The Co-operative Movement of the Russian Far East

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2.5. Marketing alternatives - FARMER COOPERATIVES VERSUS COLLECTIVE FARMS American Studies on Ukrainian Problems Vitaly V. Zinovchuk

Modern agricultural marketing is a highly developed business. In order to be not only equal in rights, farmers must also work together to create new competitive advantages. Efficient marketing requires an adequate volume of business operations which can be achieved only by a relatively large company. Cooperatives give farmers an opportunity to achieved such economies. Acting jointly they can increase demand for their products, get better market positioning, improve their competitiveness, and obtain more control in marketing channels (Figure 21), etc. Those are common objectives for any marketing groups. Besides of those specific goals, farmers' cooperatives they could also include providing of:

- the most efficient marketing outlets;

- better coordination between production and consumption;

- more dependable market outlets including sometimes the only remaining outlets;

- channel leadership, including vertical integration, and even market power for their members [Rhodes, p.265].

The ideal concept of cooperative marketing is based on the primary attention to the changing nature of customers' needs and wants, and translating these needs and wants into farmers' production and marketing decisions. Following this approach to marketing, farmers' cooperatives can move towards increasing benefits for their members through complete satisfaction of their customers' real and perceived expectations. With the aim of professional cooperative management, farmers study their customers; understand their behaviour and influences on their opinions and buying motives; establish consumer-oriented marketing mix, including new product development; control distribution channels and advantageous placing, effective promotion, and flexible pricing. All of that gives a ground for effective bilateral direct relations between agricultural producers and final consumers of their products, and can be recognized as a serious advantage of cooperative marketing.

Marketing strategies of successful cooperatives are similar to those of large food corporations. However, cooperatives have some advantages in product assembly, in lower production costs, in developing of new products at a lower cost, and lower production costs. It makes them very competitive in spite of a lower scale of business and capital than their major competitors dispose [Anderson & Stern, p.202]. But cooperative marketing also has some economic disadvantages. For example, inhibition of aggressive marketing programs, or contradiction between relatively unhurried decision making system among many cooperatives and the necessity to react rapidly to changing market conditions.
There exist some alternatives for farmers to cooperate in marketing (Figure 22). The most simple way is to pay cash immediately to patrons upon product delivery. In this case the title to the products is passed to the cooperative. Then the products will be processed or/and sold at the most advantageous price. Patrons also will receive patronage refunds if net income occurs. The advantages of the cash-at-delivery method are associated with absence of uncertainty for farmers as for product prices, sometimes resulting in increase business volume for the cooperative, less bookkeeping, closer attention to evaluation of products and costs by management, and more control for members over their own marketing startegies. As disadvantages, the cooperative's additional risk, necessity to have more working capital for cooperatives, less correspondence of cash payments to cooperative ideology could also be mentioned [Cobia, p.196]. This kind of transaction is more typical for investor-oriented firms.
More common for farmers is to accept delayed payment for their delivered products. In this case transformation of product title is not obligatory as under cash-at-delivery. Cooperatives, which do not take title, have minimum risk and financial requirements for the products. They also reduce requirements for working capital because of only partial payments in advance for delivered products. However, the delayed nature and uncertainty of final compensation for the product can cause reluctance of farmers to join cooperatives with delayed payments.
Cooperatives can use some practices for delayed payments. When the individual accounts are established, the delivered products of each farmer are handled and traced separately. This is a common practice for livestock trucking associations. Of course, to pay individual attention to each patron's product is an expensive way to keep records. Also, the fragmentation of sales is not in favor of increasing market power. Commission sales are used by cooperatives to handle products at the terminal markets on a comission basis. In this case the cooperative acts as a usual comission agent. At present it is a diminishing importance practice because of the rapid decline of terminal markets.
Another option for cooperative marketing is auctions. There exist different kinds of auctions: local, central, and electronic, which have spread more recently. An example of local auction is shown in the Box 12. They have the advantage of direct bidding by several buyers. As a rule, compensation for sold products is available shortly after transaction. Auctions are also attractive due to low marketing costs, guaranteed payment, and reduced liability for marketing losses. As for disadvantages of auction marketing it could be mentioned that buyers must be physically present; they also can avoid the auctions because of the losing market power; and auctions are able to sell limited amount of products per unit of time [Cobia, p.197]. Auctions are not convinuent for large scale transactions, and their participants prefer to deal with a regular exchance.

Box 12


Case of California Floriculture Growers Association


A flower auction, located in Carlsbad (north of San Diego, California), was organized as a cooperative in 1982. This was a reaction of 38 flower growers (mainly from San Diego County, but also from Washington, Oregon and Hawaii) to increasing import of flowers in the U.S. market. The auction was an easy way for producers to gain entry into the San Diego flower market. A grower must buy $4,500 worth of stock in CFGA to join the cooperative. The cooperative also charges members a 15-percent commission on each sale transacted through the auction. The auction handles 5 to 80% of a member production. The actual cost of conducting the auction runs at about 12-13% of sales. The extra 2-3% of the comission members pay is technically member patronage, but at the this time all excess funds are used to increase the cooperative's partnership position in the Floral Trade Center, of which it s a part owner. The cooperative is directed by a nine-member board elected from the membership. Non-members are also welcome to sell at the auction, but must pay a 24-percent comission [Campbell, p.4-5].


For large scale operations, agricultural cooperatives use pooling. This marketing practice is based on the handling products of different producers who agree a) to combine the same type of product in bigger marketing lots; b) to share risk, all marketing expences and revenue; c) to be paid for products at average price for each specific lot based on one or more grades, variety, time of delivery, and location; d) to delegate pricing and decision making process to the cooperative marketing staff. In pooling, the cooperative makes an initial payment, as large as possible, at the time of delivery. Final payment are distributed after all the pooled products are sold by the cooperative and the expenses incurred in pool transactions and overhead are deducted [Black, p.232]. Pooling is preferred by cooperatives with standardized and easily controlled quality of individually delivered products such as milk, fruits, vegetables, rice, nuts, etc.
There are two types of pooling - seasonal and contract. The difference between them is a degree of producers' control over price of pooled commodity. In a seasonal pool, which is more common practice, the producer agrees to deliver a certain portion of specified product and to accept the pool price which has been adjusted for all specified costs. Under the contract type of pool, producers receive more control over the price for the delivered product. The producer can set a minimum or reservation price below which the commodity may not be sold (that is named a call poll), or chose the time of delivery to get more advantageous price (a purchase pool) [McBride, p.263].
The pooling method is attractive for farmers because it presents an opportunity to gain access to markets, to share price risk, to get enhanced prices. All of that is possible due to using professional marketing experts, effective control of product quality, and large scale operations. But in pooling members transfer marketing decisions to professional managers. Occasionally, superior quality of delivered products is not rewarded enough, and visa verse, lower than average product quality can be overpaid because of price equalizing. Pooling is also associated with strict control for individual perfomance of contract agreement, and that is one more reason for increasing marketing costs and complicated organization.
In this study there were already mentioned marketing agencies-in-common which could be considered as a possible form of farmer cooperation in the sphere of marketing. Also farmer cooperatives can act as a bargaining agents in making sales for their members. The principle purpose of bargaining cooperative organizations is to influence producer terms of trade through contractual negotiations with the buyers of farm products [Kohls & Uhl, p.270]. They are specialized organizations with a relatively narrow set of tasks, and do not engage in physical side of the marketing, such as assembly, processing, and distribution. Normally they neither take title nor handle the product. This distinguishes them from other marketing associations. But the role of of bargaining cooperatives is not confined to the pricing. They also lead to considerable relevant information and explanation of market processes. For example, in a cannery they may negotiate the provision of shipping, containers, hauling, allowances, harvest scheduling, determination of grades, delivery quotas, harvesting techniques, and cost [Rhodes, p.327J. The spreading of bargaining service is in part a result of declining spot markets in agriculture.
Bargaining cooperatives can be of two categories. The first establishes minimum prices and terms of sale for their members' products. This must be incorporated in the contracts the members themselves execute for the sale of their produce (Box 13). They can also act as an exclusive sales agent for their members and contract for the sale of members' products [Markus, p.i]. Some bargaining cooperatives acquire processing and merchandising facilities in order provide an additional leverage in their negotiations with processors and to handle product surpluses avoiding extremely low prices for them. Bargaining cooperatives are most active in dairy, fruits and vegetables. There are three characteristic of markets where bargaining is imporant. First, forward contracts; second, perishable products and expensive storage; third, quality of the product is variable and a significant determinant of its value [Knoeber & Baumer, p.4J.
Cooperative bargaining is not an expensive service. Usually the hired staff of the association is limited to the manager and a few employees. Large investments also are not needed. Mainly bargaining cooperatives are financed through buyers' check-offs, but service charges paid by processors, annual dues, and membership fees are also possible. All the same, such bargaining cooperatives' are an important element of the market infrastructure both as price negotiationing institution and a form of control over supply.
One more distinguished marketing alternative for farmers is to participate in establishing marketing orders. Such orders are a mechanism, under government auspices, by which farmers may regulate the marketing of a selected product, usually a perishable one. They

Box 13


Case of California Tomato Growers Association


The California Tomato Growers Association (CTGA) was incorporated in 1951 and organized in 1954 as a growers' cooperative service association. Its primary functions were to recruit field labor for tomato growers, set peacework rates for workers, and to provide legal advices for the growers. But due to mechanization of harvesting, the demand for labor decreased rapidly in the early 1970s. At the same time, harvested acreage and yield increased more than doubling total production. Consumption, however, dropped 15%. CTGA had to change its principle functions. The main attention was focused on pricing of tomatoes to canneries. CTGA became primarily act as a bargaining organization. The result of its activity was an increase in price paid by processors from $31 per ton in 1971 to $55 in 1975. Then during several years the association engaged difficult negotiations with processors under conditions of tomato overproduction and severe depression of canning industry. The way out became possible only in 1980s when the demand for tomato products increased due growing popularity of Italian and Mexican foods. In 1984, CTGA introduced proportional voting (one vote per 1,000 tons with maximum of 100 votes) in order to encourage some large producers who previously had not joined the association. It was an important step to control of prices in the tomato market. Then the pricing method was changed. Differential prices were established: one for solid and whole peeled tomatoes, and another for the rest. It was benefical for both producers and processors. Production increased with the growing demand for tomato products. CTGA in recent years has produced as much as 87% of the total U.S. production. The association's membership accounted for up to 50% of tonnage going to proprietary processors [Markus, p.15-19]. Now, for price stability CTGA is proposing a "rolling term" price concept that establishes a target price a year in advance of the crop harvest. This price policy will be benefical for processors also because it enables them to make forward sales with a reasonable idea of raw product costs, and to prepare more accurate packing plans [Torgerson 1994b, p.14].


work best where the market is split by end use or by location and a different elasticity of demand exists in the two market. Marketing orders are administrated under authority of the federal or state secretary of agriculture and are binding on the total industry specified in the order [Branson & Norvell, p.206]. Marketing orders are initiated by relevant agricultural producers within a certain area in order to stabilize market and to provide reasonable prices for the product. But their propositions should not be against interests of consumers. Participation in a marketing order is a question of one's will. Marketing orders are particulary effective when they reflect common interests of producers and buyers of their products. They can only be created for certain products as specified in the enabling legislation.
What is to be regulated by a marketing order? Product flow may be one of the first subjects of agreement. This means that a periodical marketing quota of delivery can be assigned to handlers who then allocate it among producers. Standards of size and quality are usually established in fruit and vegetable market orders. To reduce marketing costs producers may agree as to the kinds and number of sizes of shipping. Also, unfair trade practices can be combatted through market orders. Market information and research is a legal goal of the agreement, too. And control of the total quantity marketed during a year, or the amount shipped to particular fresh market or processing outlets are possible contents of a market order [Branson & Norvell, p.207-208].
At the same time under the law, marketing orders can not set wholesale or retail prices or maximum prices that dealers may pay for the product. Establishing sanitary and other food safety regulations is not in their perview. Marketing orders do not guarantee a fixed level of prices and a market for producers, or regulate them by any other means. How much product must be sold by whom, to whom, or bought from whom by whom, at what prices, etc. is also not a subject of marketing orders. They can not be used to restrict production or prohibit the marketing of the product at any market [Coughlin, p.212].
Marketing orders regulate the products sold in a specified market area. Legally, two-thirds of farmers from a certain area or the farmers who produce two-thirds of total product output within this area can put the marketing order into operation. However marketing orders can be more effective when they are established under guideline of a cooperative, especially a big one. Cooperatives play a helpful role in maintaining marketing orders by organizing the interests of relatively homogenious farmer members. The organizational role and leadership in marketing orders as a rule belong to cooperatives. According to the legal regulations, cooperatives also have special influence in establishing and conducting certain aspects of marketing orders such as transfer payments to members from handlers, offer producer members selected services such as grading and market information [Cobia 1989, p.212]. Marketing orders make other cooperative marketing practices, such as pooling and bargaining, more successful.
Cooperatives also provide their farmer members an opportunity to engage in international marketing. Significance of international trade for cooperatives is associated with:
- market expansion for their members' products;
- providing incentives for farmers to increase and develop production;
- search and acception the most effective technology and methods of doing business to be enough competative on international scene;
- spreading cooperative idea on global scale.
But international marketing is also a risky business. Acting internationally, cooperatives also can be faced with foreign countries' political and economic instability, cultural differences, imperfection of legal system, strong inland and outland competitors. Besides that, the international trade agreements, changing demand for food in different world regions, and government policy may influence cooperative activities at the international level as well. But these factors can have both positive and negative effects. For example, declining governmental support of agriculture is not, of course, in favor of international marketing of cooperatives, but the U.S. governmental food aim for Eastern Africa made it possible for the Cass-Clay Creamery, Inc., to conclude some profitable agreements for milk powder deliveries in 1994.