided 53 percent. - American business investment in property, plant and equipment, as a share of national output, is one of the lowest of the western bloc countries. - All this indicates a slippage in the rate of real growth of American business. What, then, is the situation for agricultural cooperatives? The capital situation for agricultural cooperatives is no better and, in fact, may be worse than for business in general. Exhibits 1 through VI compare financial statistics and percentage ratios for a group of food processing corporations With marketing and other types of cooperatives. The information has been extracted from‘annual published reports. Generally, the statistics for 1973 are for fiscal years ending. Just before or subsequent to December 31, 1977. Most of the organizations had fiscal years ending after December 31, 1977. Data is also shown for 1977 for the same companies. The first chart, Exhibit 1, shows data for 20 food processing corporations. The groupings are based on sales volume. Average Sales (000) Percent of Sales: Earnings before Working capital Fixed assets, net Total assets employed Long~term debt Equity Other Ratios: Earnings, before taxes, . Ass ts employed Equity Long-t rm debt to equity Equity to assets employed Equity, plus long~ term debt, to assets employed - 1977 $895,000 72.1 Exhibit I 20 FOOD PROCESSING COMPANIES 1978 $959,500 12.5 24.6 37.7 50.9 70.1 8 Above Mean $2,101,000 12.5 24.6 38.5 50.7 70.2 13 Belo W Mean $257,000 ._.... Kama. . . , Van 12.6 24.3 33.7 51.8 69.3 a9 ere has been little change in the percentage ratios from 1977 to 1978. Th Further, the percentages are about the same for large companies as for the smaller companies. Exhibit 11 shows statistics for 20 processing and marketing cooperatives with operations similar to the corporations shown in Exhibit I. operate on a pooling of proceeds basis. Tri/Valley Growers, California Canners and Growers, Ocean Spray, Welch, etc. Most of them They include such organizations as 265 Exhibit II 20 MARKETING COOPERATIVES 8 12 Above Below 1977 1978 Mean Mean Average Sales (000) $104,300 $121,000 $221,500 $54,000 Percent of Sales: Working capital 6.7% 6.196 6.396 5.59’ Fixed assets, net 17.3 15.4 13.9. 19.4 Total assets employed 56.3 52.2 49.2 60 4 Long—term debt 9.9 8.8 8.4 9 9 Equity 16.6 15.1 14.1 17 8 Other Ratios: Long-term debt to equi y 59 9 58.3 59.4 55 9 Equity to assets employed 29.5 28.9 28.6 29.4 Equity, plus long-term debt, to assets employed 47.1 45.7 45.6 45.9 The most significant change from 1977 to 1978 has been the decrease in fixed assets measured as a percentage of sales. The smaller cooperatives have more invested in total assets employed, including fixed assets. Earnings data is not shown because many of the cooperatives do not charge members' deliveries of raw product to cost of production. Consequently, net proceeds for those cooperatives are much higher than would be the case if members' raw product had been recorded as .3 C051. Exhibit III compares the 20 corporations with the 20 cooperatives. 266 Average Sales (000) Percent of Sales: Working capital Fixed assets, net Total assets employed Long-term debt Equity Other Ratios: Long-term debt to equity Equity to assets employed Equity, plus long-term debt to assets employed Exhibit 111 w Corporations Cooperatives $959,500 $121,000 17.996 6.1% 17.3 15.4 54.3 52.2 10.4 8.8 27.6 15.1 37.7 58.3 50.9 28.9 70.1 45.7 There are some striking differences between the corporations and cooperatives. The cooperatives are more highly leveraged with much less equity The marketing cooperatives are able to operate under these circumstances, in part, because of deferred payments to and substantially less working capital. growers for raw product. Exhibit IV shows data for 18 dairy cooperatives. It was not practical to compare this data with dairy corporations. 267 Exhibit W 18 DAIRY COOPERATIVES 5 13 Above Below 1977 1978 Mean Mean Average Sales (000) $329,500 $347,500 $954,000 $114,000 Percent of Sales: Earnings before taxes .696 .896 .596 1.696 Working capital 2.8 2.7 2.8 2.4 Fixed assets, net 5.2 5.2 5.2 5.2 Total assets employed 20.3 19.7 19.8 19.6 Long-term debt 3.1 2.9 ' 3.2 2.3 Equity 7.4 7.4 7.2 8.0 Other Ratios: Earnings, before taxes, on: Assets employed 3.1 3.8 2.5 3 1 Equity 8.5 10.3 6.9 19.9 Long-term debt to equity 42.7 40.0 44.0 28.6 Equity to assets employed 36.3 37.3 36.3 40.6 Equity, plus long- term debt, to assets employed 51.8 52.2 52.2 52.3 It is interesting to note that the smaller dairy cooperatives had greater earnings than the large cooperatives. Further, there was little change in the data from 1977 to 1978. A group of cooperatives, as listed in Exhibit V, which furnish supplies and services to their members, have been classified as supply cooperatives, even though some of these organizations market various products for their members. Actually there were 22 cooperatives included in the 1977 study, but two of the cooperatives merged, leaving 21 in 1973. 268 21 SUPPLY COOPERATIVES 6 15 Above Below 1977 1978 M ean M can Average Sales (000) $580,000 $541,000 $1,412,000 $332,500 Percent of Sales: Earnings before taxes 2.896 2.496 2.296 2.6% Working capital 7.0 6.9 7.1 6.6 Fixed assets, net 19.3 19.0 15.6 24.8 Total assets em- ' ployed 49.2 49.2 ‘ 43.5 58.7 Long-term debt 15.5 15.8 12.9 20.7 Equity 17.3 16.7 14.4 20.4 Other Ratios: Earnings, before taxe, on: Assets employed 5.6 4.8 5.0 4.5 Equity 16.1 14.1 15.2 12.9 Long-term debt to equity 89.9 94.8 89.2 101.4 Equity to assets employed 35.1 33.9 33.2 34.3 Equity, plus long- term debt to assets employed 66.6 66.0 62.7 70.1 Total assets employed, including fixed assets, were greater, measured as a percentage of sales, for the smaller c00peratives than for the larger cooperatives. The smaller cooperatives also have more long-term debt and equity to support the total assets employed. Exhibit VI summarizes the data for 1978 for each of the four groups: 269 Exhibit VI 1978 FINANCIAL RATIOS Food Processing Marketing Dairy Supply Corporations Cooperatives Cooperatives C00peratives Average Sales (000) $959,500 $121,000 $347,500 $641,000 Percent of Sales: Earnings before taxes 6.896 -- .896 2.4% Working capital 17.9 6.196 2.7 6.9 Fixed assets, net 17.3 15.4 5.2 19.0 Total assets employed 54.3 52.2 19.7 49.2 Long-term debt 10.4 8 8 2.9 15.8 Equity 27.6 15.1 7.4 16.7 Other Ratios: Earnings, before taxes, on: Assets employed 12.5 - 3.8 4.8 Equity 24.6 - 10.3 14.1 Long-term debt to equity 37.7 58.3 40.0 94.8 Equity to assets employed 50.9 28.9 37.3 33.9 Equity, plus long- term debt, to assets employed 70.1 45.7 52.2 66.0 There are a number of significant conclusions which can be drawn from this data: - There was not a significant change in the percentage ratios from 1977 to 1973. Further, the ratios are generally the same for large and small organizations. - - Some of the 59 cooperatives included in this study are large organizations. In the last survey of the largest 500 industrial companies made by FORTUNE, eight cooperatives were included. Based on the sales volume of only the cooperatives included in this study, at least 10 additional cooperatives should also have been listed. Even so, the cooperatives tend to be much smaller than their corporate counterparts. 270 -' The cooperatives tend to be much more highly leveraged than the corporations, with resultant lower working capital and greater long- term debt. A study made by Nelda Griffin, an economist with the Economics, Statistics and Cooperative Service, USDA, shows that equity interest for the largest 100 U.S. cooperatives has been decreasing steadily. Equity measured as a percentage of assets employed dropped from 52 percent in 1962 to 39 percent in 1970 and to 34 percent in 1976, very close to the percentages shown in the preceding Exhibits. - The financial ratios for the dairy cooperatives are significantly different from the other groups. This is largely due, in part, to the fact that a high percentage of milk delivered by members is sold in bulk without further processing. - in the case of marketing cooperatives, investment in fixed assets is less than the corporations. I suspect the same comparison would be true for dairy and supply cooperatives. Further,. for both food processing corporations and marketing coorperatives, the percentage of fixed assets to sales has declined in recent years. Because of inflation, investment in fixed assets has not kept pace with sales. Further, much of the recent investment in fixed assets has been in non-productive facilities required by OSHA and EPA. The whole business and financial system of cooperatives, which has been developed ont the assumption of reasonable price stability, is dangerously vulnerable to the uncertainties resulting from significant inflation. Inflation has created a serious situation for even the strongest cooperatives. Efforts to meet these extraordinary demands for capital have forced some cooperatives into over- extended debt situations. This liquidity crisis and the cost of capital has resulted in some cooperatives having excessive short- term borrowings with attendant high interest costs and increasingly restrictive covenants. What can cooperatives do to improve their financial positions? Sale of Securities: While some cooperatives have issued stock, usually preferred stock, on a patronage basis, a few cooperatives have sold stock on a non-patronage basis. I would expect that more cooperatives will look to the sale of preferred stock to raise capital. This usually will require registration of that stock with the Securities and Exchange Commission. Only a handful of cooperatives now register securities with the SEC. Cooperative board members should be aware that a new Securities Code, prepared under the sponsorship to the American Law institute, is now being reviewed by the SEC. Upon conclusion of that review, it is expected that the new Code, as amended by the SEC, will be given to Congress for legislative action. Basically, the Code now provides that securities used as a patronage refund or as a condition of membership, and which cannot be traded except among members to meet membership requirements, will not require registration. It is expected that 271 the progress of the new legislation to enactment in final form will take several years. In the meantime, the matter will be closely monitored by the Council's staff and members of the Legal, Tax and Accounting Committee. Debt Financing: Debt financing can take many forms: - Cooperative bank financing Cooperative banks have generally provided the bulk of cooperative debt financing. There are several significant developments in this area. The banks for cooperatives are working more with commercial banks to provide the increased debt financing required by cooperatives. Limitations in lending limits, which are tied to the capital base of the cooperative banks, has accelerated this development. Other developments include a program of risk sharing among the district banks and the Central Bank. Along with this risk sharing will come more uniform credit granting standards and closer monitoring of loans by the banks. In any event, it is my opinion that the cooperative banks will continue to provide the major debt financing for cooperatives. - Other than cooperative banks We are now seeing a much greater interest on the part of commerical banks, investment banks and insurance companies in financing cooperatives. For example, such companies as Goldman dc Sachs are very active in this area, and a major marketing cooperative has just announced a long-term financing arrangement with a large insurance company. - Project financing This involves long-term financing of a new facility built for the purpose of supplying a major customer under a long-term contract. The long—term supply contract, as well as the facility itself, is used as collateral for the loan. Several cooperatives have built new facilities financed under this arrangement. - Sale of cooperative's own paper Cooperatives with a very good credit rating may find it possible to sell their own paper with lower interest rates than available under short-term loans from banks. Several cooperatives, including Land O'Lakes and, more recently, SunKist, are now selling their own paper. 272 - Leasing Leasing, including leveraged leasing, has been, and continues to be, an important means of financing new capital additions. Cooperatives have used this method because investment tax credits, until recently, were not available in full to most cooperatives. The lessor usually passed the investment credit back to the cooperatives in lower lease rates. However, the Revenue Act of 1978 has made the investment credit available in full to cooperatives and, therefore, leasing may ot be as attractive to cooperatives as in the past. However, it will still provide a means of financing capital additions when other financing methods may not be as available or attractive as leasing. It should be pointed out that recent pronouncements of The Financial Accounting Standards Board now require that many leases previously treated as operating leases now be set up on the books as an addition to fixed assets and a corresponding liability recorded. - Other debt financing methods These include industrial revenue bonds, port facility bonds, etc. They offer an excellent means of providing new facilities, particularly in communities where the facilities are desired to help bolster the economy of the area. There are a number of problems that arise with providing capital with increased debt financing. If such financing is too readily available it sometimes leads to over-expansion. The resulting heavy debt service load, in the form of high interest expense and debt retirement, overtax the earnings power and working capital generation capacity of the cooperative. Just as important, excessive restrictions are often placed on the borrower by the lender. Cooperative Arrangements with Corporations: There are several examples of a cooperative making an operating arrangement with a corporation already in existence or with a corporation formed by a cooperative. i believe we may see more cooperatives spinning off a division, forming a corporation and selling participating common stock to the public but still retaining control of the voting stock. There are several well-known examples of this kind of an arrangement, such as Curtice-Burns/Pro Fac, and S. S. Pierce e/AgCo. in New York State. However, another arrangement, Allied/United Vintners/Heublein, in California, has been recently terminated. There are some pitfalls to be considered. There is a loss by cooperative members of a share of the earnings. The objectives of the corporation are often not the same as the cooperative, as in the Allied/United Vintners/Heublein arrangement. If too much of the equity is provided by non- members, members, because of their reduced investment, may find it easier not to support the cooperative, or leave it entirely. 273 Retained Earnings In the long run, the basic equity must be provided by the membership of the cooperative, either through retention of patronage refunds, per unit retains or in capital assessments based on patronage. This may mean longer revolving periods for equities. To stabilize capital, some cooperatives have adopted base capital plans where capital required from each member is based on patronage, increasing or decreasing on a scheduled basis as the patronage increases or decreases. Cooperatives should look to tax-paid earnings as a basis for raising capital. For eXample, tax exempt cooperatives could retain gains on sale of fixed assets, net of taxes, without allocation to members. Taxable cooperatives could retain all non-patronage net earnings. One of the most significant tax developments which should facilitate the buildup of unallocated net earnings is contained in the Revenue Act of 1978, which became effecfive for fiscal years beginning after October 31, 1978. Through the efforts of the Council staff and members of the, Legal, Tax and Accounting Committee, the Act included a provision which removed the limitation on various credits for cooperatives, such as Investment Tax Credit, Energy Credits and Job Credits. Formerly, these credits were only available to cooperatives in the relation of taxable income to non-taxable income. The new Act, which applies to all Subchapter T cooperatives, allows coOperatives to use all of the credits. While no carryover or carryback is allowed to the cooperative, allocation of the credits to patrons is permitted when not used by the cooperative. The members may carryback and carryover the credits. While there are many questions yet to be answered as to tax planning opportunities, it appears that at least $35,000,000 a year will be available to cooperatives to shelter taxable income or to be passed to members. Management and Boards of Directors will need to study the implications of the Act and its effect on financial planning for their cooperative. Both short- and long-range financial planning for cooperatives has become increasingly important. Boards of Directors, as well as management, must understand what the needs of cooperatives are, and they must be involved in determining financial planning policies. Finally, they must understand what their responsibilities are, and that these responsibilities are much greater than a few years ago. In fact, lack of attention to these responsibilities could lead to legal action against Board members. Finally, it should be emphasized that the basic equity of cooperatives must be provided by members. All other methods of. increasing capital depend, in large measure, on a strong member equity base. Prepared for presentation at the Annual Meeting of the National Council of Farmer Cooperatives, Las Vegas, Nevada, January ll, I979 APPENDIX C TILLIE LEWIS FOODS, INC. 274 M2 z//7f SIMPLIFIED EXPLANATION OF TLF TOMATO GROHER PARTICIPATION PROCRAM TILLIE LEWIS FOODS. INC. hHUWtR AND CANNER SHARE THE ACTUAL NET SALES REVENUE RECEIVED IUR THE TOMATO PACK. NET SALES REVENUE IS SHARED BETWEEN GROHER AND CANNER IN THE SAME PERCENTAGE THAT EACH CONTRIBUTES TO THE TOTAL COST OF PRODUCING AND SELLING THE PACK. GROWER'S CONTRIBUTION IS THE BASE PRICE OF TOMATOES PLUS APPLICABLE INCENTIVES. CANNER'S CONTRIBUTION IS OUTLINED ON THE APPROXIMATE CONTRIBUTION PERCENTAGES WOULD BE THOSE SHOWN BELOW HAD THE PROGRAM BEEN IN EFFECT THE LAST 5 YEARS. 1212421 my!» lap: 25176 26472 77 snow-:1: No.43: 25.39% 33.85% 28.13% 22.071; 4950570 CANNER 75.57% 711.11% 55.15% 71.3“ 77.95,. 72.07 THE TOTAL PER TON CONTRIBUTION OF GROHER AND CANNER IS TERHED PARITY REVENUE IN OUR PRICING FORMULA. FINAL SELLING PRICES HIGHER THAN PARITY REVENUE WOULD ADD INCREMENTAL PROFITS TO BOTH THE GROHER AND CANNER. FINAL SELLING PRICES LOWER THAN PARITY REVENUE WOULD CAUSE INCREHENTAL REDUCTIONS IN BOTH THE GROHER AND CANNER PROFITS. THE GROHER NEVER RECEIVES LESS THAN 35% OF THE GOING PRICE PER TON (THE INITIAL AMOUNT PAID WEEKLY). THE GROHER RECEIVES INTEREST ON ANY ADDITIONAL AMOUNT DUE. Figures adjusted to discount effect of expired paste term contract. 275 ' CANNER CONTRIBUTION TO THE TOTAL COST OF THE PACK INCLUDES: 1. DIRECT OPERATING COSTS A. DIRECT LAaOR AND BENEFITS a. CONTAINERS (GLASS, CANS, DRUMS) C. INGREDIENTS D. PEELING AGENTS E. ROYALTIES (I.E. TOMATO PEELERS, PEEL RENOVERS, UASNER SYSTEM) F. FUEL, PONER, HATER G. NAREHOUSE EXPENSE (COST TO PUT THE PACK AUAY, LABELING, CASING, AND SHIPPING) H. FIELD DEPARTMENT EXPENSE I. HAULING AND RECEIVING COSTS J. SUPERINTENDENT AND INDIRECT (CANNERY SALARIED SUPERVISION PLUS INDIRECT HOURLY LAaOR) x. FACTORY aURDEN (INCLUDES N s R, RENT, DEPRECIATION, PROPERTY TAXES, INSURANCE, SENER, OPERATING SUPPLIES, REFUSE DISPOSAL, ETC.) L. FIBRE H. LABELS 276 II. SELLING EXPENSES A. CONSUMER ADVERTISING 8. OTHER DIVISION SELLING EXPENSE (SALARIES, PROMOTION, TRAVEL) c. SALES ADMIN. EXPENSE (SALARIES, TRAVEL, FORNARD NNSE. EXPENSE) D. BROKERAGE III. ADMINISTRATIVE EXPENSES A. HEADQUARTERS DEPARTMENTS ELENENTS OF EXPENSE - SALARIES, TRAVEL, RENT, DUES, TELEPHONE, SUPPLIES, HOME OFFICE EXPENSE. CONTRACT SERVICES, LEGAL, INVENTORY AND AOHIN- ISTRATIVE INSURANCE. RESEARCH AND DEVELOPMENT OEPRECIATION - OFFICE INVENTORY TAX IV. INTEREST EXPENSES V. CALIFORNIA STATE INCOME TAX VI. FEDERAL INCOME TAX VII. NORMAL PROFIT 277 CANNERS DIRECT OPERATING COSTS OUTLINED UNDER HEADING I CAN BE ACCURATELY APPLIED TO THE TOMATO OPERATION BY DETAILED ACCOUNTING. THE SELLING EXPENSES, ADMINISTRATIVE EXPENSES, INTEREST EXPENSES AND TAXES OUTLINED UNDER HEADINGS II THROUGH VI CANNOT BE READILY SEPARATED TO APPLY TO TOMATOES, SINCE TOTALS OF THESE COSTS TO TLF COVER ALL OF THE COMMODITIES PACKED. THUS A PRORATION IS MADE OF THESE COSTS PLUS NORMAL PROFIT TO APPLY TO TOMATOES AS A PERCENTAGE PROPORTION OF THE TOTAL COST OF GOODS SOLD. THIS PROPORTION IS REFERRED TO AS BUYER'S PERCENTAGE. FOR THE I977-73 CONTRACT YEAR BUYER'S PERCENTAGE HAS I7.“%. 278 QNJk/ .3.” mafiwmk SEAS hwdm.‘ 2:1; WW.Q%\C$» 2.33 _NQNW .iééa 5:03“. 2.23 \LNQMR» n53» Mwmmmmmw. “Aon .hUh_¢_h2uuz_ OZ< mu_¢& wws 125 percent and earmags per share up 23 ','er cent to _‘5 per cent.1'orthc entire six month erzod ',"'"' an an increase in per share earnings 0.. cent. Our eernings $1. z'fercd' in the l.r='. peric. the second froma 31': week strike a: the ‘l‘acorn lnlelt p! :nt of our 1:. 51:11 division. .\_il1'y'=. but the 1111-1- sion's canings seem :11 be back on the rack now, This DCL‘embc‘ 1111's the best 10. 1:: month 111 11". e (111.111.1111 21111.)- rv and rrobabiv will e t1'.e tCSlC;‘1‘nlt‘.‘:S 1110.11.1115 ueli. l'te already rctetrcd twice to Cut-:1. :- 111.1115. comperzmn organization. Pro- Fae Ccopera‘. He. 11 11.111115 .1 major cort- tribution to the success of each of our operatic; cinisions. The COQHIL‘tSVC and its relationship to Eunice-Bu. ; is cor plic21ed. lt's itr‘por‘tant 111.11 you understand it if you are to aepreciate our overall ore: :11: tion. l’-ro F.: is a pure farme: coo ..1tise. Second 0.. good manaucmcnt' ll nrovtdes cur greet. 1:11 517:? 11111“ of. .0 other fee-.1 processor “1101111. 3 mention. :’ro—Fac' 5 MA) 11: embers acres. time11:11:11, each of cur disisions “ah most of '11-: r21“ iruiL. .. -11J tables V~i.. ch they pro 2:1.-1. “. ' a Linn-.'r join: our com“ :.rattve he 21': :5 101. 'f.1\c.' a. irr; 21': 111' accrtazn 1111.1:115' ofr.w prod..1:1 for a 511.11: y: assured s'iurcect raw mat :11: d is an ad\'. .. 1.11_'e “1.1.11 1113! few food procescors hate. Secondly. (.‘tirtice 1.2111115 owns very few: 1 l'Jc (.'ooecrzitite 1w» ns the plants and cnuip; 11:: tsed 11.- Curticc- ‘..u:r'.s :11 very :‘atortl'le ten: Specific: My. the re: ...! is equal to 11:: actual derm" '11111 ph. ' the interest chin-_rs which I‘m-1's. .nc-irs to c.111v the invz'estni 1'11.\.'1it onlj‘dues that prod1:'_a rental 1'11.1'1'e f11r loner th_n any commercial firm would 11'. ' .l1u l."1:"'. 11r cquir‘nte"tto(.'urlicc ”111115. 111:1 C“L‘l|ll1'. 11111 1.2: 11~-.-d auets “llCh (unite-11111:“ uses atel.r'..1111.. in th -r “1131. Again. it is a rather 11'1”un arranyement. hut hir'hl',’ 1.11.1'1- 111111'111 CutliCC-llttrus. ‘ l.r.~tl_\. I‘m-1111' might be called ('itttit'e-l‘u'tns' l‘.l!lle. lluec itu.111c1s til (.'ntlicc llurns' \|'.'.\Il!l-ll 111111 11'1111 1'11:- 1.‘ Z94 rowing is made by l‘ro-l-‘ne Cooperative through the Farm Credit System at rates that average a quarter of a per cent tinder prime. The t-tltt r 25 per cent of our lmrrm'villl: COWCS from he entrant-.'rrial bank: at prime. In any case. it is the term lsr-rrowin; from tlt: "amt Credit limit: that has made it possible for our cririilrined orpantration to expand over the stteriteen years of our existence. The cooperative provides a banking function in other Wigs. Mast food processors must pay farmers for their produce 1’) days after it is delivered. The payments from Curticc-lhtrns to Pro-line and from Pro-l’a: to its prowcr members are spread out over a twelve month period after the cootisratise member deliver: his raw product for pro- cessing. In effect. the cooperative is providing subsrnntial 'vzorltz'ng capitf-l free to Curtice-lhrrns. You i'.$i( why are itirttters willing to do this? It is partly be:ause they are provided with an assured home for what they grow. and iii par" because they share in Curtice-lhtrus’ prc-tax er. tings. Qiilj 20 per cent to 30 per cent of the farmer’s share of tie earnings is returned to him in cash. with the remainder retained as crieity in Pro-Fae for use in the con Tsir‘d Curtieeoliurns/l’ro-Fac organization. Prod r.c's success in the eye: of the farmer is evidenced by the fact that there are waiting lists of faru.ers Who want to join. In summary. Pro-”ac provides two principal services for Curtice-Burns. lt pr witles the corporation with an assured source of lzirh quality raw material. Last year that amount— ed to a'iout 300 million pounds. Secondly. the cOOperatis-e suppliastinancial support in ways which are invaluable to Curtice-Burns. l'd like now to turn the meeting over to Ted Holtngren. Ted has spent his working; career in the food industry. lie has been a part of CurticesBurns for ten years and prior to that time. was a senior product manager at General Foods. TED HOLMGREN: Good afternoon. ladies and gentle- men. Today. 1 have the assignment of talking about Cur- ticc-Burns' approach to marketing. Marketing is. of course. very different from. say. procuetion or accounting. or purchasing. bee; use marketing thrives in the world of imagination. innovation. uniqueness. and the providing of consumer benefits. Marketing at Curtice-Burns is somewhat different from many food companies. aarticularly the large national food marketers. We are regional marketers. And while we have nine major brands in the rnarkreplace. each operates in a well defined marketing area. Nailey's brand pickles. salad dressing. canned meats and snacks operates in the Pacific Northwesr. Thank You hrand .uds‘ing sales are concentrat- . ed in the mideen. dlt'e lloy brand venetables are larrely marketed in upstate New York. And so forth What is unique is that in those areas where our brands are sold. we are frequently the dominant brand. For exam. ple. the best selling veeetables in Buffalo are not Del Monte. nor (ire-en Giant. but our Blue Boy brand. The best Selling snacks in Pittsburgh are not \‘v’ise's or l’rito-lav but our Synder's brand The best selling chili beans in Saint Louis. Chicago a: Grand Rapids are our llronks brand. The best selling chili in the Pacific Northwest is not Ameri- can Home hoods' Dennison brand but Nallcy's. 1 here are many other csamplts that l could l‘hr' you hut the point I want to make is the. because a brand is reviunal does not mean that it is mine» . licnitirial brands. mrr specialty. can be more solid and more important in their areas than nationally known brands. You might well ask why the success of the renional brands? Well. 'first of all. like rteitthliors.‘tliey Operate in their own bttkcynrd. ‘lhey've been around a lone, time. Their nunes are well known. Their reliability 's trusted and they are local folks and many consumers inst plain like to buy from people they know and trust. - The second reason. l think.’is that in our :ztlsertisino and promotion we don‘t solely rely on the cut.- and the clever. We frequently try to emphasize our repiotinlity. l-‘or e\atn- plc. our Brooks Division sponsored a contest wherehy con- sumers could win college scholarships in the cities and towns where they Iixcci. Blue Boy hrtutd just cotnplctetl Inst month what we called our "good neighbor" promotion, where the brand contribUted to local churches and charities five cents for exery label sent in and the response was tre- mendous. People really do want to be good neighbors and i think this promotion served to prove that man does not live on beer and Ruicks alone. A third reason for the success of the regional brand is that. as a company. we act with great prudence. We're careful of our prodUCts and proud how we make and sell them. However. in a dynamic world. prudence does not mean inacrion. Otir division sales and marketing depart- ments Operate with a sense of urgency and this sense of urgency is a very real strength. We can and do mme fan. to meet a competitive situation or to smell out and act on a new sales opportunity. For example. in this past year. view- int; consutners’ interest in natural foods—foods with no additives or preservatives. our two snaclt food divisions- Synder's in the East and .\’alley's in the \Vest—ccnciuded there could be a market in their regions for it?) per cent natural poato chips. From the time the decision was mate to move ahead. the product was formulate . the package was design-3d and prod.t:ed. advertisine was create . media bought and the prod-tier itself was launched into regional diSll’lbUli‘lfl. all in a period of but eight werits. This sense of urgency. and ability to move fas . is sons-asshrtt unit ue. The large food companies with their layers of management approvals hate proven no real threat to us. In fact. thei: very strct tire gives us a competitive advantage. A fourth reason for the success of the regional brand is perhaps our position. We don't strive to be the Cadillac at one end or the \‘olkswagon at the other end of our indus- try. As Hugh said earlier. we visualize our market segment as reasonably priced reasonably convenient (Owl and convenience is a very. very important attribute in the suc- cessful marketing of food products. At least it certainty is in my house. My wife is constantly telling he that kitchens are fire hazards and as little time as possible should be spent in th:m. At this i oint you might well say. "so far, so mod" but how are you going to get your marketing growth fur the future? I think it will be in three areas-mew companies. new markets and new products. Today I would like to share with you some of our thoughts and plans on it..v pro- ducts. Until recently Curticc-Burns secured its new pro- ducts by acquiring new companies and the reason this method was adopted was that it involved lets risk. in it-. early days. Curtice-llurns could not afford a heavy Ime- which is an inherent h.t.'ard in any major new product «le- velupmettt program. TOJny things are different. The crun- ptuiy is more mature and mil-{e and it can afford to branch out in'i new areas and seek new products. Crystal hall garters in marge of thinrs to conte predict an all time hit-h in the number of new products to he introduce“ this year. Should this prediction come true. we can expect an all time high III new product f‘iops. The flop ratio in new grocery product introductions Is reported to be eight or nine to tine new product suecets. and so the ris'rs are still there but lnow we can afford to take them. ln uritin" about new pro ducts. the ecrnomi'. t and -.\nib issador. John Kenneth Galbrai'li observed. “1lie man who (leVIses a IIo'.tIIIIii fur a tent ll'.“.'d anrl lhen successfully promotes huh. be- ti comes one of nature 5 noblenren." Sometimes. Galbraith Writes far too “Lil for What he has to say. ln the new products area—products which will I?“ 4 real consumer need—have the best chance for success. And this afternoon 1 would like to I ll you a‘ mi some ot' the new product work I. 1ati col '1; on at Cu: tiee- llIIr: Is. ()I: I. on the West Cia't. . .i-I Ii. '-allI.,' 2 is now intro‘ ll! Blend sal .ldrtssr. I lt is positioned directly arain" .i.p .ft sells some El 7!) r‘llli Zion worth .p eiery scar and if Nailey s with] secure only a shill pnnion efthmis business. .I could be \ery profit. able. Mag: [3 ends pri mary cl-Iizns are. that it notes as good as .\tiraclc \V hip but it costs less and has fewer calo- clsn the Mid-‘Vest .\lichi.nn Fruit Canners is lllO\int_{ into broad distribution of its Hench Orion .ind Taco Dip for chips. These shelt- -ts rinle prot. ucts require no retrigeration. . This is a unique fe.ture. as they can be displayed right in the snack section vthere they become an impulse purchase. The product is beir g very well ICCL‘lYCd and it looks like a . winne. Another new prcd.;r in the snack ca tenory is Crunchios. IAn extrud: ct pota to—base ring. It is another munch with crunch from the berth at Nally's The jury is still out on this product but anotl. er month vill tell us if \ie has: a good. solid and lo: al consumer fol' iohlllg. Fit-e years ago..‘»li:hi:an FI1iItC'4...-Iers brought out a line crasceptieally can-.31 puddings. Las t year we put some heavy adiert .sir. and p. emotional cm: thasis behind them and they respond-:3. very. very well. Later this year a new line extensiOn will Ls: launched—egg custard. 'l'he marizet re- search studies l't‘. .- proyen to be most encou: aging and Michig. .In Fro-It lo:-' 6 fcmard to anoth- r successtul entry in its in rge and prcuir c d. ssert category. Andn w.for a t Iiure. Lets ofcon Ipan es have new pro- duct failures but they are went under the rug in hushed si- 'let'tce. That's not very enod way to learn and vie believe We can learn from our mistakes. «.\letcus-Xally Pickles. the new. old-fashioned pickles. This vies suiipoml l-) he a pre- mium quality pickle that would sell for a premium price; however. to the “neaJl‘zne in this advertising. "Are you sat- isfied with your current pickle)". literally thousands of Americans said. “Yes!" Pickles are pretty much pickles. 111ese pickles lIzJ rreat uniformity of size and this wI1s ex- pensiye for us but “c round out In at consuii: er. tion 'I Care about uniform s- zr i.I pi kles. 'l'liey “ant pickles th II taste good and as nio.t other hr.:nds ot pclles tlri tl\lr: pond, who needs antithrr p;c'Ile. We had devised .'l nu‘lf‘dl‘ll for a non-existent need v-ith resultant eonsunzi-r IeieeIlIIIi. Our next piorlIItt. “lilic not new. IIItIltl tic Hernstein's 100% naturtIt -..tl Id dressinxs. ’l here’s .1 'lCiHClltiillh ~Iiri'c of consumer intr:e'-t in the pure and the natural and appre- hension and lll‘ll’U‘l ln“'uid‘n presctx-tItiwu IIIid elieiiirizttl ldditiycs in fund. H. rnsrezii's ltrJW iI.IIui:il cJIilIl he -1 Plo- ducl \thI'I'Ic time h. come and sent-try cIrIiIiIleIIitiIiti i\ LII:- ing given to mfntng the distribution and \ III: of it: use dress- itll',s beyond their current limited area in California and adjacent .\ttrtes. There llfC other products In the earlier stat-es of tleielop. ntIIit but “I: IlIIIi' I “Dill It) tip our litiiid liy prematurely talking. tiliout them. This. howeitr. SiiUlliti pint )nti sonic feeling for the direction “C 're taking: in the new products area. We will li;i\e out failures btit 1 think we 'll li. rte our SUCL' cxses too. in conclusion. l'd like to eniphasi7e the point th It our corporate marleting Ol‘jSClitcs are not mandates froi manllt'cnlcnl. Our ci\ .'.: ens are autorion Ious. lIlIirilt e1 ery corporate otf' er In Curt- e- Utiriis really l: .Ie ycI. thtit nta. - age ment is frt “less ifit rules \iithout l ell iIi ; or comnit-I Itls without lear" And so our task is to help iind to lend. To help and to le.;d our 0“” Haunted products and marketing people into those exciting years just ahead. It is now my pl-rziIure to introduce to you Executiie Vice President, liol) Hutchinson. lltlll lll.’ l'ClllNEUM Thank you Ted. it is surely a ole-n.- sure for me to be here today. There are jutt a few observa- tions l'd like to make about our business. Then I \\ ill :Ill you a little bit about the recent performance by SOHtL’Of our divisions and \xliy vie think they are doing so “ell and t‘tnnl- ly l smut to briefly tell you about our planning: process. lirst. exery disision IIas excellent ma nareiiieiit. fttll\ LX' perienced and capable of operating efficient ly under our decentralized system. Second. our plants are in good condition. Unless the Government changes the rules. the large expenditures for pollution control equirine. t are behind us. Wcm must sretid more In oney for aest es in food plIIIts. lor er. vie' re hznir. g to use s. Inlcss steel v~I‘rere raIn: ed Iiiet Juscd to be satisfactor) and that son at thing. But we don't any crash Iirograms that are needed and compliance unit the requirements “Ill .ot take a significant amount of money in relation to the total we will spend for capital im- provements in the future. Third. all divisions have. in varying degrees. year-rout: operations that mitigate the problem of ion inventor-,- turn- over and unused capacity that plagues seasonal processin businesses. Fourth e\ ery disisinn is operating protitably. Fifth. v-e haVe excellent research and deve lopment cap- ahilities in our lart‘cr di\isions and the ir services are mail— ablc to the smaller div: siuns when nt we We hav: previousl, stated that. on the record. corn~ panics have improved their profits in the years immediate-”I after they fain us ard l 'ihappyto tell you that our new est conirnu. Comstock Foods. purclia 2.! recently roIn the Burden Company. is following the pattern. ‘l'lieir earn- inps the first six months and their protection for the hul- ant'e of the year indicates they Will exec-ed our original ex- peetatioas. Our .\'Iillcy's Division. purchased from \V.R. Grace in- creased operating eariiinesfiGV'o iii l')T(I-Ihel1ist year I'.I.I were with us and liIL‘ll another ~5' in l‘)77. 1h. it I lll'H.’ “Ill fltitteii this year because of the costs .moeitited \iith I . [)(l‘tillii llllll!\.ill\'lll)ll\ Which Tetl has triltl \‘Hll about. Our .\ilL'lllI'J" l'ruit (farmer’s Ul\l\lU|l. [\lltt‘lled l'riuii Consolidated l'niids Corportitun. is llt)\\' iii its fourth si'II! with us. in the tint you their (llllllll.'\ IlIIII-IiIl. I'iie .\et‘tuiJ _\'t'.ir. hmsu er. they lflCttthd 22')""I and the tliiril year ' (l"'. l'l77 \i.is an all time tecutrl enrnirii' year for :lm lel‘tI'Ill. The record “ill likely be broken I'IL run in thi. l I-~ cal Ye 'Tr'“‘ ‘-V' 296 Snyder's of Berlin was flat in l973 and 1974. tlte first two years after they joined us. Then the pattern trtrfrtldctl."l'hey managed a l7l‘1'u increase in 1975. A (23% incrca- e itt l976. A 44% increase irt 1977 and another record will be made in Fiscal 1978. Why does this happen? We think it is because of several things. in some instances it is the fruition of developments that were started before the divisions joined us. One of our cri- teria for an acquisition is that trianat-emetu must be cap~ able. must be willing to stay with the company and must feel comfortable Operating under our decentralized system. When theyjoin us they are allowed to bring to full develop- ment the good projects and plans that they've already made. Hugh has told .'ou about the contribution Pro-Fae makes to the overall corporation. it makes a very real con- , tribution at the division level. Working Wltit grower-urem- bcrs ofthe co-operativc is a new experience for most of the managers. They like the improved return on capital em- ployed they enjoy because of the extended payment ar- rangements they have with the co-operatives. They like the better communication they have with growers through the . Pro-Fae organization of commodity committees and re- ' gional directors. improvements itt rasv product quality and the resulting manuacturing cost savings that come from . this are subtle but real. To some. talk about free form or decentralized management is discredited. it doesn’t work for everyone or for every company at every stage of its de- velopment. For us now it works. lt works because we are made up of regional businesses whose management must have flexibility to deal with the problems and opportunities in their regions. A pride of accomplishment and nrorivation to do more results. it works because of direct and short communication lines with the corporate office. it works because of a somewhat unique management incentive pro- gram that reaches deep into the ranks of the division. Though the awards are Spread on the basis of individual merit and job responsibility. t .e division as an entity is not penalized if it happens to be in the down cycle. We think this pronrores co-operation between the divisions and the desire to do the thatg that will enhance tor-.rl corporate re- sults. With all this. the division managements are held to a standard and that is where pthtltlnt’. comes in. lwant to take about three minutes to talk about a subjcct that many three day seminars have been built around. We ' plan. Each division annually draws up a detailed. one year :plan and it is scrutinized carefully by corporate manage- Emcnt. When the goals are jointly agreed to they are prescnt~ ,led to the Curtica-liurns and l’ro—l’ac Boards of Directors. This then becomes the standard to which the divisions are ; held. Because most divisions are dependent upon crops that . cannot be accurately fonjcast. we perform a mid-year 3 rcvrew ultich then becomes a road map for the balance of ltl'tc year. As analysts and security sales people. you are vrtally interested in what plans we have for continued growth. lcart't derail those plans. but I can tell you how we look at. the present and the future stance ot the corpora- tion. First. as Much has told you, we expect to continue an asture and effective acquisition prot-raur. We hase been selective in the past. bovine Companies at bars-airs prices and helping them grow and [doom . . ilfltls‘f our tnanatzenteut organization. A testimonial to our sttc‘c'css is, i think, that only one drsision. l’J. Rittcr, has been closed. That was productton declined rapidly irt New because asparagus . . t _- - . - m“ Ui- . rv ‘ ’2- _1-....,. .. Jersey and not because of management failure. The Ritrer lltnrtd on asparagus and other items is still available in the liast sutiplicd byour Michigan Fruit Canners and our (LB. Foods tlisisiotts. , While we plan to continue the acquisition program. \se recotgni/c that we must grow internally as we”. fit. ‘1 disi- sion is deeply involved in business planning for trrouth, The plans extend out for five years. They are revieued and updated annually and are reported in detail to the senior management of the corporation. Our seven production divisions are strategically iotared in farming areas adjacent to large pOpulation centers throughout the nation. liugh has explained our regional brand concept. That does nor preclude any division with a unique product or a unique product source from rolling: out and we encourage them to do so v. here it is practical. For example. a unique product might be our aseptically canned puddings front Michigan Fruit Canners or the big chunk meat stews front Nally's. An example of a unique raw . 1 product source is red tart cherries. grown primarily in the 2 States ofhlichigan and New York. There aren’t very many places in the United States where this crop can be grown profitably and those two States will be the production . centers for the foreseeable future. , We have fruit processing divisions located in the cherry ' Li producing areas itt New York and Michigan and we have i growers eager to become a part of l’ro-Fac. 7 We see 1 source of future internal growth to be our abil- ity to expioit our strategic plant location". thus broadening marketing operations for uniQUe products. Anorher area from which future growth can come will be the develop- ment of new prOdUCtS and line extensions for retail art food sers ice markets. As i mentioned earlier. our large dio ; visions have considerable research and development capa- : bilities. To sum up. we plan to continue our growrh in sales and ' earnings through a continuation of our acquisiton pro- gram, through utilizing; the strength of our management strucrure, our strategic locations. our unique products. our ‘ R 6: D capabilities and our flexibility to follow the market to where the profits are. Thank you and now 1‘" turn this back to you. liuqh. llL'lill CUMMIXC: Thank you Ted and Bob. Let me conclude with a few comments on how Curtice‘flurns' financial performance compares with other food proces- sors. ' We have become a major factor tn the processed food in- dustr y. We are now involved in seven broad classes of food and it is our intention to continue to expand both intern..llv and through acquisition into Other types of processed food. Our expertise is in food processing and marketing. We are considering such areas as frozen fish products. proces-red meats. processed dairy producrs. wine. and other Snack foods. but we will stick to foods. l With this pattern in mind. we aren’t clear with whom in the industry we should compare our performance. The most recent Standard & l’trur°s Food Processing industry Suttcv classrlics (.'urticc-liurns as one of the eitoht Lug-est publicly owned canners in the country. The others are Crawl...” .\nup. Castle ti; Cook. Del Monte. Green Giant. llcirt/ Srnucker. and Stokely. The most recent earnintts per .hare reported for the seven orders—they are mostly quarterly flotilla. but one is fur six months and one is a year-end ti"- ure—have increased on the averatte 5.4 per cent ou-r tile 0 297 comparable previous period. Cunice-Burns' most recent per share earnint's has more than doubled that increase at ”J per cent. 'lhe rrune seven companies' price earnings ratio average it.) {at cent. while Curtice-tturus' is shown as 5.0 per cent. T't-ir yield avenged 5.2 per cent. Curtice- Burns' yield is 6.” per cent. Some analysts with whom we talk say me have become more diversified than this group of to-ealled “canners“ and we should be compared to the orhcr more diversified food processors. If so. and there is some truth to this posi- tion. l’d like to compare our performance “till a group of H larye diversified lood processors in a .\'member 1977 food industry study made by one of the large New York City firms. Without naming all of the companies in the study. typical are lreatrice. Kellogg, or Standard Brands. One comparison made is return on equity. The return on average equity of the M companies for the most recent three years. is [5.6 per cent. Curtiec-llurns' return on aver- age equity for the same period has aseraged 19.4 per cent. These 14 firms hate an average Pit? of 10.5 per cent as compared to Curticevtlurus' 5.0 per cent. Their yield is H per cent, while Curtice-Burns- is 6.0 per cent. The ratios have all changed a little since mid .\'ovemher when the two reports were published. (Eunice-Burns “as shown at lS-l/S and it is now l6. but i do think the figures speak for them- selves and the message is clear. \. Well. the past is not the future and that is uhat we are all tnterested in. l thir k Curtice-Burns is what you peeple deo scribe as an emergi rg or threshold company. We are grow- ing. as a result of an unusual and somewhat imaginative plan. It has permitted geographical c'isersifieation across 'the country and the acquisition of strong regional brand ' names while still retaining our expertise in providing products for the supermarkets’ our. chain store labels. We ~ have diversified our product line t0'tl great runny value ad- ded products. salad dressings. JCS>CYRS and snacks being examples. Needless to say, there is plenty of room for fur- ther diversification. A very large part ot‘all of this has been made possible by the keystone in our arch. l’ro-Fac C0~0perative. We think these concepts differentiate US from our com- petition. lf they have worked in the past. they will work in the future. and we intend to follow the same pattern. That involves internal growth. along \\ uh acquisitions in diversio lied processed foods. We have never made specific proiec~ tions on earnings. but those of you \\ ho have followed our general projections in the past wrtl agree our track record is pretty good. Needless to say. we're Optimistic about the future. i think l Speak for all four of the Curticellurns peOple in the room today in say inc we find our business fun to be in and we intend to keep it that way. Thank you. ('ll-HRHAN: At this point we have a few minutes left for questions and ifyou'll direct your question to the individu- al you'd like the answer from. ue'll Open it up for ques- tions now. i Ql'lLS “UN: Regarding your ucqui~itiun policies, what are your criteria and him do you tlecitle on price? lll (ill ('t-.\t.\tl.\t£: We hate .r Mitten statement on ac. quisition policies and l vmu't try to repeat all of it. Some of those prerequisites are thirty-s hie rt..- cotttptuty must have r'nod manzuterueut that intends to stay unit the husiness. As i said. we hate specific types ot t-roce ‘Cci food that we want to diversify into. lt doc n't ltl'.'.ttt our acquisitions necessarily will he the ones that l trtctttturtcsl, but it indi- cates our general thinking. A very clear prerequisite is that ' the company must increase the earning"; per share of (fur- ’ tice-lturns. l think that factor in itsell laritely determines- the price that ttc’re willing to pay. lf it isn't going. to in- crease the : eturn to Cut tree-limos, use aren't rtttinr; to pursue: it. We have a very clear policy that we aren't rgorng to buy companie. with the idea that we can turn them aroundJ They have to have a history of carninr's and. as a owner of- fact. we have a procedure that vse go through in uorkiupt with potential acquisitions in sshieh use build up a pr0~- forrna balance sheet and rnconrc statement based on the' previous three years’ earnings. If the previous three years' earnings don‘t come out at a reasonable purchase price, we don‘t get very far in the negotiation. The company must :- hrtvc good earnings in the past and we intend to tnc.c:tsc ‘ their earnings in the future. Let rue talk a little bit about Comstock which we acquired last May. Obviously, you diclter on price but we tool: th past earnings of Comstock. put them into a pro-fornia Statement with Curtice-llurns and saw that they would in- crease the earnings of Curtice-Burns sufticrently to justify the price. ()L'l—‘bf'l It).\': .\lr. Cumming. prtnide Us with a ltrcalultmn ot' the sales contribution by operating- gruup h} hrnzrrl pro- duct category if you “ill? l Wonder tt' _s‘mt entrltl gise us Some indication as to What the earnings contribution is either in relntim dimensions or how e\ er you feel most eon:- fortuhlc. lil'fill ('l'.\l.\tt\'(i; The quesriort involved the relative contribution to earnings of our various divisions and are haxe carefully avoided being specifi: ..bout that. i think at the present the diusions that are making the iargesr contri- bution (discounting Coms‘cck. since it was acquired only six month; ago) are the largest dixisrons acquir..‘. recently. Consequently, their earnings ought to be large. Tl.ey hate also increased their earnings more rapidly than the original divisions in our business. So I thinlf‘l uoulu say that if you look at earnings in relations to the price we paid or to the equity involved in them. you would say tltrtt .\iiehit-an i-‘ruit Canners. Nailey's and Synder's. probably are the targest contributors to earnings- QL'i-..\TlO.\': Of those three parts of the husinesc. schist percentage mould the} entail. approximately? ltt‘t-‘ll CL‘MMI.\(.’: Somewhere around half. Ql‘l'..\'il(".\': The question had to do with Syntler's emf liernsteiu's being: mounted into contiguous ttturiaeh 23“” huts dot". :ltis‘ coincide With your other stated littlit'ic‘? 1'l-Il)l|()l.\t(§l(l‘..\: I think Bob Hutchinson mentioned in his talk that he was not precluding the possibility that n‘ we had a suft‘ciently uniQue prodUCt, we would expand into broad geographical areas. Synder's and Bernstein's are borh extremely unique products so they would he the err- Ceptions to he rule. Ql'liSTlUN: lsn't your business intensisels competitiv- and-u low margin one because of all the rtrlu-rti~tr:_ t-m haw tn tlu? 'll-.l) tltlt .\ttittll\: l feel you are right to a certain extent but. on the other hand. Curticc-Burtts has always hml .t it'- putation in its adtcrtising and ptor'mttntts fur tit.'i~.ttt}'_ a little luuk lilu: .1 int. “'6 do :1 gchl tlc.tl 0f :ttltr'tli' t'o', ol' self-liquidators Much is very itu-xgu'ttsim. llut this kind ol advertising senes to get US display in the \llt't‘llttutht'l‘. APPENDIX G PRO-FAC COOPERATIVE, INC. 298 If!!! coupenn'nve. mo. POST OFFICE BOX 38 BENTON HARBOR. MICHIGAN 49022 PHONE: (616) 927-4411 March 9, l979 Mr. Howard Gilmer, Chairman Michigan Processing Apple Growers MarkeTlng CommiTTee RouTe l, Box l45 AugusTa, Ml 490l2 Dear Mr. Giluer: As you may know, Pro-Fae CooperaTlve has for some Time been communicaTing wiT lTs Michigan apple members over The uncerTain fuTure Tor peeling apple markeTs. ,Several weeks ago, Pro-Fac apple members in Michigan held a meeTing To fully discuss This problem. : One of The facTs discussed was ThaT The markeT for peeling apples is comprised of Two segmenTs; canning and freezing, and ThaT These Two segmenTs frequenle are noT in The same supply and demand cycle. Consequenle The price floor esTabllshed ' Through The bargaining process always reflecTs The price ThaT The sTrongesT seg‘ menT will bear aT The Time. If, because of The single price approach, eiTher The canning or freezing pro- cessors conTlnue To be deprived of profiT opporTuniTies, we believe ThaT Michigan growers will suffer a loss of peeling apple markeTs and ThaT producTion capaclTy will move To oTher areas of The counTry offering a more consisTenT opporTuniTy for adequaTe reTurn on capiTal. ' A possible soluTion To This problem may be To negoTlaTe The price of apples separaTely for canning and freezing. Many of Pro-Fae Michigan apple members endorsed This approach and feel ThaT Their views should be known. A leTTer des- cribing This posiTion was given To each of our Michigan apple members. They were asked To sign iT if They were in agreemenT, oppose iT if They saw fiT or To add Their own commenTs. All of The responses are enclosed. in addiTion To The 68 enclosed leTTers, l2 members gave verbal responses. We believe iT is slgniflcanT ThaT 78.7% of The responses are in supporT of This proposal. While The leTTers signed by Pro-Fac members are addressed To MACMA, we now feel [T is mere appropriaTe To send Them To you for consideraTlon by The Processing Apple Growers MarkeTing CommiTTee. Please noTe ThaT coples of This leTTer are direcTed To The MACMA general manager and To The manager of iTs processing apple growers division. ' ”_— _..,_, “ ,flms-.,.wm~m 9.” new. ~ 299 Mr. Howard Gilmer Page 2 March 9, I979 we believe ThaT The ieTTers speak for Themselves and ThaT They warranT serious consideraTion. We would appreciate being advised of The commiTTee's aTTiTude Toward This proposal afTer if has had an opporTuniTy To review iT. Sincerely, é/ze/ Thomas R. Kalchik Area Manager Member RelaTions TRK/Jw cc: Mr. Noel STuckman Mr. Thomas BuTler AgriculTural MarkeTlng & Bargaining Board _— _ a ._. ._.».— __ -~..._.- ..—“'...3:"";.'_“'_‘-.".'.'_.-9£‘-?—'. _'..” ...‘-'. '. f“?.";'~'”-'-“ 3‘. V": _' ' ‘ 3(N3 January 26, l979 Michigan AgriculTural CooperaTive MarkeTing AssociaTion POST Office Box 960 Lansing, Michigan 48904 GenTlemen: As a Michigan apple grower and member of Pro~Fac OooperaTive, inc.,'l am wrlTing To express my concern over whaT I consider To be The poor prospecT for mainTaining exisTing markeTs for processing apples. The basis for This concern, in large parT, is The conTinued esTablishmenT of non-compeTiTive prices for processing apples in Michigan, wiThouT regard for prices paid in ccmpeTing areas. lT is a difficulT Thing for commercial growers To advocaTe lower prices and ThaT is noT The purpose of This IeTTer. lnsTead, i am urging you To consider our need To proTecT The reliable markeTs ThaT we have developed for our crops. Processing apples in Michigan go To canners or freezers. They are differenT markeTs and There is no consTanT value relaTionship from one To The oTher. The severlTy of This problem varies according To uTilizaTion and apple sauce is under greaTer sTress Than oTher processed apple preducTs. However, The negoTlaTlng process To daTe has resulTed in esTablishing prices for processing apples, wlThouT regard for uTllizaTlon. LasT year, an apple sTudy was sponsored by Pro-Fae and CurTice-Burns, under The dlrecTion of faculTy members aT Michigan STaTe UniverslTy. lTs purpose was 'To deTermine fuTure producTion Trends of apples in Michigan and To idenTify changes necessary To allow maximum profiTabiliTy from apple operaTions, boTh for The members of The CooperaTive and for The shareholders of CurTice-Burns. The sTudy concluded wiTh recommendaTions in markeTing, research and developmenT, acquisiTion and handiing, raw producT producTion and obTaining compeTiTive raw producT cosTs. The presenT sTaTus is ThaT progress has been made in all of These areas excepT The lasT. One immediaTe resulT ls ThaT The Pro-Fac pudgeT for apple receist in [979 has been reduced from previous requiremenTs. AnoTher is ThaT Pro-Fae is faced wlTh The néed To approorlaTe subsTanTial capiTal invesTmenTs in planT and equipmenT if producTion of The exisTing volume and apple producT groups is To be conTlnued in The fuTure. I am informed ThaT presenT margins do noT jusTify These caplTal invesTmenTs in Michigan. i believe ThaT The muTual long-range inTeresTs of growers and processors mighT be served if negoTlaTlng procedures were changed To esTablish prices separaTely for canning and freezing apples. The managemenT of CurTice-Burns ~ _ 1‘:""—~vr- .T‘S—‘W'l' -;~.-~ _--, .’—_- v—q;':' , , , 301 Michigan AgriculTural CooperaTlve MarkeTlng AssociaTion Page 2 January 26, l979 agrees ThaT This change may offer some possibiliTy for conTinuéd operaTions aT' previous volume levels. As a member of Pro-Fac, I join in urging your favorable consideraTion of This requesT. Sincerely, cc: AgriculTural MarkeTing and Bargaining Board APPENDIX H HUNT-WESSON FOODS, INC. 302 ’ ' A % HUNT-WESSON FOOOs L'c'o'owwm'm “0 Hunt-Wesson Foods. Inc. 1845 West Valencia Drive Zulloge‘nizgggiania 92634 ' DECEMBER 12. 1979 "INDEX PRICING" CALIFORNIA TOMATOES THE PROBLEM: IT IS OBVIOUS TO EVEN THE CASUAL OBSERVER THAT OUR CALIFORNIA ~TOHATO INDUSTRY HAS SERIOUS PROBLEMS. THE LARGE 1979 CROP HAS PERPETUATED AN OVER-SUPPLY CONDITION; NHILE THIS OVERSUPPLY HAY NOT BE LARGE ON A PERCENTAGE BASIS, IT HAS BROUGHT DISPROPORTIONATE PRESSURE ON MANY CANNERS T0 DISPOSE OF INVENTORIES AT LESS THAN ECONOMICALLY-REALISTIC PRICES. SOME ”PRIVATE LABEL" CANNERS ARE SEEMINGLY wILLING TO GIVE UP FINISHED PRODUCT PROFITABILITY AND SELL BELOH COST IN ORDER TO MOVE INVENTORIES OR To INCREASE THEIR SHARE OF MARKET. SUCH PRICING STRATEGIES TEND TO LowER THE FLOOR FOR THE REST OF THE INDUSTRY. POTENTIAL BANKRUPTCIES: PLANT CLOSINGS. owNERSHIP CHANGES ARE INDICATIONS OF THE INDUSTRY TURHOIL. PROBLEMS ARE FURTHER AGGRAVATED BY INFLATION AND HIGH INTEREST RATES. AN EXPECTED SOLUTION IS TO DRAMATICALLY CUT RAH PRODUCT PRICES AND SEVERELY REDUCE THE 1980 ACREAGE, THEREBY REDUCING INVENTORIES AND ALLOHING A RETURN TO PROFITABILITV. WHILE wE ~ . AGREE THAT THESE PROCEDURES MAY wELL BE NECESSARY. wE BELIEVE THAT HUNT-WESSON AND HUNT-WESSON GRowERs STILL FACE A SERIOUS, LONGER TERM PROBLEM. THE PRESSURE FOR HIGH RAw PRODUCT PRICES BY CTGA. wITH ITS LEADERSHIP STRONGLY INFLUENCED BY co-OPS. HAS FACILITATED THE GRADUAL INCREASE OF COOPERATIVES AT THE EXPENSE OF PROPRIETARY 303 CANNERS. NE ESTIMATE THAT THE CO-OP‘AND "PARTICIPATING CONTRACT” CANNERS' SHARE OF THE CALIFORNIA MARKET HAS INCREASED FROM APPROXIMATELY % IN 1971 TO APPROXIMATELY 38% IN 1979, HITH A CORRESPONDING DECREASE TO PROPRIETARY CANNERS BEE THEIR GROHERS. THE RAH PRODUCT COMPETITIVE ADVANTAGE ENJOYED BY COOPERATIVES REFLECTS THE FACT THAT: THE CO-OP GROHER HAS :Hg_OPPORTUNITIES FOR A PROFIT; (1) THE RAH PRODUCT PRICE. AND (2) THE PROFITABILITY OF FINISHED GOODS. UNDER THE HIGH RAH PRODUCT PRICES HE’VE HAD THE LAST FEH YEARS, THE co-OP GNOHER HAS BEEN SATISFIED HITH HIS RAH PRODUCT PRICES ALONE AND HAS BEEN HILLING TO SACRIFICE FINISHED PRODUCT PROFITABILITY IN FAVOR OF THE PRESUMED LONG- TERM OPPORTUNITIES FROM INCREASID SHARE OF MARKET. 0F PARTICULAR SIGNIFICANCE IS THE FACT THAT HIGH "UP-FRONT” PRICES PAID BY PROPRIETARY CANNERS HAVE ACTUALLY SUBSIDIZED co-OP AND PARTICPATING CONTRACT GROHERS HHO HAVE BEEN RECEIVING LOHER RAH PRODUCT RETURNS. IT IS OUR OPINION THAT PEACH co-OP GROHERS HAVE FOLLOHED A SIMILAR STRATEGY OF CLING PEACH PRICING AND POLICY UNTIL MOST OF THE PROPRIETARY PEACH CANNERS AND THEIR GROHERS HERE FORCED OUT OF BUSINESS. ' TO PROTECT HUNT-WESSON AND OUR GROHERS FOR THE LONG TERM. HE MUST PURCHASE TOMATOES ON SOME FORM OF PARTICIPATION IN GROHING PROFITS AS HELL AS PROCLSSING PROFITS, HHICH HILL REDUCE THE co-OP AND "PARTICIPATING CONTRACT” CANNERS' ADVANTAGE OF BEING ABLE TO PAY LESS THAN THE FULL RAH PRODUCT PRICE, TO MAKE DEFERRED PAYMENTS, AND NEUOTIATE FOR HIGH RAH PRODUCT PRICES To GIVE THEM FLEXIBILITY IN FINISHED PRODUCT SELLING PRICES. THE ALTERNATIVE To SUCH A CONCEPT MIGHT BE JOINT VENTURES HITH GROHERS. OR SELECTED COMPANY FARMING VENTURES. HOW TO RESOLVE THE PROBLEM: HUNT-WESSON HAS DEVELOPED.AN iNDEX To DETERMINE RAH PRODUCT PRICE BASED ON THE SELLING PRICIS AND CALCULATED PROFITABILITY OF CALIFORNIA ”PRIVATE LABEL" TOMATO_PRODUCTS. 304 THE INDEX ASSUMES THAT RAH PRODUCT PRICE SHOULD BE A FUNCTION OF FINISHED PRODUCT SELLING PRICES AND MOVEMENT IN THE CURRENT CROP YEAR. THE INDEX RECOGNIZES A HEIGHTED PRODUCT MIX OF SIGNIFICANT AND REPRESENTATIVE "PRIVATE LABEL“ PRODUCTS. REPRESENTATIVE PRODUCT COSTS. TOGETHER HITH MONTHLY HEIGHTED AVERAGE SELLING PRICES HILL BE USED TO CALCULATE RESULTANT PROFITABILITY. EACH YEAR HE HILL HAVE HASKINS AND SELLS, OR ANOTHER NATIONALLY RECOGNIZED ACCOUNTING FIRM VERIFY THAT THE DATA UTILIZED To DETERMINE THE INDEX NUMBER FAIRLY REFLECTS INDUSTRY CONDITIONS AND IS USED IN A CONSISTENT MANNER. HOW "INDEX PRICING” WORKS: THE FOLLOHING IS THE INDEX/PRICE SCHEDULE FOR THE 1980 SEASON: RAN PRODUCT PRICE INDEX PER PAID-FOR TON 120 S 60 (MAXIMUM) 118 $9 116 58 11A 57 112 56 110 SS 108 SA 106 53 10A . 52 102 51 100 50 98 49 96 A8 94 A7 (MINIMUM) A MINIMUM ”DOHNSIDE” PRICE IS NECESSARY To PROTECT GROHERS AGAINST "DISASTER” CONDITIONS IN THE MARKETPLACE IN ANY GIVEN YEAR. FOR HUNT-WESSON To ACCEPT THE RISK OF A GUARANTEED MINIMUM PRICE, THERE IS AN ”UPSIDE”MAXIMUM PRICE HHICH HOULD BENEFIT HUNT-WESSON —r -_‘_-.—an T— --— -- .omxu “_o: ugmnoa .¢.> .uoxu mgmaamz .z ;a_a¢ .Lm: .cmu caugpu :ogmsau .gmz amam wflcam quaz .mmgm gmpzzum com umzmw>gmu:_ Amvcomgwa comm-mm~ AchV ~N~mm _4 uwmggm mma_o: mom“ m_:gom__mu mo mgmuzuosm uoo_gg< whom-~mm Am_ev vodcm <0 .oom_u=~.E cam “magum swam cc” cowum_uomm< smog m:_::uo avcgom__nu “55¢-emu Amfiqv memeo <9..oaumxm%m4 oNN mu_:m .n>_m opampo .uz mofim :o_ua_uomm< sumo; m:_==mu cwcsom__wo ._=LOE__QU :owu awoOmm< vmzo_>gmu:_ mucmsommcaz :owua_uomm< m:_:_mmgmm 3133 mm\ow\m m~\-\m .m~x~\~ mmxm~xv mm\N~\v mm\N_\v mm\m\v a~\_~\v am\~\~ am\__\e can: .gmz goumou xgga: .gmz casxuzum _moz .Laz .:mo acagaz c_agwo .Lmz “we; xgaaxn_o x23 Nam: u=m_gmmuz xu_o .Lmz .cmw Sum—_ou Nu_gu .gmz m5m____2 xggma gouumES: couxa_u apoga: .Lmz moo .m acco cozm_>gmu:_ Amvcomgom mmuu_==au m:_umxgnz mammguam< ooo~-m~m ANdmv ecmme _z .m=_m:c4 z~=_mam .3 msms samgzm Esau cmm_:u_z A<=u_gagoaoco _agzupaupgm< cam_:o_: cum_=o_z o-~-mm~ “mowv H-ma a. .uoohxu._a «em xcm ozuu_ mo msmzosm cacao; mm_h-coa Amomv <3 .ns_xm> o=_u_.=m goo=1~a_o= NON =o_uc_uomm< Loom acpccmu :omogoucouacpgmu: momNm ac .=a_am mmnm xom .o.¢ .cugoz .uaoa Lm>pz ammv =o_aa_uomm< mgmxogo :oum:_:mm3-commgo -o¢-~mm A¢omv eeamm <3 .mu_m»===m ummgum gum susom cum :owum_uomm< maogu sguu ccumcvsmaz _agucou «mom-~mw .momv vemmm <3 .mquxaczm Km“ .o.¢ .uamgum gas zuaom mgm :ovua_oomm< mgmzogo maaagaam< :oam:_=ma3 ummzsugoz =c_uc_uomm< — —rr *1 ’,,--u. 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.um_socoo9 pogou—=o>gm< mood copzoz .9.o .coum:_:mo2 ..~=< go_=mm =92ooo __ogmgas :owuoocoou scam .omwzacoom goumogosg< Lou—o2 .9.2 .coum=>2mo3 .:2 m>>uogoaoo9 .Looogum_:mao< .ooa comgomgoh P—ooooa .9.o .coumcpcmoz .=o>uo_oomm< mgmoooogo zoom _ocomuoz .um_aoooou Lo>com gwoz oo> mooogzoo .9.o .coom:_2mm2 .mgoozooga 2__z 9o cowoogooou pocomuoz comcgonm _woz Locos gasoo BIBLIOGRAPHY BIBLIOGRAPHY Abrahamsen, Martin A. 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