UNIVERSITY OF CALIFORNIA COLLEGE OF AGRICULTURE AGRICULTURAL EXPERIMENT STATION BERKELEY, CALIFORNIA -^''ror.7- CIRCULAR 298 Res October, 1925 ^^rvQ Revised February, 1942 POSSIBILITIES AND LIMITATIONS OF COOPERATIVE MARKETING H. E. ERDMAN^ The possibilities and limitations of cooperative marketing can hardly be discussed without recognizing that there is a wide range in what may reasonably be expected of various organizations. Just what the possibili- ties are in any given instance will depend upon a number of factors such as the nature of the commodity, the degree to which private business has already perfected a system for distributing it, and the degree to which people are trained in cooperation. In the opinion of many persons who have not given the matter critical thought, an ideal system of marketing would permit producers and consumers to meet personally to complete their transactions. Modern specialization in production has gone so far that such direct dealing is impossible except in a very few cases. In fact, any attempt to carry direct dealing very far would take so much of the time of each producer as to restrict his productive activity greatly and would thus seriously limit him as a modern consumer. Specialization in production has therefore led to another form of specialization : marketing agencies have developed to perform the necessary services involved in bridging the gap between producers and consumers, a gap which becomes ever wider as improved transportation makes available to consumers ever increasing choices of the world's consumable goods. These marketing services consist in a great variety of operations per- formed singly or in combination, such as grading, processing, packaging, transporting, storing, financing, and selling. Cooperative marketing ordinarily takes over some of these marketing services formerly per- formed by older types of middlemen. A cooperative should perform these ^ Professor of Agricultural Economics, Agricultural Economist in the Experiment Station, and Agricultural Economist on the Giannini Foundation. [1] 2 University of California — Experiment Station and other services so well that members obtain some benefits they would not otherwise have received. Unless it can do so, there is no need for its existence. One may find examples of successful cooperation here and there for almost every imaginable type of activity. Also, one may find communi- ties where there is no cooperation and occasionally a community in which there is cooperation at almost every turn. An extreme case was recently cited in which the members of the board of directors of a cooperative in a small town in Oregon were said to belong to an average of seven co- operatives. This town, with a population of less than 1,000, is reported to have a cooperative telephone company, a cooperative electric-service association, a cooperative laundry and cannery combined, a cooperative creamery and frozen-food locker combined, a cooperative turkey-mar- keting association, a cooperative feed- and seed-supply association, a cooperative fuel and implement association, a cooperative grocery store, and a cooperative credit union.^ Some of the more important possibilities of cooperative marketing are discussed in the following pages. It will be a long time before all the pos- sibilities mentioned are fully realized. As a matter of fact, some are be- yond the range of probability for the immediate future, though well within the range of possibility if sought by men of ability and clear vision. Moreover, all of them depend on good management. POSSIBILITIES OF COOPERATIVE MARKETING Improving and Standardizing Froduction. — Many persons, when con- sidering the possibilities of cooperative marketing, are inclined to think in generalities — such as of the elimination of middlemen, or of price fix- ing, or of "orderly marketing" — little realizing that some of the most likely fields for fruitful activity on the part of their marketing organiza- tions are close at hand. Among the latter are the possibilities arising from improvements in production to reduce costs and improve quality, or changes in production to meet market demand, either by the general adoption of the more acceptable breeds or varieties or by the adoption of desirable production methods. Improvements in production frequently arise out of the related serv- ices provided by a commodity sales cooperative or out of the services of a cooperative set up for some other purpose. Many a cooperative has at once cut costs and improved output by purchasing for its members at wholesale such supplies as seeds, fertilizer, feeds, and equipment. Few large industrial firms would buy a commodity such as coal without a 2 Vine, Vernon. Hermiston licks the sand. News for Farmer Cooperatives 7(12): 12-14. March, 1941. CiR. 298] Possibilities and Limitations of Cooperative Marketing 3 chemical analysis of its fuel value, but the individual producer must take the retailer's statement or depend upon his ovs^n experience. Indi- vidually the producer has no satisfactory way of judging quality. The cooperative, on the other hand, can well afford to have each purchase tested, either in its own laboratory or by some public laboratory. For example, the vitamin content of alfalfa hay is known to vary widely. But in order to make sure that its members' feeds are regularly of high quality, the Poultry Producers of Central California has its own labora- tory determine the vitamin content of alfalfa hay that goes into its poultry mash. Marketing men generally recognize that the problems of selling are increased if the community produces many varieties of a given product, particularly if sales must be made in distant markets. Yet many a pro- ducing region has a surprising diversity of relatively unknown varieties. Some years ago a survey of 24 farms in northern California showed that 42 varieties of plums and 32 varieties of peaches were being pro- duced on these 24 farms. Again, the almonds from certain sections of California are difficult to sell because some of the numerous varieties raised are relatively unknown to the trade and some of the well-known varieties are not well liked by consumers. Still another illustration is that of the Calavo Growers of California, which has found difficulty in merchandising many of the great number of varieties of avocados pro- duced by its members because some of these varieties do not please con- sumers yet they resemble desirable varieties. For local markets and particularly for direct sale to consumers, a multiplicity of varieties on a given farm or in a given area does not offer any particular sales difficulties. In fact, for local or direct-marketing purposes there may be advantages in having a number of varieties, es- pecially if they mature at different times so that a lengthening of the marketing season is made possible. But the problem of distribution to distant markets becomes vastly more complex if every car or truck loaded at a shipping point is likely to contain a large number of varieties. The instances noted are possibly extremes, but they indicate a ten- dency among farmers to select varieties of plants or breeds of animals upon independent, individual judgment rather than upon the basis of community experience. From a marketing viewpoint, however, this only splits up the quantity marketed at a given country point, when quanti- ties of uniform quality are already too small for efficient marketing in many communities. Cooperative organizations can do much to bring about improvement along this line by discouraging the production of the less desirable va- rieties, by promoting the adoption of a few of the best, and by making 4 University of California— Experiment Station due allowance for possibilities of lengthening a season or supplying a local market. Again, cooperative associations may well promote the adoption of those production practices which tend to make for uniformly high qual- ity of product in the community. In so far as methods of performing such operations as spraying and pruning may affect quality, the general adoption of what experience has shown to be the best methods should make for uniformity of color and appearance in fruit packed by a co- operative. In certain sections of California, activities designed to control insect pests and disease in citrus orchards are carried on by the coopera- tive packing associations themselves, rather than by the individual farmers. The result is not only greater efficiency in performing these operations but also greater uniformity in the product. For similar rea- sons many of these associations have also undertaken the cooperative picking of the fruit. Independent local cooperative creameries have had difficulty in meet- ing the competition of the large, centralized creameries. Often their product has scored higher, but because the quality varied from time to time they could not obtain prices as good as those obtained by large con- cerns for a highly standardized but lower-scoring product. In recent years certain groups of these creameries have come to recognize the advantages of standardized products and have employed field men to work with the local buttermakers in order to bring about uniformity. One of the outstanding advantages gained by the Danish cooperative creameries in selling their butter on the English market arose from a similar line of action. Danish bacon offers even a more striking example of planned production. In this case the Danes learned that the English trade was willing to pay premiums for bacon from a particular type of hog. The Danes thereupon set about, by organized effort, to produce that type of hog by the adoption of appropriate breeding practices. In numerous instances, the financial gains from such standardization and improvement in product as those discussed above have been greater than any possible savings in the costs of marketing. Members of coopera- tive associations, however, often resent having the management make recommendations on production problems. The management, in their opinion, has been hired to sell. Members must bear in mind, however, that the management of a selling organization is in a position to know what varieties and qualities generally bring the better prices on the mar- kets, and they should expect such facts to be pointed out. In addition, an association's management should make sure that returns to growers adequately reflect differences in quality as recognized by the market. If there is a field department, its staff, directly or through such agencies CiR. 298] Possibilities and Limitations of Cooperative Marketing 5 as the Agricultural Extension Service, may well work with growers on problems of adopting cultural or packing practices to meet market requirements. The final decision to adopt or not to adopt procedures for change must, of course, be left to the individual grower who normally decides on the basis of net returns. Thus the cooperative may return a premium for the higher qualities, but the member himself must decide whether at that premium it pays him to take the extra trouble or whether he should be content with the returns for ordinary quality. Farmers often look with envy at the success of the sales department of manufacturing concerns, little realizing how much of the success in such cases is due to the adjustment of production to meet market preferences. Thus, the sales of radio sets at one time curtailed the outlets for phono- graphs ; later, the phonograph manufacturers turned to the making of radio sets in combination with phonographs. At the same time they greatly improved the phonographs by adopting new methods of sound reproduction. Agricultural production must likewise adjust itself to meet changes in demand or in available production techniques. Coopera- tive associations are in a position to point the way. Standardizing and Improving Grade and Pack. — A second outstand- ing possibility for cooperative-marketing organizations consists in im- proving and standardizing grade and pack. Cooperative organizations, particularly the larger ones, have played an important part in bringing about not only the improvement of grades but also the standardization of grades to make them uniform from shipping point to shipping point and from time to time. Familiar examples of a high degree of standard- ization by California cooperative associations are brought to mind by the mention of leading cooperative brands — "Sunkist" or "Pure Gold" citrus fruits, "Blue Anchor" deciduous fruits, "Sun-Maid" raisins, "Sunsweet" prunes and apricots, "Diamond" walnuts and almonds, "Calavos," "Sea- side" beans, "Challenge" dairy products, and "Nulaid" eggs. There is probably no more effective way of improving a product as it comes from the farm than by careful and consistent grading to make it more adequately meet consumers' needs. Under most conditions, grading products into lots of uniform quality is profitable because consumers will pay more for something of known and desirable quality than for mixtures of unknown proportions. Consumers with high incomes will pay premiums for superior quality. This, however, means that the lower qualities will bring less than the average price they would have brought without grading, but if the total net return is increased, the purpose of grading has been accomplished as far as the producers of high quality are concerned. Private operators commonly avoid buying on clearly 6 University of California — Experiment Station defined grades, whereas cooperatives commonly do so. Seldom do private operators, even in competition with cooperatives, make payments on the basis of the full spread between top and bottom qualities which the mar- ket actually returns when the product is resold. But in so far as coopera- tives do pay growers for the varying proportion of superior products they deliver, they not only reward the producers of superior products but also encourage increased production of those qualities. The result has often been that producers' net returns are still further improved by an increase in the percentage of high-grade products in their deliveries. For products that can be sorted after delivery by the producer, the control of numerous local receiving houses enables an association to put into effect improved grading and packing practices on short notice. With such products as berries, however, where farmers do their own grading and packing, a program of education among producers may be necessary. What has been said of grading may also be said of packing. Improved and standardized packaging is particularly important because of the fact that sale in the wholesale and jobbing markets is commonly made by the package. Apples, for example, are sold by the barrel, basket, or box ; lettuce by the crate or hamper ; berries by the crate, tray, or box ; peaches by the box or by the basket. Moreover, packages even of the same type frequently vary in size or shape by such slight gradations that the eye cannot successfully detect differences. All this tends to lead to dis- satisfaction among buyers. The retailer who finds that some packages do not contain full measure may thereafter make allowance for short measure when he considers what he may bid on any such packages. The greater the control an association has over the product of a re- gion, the greater the possibility that a high degree of perfection may be reached in standardizing grade and pack. The California Walnut Grow- ers' Association, which handles some 85 per cent of the walnut crop of California, illustrates this point. The walnuts, first graded according to size and quality at the various local plants, are assembled at the central plant where nuts of each of several varieties are blended into a small number of size and quality groups so that most of the state output, as sold under the several brand and size designations, represents a com- modity almost as highly standardized as a machine product. Improving and standardizing grade and pack should make marketing more efficient by (1) raising the level of quality of the product offered for sale; (2) improving its carrying quality; (3) permitting readier agreement between buyer and seller; and (4) decreasing the likelihood of misunderstanding upon delivery. Stabilizing Production. — Agriculture is particularly subject to pe- riods of overproduction and underproduction, which lead first to low CiR. 298] Possibilities and Limitations of Cooperative Marketing 7 prices and then to high prices. Under ordinary conditions, growers of tree fruits continue to plant as long as prices are high, in spite of the fact that immense acreages have already been planted but have not yet come into bearing. Breeders of livestock tend to overexpand as long as prices are good, only to have young stock maturing for a couple of years after prices have fallen. Stabilizing production in agriculture is, however, most difficult be- cause, first, the biggest single factor in determining production in any one year is the uncontrollable element of weather, and, second, the deci- sion of how much to plant or how intensively to operate rests with so many different individuals, each acting independently. A cooperative-marketing association obviously cannot limit produc- tion by its members. Urging a decrease* in production does not work. This has actually been tried by wheat growers of the Dakotas, cotton growers of the South, tobacco growers of Kentucky, and fruit growers of Cali- fornia. A campaign for decreased production actually tends to bring on an increase. Apparently, every farmer feels that if others are going to produce less, it will pay him to produce more. Agitation to induce gen- eral curtailment seems merely to fan hope in the individual that an increase may pay him. If some of the unwarranted expansion in an industry could somehow be prevented, that very fact would help prevent depressions that so commonly follow overexpansion. The larger cooperative associations should be able to do much along this line by keeping their members and others thoroughly informed regarding the prospects of overexpansion or of curtailed demand so that individual judgments of the future would be wiser. Experience in California suggests that growers ordinarily fail to heed such warnings while things are going well. In fact, they have tended to resent pessimism on the part of those they have hired to sell their products. Governmental agencies are already publishing many of the facts, but these either do not reach all producers or their application to local prob- lems is not fully understood. Cooperative organizations may well do three things to assist : they can help make crop information more accu- rate by cooperating with crop-reporting agencies ; they can discuss gov- ernmental crop reports with their members and point out their meaning to producers in given localities ; and they can do still more to bring about intelligent adjustment by promoting discussion of alternative lines of action which will help producers decide what they individually should do. In these educational activities, cooperatives perhaps can be more effective by collaborating with the Agricultural Extension Service than by expanding their own organization. 8 University of California — Experiment Station Controlling Flow to Market. — California farmers have long discussed control of the rate of flow to market as one phase of what, in more recent times, has come to be called "orderly marketing." Many have considered such control one of the outstanding needs of agriculture. They have often advocated cooperative marketing as the best method of attaining that end. Controlling the rate of flow to market means very different things for different commodities. Such crops as apples, prunes, or wheat are harvested at one period but are consumed fairly steadily throughout the year. Obviously, the greater part of such crops must be stored by someone and fed into the market gradually. Such products as butter and eggs are produced throughout the year, but the rate of production is very different from the rate of consumption. Hence, a part of the product must be stored during the season of heavy production and moved into consumption later. For products like walnuts, almonds, and turkeys, there is a heavy seasonal demand which involves problems of hastening the movement just before the Thanksgiving and Christmas holidays, holding, of course, such portions of the crop as can be sold to advantage at other times of the year. Finally, with such perishable products as berries, which have a high seasonal peak in production but which cannot be stored for sale in their natural condition, only minor adjustments in rate of movement can be made unless there is also provision for diversion to secondary uses. Action by cooperative associations designed to control the rate of flow to market in any of the above situations is as dangerous to coopera- tive success as it is enticing. Strong cooperatives can, however, do much for their members in any of these situations, provided they bear in mind the risks of loss and the danger of "playing into the hands of competitors." It has long been recognized in cooperative circles that supporting a market price by withholding a product increases the opportunity for nonmembers to make sales at the supported prices and may leave a year- end industry surplus in possession of the cooperative. Many an associa- tion has run into difficulty as a result of such action, and not a few have failed. Members who learn that a nonmember got higher prices than they did get little satisfaction and less cooperative enthusiasm out of the statement — which many will not believe — that their own returns are higher than they would have been had the cooperative failed to support the market. For many years California producers tried to work out voluntary clearing-house plans for uniting cooperatives and independent shippers CiR. 298] Possibilities and Limitations of Cooperative Marketing 9 on industry programs. The result is a long list of failures. There were always a few who sought to reap a benefit by remaining outside. Begin- ning with the passage in 1933 of the California Agricultural Prorate Act and the marketing-agreement provisions of the first United States Agricultural Adjustment Act, laws have gradually been developed under which such problems can be handled by industry groups. Since the co- operatives are important participants in such industry groups, it is no longer necessary for cooperatives to undertake those orderly-marketing activities which benefit nonmembers as well as members, since nonmem- bers are required to adhere to the industry program. Improving Distribution between Markets. — Evenness of distribution between markets is of particular importance in the marketing of perish- able fruits and vegetables. This is especially true when a given produc- ing section must so distribute its products among many markets as to net to its producers the highest possible return and thus avoid a situation in which some markets are glutted while others are relatively bare. When one area alone produces the bulk of a crop, as is the case with California lemons, the matter is relatively simple. But the task becomes far more complex when numerous sections compete with each other. Such is the case with peaches during certain summer months, with strawberries during much of the summer, and with many other fruits of like nature. It must not be assumed that the best geographic distribution of a perishable crop from week to week is a simple job. The distribution of the lemon crop is greatly simplified because practically the entire crop is produced in California, and most of that is distributed by one agency. The task, however, still involves daily adjustments between markets to meet changing economic and weather conditions. Most persons are inclined to underestimate the importance of this type of adjustment and to overlook or minimize the violence of changes in demand, which are all too common. A hot wave greatly increases the consumption of many fruits. A cold wave has the opposite effect on the demand for such products as lemons as well as melons and cantaloupes, except when, as frequently is the case, a cold wave is accompanied by an influenza epidemic, which may increase the demand for lemons. Such hot or cold waves, however, do not hit all the markets at the same time. Hence, marketing agencies must be constantly alert to make adjustments quickly. Again, as given local crops near eastern markets mature, the demand for California products supplying those markets may drop abruptly. For example, tomatoes from California find a ready market in the Middle West and East at certain times in early spring and summer, but 10 University of California — Experiment Station local supplies effectively block California shipments during midsummer and fall, or until killing frosts in the East again open a fall market for California producers. Expansion of Market Outlets. — Among the possibilities of cooperative marketing none stands out more than that of expanding market outlets for the benefit of the farmers involved. This is true whether the associa- tion is small or large, and whether it handles a specialty or a staple. Ob- viously, the nature and extent of market-development activities that may be profitably undertaken will vary widely from situation to situation and with different products. Thus, the job of expanding markets for oranges today is different from that of half a century ago when Cali- fornia producers were just beginning to experiment with cooperative marketing. Oranges were then largely a holiday product, with consump- tion perhaps 5 or 6 pounds per capita. Today consumption has increased by tenfold. The job of expanding the market for specialties like avocados or per- simmons involves very different problems from those involved in widen- ing today's markets for staples like oranges, apples, potatoes, or eggs. The products in the latter group are all well-known articles of common use in American homes. They have long been handled by retail dealers in every city, town, and hamlet in the country. Expansion of markets thus means getting old users to buy more whether for old or new uses. Avocados or persimmons, on the other hand, are still unknown to much of the population and are not regularly used by many of those who do know and use them. Market expansion here means not only getting old users to buy more, but also getting new users to try them. Before new users in distant cities can be induced to buy such specialties, however, it is necessary to make arrangements with retailers in the neighborhood stores to lay in supplies and keep them on display. Obviously, such retailers, selling many hundreds of commodities regularly, are not readily interested in a new commodity which the customer may not know how to use and which the retailer may not know how to handle. A large association may go further than a small one in such matters as the development of a sales program and the establishment of its own sales branches in the leading markets should these branches promise to bring greater net returns than the use of brokers or commission men. A large volume of business is necessary to carry the heavy expense of developing a national market. Furthermore, unless an association also controls a large proportion of the supply, competitors will gain much of the advantage of any such activities as those discussed above. Obviously, the management of any cooperative must decide from time to time what sales plans best suit its needs and how much money it can CiR. 298] Possibilities and Limitations of Cooperative Marketing 11 afford to spend to make additional sales. A question which must always be kept in mind is whether the additional sales or the additional price will net something to members. There are limitations on the extent to which given brands of a product can be differentiated by advertising and merchandising so as to induce consumers to pay premiums for them, or to buy more of the product instead of buying something else. Collective Bargaining. — The term "collective bargaining" is applied to that method of selling in which an organized group of individuals selects an agent to do the negotiating for them in the sale of their product but without actually handling the product itself. This form of coopera- tion is not so common in agriculture as it is in the labor-union field where the principles have been developed most fully. The most common illustrations of the use of this method of selling in agriculture are (1) milk producers' associations organized for bargain- ing collectively in the sale of milk to large dairy companies, the milk to be handled by the individual producers; (2) sugar-beet producers' as- sociations organized to bargain with the beet-sugar manufacturers ; and (3) organizations of producers of crops for canning or other forms of processing. Individually the farmer is a notoriously weak bargainer because (1) he may not know in what grade his product falls ; (2) he may not know the relative value of different grades; (3) he may not know what his local price should be even when central market prices are known, and frequently he cannot even interpret wholesale market quotations; (4) he cannot follow market conditions closely enough to know at any given time whether market tendencies are up or down ; (5) he finds it difficult to judge a proposition put in a new way; and (6) his own supply is so small a part of the buyers' needs as scarcely to be missed if he refuses to sell. An association may not only employ a skillful bargainer but may readily spend considerable sums in collecting and effectively arranging such information as will strengthen the farmers' position at the bargain- ing table. Clearly, collective bargaining by an efficient organization puts pro- ducers in a much better position than individual action. It is equally evident, however, that the price-making power of such an organization is much more limited than is commonly believed. Thus local fruit- and vegetable-canning associations cannot obtain prices substantially higher than those obtained in other states or regions because canners are in such keen competition with other regions as to be forced out of business in a given section if prices are substantially above those with which they must directly compete. 12 University of California — Experiment Station Financing Marketing Operations. — The individual farmer in many parts of the country has paid dearly for credit obtained through those who bought his produce or sold him supplies. Where commercial or- ganizations have supplied the credit, they have had to play safe and have not only charged high rates but have also required producers to sell or consign to them, which restricted their choice of outlets. Cooperative organizations, when efficiently managed, can obtain credit at more reasonable rates or they may obtain more credit, or both, than the average individual. They do this on the basis of (1) the collective credit of the group; (2) adequately warehoused goods; and (3) col- lectively owned property. The farmer has long complained that "big business" is a favored borrower. He is coming to see that a properly organized and efficiently operated cooperative association has an equal chance with any other business institution. Furthermore, since the establishment of the banks for cooperatives in 1933,^ growers' associations not only can borrow on favorable terms but also can obtain specialized technical advice on problems affecting their financial operations. The net result then is not only more or better credit but greater freedom in bargaining for sale or purchase. Reducing Costs of Marketing. — One of the aims of cooperative mar- keting has been to reduce the costs of marketing. Oftentimes farmers have been led to believe that independent handlers are very inefficient and yet are making big profits. They believe, therefore, that through cooperative marketing they can reduce costs and increase profits to members. Such farmers are often surprised to learn that their coopera- tive cannot cut costs of marketing as drastically as they had supposed. In fact, they soon learn that only the more efficient independents make profits that are at all attractive. And they soon realize that their co- operative can reduce their costs of marketing only by (1) cutting the costs of the various operations, (2) eliminating such services as they may consider unnecessary, and (3) acquiring for themselves such profits as may be available through efficient operation. There is only one good reason why a cooperative should be able to reduce the costs of given operations, and that is the possibility of ob- taining the advantage of larger volume than is readily available to the ordinary independent operator. Repeatedly the fact stands out in co- operative experience that, given similar size and comparaMe manage- ment, the cooperative cannot beat the independent at cost cutting ; for example, the independent may discharge employees without fear of ^ The Berkeley Bank for Cooperatives, located at Berkeley, California, is one of twelve regional banks set up as part of the Farm Ci-edit Administration. It serves the cooperatives in California, Nevada, Utah, and Arizona. CiR. 298] Possibilities and Limitations of Cooperative Marketing 13 starting a community quarrel among patrons. Furthermore, it may make changes quickly without consulting a number of people. As for taking over the profits of business, experience shows that such profits come only when a cooperative is run efficiently, that is, when the cooperative does at least as good a job as the better private operators. The cooperative manager must be able to hire efficient help and give it such direction as to make the organization operate smoothly and without waste motion. He must be able to buy the right types and sizes of equip- ment for the jobs at hand, have them properly installed, and see that they are properly used. He must exercise good judgment on business operations generally, and particularly in sizing up future developments in the market ; and finally he must be able to handle people well, whether inside the organization or outside. Providing Better Services. — Cooperatives have not only sought to re- duce costs of operation but also have frequently offered improved serv- ices, even though added costs might be involved. Thus cooperative cotton gins are reported to run their machines slower than many private gins do during the peak of the ginning season. The result is a longer staple because fewer fibers are broken. Deliveries of grapes to independent wineries have often been expen- sive and annoying because growers have had to wait in line for many hours. Cooperative wineries have prorated deliveries to their members in order to eliminate annoying delays and uncertainties. Cooperative associations have paid on the basis of grade much more commonly than have private operators. Supply cooperatives have stressed open formulas for feeds and fertilizers so that members might know what they were buying, and have frequently offered additional services to producers. Maintaining FavoraMe Puhlic Relations. — The management and of- ficers of a cooperative organization are closely in touch with the needs of their industry and are therefore in an excellent position to represent their members before public officials or before legislative or regulatory bodies. They can collect and present evidence favoring or opposing given lines of action or legislation far more effectively than can individ- ual producers. With the rapid increase in the number of regulatory bodies and the increase in their scope of influence, the need for such representation has become steadily more important. Among the more significant of these recent developments are those involving the various market-control schemes already mentioned and the problems arising out of the increased organization of labor with which cooperatives must frequently deal directly or through mediation boards. 14 University of California — Experiment Station LIMITATIONS OF COOPERATIVE MARKETING Thus far the positive side of cooperative activity has been presented. There are, however, some very definite limitations. Oddly enough, some of these limitations are widely heralded as possibilities. There are per- haps no two ideas more widely prevalent among farmers than (1) that a,strong cooperative organization should be able to fix prices regardless of the laws of supply and demand, and (2) that cooperation will "elimi- nate the middleman." Yet both of these are largely impossible, and are given below as limitations. In fact, these two are what might be called positive limitations. Other limitations are more in the nature of obstacles which competent management may overcome. Cooperative Associations Cannot Arhitrarily Fix Prices. — Some of the limitations to price control by farmers' organizations have already been pointed out indirectly. No farmers' organization can fix the price at which the product is to he sold and sell all its product unless that price also suits the consumer. The consumer holds the purse strings, and if the price is high in comparison with other desirable things, he will buy less — perhaps a little less, perhaps much less, hut always less. And the cooperative organizations, no matter how powerful, have no way of stopping production so as to maintain any given price. It must be re- membered that there is probably no farm product of which the supply will not increase if a price is obtained that makes production unusually profitable as compared with other lines of farming. Suppose, for example, that a group of milk producers about a given city form an organization which succeeds in obtaining an unusually profitable price. Many producers at once begin to feed their cows better and to give them greater care. Others may buy cows from distant pro- ducers now supplying some other market. Producers who have been selling cream to butter factories begin to sell whole milk. Cows are milked a little longer during each lactation period. Old cows that were to have gone to slaughter are kept another year. All this is on the pro- duction side of supply. There is another side. Less milk is wasted; less is fed to calves and other young stock ; less is used in the farm home ; less is made into butter. The result — it may come slowly or quickly — is an increased supply of whole milk. A strong association controlling a large percentage of the supply might divert some of the product to secondary uses, but if that involves lower prices the association loses on the surplus so diverted while the lump sum obtained for the total product has to be divided between the constantly increasing number of producers. CiR. 298] Possibilities and Limitations of Cooperative Marketing 15 Cooperative Organizations Cannot "Eliminate the Middleman." — A second fallacy is that cooperation ''eliminates the middleman." What is done is to replace private business units by cooperative units. True, one cooperative association may replace a number of dealers. Again, a farm- ers' organization may take over the services performed by a series of dealers, each of whom has been playing his part in moving the product toward the consumer. The California Fruit Growers' Exchange, for example, has in its system the local house, the central exchange, and the eastern representative. These have replaced the local buyer, the dis- tributor, and in many cases the broker. This, however, is not elimination, but integration — the bringing together of a succession of steps under one control. No large organization has thus far eliminated any of the im- portant steps in the marketing process. Many have brought several steps under their own single control or have combined several marketing services in new ways. This has not always meant lower costs, though it may have meant better service, greater control over quality, or more uniform distribution, so that in the end there has been a net gain, even though costs may not have been reduced. A decade ago considerable publicity was given to the fact that the Sun-Maid Raisin Growers' selling costs had risen. The blame was placed on the system of selling through salaried representatives instead of through brokers. In fairness to the group of persons who established that particular sales plan, it should be said, that when they employed these salaried agents, they were charged with the sale of the major part of the California raisin crop, as well as the major part of the dried peaches and dried figs of the state. Furthermore, they hoped to make arrangements to sell for groups of growers of prunes and other dried fruit. Had all these plans materialized, salaried men might well have been found to give cheaper service than brokers. Volume declined, how- ever, and costs rose. It is a matter of common experience that when volume of business declines, the management, whether of a public or a private institution, seldom cuts its staff rapidly enough to keep up with shrinking volume, partly because it is hard to lay off employees, partly because there is always the hope that the decline is temporary and that business will pick up. At any rate, by the time the change was made from salaried men to brokers, the Sun-Maid organization had perhaps a third of the raisins, instead of seven eighths, and with that volume the use of brokers was undoubtedly the more desirable plan. There are cases in which a cooperative does actually eliminate some of the steps involved. The Central California Berry Growers' Associa- tion, for example, does not make use of brokers on its eastern business, but deals directly with wholesale receivers, who sell on commission to 16 University of California — Experiment Station jobbers or large retailers. In this particular case, the job of the broker is unnecessary because the berry deal is not a large one, and also because the Association manager himself performs part of the job. He makes his own contact with the wholesale receiver and arranges the general plan on the basis of which he can consign regularly or irregularly as arranged by telegram from time to time. _ Private businessmen are also trying to eliminate the middleman. Wherever a given dealer can find and use a short cut that enables him to increase his own profit, he uses it. Some retailers buy directly of farmers. They do not all do this because most of them find that they can make more profit by attending to their retail business and letting wholesalers, jobbers, brokers, and distributors perform some of the market services for them. For the same reasons farmers cannot eliminate these intermediaries. WEAKNESSES IN COOPERATION In addition to the two limitations given above, there are a number of inherent weaknesses in cooperation which must be overcome by capable management if cooperation is to be genuinely successful. Harmony between Management and Membership. — A Cooperative or- ganization is made up of a group of individuals each of whom operates an independent business of his own, but all of whom have a common purpose in cooperating. After they have been united into an organiza- tion each individual continues to go about his own business, while the management proceeds to execute the purposes of the new organization. But there is always danger that members and management may get out of step with each other. That is, the producers, busy with their own affairs, may ignore the problems of the association. The management, on the other hand, may become so engrossed in the details of manage- ment as to lose the point of view of the members. This does not mean that the management fails to keep in mind the interests of the members ; it is just as serious, however, from the point of view of harmony and efficient functioning, if the management interprets the needs of the mem- bers differently from the way the members themselves interpret them. Thus, even though the management is capable and sincere there is a real possibility that the growers may lose confidence if they do not under- stand changes in the policy of the management, or if they come to believe that the management has not followed their original intentions or is not seeking their best interests. Members Careless as ^'Cooperative Citizens.'^ — Members may lose in- terest and fail to come out to annual meetings or they may select as directors and officers those among them who are the best talkers rather CiR. 298] Possibilities and Limitations of Cooperative Marketing 17 llian those who have the greatest business ability. Either situation is likely to lead to the election of second-rate men as directors. The di- rectorship in a cooperative association is so important that only the ablest men available should be elected. Most serious mistakes in manage- ment after ail are traceable to carelessness or poor judgment on the part of the directors. Tendency towards Extravagance. — The piling up of a number of small amounts soon increases costs out of proportion to business done. For example, the management may consider that a given expenditure costs but a fraction of a cent per unit, but the members later see the lump sum. It is sometimes said that an organization must have a volume of busi- ness large enough to carry its overhead expenses. It is just as important, however, that an organization keep overhead down to a point where competition can be met. Prices to Outsiders Sometimes Higher than to Members. — There is a disrupting influence in the fact that even with an efficient organization outside growers are at times able to obtain higher prices than members. Such a situation is not necessarily a reflection on the efficiency of a co- operative association. It is a situation, however, that places some definite limits on what a cooperative may do. The greater the percentage of a crop a cooperative organization controls, the greater the likelihood that some of the outsiders will get higher returns than the members. But even then members may be receiving higher prices than they would without a cooperative association. There are several reasons why private buyers sometimes pay non- members more than the returns to cooperators. (1) The private buyer, if he handles a number of lines, may sacrifice profits by paying higher prices on the cooperativly marketed line in order to discredit the associa- tion. (2) He may want to supply his regular customers with a full line of goods so as not to let them go to a competitor for a part of their stock. He may therefore be willing to pay a substantial premium over returns the association makes to its members if that is necessary to get the goods he needs. (3) The independent buyer may be able to pay more because he does not need to make expenditures for advertising and market development except when such expenditures will directly bene- fit his own brands. A cooperative, on the other hand, may be building for the future of the industry. (4) The independent may be buying only such crops and such qualities as he requires for his immediate trade needs and may therefore assume less risk than a large cooperative from losses on price declines, shrinkage, spoilage, storage, and insurance charges on holdovers. (5) In some cases the independent buyer can pay 18 University of California — Experiment Station a premium because he takes no loss on surplus, whereas a cooperative may seek to support the market by diverting a portion of the product into noncompeting channels, even though this involves some loss on the portion so diverted. Tendency for Benefits to Disappear. — Most discussions of the results of cooperation assume that once something has been done the members can sit back and continue to reap the benefits. But the results of success- ful cooperation have a mischievous habit of disappearing with the pas- sage of time in ways that are most confusing to farmers and most dis- concerting to cooperative leaders and promoters. The benefits of cooperative marketing tend to disappear in four ways : 1. Competitive operating margins tend to become narrower as com- petitors struggle to hold business by paying higher prices. The result is that the usual measuring stick of cooperative advantage changes, which suggests that the need for cooperation has passed because competitors now pay about as much as the cooperative. 2. Improved returns lead to increasing supplies and hence to lower prices. New supplies come either by increased production or by attract- ing the product from other uses — as the shifting of certain grapes be- tween table, dried, or wine uses. 3. Average costs of production (and marginal costs) tend to rise as production is increased in response to improved returns because farmers use less advantageous resources or old resources more intensively, or because inexperienced farmers enter the industry. 4. Increased returns are capitalized into land values as farms change hands in the course of a generation. Thus the newcomers and the second- generation farmers find themselves in possession of high-priced lands on which returns are low and taxes high. Much of the recent dissatisfaction with cooperation in the marketing of such crops as citrus, walnuts, and grapes in California may be traced to such disappearance of benefits. It should be noted, perhaps, that "disappearance" may mean going out of existence or may merely mean going out of sight. Too Much Expected of a New Organization. — Seldom, indeed, can a large organization be formed without raising hope too high. Then fol- lows disappointment, contention, and complaint, which only the most patient and capable of management can overcome. Indeed, here lies one of the big jobs of the manager of a cooperative association. He must not only be an efficient manager but must keep his membership with him. He must have such a vision of what a strong organization can do that his enthusiasm becomes contagious. At the same time he must be sufficiently levelheaded not to buoy up his members with false hopes. CIS. 2i^8] Possibilities and Limitations of Cooperative Marketing 19 SUMMARY The possibilities and limitations of cooperative business activity by farmers are generally misunderstood. In fact, some of its limitations are often heralded as possibilities, whereas many of its possibilities are not generally appreciated at all. Some of the outstanding possibilities are improving and standardizing production, standardizing and improving grade and pack, stabilizing production, controlling flow to market, improving distribution between markets, expanding market outlets, collective bargaining, financing mar- ket operations, reducing costs of marketing, providing better services, and maintaining favorable public relations. Two limitations are set out particularly because they are so often listed as possibilities of cooperation. The first limitation is that coopera- tive associations cannot arbitrarily fix prices although they can and do exercise a favorable influence on prices. The second is that cooperative organizations cannot eliminate the middleman except in the sense of combining the functions performed by a number of dealers at any given stage in the marketing process. What they really do is to substitute a cooperative agency for a private one, and to combine a series of steps in the marketing process under one management. There are also some inherent weaknesses which capable management may overcome and often does. Most important among these are main- taining harmony between management and members, obtaining partici- pation of members in cooperative affairs, avoiding extravagance, and meeting competition. The manager of a cooperative association must not only be an efficient manager but must keep his membership with him. He must have such a vision of what a strong organization can do that his enthusiasm becomes contagious without leading to extravagant expectations. 25'r/i-3,'42(7731)