Maket access,countervailing power and yardstick roles enhance economic efficiency.

By Charles Ling, Ag Economist
Cooperative Programs
USDA Rural Development
charles.ling@wdc.usda.gov


"The cooperative is a means for promoting and
maintaining competition in the marketplace...Its
business, but to see that they are kept truly competitive"

Editor’s note: This article is a sequel to
“What Cooperatives Are (and Aren’t),”
Rural Cooperatives, Volume 76, Number
6, November/December 2009.



he year 2012 has been declared by the United Nations General Assembly as the International Year of Cooperatives in order to highlight the contribution of cooperatives to socioeconomic development worldwide. That same year also will be the 90th anniversary of the publication of “Economic Philosophy of Cooperation,” the first academic paper on the theory of cooperation, published in the American Economic Review (Nourse, 1922; Hess). The piece was written by Edwin G. Nourse, who later became the first chairman of the Council of Economic Advisers, Executive Office of the President, 1946-49.

This may be an opportune time to review Nourse’s ideas on cooperation and see if they have relevance to the reality of the market performance of cooperatives today and, therefore, if they deserve to be relearned.

Nourse’s primary focus, along with the oft-quoted “brief remarks” he made years later (Nourse, 1945), was on the role agricultural cooperatives played in the marketplace. This arose from his observation that the attempt to apply the cooperative form of organization to economic needs and problems in agriculture was critically important.

Purposes of cooperation
The following examples are taken from Nourse’s paper to illustrate how farmers organize cooperatives to perform various market functions jointly and efficiently in various market situations — functions that cannot be satisfactorily carried out alone by individual farmers:

1) Cooperation for market access — An example is a small fruit-producing area far from any large market. The product is perishable, hence both risk and marketing expense are high. Volume is not large enough to attract a private distributor. Facing this situation, producers have the option of organizing a cooperative association to market their products. These cooperatives have frequently demonstrated the ability to achieve successful results where private outside entrepreneurship fails to perform.

2) Local to regional coordination — A local cooperative creamery may initially be effective in meeting the competition of other small, private creamery operations. However, when competing creameries have grown to be entities of great size, the competition must be met by a distributing organization of equal scope. This will often be achieved through federation of the cooperative creameries across a region which may embrace an entire state, several states or parts of a state.

3) Region-wide associations — In many instances, growers in horticultural regions have organized and integrated highly efficient businesses that serve producers across an entire production region by assembling, processing and distributing their products. These agencies have eliminated wasteful competition both at the local shipping point and at the central markets. Further-more, they are the instruments of the producer and owner of the goods, and hence are likely to be more aggressive in the effort to reduce expense and wastage in the handling process and to improve quality and enlarge outlets.

(Author’s note: Cooperative organizations covering entire production regions have been most prevalent in California because of the characteristics of the state’s economic geography. This type of cooperative organization was called “the California plan” and was promoted on a national scale in the 1920s by Aaron Sapiro, with varying degree of successes and failures (Sapiro; Larsen, et al).)

Countervailing power
The above examples show how cooperatives are organized and grow to enable farmers to exercise “countervailing power” in the market-place, although the term was not coined until the 1950s when economist John Kenneth Galbraith cited the type of cooperatives made famous by Sapiro as an example for his explanation.

Nourse certainly recognized the importance of countervailing power if cooperatives are to have a strong market position. As he stated: “Possibly the keynote of the philosophy lies in the idea that a means must be found for giving agriculture a type of organization whose productive and bargaining units respectively will expand in step with the growing needs of the agricultural techniques (and its accompanying capital demands) and of the size requisite to an effective bargaining position in contact with the units of commercial organization with which they must deal.”

Pro-market
Nourse said that the theoretical implication of agricultural cooperation “is preeminently that of functional reorganization rather than comprehensive economic regeneration.” In other words, the farmer takes the essential facts of the market as given and, working together with other producers through the cooperative, seeks to be in the most effective market position to compete. Thus, the distinctive economic philosophy of this business form is viewed “as a means to improve the lot of both farmer and consumer by improving the efficiency of the economic machine.”

Cooperatives enable farmers to effectively compete in the marketplace and garner market signals that put them in a position of prompt and sensitive response to the reaction of the consuming public and guide their farming business decisions. According to Nourse, the cooperative objective is twofold (Nourse, 1945):

1) “It is to make the most economical and efficient market channel by which whatever volume of product farmers see fit to produce gains access to the attention and the purchasing power of all who might use such a product. (For supply-buying coops, most economical access to the best sources of the goods they need.) Thus, a true supply-and-demand price is allowed (and aided) to express itself for the guidance of producers.”

2) “It aims to reflect these market conditions back most promptly and fully to producers in ways that will both guide and, so far as possible, assist them in changing their methods so as to continue production and to prosper or to shift to more suitable lines of production.”

Competitive yardstick
In Nourse’s view, the cooperative is a means for promoting and maintaining competition in the marketplace. The supply-demand-price dynamic “provides a powerful stimulus to the association to devise further economies of method which will enable them to maintain the level of net returns to the grower. Such competition also spurs the private agency to outdo the cooperative in its efficiency in order to hold its business.”

He used the term “yardstick” years later (Nourse, 1945), when he said the place for the agricultural cooperative in the nation’s business “is primarily that of ‘pilot plant’ and ‘yardstick’ operation. Its objective is not to supersede other forms of business but to see that they are kept truly competitive.”

The cooperative is to “occupy certain strategic points, and there to set a plane or pace of competition which will assure for the farmer efficient service at true long-run cost.” When such services (manufacturing, distributing, transporting, financing, etc.) are furnished efficiently and economically (which means in a truly competitive manner), “there is no occasion for the farmer to occupy the field and divert some of his capital and some of his managerial time and effort to these tasks and away from his main enterprise of farm production.”

Farmers should remain vigilant. Nourse cautioned: “It is of the upmost importance, however, that farmers shall have both the legal institutions and the organizational ‘know-how’ to step into these fields when and to the extent that service is inadequate or unduly high in cost. It is important also that they remain in each of these fields with an organization sufficiently large to attain high efficiency so that farmers shall be protected against any subsequent lapse in the quality of service or temptation to profiteer in charges by the noncooperative service agencies.

“But it is just as important that the cooperatives recognize when they have in fact attained their real objective by demonstrating a superior method of processing or distribution or by breaking a monopolistic bottleneck, and that they should then be content merely to maintain ‘stand-by’ capacity or a ‘yardstick’ operational position rather than try to occupy the whole field or a dominating position within it. In some cases, they may be well advised in entirely terminating operations once they have stimulated regular commercial or manufacturing agencies to competition amongst themselves.”

Nourse’s economic philosophy of cooperation may be summed up in a nutshell: Cooperatives make it feasible for farmers to jointly market their products. The cooperative may evolve to a scale large enough to effectively bargain with other market participants and/or to avail itself of scale economies in processing and marketing operations. Subject to the same market disciplines and supply-demand-price dynamics as any business, the presence of the cooperative challenges other market participants to operate efficiently and thus strengthens the competitive market mechanism. When the market for members’ products has become truly competitive, the cooperative may want to assume only a stand-by position but maintain the legal institutions and organizational capacity to reenter the field, if necessary. Table 1 summarizes all these points in the left column.

Examples in real life show that Nourse’s ideas on cooperatives are still very relevant today. Consider dairy cooperatives, which as a group are the most prominent U.S. agricultural marketing cooperatives. A point-bypoint comparison of dairy cooperative practices to Nourse’s theory is summarized on the right column of table 1. It shows that market performance of dairy cooperatives coincides with the basic principles posited by Nourse’s economic philosophy of cooperation. With current renewed interest in the cooperative form of doing business, it may be worthwhile for the newgeneration of cooperators to relearn Nourse’s ideas and fully understand the roles cooperatives play in the marketplace.

Editors note: More details on cooperative
theory and practice using dairy cooperatives
as a case study will be available in a
forthcoming research report from the
Cooperative Programs office of USDA
Rural Development.



































References

Galbraith, John K. “American Capitalism: The Concept of Countervailing
Power,” revised edition, Houghton Mifflin Company, Boston, 1956; esp.
Chapter XI, The Case of Agriculture, pp. 154-165.

Hess, Jerry N. Oral History Interview with Dr. Edwin G. Nourse,
Washington, D. C., March 7, 1972, Harry S. Truman Library,
Independence, Missouri.
http://www.trumanlibrary.org/oralhist/nourseeg.htm.

Larsen, Grace H. and Henry E. Erdman. “Aaron Sapiro: Genius of Farm
Co-operative Promotion,” The Mississippi Valley Historical Review, Vol.
49, No. 2, 1962, pp. 242-268.

Nourse, Edwin G. “The Economic Philosophy of Co-Operation,”
American Economic Review, Volume XII, No. 4, December 1922, pp. 577-597.

Nourse, Edwin G. “The Place of the Cooperative in Our National
Economy,” American Cooperation 1942 to 1945, American Institute of
Cooperation, 1945, pp. 33-39.

Sapiro, Aaron. “True Farmer Cooperation,” Journal of Agricultural
Cooperation, Volume 8, 1993, pp. 81-93, reprinted from the World’s Work,
May 1923, pp. 84-96.

United Nations. “United Nations Declares 2012 International Year of
Cooperatives,” Press Release DEV/2784, December 21, 2009, New York.




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