Making a Market
Co-ops
facing challenges
of global supply-chain economics
Julie A. Hogeland, Ag Economist
USDA Rural Development
Global market
expansion is forcing
cooperatives to draw
upon historic strengths
to resolve
contradictions and problems emerging
from modern supply-chain marketing.
One expectation associated with supplychain
economics is that greater
efficiency and coordination will result
from reducing conflict within the
supply chain. “A frictionless
marketplace” will emerge from a
smoothly functioning, logistically
optimal supply chain in which partners
share a common customer focus
(Wysocki).
This idealistic, optimistic vision
obscures how intense competition and
even market failure remain persistent
features of the marketplace, challenging
cooperatives to protect their assets,
producer-members and customers.
Global retailers such as Tesco,
Carrefour and Wal-Mart are battling
for market share within China, India,
South America and the privatizing
economies of Russia and Eastern
Europe. Projections from 2007 suggest
that these emerging economies will
grow three to five times faster than
Europe, North America and Japan,
according to Michigan State University
Professor Thomas Reardon. Growth
potential on this scale has triggered a
competitive struggle Reardon regards as
“fierce” — a struggle invariably with
cooperative ramifications, the topic of
this article.
The August 2008 food-poisoning
crisis in China, caused by the addition
of melamine to milk supplies,
profoundly impacted New Zealand
dairy cooperative Fonterra, revealing
some of the risks of being a “first
mover” or early market entrant.
Motivated to form a joint venture by
the prospect of becoming China’s
leading dairy producer, Fonterra
assumed a 43-percent ownership stake
in Chinese milk distributor Sanlu in
2005.
The Chinese dairy industry was only
partially industrialized, by Western
standards. Agricultural norms, values
and processes understood in a Western
context did not come “packaged” along
with new processing technology.
Squeezed by inflation and governmentimposed
price limits, farmers realized
the importance of reducing costs and
maximizing profits. Less apparent
within China was a clear understanding
of industrialization’s goal of meeting
consumer needs even before they are
articulated.
California co-ops initiate
value-added strategy
Within the United States, Upton
Sinclair’s pro-socialist novel, “The
Jungle,” helped reform capitalism early
in the 20th century by encouraging
greater public awareness and
accountability for food safety. The
legacy of hacienda production — large,
Spanish-influenced estates or
plantations — enabled California to
industrialize agriculture several decades
before the rest of the United States.
Hallmarks of industrialization — such
as a business attitude toward farming,
contract production, large-scale
mechanized farming and organization
for export markets — were evident by
1910 or 1920.
In 1923, California attorney Aaron
Sapiro drew the outline of the
contemporary value-added cooperative
by summarizing the attributes that
made cooperatives, such as Sunkist,
Sun-Maid and Sunsweet, successful. He
saw cooperatives bringing order to
chaotic markets by preserving a
commodity so that it could be released
on the market gradually, not dumped at
harvest. Yet, Sapiro’s market-driven
emphasis — he did not consider a
product marketed until it was actually
sold — was not completely understood
by farmers who pinched pennies to
keep their farms going.
The Spartan outlook of economist
Edwin Nourse resonated with such
farmers. Why did so many cereal
brands exist in 1922, Nourse asked,
when he found that his own brand was
perfectly adequate? He concluded that
brand proliferation and advertising were
opportunities for food manufacturers or
middlemen to ladle monopolistic profits
or surcharges on to the price of food.
Cooperative marketing — stripped
of such excess and established on a
straightforward, cost-of-service basis —
appeared to be more transparent and
conducive to revealing a true supplyand-
demanddetermined
price.
Other economists said
that excessive
marketing costs seemed
to be the result of too
many middlemen
competing against each
other at a time when
farmers seemed to be
getting less than their
fair share of the retail
dollar.
A culture of marketing
conservatism was
endorsed within the
1971 edition of
“American
Cooperation,” which
proposed that the
introduction,
promotion and
advertising of so-called
“new foods” did little
more than add to the
cost of food. “There are really very few
really new products, with frozen orange
juice, instant mashed potatoes and now
a new fried milk curd product being the
only really new products,” it said. Not
until value-added potential emerged
from Midwestern crops such as
sugarbeets, grains (identitypreservation)
and corn (ethanol) in the
late 20th century did Midwestern
producers (other than dairy or pork
farmers) become as “market driven” as
had California specialty crop producers
some 50 years earlier.
This pattern suggests that values and
norms emerge from a local context; it is
difficult to import them from one
context (e.g., the West or California) to
another.
Technological and infrastructure
requirements for rapid industrialization
complicate the development of new
values and behaviors when norms and
standards cannot be transmitted or
imposed from the “outside.” During the
melamine crisis, Chinese milk tests
were unable to differentiate between
chemical or man-made protein and
natural amino acids. The Washington
Post reported that dairy cows were new
to Chinese farmers; they did not know
how to feed and care for them (October
20, 2008).
In 2007, an economic team led by
Dr. Jikum Huang concluded that the
spot-market exchange routinely used by
Chinese apple and grape growers did
not generate the transaction trail
necessary for a successful trace-back
system. Contract marketing and
extension services were practically
nonexistent.
Market failure challenges
Another challenge for cooperatives is
market failure: could it limit or render
ineffective what cooperatives are doing?
Market failure has been defined as
market deviation from the ideal. Yet,
“the new economic paradigm for
agriculture accepts some imperfect
competition [or market concentration]
in the food and agriculture sector for
the sake of economic efficiency,
technological progress and rising living
standards” (Persaud and Tweeten 2002).
For this reason, aligning the incentives
between different components of the
supply chain has perhaps been
emphasized more as a collective
marketing strategy in recent years than
the potentially adversarial — but still
traditional — cooperative role of
correcting or compensating for market
failure.
Nonetheless, both subtle and
spectacular examples of market failure
continue to exist. In May 2007, CHS
President and CEO John Johnson told
this writer that: “Emerging markets
offer growth, but also significant risk
because the sources of demand and
supply are not clear.” This comment
seems prescient, considering the
situation with
melamine in China.
One of the consequences of the
fierce competition among retailers is
that suppliers may be “de-listed” for
failing to provide the continuous
leadership in market development and
procurement demanded by the chains.
This is an example of how Reardon
expects long-term supplier bargaining
power to decline as the chains become
more concentrated.
Coming to terms with monopolistic
elements in the economy is an
important challenge for agricultural
economies in transition and for
vulnerable producer groups. The
burden of adjusting to agricultural
industrialization fell hardest on small
producers in the United States because
they were the largest producer group
for most of the 20th century. Small
Chinese farmers will likely absorb the
impact of the melamine crisis because it
is easier to control or monitor a small
number of large operations for food
safety compared with the fragmented
supply chain these producers represent.
Reardon anticipates that, as global
retailers spearhead the process of
consolidating, integrating and
modernizing fragmented, traditional
supply chains, they will develop private
standards of product quality and safety.
At this point, private standards mainly
reflect produce size, color, blemishes
(or other damage) and foreign matter,
not necessarily safety concerns.
Competition between supply chains
based on private standards is expected
to replace competition between
individual firms.
Private standards compensate for
spotty enforcement of public standards
within emerging markets. For the
burgeoning number of emerging
market consumers with middle class
incomes, private standards will resolve
the inconsistency between loose
standards for local consumption
compared with tighter export standards.
Co-ops can help build
trust in marketplace
Fundamentally, Sapiro’s orderly
marketing norm facilitated producer
trust in market exchange based on the
kind of market knowledge — the
commodity grades and standards
developed by cooperatives — that have
become the basis of contemporary food
safety and security (Hogeland,
forthcoming report). Contemporary
consumers are not unlike the producers
of the early 20th century who needed to
know how their fruit was graded and
how different grades compared in value
before they could have confidence in
the market. Lack of trust in market
exchange causes significant economic
underdevelopment, according to
economist Kenneth Arrow. Cooperative
norms or values can compensate for
such mistrust and allow markets to
develop.
Product identity standards protect
consumers from fraudulent or deceptive
practices; grades categorize
commodities according to economically
significant attributes. Both reduce the
transaction costs of commodity markets.
Reardon notes how grades and
standards are emerging as a tool for
product differentiation and market
segmentation. Companies are now
positioning themselves by product
attributes.
Process-control technology now
provides information on how product
attributes and outcomes, such as calorie
reduction or organic production, are
biologically created and maintained in
the sequence of production. The
process begins with plant genetics, then
cultural practices, inventory, handling
and on through processing. The result
is a more substantive basis for
nutritional claims and food safety traceback
programs.
Being innovative and a trend-setter is
a particular focus of MBG Marketing,
“The Blueberry People,” 300-member
cooperative headquartered in Grand
Junction, Mich. As the world’s largest
supplier of blueberries, and with
members in 13 states and British
Columbia, co-op CEO Frank Bragg’s
interest in traceability has been driven
by the question: “Who knows the
source of that product?”
The cooperative was the first in the
industry to use secure clamshell
packaging and now provides total
traceability. MBG can identify the day
particular blueberries were picked, the
field block they were picked from and
the people who picked the fruit. Setting
MBG apart from the other suppliers is
the co-op’s unique ability to also trace
the lot harvested in the field forward to
the customers that received it.
Noting that each member has a food
safety program on their farm, MBG
Director Allen Miles adds: “Our
standards exceed USDA standards to
differentiate MBG from any other
marketer to put MBG on the cutting
edge.”
MBG was started in 1936 to provide
a fair return to members. Through the
cooperative’s sales force, it gives
grower-members a single voice in the
marketplace. The early years of the
cooperative coincided with a phase of
industry development that involved
transitioning from independent
segments to a more integrated,
coordinated system.
Perhaps because the 72-year-old
cooperative retains an institutional
memory that if the milk buyers didn’t
come, milk had to be dumped, MBG
has kept the Sapiro-based marketorientation
that contributed to its
creation. “MBG is continually looking
for ways to get closer to the consumer,”
notes Bragg. MBG is, therefore, highly
focused on improving the retailercustomer
interface representing the
current phase of industry development.
Fierce competition for emerging
markets has encouraged retailers to
pursue the basic norm of agricultural
industrialization: “the low-cost
producer survives” (Hogeland, 2006).
To deliver a consistent level of quality
to the consumer and squeeze out excess
costs, retailers have backward integrated
to the grower level. This can affect
what retailers are willing to pay
growers. Consumer price “rollbacks” by
retailers ignore the effect of inflation on
grower costs.
Today’s market expansion and strong
prices portend a potential blueberry
market glut five years from now.
Production levels in 2013 are expected
to represent a doubling of 2008 levels.
Eventually, once quality improves,
lower-cost Chinese blueberries may
create import competition for U.S.
growers.
If “costs are everything,” then the
product becomes a commodity and
procurement will be driven by the
cheapest price. California apricot.
Protection for suppliers
Suppliers can protect themselves by
offering retailers a better understanding
of the consumer, by recognizing
purchasing patterns from retail data, or
by interpreting market signals to
identify what is and isn’t selling. Sun-
Maid targets more than a 99-percent
order-fulfillment rate and 95-percent
on-time delivery. This is especially
significant because Sun-Maid is the
world’s largest producer and processor
of dried fruit and represents more than
one-third of California’s raisin growers.
To John Shelford, CEO of MBG’s
affiliated grower organization, Naturipe
Farms Grower Services LLC,
efficiencies come from providing value
to the customer through a guaranteed
supply of blueberries, blackberries,
strawberries, etc. As a perishable
product filling a niche market, berry
production based on a high-volume,
industrialized model matters less than
continuous product availability, a
concept MBG calls “selling the
category.”
Naturipe Farms markets fruit from
all over the world to establish its
credibility as a year-round supplier.
This led MBG to successfully develop a
market for late-season blueberries.
Marketing 12 months each year enabled
the cooperative to spread costs to
support a fresh-product sales team.
Contributing to successful global
marketing are the right partnerships
that can preserve grower interests as
retailers consolidate. In December
2008, Sunsweet, the world’s largest
prune packer, and ShoEi Foods USA
(the third largest prune packer in
California), formed a joint processing
alliance. This united the latest
technology for responding to consumer
taste preferences and sensitivity to food
safety. ShoEi USA will contribute a
proprietary preservative-free process to
the alliance to attain the highest
possible degree of food safety, sanitation
and fresh prune flavor for Japan and
other high-specification customers.
To achieve this, the alliance will
result in a specially constructed,
enclosed processing area where
Sunsweet Growers can apply its worldclass
patented processing and pitting
systems to dry, process and pack all
ShoEi USA prune products.
Foreign-sourced fruit concerns
When MBG was offered a source of
contra-seasonal fruit supply, some
members filtered this through the
traditional belief that cooperatives
should not compete with their
members. (This was a norm that
contributed to the loss of significant
cooperative presence in the pork
industry — see Hogeland, 2006). To
this “all you are doing is helping
competitors succeed” stance, Bragg
replied: “They’ll be successful with or
without us.”
In fact, Reardon indicates that
effective global marketing is
relationship-based. Chains need
suppliers who will connect growers in
one emerging market with customers in
another. Sunsweet recognized that new
prune-plum orchards planted in Chile
and Argentina could depress prices by
increasing world supply. The
cooperative has actively engaged
Chilean growers in market
development, education and advertising.
By increasing the farming skills of highpotential
local growers, Sunsweet
actively manages the quality of the
product fed into local or global supply
chains. Through direct sourcing and
programs putting local suppliers on a
par with foreign competition, Reardon
anticipates marketing infrastructures
will naturally evolve to encompass new
super markets.
Indeed, a premium-quality Chilean
sourcing presence positions Sunsweet to
capture high-value opportunities in
emerging global food markets.
Moreover, foreign sourcing reinforces
cooperative control over the world’s
largest prune supply. Since 2005,
Sunsweet’s market has grown by 32
percent and revenue has increased by
$75 million.
In this era of emerging markets and
food scares, better market
access requires improved product
information and handling (including
speed of delivery), multi-site production
and sales locations, and
product sensitivity to changing
demographics, cultures, climates and
tastes. Sunsweet, MBG Marketing and
Sun-Maid demonstrate how
cooperatives can offer market access to
retailers based on these
criteria.
Co-op not just a home, but a support system for members
Michigan Blueberry Growers’
(MBG) membership of 300
producers represents a
combination of both very small
and very large growers. Director
Allen Miles, a large grower,
chose to become a MBG member
because the cooperative was
more cost-effective than using a
broker or other sales force.
The cooperative operates on a
cost-plus basis. MBG is not a “for
profit” company, but is a “for
grower” company. MBG also guarantees that it will sell
every blueberry a member produces — this
is the cooperative as the proverbial “home
for the growers’ product.”
“MBG is more than just a home, it’s a
support system!” stresses Director Pat
Goin. She and her husband, members
since 1980, represent small producers. “If
you want to be a quality producer, MBG is
interested in you,” she says.
The cooperative fosters strong support
from growers through a member horticultural
program which Goin calls “phenomenal.”
Rapid payout after harvest promotes enthusiastic
member commitment to marketing
their entire crop through the co-op. All
members undergo an audit each year,
choosing among a PRIMUS audit (requiring a
crew trained in food safety and hygiene), a selfaudit,
an MBG audit, a GlobalGAP (non-genetically
modified organisms) for European export, and an
AIG (or American Institute of Baking) audit. MBG
approves processing facilities according to a
“Process 2001” Program, which requires use of a
Food Safety and Quality system.
By “providing a home for the growers’ product,”
cooperatives risk excess inventory accumulation
when markets mature or harvests are
overabundant. Prolonged inventory carryover has
undermined marketing boards that operated on a similar
principle of storing product until prices rose.
American cooperatives have the option of restricting
membership (closing the cooperative) when challenged by
oversupply or stimulating demand.
Choosing the latter, Sunsweet
recast prunes as a “candynutrient”
by individually wrapping
perfect, moist prunes in
cellophane, making them a
“snack-on-the-go” branded as
“Sunsweet Ones.” The product
launch was supported by a
$500,000 Value-Added Producer
Grant (VAPG) from USDA Rural
Development.
In 2007, Sunsweet began
marketing a light, low-calorie version of its PlumSmart®
juice product, aided by a $300,000 VAPG from
USDA. PlumSmart Light is made from fresh
prune plums which normally are less visually
appealing than the varieties grown for
fresh markets. Made from fresh plums,
PlumSmart Light is cost-efficient because
growers avoid the expense of drying fruit.
PlumSweets — dark chocolate-coated
prune bits introduced by Sunsweet in 2005
— are an imaginative product far removed
from the stodgy compotes and stewed
prunes of Nourse’s day. PlumSweets satisfy a
sweet craving and add an extra dose of
nutrition through the reputed antioxidant
power of dark chocolate.
Younger consumers are the target
market for this product. Through “slicing and
dicing” the market, as economist Joe Coffey used to
say, the catch-all category of “consumers” can be
mined to reveal highly specific attributes and wants.
Sensitive to another category of consumers,
Sunsweet introduced “60 Calorie Packs” in 2008.
Both PlumSweets and the “60 Calorie Packs”
received VAGP support from USDA.
Because the PlumSmart line represents pruneplums
as snacks, nutrition-on-the-go, or food with
specific nutritional claims, it requires advertising to
engage consumer attention and interest. These
products cannot just sit on a shelf. New product
development — making a market — is the contemporary
justification for providing a home for the growers’ product.
By Julie Hogeland
Selected References
Hogeland, Julie A.:
(a) Forthcoming 2009 “The
normative construction of
American agricultural
cooperatives, 1900-2008.” In
Cooperation. Marshall, Robert C.,
ed. Walnut Creek CA: AltaMira
Press.
(b) 2006 “The economic culture of
U.S. agricultural cooperatives,”
Culture & Agriculture, 28:67-79.
http://www.rurdev.usda.gov/rbs/pu
b/rr5.pdf.
Nourse, Edwin:
1922 The economic philosophy of
cooperation. The American
Economic Review 12:577-597.
Persaud, Suresh and Tweeten,
Luther:
2002 “Impact of Agribusiness
Market Power on Farmers” In
Agricultural Policy in the 21st
century. Tweeten, Luther and
Stanley R. Thompson, eds. Ames:
Iowa State University Press: 127-
145.
Reardon, Thomas:
2007 “Supermarket Revolution:
The Supermarket Revolution in
Emerging Markets: Implications
for the Produce Industry.” Brief
prepared for the Produce
Marketing Association, December,
2007. Newark, Del.: Produce
Marketing Association.
