Division of Agricultural Sciences UNIVERSITY OF CALIFORNIA $k&f% J2&* k& Coo?^ at^es \tv Ca\V^ tTVia CALIFORNIA AGRICULTURAL EXPERIMENT STATION BULLETIN 760 What are the economic functions of marketing contracts? What kind of contract should a cooperative use? Should the contract run for only a year, or longer? What is a fitting penalty for nonperformance? How much integration is desirable? The marketing contracts used today by California agricultural cooperatives reveal a wide choice of answers to these and many other related questions. Con- tract provisions differ not only among associations handling different kinds of products but also among those handling the same commodities. To find out what makes a good marketing contract, the authors have drawn on the experience of more than 200 agricultural marketing cooperatives in California. Their analysis of existing contracts and bylaws makes clear why there can be no single, ideal contract that will fit all marketing associations. In a discussion of the economic and legal functions of contracts, the authors raise the important points that each association should consider — in relation to its particular needs — in order to develop a satisfactory contract for its members. This bulletin should be useful both to new cooperatives working out their first marketing contracts and to established associations seeking to improve existing contracts. THE AUTHORS: W. F. Mueller was, during the preparation of this bulletin, Assistant Professor of Agricultural Economics and Assistant Agricultural Economist in the Experiment Station and on the Giannini Foundation, Davis. J. M. Tinley is Professor of Agricultural Economics and Agricultural Economist in the Experiment Station and on the Giannini Foundation, Davis. MARCH, 1958 MEMBERSHIP MARKETING CONTRACTS of AGRICULTURAL COOPERATIVES in CALIFORNIA W. F. MUELLER J. M. TINLEY I. WHAT MAKES A GOOD COOPERATIVE MARKETING CONTRACT? The marketing contract is one of the tools available to those wishing to build a successful cooperative. It is by no means the only tool needed for successful cooperation, but it is an important one. Because marketing problems and objec- tives may vary widely from one associa- tion to another, each cooperative should choose contract provisions best suited to its particular needs. Although the historical origins, mar- keting functions, and commodity pecu- liarities of each association tend to make its needs unique, we can make certain generalizations about what a good coop- erative marketing contract is. We can at least help the cooperative by framing the questions that it should answer in de- veloping a contract that will be good for its particular needs. Forms of Contracts The marketing contract may be in- cluded in the bylaws of a cooperative, or it may be a separate legal document. Legally, there is no difference between 1 Submitted for publication April 11, 1957. these forms. In regard to clarity and con- venience, however, there are important differences. A separate document seems more ap- propriate. One advantage is that it clearly isolates all the marketing obliga- tions and rights of both parties from other aspects of the bylaws. Another is that putting all the marketing provisions in a separate document makes it possible to spell them out in greater detail, leaving little doubt as to what is expected of each party in relation to marketing. Moreover, an association that also does business Questions that each cooperative should put to itself to determine how much inte- gration is desirable for its members and to develop a satisfactory marketing con- tract are given at the end of this section. These questions also provide a guide to the contents of this publication, as page numbers have been included for quick reference to discussion of the various points an association should consider in working out its own particular set of answers. [3] with nonmembers must use a separate contract for them, since the association cannot make them sign the bylaws, which apply only to members. Language of Contracts For the layman, cooperative market- ing contracts should be as understand- able and as unambiguous as possible. Lawyers, like economists, are not gener- ally applauded for their literary clarity. But legal documents can and should be made readable for the layman as well as the lawyer. Many California cooper- atives have succeeded in this respect. The terms of their contracts are spelled out clearly, and they are also organized to make for easy reading. Some contracts are made more read- able by the use of side or marginal head- ings for the various provisions. The reader can thus readily find clauses of particular interest. For example, some of the marginal headings used by a fruit association are: "sale and delivery of products," "duration of membership agreement," "disposition and handling by association," "arbitration of disputes as to grades," "liquidated damages for nondelivery," "home canning," "crop re- ports," "notices," and "bona fide trans- fers." Such headings are especially help- ful in very long contracts. A final aid to more readable contracts is the avoidance of very small print. While small print may make a long con- tract appear shorter than it actually is, it also proves a strong deterrent to close reading by members. Contract Provisions It is most important from an opera- tional standpoint that marketing con- tracts include the appropriate provisions. Such appropriateness can be measured in two ways, legally and economically. Legally, the appropriateness of a market- ing contract depends mostly on whether it is an enforceable document. Economi- cally, its appropriateness is determined by whether it best accomplishes the eco- nomic objectives of the association. The legal aspect. We shall not ex- plain here what a legally desirable con- tract is. Any good cooperative counsel can see to this. But care should be taken to aid such counsels in regard to the eco- nomically appropriate provisions that should be included. Many lawyers may not be familiar with all the operational peculiarities and economic objectives of the cooperatives they represent. They may, therefore, tend to pattern coopera- tive marketing contracts after those of noncooperatives, which often deal almost exclusively with delivery, sale, or agency provisions, and overlook some of the other important integrating features needed in cooperative contracts. This may leave some of the integrating prac- tices of cooperatives without a sound and workable legal basis. This problem can best be overcome if cooperative management fully informs its lawyers about its operations. The at- torney can then decide if certain prac- tices should be given a legal basis in the association's marketing contract. The economic aspect. If coopera- tives are to operate most efficiently, cer- tain production and marketing activities of farmers must be closely integrated with their association. The marketing contract provides the legal basis of such integration. It spells out the duties and rights of both parties relative to certain marketing decisions. For example, it may give the association the right to make decisions concerning the time individual members should harvest their crops. Before an association can decide upon the economic appropriateness of particu- lar contract provisions, it must evaluate its own economic objectives. It must de- cide how it wishes to qualify the basic economic objective of increasing its members' farm income. Most associa- tions will qualify this objective some- what. More important, American farm- [4] ers are not willing to surrender all of their production and marketing decisions to their association. But most farmers are willing to give up some of their de- cision-making power to the association in the interest of greater economic re- turns. Thus, there may be a basic conflict between an association's desire for eco- nomic efficiency — which may require close integration — and the rights and wishes of its individual members. Each farmer faces this conflict, and many will look at it differently. Some will be will- ing to give up more freedom than others. Fortunately, cooperatives are seldom confronted with "all-or-nothing" propo- sitions. Seldom does deviation from the economically optimum position lead to disastrous inefficiency. There are as many shades of economic efficiency as of indi- vidual freedom. Fortunately again, in our democratic society it is for the indi- viduals forming a cooperative to decide how to reconcile the conflict between col- lective or group economic efficiency and individual managerial freedom. (Of course cooperative members cannot ex- ercise complete freedom in this respect. They can not, for example, bind them- selves together in such a way as to con- stitute a monoply in violation of the country's antitrust laws.) Since this conflict can only be resolved ultimately by a cooperative and its asso- ciated membership, there is no single, clear-cut answer that can be provided here. The conflict can be resolved more easily and satisfactorily, however, if the association asks itself the proper ques- tions. Such questions are raised and dis- cussed throughout this study. The ques- tion of how much integration is desirable is dealt with on pages 49-50. The ques- tion of contract length is discussed on pages 19-21, and the proper size of liqui- dated damages on pages 27-33. Below are important questions concerning mat- ters which a cooperative may consider including in its marketing contract. 1 . Delivery and acceptance. How much of their crop should members be obli- gated to deliver? How much should they be permitted to retain for home use? How much of its patrons' crops should the association be obligated to accept? Should the association be permitted to decline acceptance, and its patrons to re- fuse delivery, under certain special cir- cumstances? Should the contract provide for prorating acceptance in some equi- table manner in the event of forced lim- ited acceptance? (See pages 35-39.) 2. Time and place of delivery. Should the association be permitted to set the delivery time and place? Should mem- bers be required to deliver their entire crop before some specified date? (See page 41.) 3. Method of payment. When should patrons be paid? Should their associa- tion be permitted to set up a grading system to be used in paying its members? Should arbitration be provided for in the event of disagreement over interpre- tation of such a grading system? (See page 47.) 4. Termination of contracts. How long should the contract run? How should members be permitted to terminate their contracts? How may members who have left the association or been expelled from it be permitted to rejoin? (See page 47.) 5. Enforcement methods. Should the contract specify the extent of liquidated damages? How large should these dam- ages be? Should they be a fixed absolute amount or a fixed percentage of the prod- uct's market value? Should minimum damages be prescribed? (See page 27.) 6. Crop inspection and reporting. Should the association be permitted to inspect certain of its members' farming operations? Should patrons be required to notify the association of changes in acreage and of expected crop yields? (See pages 42-43.) 7. Quality requirements. Should the association be permitted to set quality standards which its members must meet [5] to retain their membership? How should such standards be enforced — by expul- sion for noncompliance or by assessment of damages? (See pages 39-40.) 8. Crop harvesting. Should the asso- ciation be permitted to set harvest provi- sions or be authorized to perform the actual harvest? (See page 40.) 9. Crop pooling. Should the associa- tion be authorized to pool its members' crops? (See page 42.) 1 0. Independence of control. Should the association's management be free to function independent of interference from individual members? (See pages 43-44.) 1 1 . Industry marketing agreements. Should members give their association's directors the right to vote for them in a marketing agreement referendum? (See pages 45-46. ) 12. Method of operation. Should the marketing contract specify that the asso- ciation follow the principle of cost opera- tion and of equal treatment of all pa- trons? (See pages 44^45.) 1 3. Processing cooperative is to per- form. Should the association undertake to process patrons' crops into certain products? (See page 45.) 1 4. Transfer of obligation. Should the cooperative permit its patrons to trans- fer their obligation to perform on their contracts? Under what conditions should such transfers be permitted — only on death? (See page 48.) 1 5. Litigation costs. Should the con- tract specify that in litigation over breach of contract, the party losing such actions should pay the other's litigation costs? (See page 34.) 1 6. Guarantee of control. Should the contract specify that the patron has com- plete control over the crops he contracts to deliver? (See page 48.) II. INTRODUCTION This study emerged during the course of two long-term research projects re- lated to the economic and financial as- pects of agricultural marketing and pur- chasing cooperatives in California — one concerned with the methods such coop- eratives use to finance their operations, the other with the problems of integra- tion within and between cooperatives. Basic information was collected by means of questionnaires sent to all mar- keting and purchasing cooperatives in the state and by personal visits to many of them. All those visited and a consid- erable number of those that returned questionnaires supplied copies of their articles of incorporation, their bylaws, and their marketing contracts with mem- bers. Since the contractual relations be- tween members and their cooperative associations are intimately related to the problems of both financing and integra- tion, it was decided to make the special analysis of membership marketing con- tracts that is presented here. This publi- cation may thus be regarded as an inte- gral part of the two broader long-term studies. Marketing contracts are also known as marketing agreements and membership contracts. The authors prefer the term "marketing contracts" because today the term "marketing agreement" is com- monly used to describe the industry-wide marketing agreements operating under the Agricultural Marketing Act of 1937 and various similar state laws. In prac- tice, however, many cooperatives use this term, especially when the contracts are separate from the bylaws. The term "membership contracts" is seldom used today to describe marketing contracts; it generally refers to the contract a mem- ber signs upon joining an association, which states that the member ratifies and [6] adopts the association's articles of in- corporation and bylaws. In most cases, acceptance of the bylaws may also in- volve acceptance of the cooperative mar- keting contract. Economic Importance of Agricultural Cooperatives In 1954-55 there were 9,887 agricul- tural cooperative associations in the United States engaged in marketing farm products, purchasing farm supplies for members, or rendering some form of marketing service (Gessner, 1957 ). 2 These associations had a combined mem- bership of some 7,600,000 (many farm- ers belong to two or more) and in 1953- 54 transacted a gross volume of business amounting to $12.5 billion, of which $9.3 billion was from the sale of farm prod- ucts, $2.9 billion for farm supplies handled, and $195 million for marketing services rendered. The average gross vol- ume of business per association was thus about $1,264,000. The 454 agricultural marketing, sup- ply, and service cooperatives in Califor- nia had a combined membership of only 121,600 or 1.6 per cent of the total for the United States. The California coop- eratives, however, had a gross volume of business of almost $1.2 billion or about 9.5 per cent of the combined volume for the United States. 3 In California the aver- age volume of business per association was $2,614,000 as compared with the national average of $1,264,000 per asso- ciation. Similarly, the gross volume of business transacted per member by the 2 See "Literature Cited" for citations, referred to in the text by author and date. 3 The net value of business of cooperative as- sociations in California was $829 million. This figure represents the volume of business trans- acted by local and centralized associations. In other words, it excludes the value of business transacted by federated cooperatives from the gross value on behalf of local member co- operatives. 454 California cooperatives was $9,800 as compared with a national average of $1,600 per member. Although the ma- jority of the 454 marketing, supply, and service cooperatives may be classified as local associations (i.e., associations op- erating in a restricted area), more than 20 are either large centralized associa- tions (i.e., they operate over the whole state or a large part of it) or federated associations (i.e., an affiliation of several local associations). Financial reports available from most of the large feder- ated and centralized associations indicate that many of them have a gross volume of business in excess of $25 million a year. Individual farmers who are mem- bers of cooperative marketing, supply, and service organizations have contribu- ted many millions of dollars to supply the capital needed by their associations. In view of these facts it is no wonder that in California there has grown up over the years a rather highly formalized contractual relationship between indi- vidual members and their associations — embodied either in the bylaws or in sep- arate marketing agreements or contracts. It has also been known that there are significant variations in the details of these contracts as between associations handling the same types of products (citrus fruit, for example) as well as between associations handling different types of products or performing differ- ent types of service. It is the purpose of this study to analyze these differences in some detail. Recent advances in the economic theory of cooperation, particularly those made by Ivan V. Emelianoff, Frank Ro- botka, and Richard Phillips (Phillips, 1952), should prove helpful in this an- alysis. They will help us make more meaningful hypotheses about the reasons for and implications of various contract provisions. [7] III. ORIGIN AND MEANING OF THE MARKETING CONTRACT The Agricultural Cooperative Association We can best understand the nature and function of cooperative marketing con- tracts by first getting a clear understand- ing of the economic nature and function of agricultural cooperative marketing associations. Agricultural cooperatives as a way of doing business may have social as well as economic bases, but in the United States, especially in recent times, their basic objectives or goals have been eco- nomic. Farmers have resorted to this means of business to improve their eco- nomic position in a capitalistic economy. Relatively few farming enterprises in the United States are large enough to justify extending their economic activi- ties into the processing and marketing of the commodities they produce. To do so, the farmer would have to own and control the facilities and equipment nec- essary for processing and marketing as well as those needed for production. Such ownership and operation of successive stages of production and marketing is known as vertical integration. The great majority of farms in the United States are too small to permit such integration individually. However, by associating with others to form a cooperative cor- poration, farmers have been able to ex- tend their operations beyond the farm — into the economic activities of processing and marketing. Such multiple-stage production and marketing operations are becoming in- creasingly common in our complex mod- ern economy. For a variety of reasons, many types of business find it more eco- nomical to extend their activities into several stages of production and distri- bution. In the petroleum industry, many companies own their own wells, refiner- ies, pipelines, and retail outlets. Steel companies often own their own mines as well as manufacturing plants. And agri- cultural processing concerns sometimes integrate backward into agricultural pro- duction as well as forward into several stages of distribution. Similarly, when a number of farmers unite in joint ownership of agricultural marketing and processing facilities, it is simply a form of vertical integration. For while the cooperative organization enjoys certain rights apart from its indi- vidual owner-patrons (due to its incor- poration as a legal entity), it exists for, and is ultimately controlled by, them. In truth, the economic relationship be- tween farmers and their jointly owned associations often is like — both econom- ically and legally — the vertical integra- tion involved when several industrial firms form jointly owned subsidiary com- panies. Such jointly owned companies are operated for the benefit of their legal parents. For example, several railroad companies often own jointly terminal facilities and railroad bridges. Retail grocers frequently combine to form jointly owned associations to act as their buying agents. Chemical companies also often have united to form jointly owned subsidiary companies, both in domestic and foreign markets. The reason is usu- ally that business firms can often per- form a task better through joint action than through individual action. There are two main economic differ- ences between agricultural cooperatives and most other forms of vertical integra- tion 4 found in our economy. 1 Strictly speaking, vertical integration is only one form of "vertical extension," the latter being defined as the "extension of the scope of an enterprise so that it influences more proc- esses between raw material extraction and the final sale of the finished product. . . . Vertical integration thus is one form of vertical exten- sion and consists of extending a firm's scope vertically through ownership." (Alfred R. Oxenfelt, Industrial Price and Market Prac- tices; New York: Prentice Hall, 1951, p. 207.) Thus, narrowly, vertical integration occurs only between owner-patrons and their cooperative. [8] First, because farm firms are relatively small, a large number must join together when they integrate. This is not usually true of most industrial concerns. Prac- tically all are large enough (or can be- come large enough) to integrate forward or backward individually. And even when one concern is not large enough to do a job for itself, it usually need join with only one or two other firms to undertake an efficient jointly owned operation. Second, agricultural cooperatives usu- ally operate their jointly owned facilities entirely for the benefit of their patron- owners (and occasionally of their non- owner patrons) on a patronage rather than an ownership basis. Many nonagri- cultural concerns operating jointly owned subsidiaries also follow this procedure, but the practice has become so univer- sally accepted by agricultural coopera- tives that it might properly be considered their foremost distinguishing character- istic. Of course, insofar as patronage is proportional to ownership, as is increas- ingly common in California coopera- tives, there is no distinction between the two. The Economic Function of Cooperative Marketing Contracts Successful vertical integration (that is, aiming at maximizing members' in- comes) through cooperation requires that certain activities of members and their cooperatives be integrated or co- The relationship between nonowner patrons and a cooperative involves different forms of vertical extension. It may be based entirely upon the patron's voluntary participation in the coopera- tive. But when nonowner patrons are tied to the cooperative by the same marketing contracts as members and are treated the same as members with respect to patronage dividends and in other important respects, their vertical exten- sion may be as complete as between owner- patrons and their cooperative. The most impor- tant difference, of course, is that nonowner patrons generally have no formal voice over the cooperative's policy. In practice, this difference may be more imagined than real. ordinated. Insofar as farmers have other goals of cooperation, some of the follow- ing discussion of the methods coopera- tives should use to achieve this profit end may not be relevant; but even coopera- tives motivated by noneconomic consid- erations must operate at something ap- proaching maximum economic efficiency to survive in a competitive world. When farmers join or form coopera- tives to further their individual economic positions, they must also be willing to surrender some of their individual sover- eignty to the association, for only in this way can the cooperative be run as an effi- cient economic extension of its members' individual farm firms. Formally, indi- vidual members make concessions to their cooperative, but in reality they make concessions to its owners, that is, its other member-patrons. This involves multilateral agreements between all mem- bers. 1 It is well to keep this in mind. Treating the cooperative as an entity apart from its members may result in serious analytical pitfalls. An especially important feature of such integration is the continuing participation of patrons in their association. The association's facilities are built and its management is hired to serve its patrons. In carrying out its buying, proc- essing, storing, selling, and other func- tions, the cooperative (as the representa- tive of all members) may make large capital investments. In making them, it usually borrows the necessary funds from its members or elsewhere. Many such investments are of fixed character — once made, their total cost varies but "Phillips (1952, pp. 63-64) explains the agreements between members as follows: "This multilateral agreement is a formal one — ordi- narily a binding contract between sovereign and otherwise independent firms. This formal agreement does not alter the entrepreneurial decision-making body — that function continues to rest with the individual firms. It does, how- ever, involve coordination of the activities and functions of the decision-making units with re- spect to the joint plant." [9] little with the volume of plant operations. In making these fixed investments, a cooperative must make certain estimates about its future business volume. Should these estimates prove wrong, the coop- erative, and eventually its member pa- trons, may suffer serious losses. One cause for uncertainty about the future is patron "disloyalty." Without some legal or nonlegal means of assuring continued patron participation, coopera- tion is a very loose form of vertical inte- gration. It is then based solely on the voluntary participation of its patrons, who may break or renew their member- ship at will. The bond between a farmer and his cooperative is tied by nothing stronger than membership loyalty, good will, or whim. Under such circumstances, the dis- loyalty of a minority of patrons may seri- ously jeopardize the economic interests of the remainder. Because many costs are fixed, average unit costs depend pri- marily on business volume. Therefore, when some patrons temporarily are tempted to sell outside their association, those patrons continuing to sell through it will likely receive lower net returns than those selling outside it. To have their loyalty repaid in this way may en- courage additional members to sell out- side the association in subsequent years. Thus, what may have started as the tem- porary disloyalty of a few members may shortly snowball until the association is ruined. This danger is especially real in the early years of a new cooperative when it needs time to prove itself, to assemble and train personnel, and to eliminate "squeaks and rattles." During this "shakedown" period cooperatives may be easy prey to strong rivals seeking to crush them by temporarily paying higher prices to some cooperative mem- bers. Marketing contracts are one means of protecting a cooperative association against such actions (other factors are discussed on pages 24-26) . They may re- quire farmers to market through their association for a specified period. Some economists have cited other ad- vantages of cooperative marketing con- tracts, but, for the most part, these are simply variations of the reason given above. For example, Bakken and Schaars (1937, pp. 307-312) point out that mar- keting contracts (1) assure the asso- ciation the continuous support of its members; (2) cut down the cost of as- sembling members' products by insuring their delivery; (3) assure the association a certain volume of business upon which to plan future operations, sales, commit- ments, and merchandising programs; (4) permit an association to adjust its costs to a minimum; (5) assist the as- sociation in its financing operations; and (6) enhance the prestige of the associa- tion. These are all valid justifications for marketing contracts, but all are reducible to the same fundamental advantage: marketing contracts provide such inte- gration of patron and cooperative ac- tivity as to insure that the cooperative will have a definite volume of business during a particular period. And by re- ducing uncertainty in this respect, an association can operate more efficiently in making both short- and long-run in- vestment and other decisions. Advantages to operating efficiency re- sulting from stabilizing business volume are not peculiar to cooperatives. Nonco- operative concerns, recognizing this problem, have made increasing use of marketing contracts to insure themselves a more uniform volume of business. It is because farmers anticipate receiving higher returns by selling through co- operatives that they are willing to enter into marketing contracts with them. Be- cause a particular noncooperative mar- keting concern generally cannot promise a farmer higher prices than the general market price, there is little economic in- centive for a farmer to make agreements with them unless nonprice advantages are anticipated. Of course, where buyers are few, farmers often find it desirable [10] to enter into marketing contracts with them to make certain that they will have a market for their product. In these cir- cumstances, buyers often must state at the beginning of the planting season a specific or minimum price in their mar- keting contracts to induce enough grow- ers to make such contracts with them. Because of this difference in farmers' attitudes toward cooperative and nonco- operative marketing agencies, it seems proper to conclude that cooperatives may have a definite advantage in the use of marketing contracts. Other things being the same, cooperatives are better able to use marketing contracts in stabilizing their volume of business than are nonco- operative concerns. This is not to imply that cooperatives may not stabilize their volume of business at too low a level. But when this happens, it is not ordi- narily the fault of marketing contracts as such, although, as pointed out below, unduly lengthy contracts may restrict membership in cooperatives. Like Bakken and Schaars, other stu- dents of cooperation have looked at only the integrating feature of cooperative marketing contracts discussed above (Steen, 1923, pp. 312-15; Jesness, 1932, pp. 185-86; Nourse, 1927, pp. 171-77). It is true that the "maintenance clause" feature of marketing contracts is always important and apparently was the only important feature of early contracts. But today it is by no means the only impor- tant integrating feature of cooperative marketing contracts. Through the years, cooperative managers and directors in- creasingly have recognized the need for closer integration between growers and their cooperatives in other respects. Not only must performance be assured, but the time, place, and manner of perform- ance are often important also. At times the cooperative must also be able to con- trol the quality of individual members' production. Sometimes most efficient operation requires not complete perform- ance but limited performance. To insure the degree of integration necessary to achieve maximum operating efficiency, the legal rights and duties of patrons under the above circumstances must be spelled out in the marketing contract. More and more cooperatives have done just this. The term "marketing contracts" as used herein means the legal basis inte- grating certain marketing relationships between patrons and their association. The Development of Marketing Contracts Cooperatives have used marketing contracts as a legal integrating device for over half a century. Apparently the Swiss, and later the Danes, were the first to use them. In the latter half of the nineteenth century, Danish cooperative creamery and bacon-selling associations began using marketing contracts (Steen, 1923, p. 30). These associations initially had depended entirely on the mutual re- spect, good will, and loyalty of their members to insure their continued partic- ipation. But successive experiences with disloyalty of members, tempted by tem- porarily higher prices of noncooperative dealers, contributed to many cooperative failures. To prevent such raids on their membership, the Danish associations reinforced member loyalty with legal obligations to market through the asso- ciations for a specified period. This marked the beginning of cooperative marketing contracts which have re- mained a common feature of cooperation in Denmark to the present day. As far as can be ascertained, the first American cooperative to use a marketing contract was a farmers' elevator in Iowa. In 1889 it adopted a contract which per- mitted members to sell elsewhere only upon payment of a penalty of one cent a bushel (Steen, 1923, p. 310). The adoption of cooperative market- ing contracts by early American associa- tions probably involved an evolution similar to that of the Danish association [in but separate from it. However, the Danes' successful experiments with con- tracts may have influenced some early American agricultural cooperatives. In the early 1890's orange growers in south- ern California began signing marketing contracts with their associations. One authority claims these early contracts were copied directly from the Danes (Steen, 1923, pp. 310-311). Another re- ports that these early associations may have been encouraged to use such con- tracts because noncooperative citrus buy- ers used them (MacCurdy, 1925, p. 22). Other California cooperatives followed the example of the early citrus associa- tions. Since the turn of the century, and espe- cially since 1910, marketing contracts have become common in practically every field of cooperative marketing. As early as 1923, of 185 associations larger than county-wide in scope, over 160 used marketing contracts (Steen, 1923). While marketing contracts gained in- creasing acceptance through the years, their forms and objectives have changed. Most of the early contracts were of short duration. They usually bound growers to sell through their association for but a single marketing season. For example, while the early California citrus con- tracts were for 21 years, they could be cancelled by either party annually. Simi- larly, the contracts between the Cali- fornia Fruit Growers Exchange and its local associations were for 20 years, but the locals were given the option of with- drawing on September 1 of any year by giving proper written notice. IV. LEGAL NATURE The cooperative marketing contract is a legal document. Without recourse to legal remedy, it would be practically worthless. It would simply be a written pledge depending solely on a moral obli- gation to fellow cooperators. When co- operatives began using marketing con- tracts, around 1900, the courts often After 1920, marketing contracts for longer periods became common through- out the United States. Many cooperatives formed during the twenties were central- ized associations with five-year market- ing contracts. The avowed purpose of many of them was to gain control over the supply of particular agricultural products and to use such control to en- hance prices. To accomplish this end, these associations felt obligated to bind their members for more than a single year. But in spite of their long-term, "iron- clad" contracts, practically none of the associations using them were able to pre- vent membership nonperformance; they either failed, or they were forced to modify their operations and liberalize their contracts (Hood, 1927, pp. 287- 293). The failure of these associations was not caused by the nature of their marketing contracts. It would be more correct to say that they failed in spite of them. The chief reason for failure was their inability to control the supply, not only of nonmember production but of their members as well. This made monop- olization impossible. Since the late 1920's long-term con- tracts without annual withdrawal privi- lege have become increasingly less common. Bakken and Schaars' (1937, p. 320) study of 83 large-scale American cooperative sales associations in 1934-- 35 indicated that more than half had contracts of three years or less. But at that time one out of four of these associ- ations still had contracts of ten or more years' duration. OF THE CONTRACT questioned their legality as means of en- forcing members' sale through their asso- ciation. By the early 1920's, however, the courts in most states accepted them as a legitimate means of controlling member- ship participation. Nourse (1927, pp. 282-3) summarizes the three grounds upon which the courts relied in accepting [12] the contract method of tying a coopera- tive together as follows: (1) That it is proper that a mutual association provide for the financing of its current opera- tions by the assessment of their cost upon the whole body of members, who themselves adopt this provision as one feature of their by-laws; (2) That an association making capital outlays for the erection of buildings or otherwise must make definite contract arrangement for the liquidation of such long-term obligations by equitable distribution of the burden over the membership who are to be benefited by such outlays and will be the owners of the property; and (3) That the purposes of the association in providing more efficient or more economical processing or marketing services can be realized only if mutually supported by a sufficiently large number of people on a sufficiently perma- nent basis. While the courts have since continued to find cooperative marketing contracts legal on these grounds, such contracts may be declared illegal unless they in- clude certain safeguards for both parties. Basic to the legality of all contracts is the concept of mutuality. This means that both parties to a contract must be bound by it. To insure that a contract possesses such mutuality of duties and rights, it should be in writing, setting forth clearly and fully the rights and duties of both parties (Hulbert, 1942, p. 115). Another important determinant of the legality of cooperative marketing con- tracts is the amount which members agree to pay for nonperformance. The liquidated damages provisions of con- tracts are legal if the specified damages do not greatly exceed the actual losses suffered by the association due to non- delivery. If they greatly exceed actual damages, the courts may declare them illegal because they involve "penalties" rather than "damages" (Packel, 1947, pp. 154-55). For this reason coopera- tives must keep the stated amounts of such damages within reason. Another common provision determin- ing the legality of marketing contracts is their duration. Cooperative marketing statutes in most states restrict the maxi- mum period that such contracts may run. The California law restricts this period to 15 years. 6 While contracts may not run for longer than the periods specified in the various states, the courts have held that a contract may run continuously if an annual withdrawal privilege is in- cluded (Hulbert, 1942, pp. 130-31). Such a "continuous" contract is in effect, a one-year contract with the provi- sion for automatic renewal unless an action is taken by a member or the asso- ciation to discontinue it. As noted below, most cooperative marketing contracts in California are now of this form. Legal Remedies for Nonperformance A cooperative uses marketing con- tracts because they give it a legal means of forcing members to keep their promise to do business through it, or to compen- sate it if they fail to do so. The legal remedies available to cooperatives when a marketing contract is broken are the same as those applying to other contracts involving persons or businesses. In addi- tion, the California law provides that cooperative associations whose market- ing contracts are broken may, if the con- tracts so specify, be entitled to the remedy of liquidated damages and, even though not specified, to remedies of specific performance and injunction. Liquidated damages is a form of legal relief whereby the party breaking the contract may be compelled to pay the other party to the contract a specified amount agreed to in advance, without the necessity of the aggrieved party being compelled to prove the amount of actual damage suffered. The injured party needs only to prove that a breach of contract has occurred. Unlike specific perform- ance and injunction, liquidated damages can be assessed directly by an association without recourse to the courts. Even in the case of liquidated damages, however, 6 Agricultural Code of California (Revised Sept. 15, 1945), Section 1208. [13] it may be necessary for an association to seek court sanction if a member re- fuses to pay and if he has no assets in the association which can be debited or drawn on. Section 1209 of the California Agri- cultural Code states: The by-laws or the marketing contract may fix as liquidated damages, specific sums to be paid by the member or stockholder to the association upon the breach by him of any provision of the marketing contract regarding the sale or delivery or withholding of products; and may further provide that the member will pay all costs, premiums for bonds, expenses and fees in case any action is brought upon the contract by the association, and any such provisions shall be valid and enforceable in the courts of this State; and such clauses providing for liqui- dated damages shall be enforceable as such and shall not be regarded as penalties. The right to recover actual damages in the event of a breach of contract is avail- able even though there is no provision for liquidated damages. This requires specific and detailed proof of the actual damage suffered. In many cases it is ex- tremely difficult, and often impossible, to establish accurately the damage actu- ally suffered, and experience has taught cooperatives that it is desirable to specify in their marketing contracts an agreed amount as liquidated damages rather than rely on the right to recover actual damages. If the amount specified is not greatly in excess of the possible actual damages suffered, the damages specified are legal. Spelling out the extent of damages in the marketing contract has more than a legal advantage. By doing so, a member anticipating breaking a contract knows exactly what it will cost him to do so. Because both parties know just what to expect in the event a contract is broken, an association can usually collect such damages without bringing a legal action. As a result, membership ill will may be kept to a minimum. In fact, it is not un- common for a member to break a con- tract one year, pay the association his liquidated damages, and remain a mem- ber in good standing. There have been cases when noncooperative concerns have engaged in price wars, where cooperative management has urged members to sell on the outside and pay their damages to the association. This action usually re- sults in a quick cessation of the price war. As was pointed out above, if liquidated damages are not specified in the contract, it is necessary to turn to the courts to arrive at the amount of actual damages. Such action may result in serious mem- bership antagonism, often causing mem- bers to leave the association when their contracts expire. If liquidated damages do not provide adequate relief to an association, it may ask the court for a decree of specific per- formance. Such a decree involves an action by the court, ordering the member who is breaking, or is threatening to break, a contract to carry it out. Failure of a member to comply with the court's decree results in a citation for contempt of court, for which he may be fined and/ or imprisoned. Whereas liquidated damages and spe- cific performance are positive legal reme- dies, injunctions afford a negative remedy. An injunction granted under a marketing contract is an order by the court restraining the offending party from selling his crop outside of the asso- ciation. A party disobeying an injunc- tion is held to be in contempt of court and is punishable by fines and imprison- ment. Section 1210 of the California Agricultural Code reads: In the event of any such breach or threatened breach of such marketing contract by a mem- ber, the association shall be entitled to an in- junction to prevent the further breach of the contract and to a decree of specific performance thereof. Pending the adjudication of such an action and upon filing a verified complaint showing the breach or threatened breach, and upon filing a sufficient bond, the association shall be entitled to a temporary restraining order and preliminary injunction against the member. [14] Injunctions may also be used against individuals not parties to the contract in question. For example, if a third party encourages cooperative members to break their contracts, the association may obtain a court injunction ordering him to discontinue such activities. Fail- ure to abide by such an order may result in punishment for contempt of court. In California such injunction against third parties can be obtained only if copies of the contract are filed in the county courthouse. Although all these remedies are avail- able to associations in enforcing their marketing contracts, liquidated damages are most commonly used today. Most co- operatives spell out clearly the extent of such damages in their contracts both to insure their legality and to improve mem- bership relations. How Many Cooperatives Use Marketing Contracts? The preceding discussion has outlined the general economic and legal nature of cooperative marketing contracts, and has dealt briefly with their historical V. CALIFORNIA EXPERIENCE origin and development. Let us now ex- amine their current nature and function. To accomplish this we shall describe and analyze the legal form, duration, enforce- ment provisions, integrating provisions, and other features of contemporary Cali- fornia contracts. Much of the data pre- Table 1. Number of California Cooperatives Using Marketing Contracts, by Commodities Type of association Total number cooperatives Cooperatives with contracts Cooperatives without contracts In sample Estimated no. in state* In sample Estimated no. in state f In sample Estimated no. in state t Citrus Wine Other fruits and vegetables Nuts Dairy Livestock Field crops Poultry Purchasing Miscellaneous Total 61 17 65 23 13 2 25 9 8 5 173 28 131 26 28 6 40 22 17 6 61 17 57 23 9 24 7 1 4 173 28 115 26 19 38 17 2 5 8 4 2 U 2§ 7 1 16 9 6 2 5 15 1 228 477 203 423 25 54 * These are the cooperatives to which we sent questionnaires and which we assumed to be still in business. t These estimates are made on the assumption that the percentage of all cooperatives of each product type using contracts is the same as that of the sample. For example, 9 (69 per cent) of the 13 dairy coopera- tives in our sample use contracts. If we assume that 69 per cent of all 28 dairy cooperatives in the state use contracts, then 19 use contracts and 9 do not. We have weighted our samples for each type of association in this way. This results in a more accurate estimate of state figures because there generally is less variation within commodity groups than between groups. For example, all of 61 citrus associations in our sample use contracts. On the other hand, only one of the eight purchasing associations in our sample uses a marketing contract. The reliability of these estimates and those in tables 2 and 3 varies from one product to another, depending on the size of the samples and the total population. t This was a rice association with a larger purchasing than marketing business. § These two poultry cooperatives did a larger purchasing than marketing business. [15] sented below were received from a questionnaire sent to all California mar- keting and purchasing cooperatives (See Appendix A). Of 228 California cooperatives reply- ing to a questionnaire, 203 (89.0 per cent) used marketing contracts. Only 25 (11.0 per cent) did not (table 1). Of the cooperatives not using marketing contracts, seven were purchasing co- operatives. Three of the others (one rice and two poultry associations) might also properly be classified with purchasing cooperatives, since their supply business exceeded their marketing business. Two of the four dairy associations without contracts were bargaining associations. Thus, of the 25 cooperatives not using contracts in 1954, only 13 were primarily marketing associations, and one of these reported that it was going to begin using a contract in the near future. These 13 cooperatives not using contracts mar- keted livestock, fruits and vegetables, dairy products, and honey. The two livestock marketing associa- tions apparently do not use contracts be- cause they are not very practical or necessary in this type of organization. Livestock producers may find it feasible and desirable to market through a num- ber of alternative marketing channels depending on marketing conditions. Be- cause their livestock associations are not represented in all markets, members cannot always sell through them. More- over, it is not vital for efficient opera- tion that every transaction be made through the livestock associations, be- cause they do not have large capital investment to protect. Rather, these as- sociations act primarily as agents or brokers for their patrons in central mar- kets or local auctions. Some fruit and vegetable marketing associations (excluding those handling citrus and grapes) do not use marketing contracts (table 1). This is true of eight such cooperatives in our sample. All of these were either small local or central- ized associations doing an annual busi- ness of between $100,000 and $700,000. Because of their size or for other reasons, they either have never used marketing contracts or have abandoned them. One of the two dairy marketing associ- ations (in addition to the two bargaining associations mentioned above) not using marketing contracts is a small local co- operative. The other has annual sales exceeding $10 million and is the only large California marketing association not using a contract. Its members are bound to the association primarily by the confidence it has built up during its fifty years of successful operation. Except for these few cases, all of Cali- fornia's marketing cooperatives in our sample use marketing contracts of one sort or another. The figures given above include all types of associations — local, centralized, and federated associations. In the case of 11 central associations of federated cooperatives in our sample, all but one purchasing central have marketing con- tracts with their local associations. These include federated cooperatives in the fol- lowing fields: one each in dairy, decidu- ous fruit, dried and canned fruit, vegetables, and nuts; and two each in citrus, purchasing, and wines. These facts indicate that today about 90 per cent of California's cooperatives use contracts. If we exclude purchasing associations, about 92 per cent use con- tracts. Available evidence does not per- mit comparisons between present and past use of contracts by the cooperatives in our sample. We can, however, make an interesting comparison between the extent of this practice by present and past California cooperatives. Between 1875 and 1939 at least 430 California cooperatives (almost as many as are operating in the state today) went out of business, and 70.8 per cent of these used marketing contracts (Cochrane and Elsworth, 1943). This indicates that a greater percentage of California cooper- [16] atives use contracts today than did in the past. It is also interesting that in Cali- fornia there were more discontinuing co- operatives that used contracts than in any other state. New York was second with 54.3 per cent and Washington third with 52.1 per cent. The average for all states was only 27.6 per cent. If we assume that our sample of each commodity group is representative, we can estimate how many California co- operatives use marketing contracts. We have made such estimates in table 1. Ac- cording to these estimates, 423 (88.7 per cent) of the state's 477 cooperatives use marketing contracts. If we exclude pur- chasing cooperatives, about 92 per cent of the state's associations use contracts. Forms of Marketing Contracts Bylaw versus separate contracts. California cooperatives use many dif- ferent types of contracts, but all contracts take one of two general legal forms. The oldest contract form spells out the mar- keting duties and rights of patrons in the association bylaws. This procedure usually includes all marketing obliga- tions under a particular bylaw article. For example, citrus associations, most of which still use this form of contract, include most marketing provisions in a bylaw typically entitled "Marketing of Fruit." In some cases, the marketing pro- visions appear in several articles of the bylaws. Through the years more and more co- operatives have included all the market- ing duties and rights of patrons in a separate legal document variously called marketing contract, marketing agree- ment, membership agreement, agency agreement, crop agreement, or simply, agreement (see Appendixes A and B). When cooperatives use this form of con- tract, members must sign the marketing contract as well as the association bylaws. There is no significant difference be- tween the types of provision found in separate marketing contracts and those spelled out only in bylaws. For example, in citrus, where about two out of three local associations use only bylaws, prac- tically all associations have identical marketing provisions (table 3). Apparently the main reason coopera- tives choose one contract form over the other is the matter of convenience and clarity. There is no significant legal dif- ference. Including all marketing provi- sions in the bylaws has the advantage of greater simplicity: only one legal docu- ment is needed. On the other hand, sepa- rate contracts have the advantage of isolating all the marketing obligations of both parties and assembling them in a separate legal document where provi- sions can be spelled out in greater detail. Most California associations appar- ently feel the latter advantage outweighs the former. Of the 117 cooperatives sup- plying us with their marketing contracts as requested, 76 used separate contracts and 41 included all their marketing pro- visions in their bylaws. In this discussion, the term "market- ing contract" refers to marketing obliga- tions spelled out in either bylaws or separate marketing contracts. Agency versus purchase-and-sale contracts. In addition to the differences in form of contracts mentioned above, there are also some important legal dif- ferences involving the legal ownership of a patron's product while the coopera- tive has possession of it. California cooperatives use both "agency" and "purchase-and-sale" con- tracts. As a general rule, an association will use an agency type of contract when either or both of the following conditions obtains: (a) the separate identity of each member's product is to be maintained from time of delivery to time of sale, and (b) the period of time between delivery to the association and sale is relatively short — say not more than a week or two. On the other hand, an association gen- erally uses a purchase-and-sale contract [17] if (a) the products delivered by individ- ual members are to be pooled or com- mingled, and/or (b) a considerable time lapses between delivery and sale, as, for example, when products have to be proc- essed or stored. Agency contracts make the coopera- tive the legal agent of its members in marketing their crops. This permits the association to use its discretion in mar- keting such crops, but the patron keeps legal title to them. This means that the grower assumes any price or other risks to which his products are exposed while the association handles them. The fol- lowing clause from a fig association's marketing contract is a typical agency contract clause: The grower hereby appoints the association the sole and exclusive agent of the grower for the sale and handling of the grower's fig crops, and also as attorney in fact of the grower for such purpose. Under purchase-and-sale con- tracts, the association takes title to its members' crops as well as control over marketing them. The following clause from a walnut association's marketing contract is a typical purchase-and-sale contract clause: Local agrees to buy of and from Grower and Grower agrees to sell and deliver to Local all of the walnuts produced by Grower. Each type of contract has certain ad- vantages. Agency contracts sometimes favor the patron. If a cooperative be- comes insolvent, creditors cannot satisfy their claims against it by seizing pa- trons' crops held by the association (Hul- bert, 1942, p. 125). There is one important exception to this general rule, however. If a clause in an agency con- tract permits the association to borrow on a patron's product, creditors may seize the crop even though title has not passed to the association (Hulbert, 1942, p. 124). Purchase-and-sale contracts may make an association's selling job easier. Some buyers may prefer to do business with an association if it actually has title to the things it sells. This makes it easier Table 2. Number of Agency and Purchase-and-Sale Marketing Contracts Used by California Marketing Cooperatives, by Commodity Groups Type of association Citrus Wine Other fruits and vegetables Field crops Dairy Poultry Nuts Total Number of cooperatives in state using contracts* 173 28 115 38 19 17 26 416 Number of cooperatives with agency contracts In sample I 25 13 5 3 2 1 49 Estimated number in state f 131 38 21 11 9 2 212 Number of cooperatives with purchase-and-sale contracts In sample 8 9 27 5 2 2 15 68 Estimated number in state f 42 28 77 17 8 8 24 204 * This estimate is taken from column 5 of table 1. Because we received no marketing contracts from purchasing or miscellaneous associations, they are not included in this table. t This estimate is based on the assumption that the ratio of agency to purchase-and-sale contracts for each type of association is the same for the entire population as for the sample. See footnote to table 1. [18] for the buyer to find out if the title to the product is clear. There is no difference between these two types of marketing contract so far as enforcement of performance is con- cerned. The California Agricultural Code gives cooperatives the same enforcement remedies in each case (see pp. 13-14). Of the 117 contracts inspected, 49 (41.9 per cent) were agency contracts and 68 (58.1 per cent) were purchase- and-sale contracts (table 2). In some fields one type is much more common than the other. In citrus, for example, about three out of four associations use agency contracts. In other fruits, in vege- tables, and in nuts, the bulk of the asso- ciations use purchase-and-sale contracts. In other fields there seems to be no sig- nificant preference for one type over the other. Again, if we generalize the findings of our sample to all California cooperatives, we can estimate that slightly over half the California associations use agency contracts (table 2). Duration of Marketing Contracts Local and centralized coopera- tives. Of the 192 local and centralized cooperatives in our sample using market- ing contracts, 154 (80.2 per cent) have contracts that are, in effect, only of one- year duration. Fifteen use straight one- year contracts. Another 104 use so-called "continuous" or self-renewing contracts. All but one of the continuous contracts in table 3 remain in force until the mem- ber notifies the association of his inten- tion to withdraw. Such "continuous" contracts always specify a given period (varying from a few days to several months) of each year during which pa- trons may withdraw from their associa- tion. One continuous contract runs until the member sells his stock in his associa- tion to another party who then assumes the contract's obligations. Another 35 Table 3. Length of Marketing Contracts of Centralized Cooperatives and Locals of Federated Cooperatives in California Length of contract Number of cooperatives using contracts Number of cooperatives with annual withdrawal privileges Number of cooperatives with i Number of annual withdrawal cooperatives without privileges after ' annual withdrawal initial contract privileges period 1 Number in sample Estimated no. in state* Number in sample Estimated no. in state Number in sample Estimated no. in state Number in sample Estimated no. in state "Continuous" . 1 year 2 years 3 years 5 years 7 years 10 years 15 years 104 15 23 f 2 13 4 2 29 192 245 38 38 4 29 9 5 43 104 15 1 3 2 29 154 245 38 2 7 5 43 16 1 1 26 2 2 30 6| 1 9 4 10 2 20 9 Total 411 340 18 20 41 * These estimates were made in the same way as those in table 1. See footnote to table 1 for an ex- planation of method used to apply sample to state figures. t Includes three "continuous" contracts that provide for withdrawal annually, withdrawal becoming effective a year after notice has been given; they are therefore actually 2-year contracts. t Includes one cooperative with a 15-year contract with withdrawal permitted every two years. r 19] contracts, varying between 2 and 15 years, include annual withdrawal privi- leges similar to those specified in "con- tinuous" contracts. Three "continuous" contracts in our sample provide for with- drawal annually, but withdrawal does not become effective until a year after notice has been given. They are, there- fore, actually two-year contracts and have been counted as such in this study. Eighteen (9.4 per cent) other contracts permit annual withdrawal after an initial period of membership beyond one year. For example, 16 contracts provide that after two years of membership a member may withdraw annually. One contract permits annual withdrawal after two years of delivery, and another after five years. Only 20 (10.4 per cent) of the con- tracts in our sample have continuing nonwithdrawal contracts exceeding one year. Nine have five-year and four have seven-year contracts. One of these five- year contracts permits withdrawal after two years on the condition that mem- bers give the association, as "liquidated compensation," their accumulations in the association's reserves. Assuming our sample of each com- modity group to be representative of the entire group, we made the following esti- mates (table 3): 340 (82.7 per cent) California cooperatives use one-year con- tracts. Thirty (7.3 per cent) use contracts that have annual withdrawal privileges after an initial period of membership of between two and five years. Only 41 (10.0 per cent) use contracts exceeding one year which do not have annual with- drawal privileges, either annually or after an initial period of membership. Federated cooperatives. Appar- ently, the "central" associations of federated cooperatives do not have sig- nificantly different contract periods with their "locals" than do the locals and cen- tralized cooperatives listed in table 3. None of the 11 "centrals" using contracts use continuing contracts exceeding one year. Four "centrals" have contracts with their locals permitting annual with- drawal after an initial contract period. The central of a supply association has a five-year contract that permits annual withdrawal thereafter. California's larg- est dairy central has a "ten-year" con- tract, but it permits annual withdrawal after three years of membership. A wine central has a contract with its locals per- mitting annual withdrawal after three years. A dried fruit central permits its locals to withdraw annually after two years. Locals are permitted to withdraw annually from six other marketing cen- trals (two citrus, one vegetable, one deciduous fruit, one nut, and one wine). Finally, the central of a federated pur- chasing cooperative does not have any contract with its locals. Why Are Short-term Contracts Used? These facts indicate that the great bulk of California cooperatives do not depend upon marketing contracts to maintain membership loyalty for periods exceed- ing one year. Even most of those associa- tions with contracts exceeding one year permit annual withdrawal after two to five years of membership. This situation apparently represents a significant change over the types of marketing con- tracts commonly used in the United States during the 1920's. A 1924 study revealed that 55 (58.5 per cent) of the 94 American cooperatives studied (all of which used contracts) had nonwith- drawal contracts of three to seven years' duration (Johnson, 1924, p. 2). Forty of these were five-year nonwithdrawal contracts. What factors are responsible for this general acceptance of one-year market- ing contracts by California cooperatives? Familiarity with California experience suggests the following hypotheses. First, many associations have found [20] that some members resent long-term con- tracts. Thus, benefits from long-term con- tracts are more than offset by the barriers to membership resulting from them. Second, most California cooperatives are so well established today that they need not depend on long-term contracts to give them an opportunity to prove themselves. Third, annual contracts adequately protect associations against most poten- tial causes of patron nonperformance. Fourth, California cooperatives have other ties with their patrons, which make it unnecessary to bind them with market- ing contracts for long periods. Let us see what evidence there is to support these hypotheses. Do long-term contracts deter membership? Available evidence sug- gests that marketing contracts discourage some patrons from doing business with cooperatives. In answer to the question on this point, 153 California coopera- tives having marketing contracts ex- pressed an opinion. Twenty-five, or about one out of six, felt that contracts did tend to deter producers from joining an association. 7 This is significant in view of the fact that the great bulk of the associations in our sample used only one- year contracts. As one might expect, a higher proportion of the cooperatives with contracts exceeding one year stated that their contracts deterred membership. Of the 17 cooperatives with nonwith- drawal contracts exceeding one year which responded to the question, ten in- dicated that their marketing contracts do tend to deter some farmers from join- ing. Moreover, those cooperatives not using contracts often gave as their reason 7 A better indication of membership attitude toward contracts could be obtained from mem- bers rather than management. Perhaps a still better indication could be derived from asking nonmembers of associations with long contracts whether the contract period acts as a deterrent to joining the association. Neither of these ap- proaches was undertaken in this study. for not doing so the belief that such con- tracts deter membership. These facts sup- port the hypotheses that marketing contracts of even one year may deter some potential members from joining cooperatives, and that contracts of longer duration deter a greater number. Of course this tells only part of the story, representing the point of view of management rather than members. Doubtless many patrons would not be willing to join an association if they were not assured of contracts. Therefore, the net effect of contracts very likely is to increase cooperative membership. But this evidence does indicate that patron resentment to long contracts is one im- portant reason why more California co- operatives do not use longer-term con- tracts. Moreover, our conversations with cooperative leaders also support this con- clusion. How well established are today's cooperatives? Another possible reason for the short-term contracts is that most California cooperatives have long, suc- cessful histories. Therefore, they are less dependent on long-term contracts than are newly founded associations. In 1923 California's Aaron Sapiro, a strong ad- vocate of long-term contracts, expressed their need in the case of new associations as follows (Bakken and Schaars, 1937, p. 323n) : The contract should always be a long-term agreement. It is impossible for farmers in a period of less than three years to develop a trained personnel, to perfect the process of receiving the commodity, to make good and wise commercial connections and to effect satis- factory banking arrangements. The rule is rather sound; a short-term contract is hardly worth the paper it is written on. A long-term contract gives the farmer a chance. There should be no right of withdrawal whatsoever, except at the end of a specified long term. If the farmers intend to try the cooperative mar- keting system, they should go into that work seriously, earnestly, and on a permanent basis. This argument for long-term contracts is strongest for newly organized coopera- [21] tives. Therefore it does not apply in the case of most California cooperatives to- day. Of the 207 marketing associations giving us this information, 77 (37.2 per cent) were formed before 1920, 126 (60.0 per cent) before 1930, 178 (85.9 per cent) before 1940, and 186 (89.9 per cent) before 1945. This indicates that nine out of ten of California's marketing cooperatives in our sample have been in business for ten or more years. Because most of California's coopera- tives had long ago proved that they were efficient organizations, the need for long- term contracts to "get their organizations started" no longer exists. That California cooperative sentiment still favors longer contracts for new associations is sup- ported by the nature of the contracts of marketing associations formed since 1940. Of 27 marketing associations formed since 1940 which use contracts, 14 have contracts exceeding one year. Three of these have seven-year nonwith- drawal contracts; seven have five-year nonwithdrawal contracts; one has a straight two-year contract; one has a five-year contract with an annual with- drawal privilege after five years of mem- bership; and two have contracts permit- ting annual withdrawal after two years of membership. These relatively new associations apparently feel that they need longer contracts to get their asso- ciations under way. Do annual contracts meet non- performance problems? Another fac- tor tending to encourage the use of one-year contracts may be that such con- tracts give ample protection against most forms of nonperformance. Empirical evi- dence to test this hypothesis is hard to come by. But we can make some mean- ingful observations by analyzing the types of situation responsible for non- performance. The prospect of getting higher net prices by selling outside of their associa- tion is chiefly responsible for patron nonperformance. This opportunity may develop for several reasons. It may arise if a cooperative attempts to raise prices for its members through market control. To raise market prices signifi- cantly, a cooperative must do two things : (1) it must have most of the producers as patrons; and (2) in the absence of production controls, it must divert part of the supply from regular market chan- nels — either by exporting, dumping, or processing or diverting it to some lower price use. The immediate effect of such actions is to raise prices in the primary markets above competitive levels. This may give cooperative patrons a blended price — a weighted average of the price of the product sold in the primary and secondary market — which is higher than they would otherwise have received. But this is only part of the story. Noncooper- ative members may be benefited even more than members by such a program. Because they are able to sell all of their output in primary markets, nonpatrons receive net prices exceeding the blend prices of members. Cooperative mem- bers, seeing this, have a powerful incen- tive to desert their association in subse- quent years. Consequently, associations having price enhancement or stabiliza- tion as a primary objective must have contracts exceeding one year. But experience has demonstrated that even long-term marketing contracts are not enough to permit cooperatives to achieve significant monopoly power. As more and more members leave the asso- ciation, and as production is expanded (both by members and nonmembers) in response to the noncompetitive price levels, the burden of the diversion pro- gram becomes excessive. The blend prices of cooperative members fall so far below nonmember prices that mass de- sertions of members occur until the asso- ciation either goes out of business or changes its objectives. 8 8 The experience of the South Carolina Cot- ton Growers provides an interesting example [22] During the 1920's some California co- operatives attempted to imitate the mo- nopolistic behavior of nonagricultural concerns, but none of these associations succeeded for long. Since then the asso- ciations have changed their objectives primarily to increasing patrons' returns through more efficient marketing. Al- though many cooperatives still take an active interest in price enhancement and stabilization, thsy have generally not tried to accomplish this through their own activities. Instead, federal or state marketing-order programs are used to this end. These programs treat all grow- ers in the industry alike; therefore, mar- keting through cooperatives in the indus- try involved is neither encouraged nor discouraged. They may indirectly re- duce cooperative membership, however. Growers are usually most conscious of marketing savings in times of low prices. Therefore, insofar as state or federal marketing-agreement programs enhance prices, growers may have less incentive to join cooperatives. But the net effect of this incentive is likely to be very small. Because today's California coopera- tives do not have monopoly pricing as an objective, the price incentive does not tempt members to leave the association as it inevitably would otherwise. There- fore this reason for long-term marketing contracts no longer exists. California cooperatives today are not confronted by the above-mentioned causes for member disloyalty, but other causes still exist. The incentive for tem- porary patron disloyalty may become especially strong in times of abnormally of this process. In 1922 it signed up 11,434 cotton growers. Before their five-year contract expired in 1926, 71 per cent of the members refused to sell through the association. After the contract expired in 1927, all but 8 per cent had left the association. Obviously by this time, it had lost whatever monopoly power it had in the initial years. (Wilson Gee and Edward A. Terry, The Cotton Cooperatives in the Southeast (New York: D. Appleton-Century Co., 1933), p. 160. short supply or high demand. When sup- ply is abnormally short, noncooperative marketing organizations may make every effort to attract some cooperative patron business so as to operate nearer capacity. As long as all marketing agencies, in- cluding cooperatives, pay the same price to all comers, cooperative members have no price incentive to sell outside their association. But some noncooperative marketing concerns may offer slightly more than the market price to get certain growers' business. Cooperatives are un- able to cope with such "competition" because they must pay all growers identi- cal prices, particularly when they sell on a pool basis. Therefore some patrons have a price incentive in such cases to sell outside their association. For this to occur, however, price competition must be limited. It is most likely to happen in industries where cooperatives have only a few rivals. Such market structures are common in many agricultural processing industries. In such oligopolistic markets (markets of few buyers) competition generally does not force buyers to pay identical prices to all sellers. This per- mits the above-mentioned type of price discrimination between growers to occur, with its consequent undermining of patron loyalty. One-year marketing contracts are as effective in preventing such nonperform- ance as are longer contracts. Growers generally are unable to know at the time of signing their annual contracts whether or not supply is going to be abnormally short. Even if the grower anticipated a short supply, he might not be sure that he would be singled out by competi- tors for special price treatment. Conse- quently, he would probably decide to sign a contract with his cooperative if past experience proved that it usually paid growers average market prices or better. Thus, this type of threat to mem- ber loyalty can usually be met as well by annual contracts as by longer-term ones. [23] Short-run price changes may also en- courage a patron to sell all or part of his crop outside his association. This situation arises whenever cooperatives pool members' crops. For example, sup- pose an egg-marketing association is using a two-week marketing pool. Under such an arrangement, all growers deliver- ing eggs of a certain quality during a two-week period receive the average mar- ket price for such eggs. Should market prices suddenly rise near the end of a pooling period, a grower belonging to this association would have an incentive to sell outside it, for the price he could expect in the open market would be higher than the average pool price he would get from his cooperative. Such op- portunities would be most likely to arise when prices fluctuate greatly and when the pooling period is long. Seasonal price variations fluctuate widely for most agri- cultural products, and many coopera- tives use quite long pool periods. For example, the local citrus associations be- longing to Sunkist Growers, Inc., use pooling arrangements varying from two weeks to an entire season (Gardner and McKay, 1950, p. 36). For cooperatives to operate most ef- fectively under such conditions, they must have a legal tie to insure delivery. One citrus cooperative official com- mented, "When prices fluctuate sharply in response to both market and sup- ply, ... I am sure the existence of our membership contracts is the only thing which insures our fruit supply." This threat to delivery makes market- ing contracts essential. But again, one- year contracts are as effective as longer ones in preventing nondelivery due to this problem. This is true because during the annual period when patrons can withdraw from their association, they are unable to predict whether they are going to benefit or lose by selling on a pool basis in the future. Actually, they may usually prefer the prospect of get- ing at least the season average price rather than take the chance of more or less. Therefore they may be willing to sign a marketing contract binding them against nonperformance. Once having signed the contract, they are again bound for the entire season. So long as the patrons remain convinced that the pool is being run judiciously — accurately re- flecting quality differences, etc. — they do not withdraw from their association. Noncontractual considerations encouraging cooperative member- ship. A final reason why cooperatives may not need longer marketing contracts is that certain nonlegal considerations encourage continued participation in co- operatives. These may be social, political, or economic. Patrons may prefer coop- eration as a "way of economic activity." They may believe that by belonging to a large, politically articulate cooperative, they may be able to enhance their long- run social, political, and economic in- terests. These and other noneconomic considerations may serve as strong bonds between cooperatives and their patrons. But here we shall consider only some of the chief economic considerations en- couraging continued patron participa- tion. Perhaps the strongest nonlegal tie be- tween patrons and their cooperative is the patrons' belief that their cooperative is doing a good job. If patrons feel that their cooperative on the average pays equal or higher returns than other busi- nesses, they will not readily be tempted to sell elsewhere. They know that should they sell elsewhere, they may be expelled from the cooperative and not be permit- ted to sell through it in the future. Even if they wait until their marketing con- tract expires, they may not be able to rejoin their cooperative in the future (see page 47.) Thus, patrons who would gain a temporary advantage by leaving their cooperative may remain in it even when not legally bound to do so. They realize that it is against their long-run [24] economic interest to do otherwise. Of course, if expelled or withdrawing pa- trons could rejoin an association at their discretion rather than at the coopera- tive's, probably many would leave to sell on the outside whenever it was profitable to do so. So the above economic incen- tive for remaining within a cooperative is made more effective by the coopera- tive's right to refuse membership to ex- pelled and other past members. Every cooperative ultimately must en- gender this feeling of economic adequacy in the minds of its patrons. Without it a cooperative cannot hope to survive, much less grow. And while marketing contracts may contribute to a coopera- tive's efficiency, they are but one of the many factors in determining its ultimate success. Another economic bond tying patrons to their cooperative may be created by the revolving-fund method of financing, which is widely used by California co- operatives. This bond, which is not a legal one, may be created under the fol- lowing circumstances. The price and patronage rebates co- operatives pay patrons may represent not only a payment for the patron's com- modity, but may also include a payment or return on his investment in his coop- erative. This is not necessarily true if the cooperative pays interest on its in- vested capital. But because many Cali- fornia cooperatives do not pay interest on their revolving-fund certificates, pa- trons, in effect, do get a return on in- vested capital included in their patron- age payments from their cooperative. Such payment may be more or less than a patron's proportionate investment in his cooperative. This comes about pri- marily because whereas the annual de- ductions for revolving funds customarily are proportional to patronage, new mem- bers do not have as much in the revolv- ing fund. For example, during his first year of membership, a patron receives the use of the cooperative's capital facili- ties although he has made practically no investment in the association. But gen- erally, the revolving-fund method of financing tends to make a patron's in- vestment in his cooperative proportional to his patronage. Informed cooperative patrons are aware of this fact and take it into consid- eration when estimating how the returns received from their association compare with prices paid by other marketing in- stitutions. A patron has an economic in- centive to quit his cooperative whenever prices paid elsewhere exceed those paid by his cooperative, less that part of the cooperatives' prices representing a re- turn on his investment. But should he be unable to withdraw immediately his en- tire investment from his cooperative, his decision might well be different. For ex- ample, suppose he was selling through a cooperative financed entirely by a seven- year revolving fund. Then his investment in his cooperative might be considerable, especially if it owned processing facili- ties. Should he leave his association, he would receive no interest on his invest- ment and would be repaid his principal at the rate of one-seventh each year. Co- operative bylaws or marketing contracts invariably provide that members quitting an association be repaid their equity in revolving funds at the same time as if they had remained in the association (see page 47). Thus, for seven years, in the example given above, the patron would have to forego any earnings on all or part of his investment in the association's revolving fund. (This is not to say that he is treated unfairly, for when he joined the associa- tion he, in effect, received a return on someone else's investment until he had been in the association for some time.) Such a possibility may act as a powerful deterrent to a member considering leav- ing an association. The relative impor- tance of this form of economic bond be- tween a cooperative and its patrons will vary with the size of the revolving fund [25] and its period of revolution. For ex- ample, in wine cooperatives the average period of revolution is about nine years. The average investment of patrons who have been in these associations for nine years exceeds $10,000. A member with an investment of $10,000 in a nine-year revolving fund would be faced with this prospect: If he left his association, he would be repaid $1,100 of his principal each year for nine years. If he remained in it, he would receive the market price for his products sold through it, plus a premium representing a return on his in- vestment in it. If his cooperative earned 10 per cent on his investment, this return would amount to $1,000. This would be about the same as the principal he would be repaid each year upon leaving the association. This could prove a strong incentive for him to remain in the associ- ation. This deterrent to withdrawal may be especially strong between locals of feder- ated cooperatives and the centrals of such associations. The legal bond between locals and centrals is usually short, but the economic bond created by the locals' interest in their central's revolving fund may be very great. All of California's large federated cooperatives are financed by revolving funds. The individual lo- cal's share in the central's revolving fund may run into hundreds of thousands of dollars (one local wine cooperative has nearly $1,000,000 invested in its central's revolving fund), and the funds may re- volve in a 10-year cycle. Under these cir- cumstances, a local association would be very hesitant about striking out on a marketing venture of its own. Insofar as the conditions assumed above apply to specific cooperatives, the revolving-fund financing method may serve as a strong economic bond between members and their associations. And since most California cooperatives do use revolving funds, they may often strongly supplement the legal bond cre- ated by marketing contracts. [26 Summary. All four of the reasons discussed above apparently encourage or permit cooperatives to use short-term contracts. Doubtless the relative impor- tance of these reasons varies during an association's development, and some rea- sons may seldom or never apply to co- operatives handling certain commodities. Some cooperatives may have sound economic reasons for using long-term contracts; others may not. Some may continue to use long-term contracts after the need for them disappears. They may reason that as long as patrons do not strongly resent long contracts, there is no need to shorten them. They may be right. But such associations should ask themselves these questions: Have condi- tions changed significantly since we fixed the initial contract period of our mar- keting contracts? If so, can and should we reduce our contract period? The ultimate answer to these questions rests with the peculiarities of each asso- ciation. But the fact that nearly all well- established associations find short-term contracts adequate suggests that long- term contracts are not necessary for ef- ficient operation, except perhaps for the first two to five years of an association's life. Thus, all associations using long- term contracts should periodically ask and answer these questions. Enforcement Provisions Types of provisions. Marketing con- tracts set forth the ways in which farmers agree to become integrated with their co- operatives. When farmers agree to a con- tract they almost invariably intend to keep their part of the bargain — and they nearly always do. But experience has clearly shown that circumstances often arise which make it appear advantageous for some farmers not to live up to their part of the bargain. Then the value of the contract as a legally enforceable doc- ument becomes important. Contracts take on new meaning because the courts recognize them as bona fide legal agree- ] merits giving the injured party certain legal remedies. Without this promise of assistance from the courts, marketing contracts would be mere pieces of paper setting forth the moral promises of each party to do certain things. The California Agricultural Code per- mits cooperatives to use three types of legal remedy to enforce their market contracts: liquidated damages, specific performance, and injunction. Nearly all California marketing contracts include specific provisions permitting the associ- ation to use one or all of these remedies to insure patron performance. Of the 117 such contracts inspected, all but three (marketing cotton, deciduous fruit, and rice) included provisions for liquidated damages, and 45 also included provi- sions for injunction and specific per- formance. No contracts provided for injunctions and specific performance without also providing for liquidated damages. Some cooperatives including provisions for all types of remedy also included a provi- sion giving them the right to select the most appropriate one. For example, one association has the following provision: No remedy herein conferred upon Association is intended to be exclusive of any other remedy, but each and every such remedy shall be cumu- lative and shall be in addition to every other remedy given herein or now or hereafter exist- ing in law or equity or by statute. Association may enforce any or all of such remedies either separately or concurrently. Methods of setting damage. All contracts providing for liquidated dam- ages spell out the extent of such damages. California associations set damages in four different ways. Absolute amounts. Most typically, these provisions set a specific absolute amount to be paid as liquidated damages for each unit of a commodity sold out- side of the association. For example, most citrus contracts fix damages at $0.25 a box. A typical provision setting damages of a fixed absolute amount reads: [27 The parties hereto fully understanding and ad- mitting that it will be impractical or extremely difficult to fix the actual damages to the buyer which will result from the breach of this con- tract by the seller hereby expressly agree and stipulate that in the event of the seller's neglect, failure or refusal to deliver to the buyer the fruit purchased hereunder, the seller will pay the buyer the sum of $0.25 per box for all fruit covered hereby, and undelivered as liquidated damages for such breach. Of the 117 contracts inspected, 96 (82.0 per cent) fix damages at some absolute amount. Per cent of market value. Eleven prune and apricot marketing associations and one wine association in our sample fix damages at 20 per cent of their market value. One dairy association also fixes damages in this way, setting damages at 15 per cent of the product's value. Equal to share of fixed cost. The third most frequent method of setting damages is to fix them equal to the nonperform- ing member's share of the association's fixed cost. One wine and six prune-dryer associations in our sample set damages this way. The prune-dryer associations' contracts permit them to assess damages equal to the proportionate cost, as determined by the Dryer, of the upkeep and maintenance of the dryer and drying equipment, including overhead of the Dryer (except labor, fuel and power actually expended by the Dryer in the dehydration of the prunes of the members of the Dryer) based on the number of tons of fresh prunes agreed to be delivered by him. The wine association fixing damages in this way directed the Board of Direc- tors to levy an assessment against such stockholders to cover his proportion and share of the fixed charges for each year separately during which the said stockholder refuses to deliver ... his entire allotment of grapes. Equal-to-marketing charge. A decidu- ous fruit association uses a fourth method of setting damages. It fixes damages equal to the marketing charge it would have received had it marketed its pa- trons' products. This association fixes such marketing charges each crop year. Minimum damages. Another fairly common feature of liquidated damages provisions is to fix a minimum amount of damages as well as a specific amount per unit. For example, a citrus coopera- tive has a provision for damages of $0.25 per box with minimum damages of $25 per violation. An avocado association fixes minimum damages at $1,000 plus $0.05 a pound for all avocados not marketed through it. In all, 17 of the contracts inspected included similar minimum damage provisions. Relative size of damage provi- sions. The relative size of liquidated damages set by California cooperatives varies greatly. Table 4 compares the liquidated damages for various com- modities with their market value in 1953 and 1939. (This comparison includes Table 4. Extent of Liquidated Damages for Various Products Marketed by California Cooperatives and Comparison at 1953 and 1939 Prices Product Number of contracts Extent of damages Dollars unit Liquidated damages as per cent of average prices re- ceived by California farmers 1953 1939 Cotton Flaxseed Butter Honey Dairy products Eggs Apples Strawberries Pears Peaches Lemons Walnuts Grapes (Wine) Beans (Kidney) Cottonseed Olives Apricots and prunes Hay Oranges Almonds Chickens Avocados Beans (Lima) Raisins Figs 4 1 1 1 5 2 2 2 5 5 17 14 8 1 1 4 11 2 25 1 1 1 3 1 1 $1.00 0.25 0.05 0.01 0.05* 15% of value 0.05 8.00-10.00 0.50-1.00 0.00-10.00 6.00-10.00 0.25-.75 0.03 5.00—20% of value 2.00 10.00 10.00-60.00 20% of value 3.00-5.00 0.25-.50 0.05 0.25 0.05 0.02 0.03 0.03 Bale Bushel Pound Pound Pound Dozen Ton Crate Ton Ton Box Pound Ton Bag Ton Ton Ton Box Pound Bird Pound Pound Pound Pound 0.6 6.6 7.7 7.9 3.6-15 9.4 9.5-11.9 7.2-14.4 8.3-13.8 9.9-16.4 7.2-21.6 14.6 11.6-20 16.8 18.8 5.6-33.6 20 14.3-23.8 15.2-30A 21.2 24.5 27.0 17.2 35.9 40.0 2.1 15.6 18.1 18.9 10-15 23.1 38.1-47.6 18.1-36.2 12.5-39.0 28.6-47.6 16.7-50.1 34.7 20-36.5 37.3 36.5 13.2-79.2 20 33.7-56.2 20.2-41.0 47.6 48.1 65.8 42.0 124.0 76.9 Totalf 119 * Italicized figures represent the most frequently used liquidated damage provision found in the market- ing contracts of a particular commodity. t The number of cases listed here and in table 5 differs from the number of contracts (109) which set damages of a fixed amount or percentage. This difference arises because some associations marketing several products (e.g., citrus) use the same contract for each. [28] only the 109 associations setting damages at some absolute amount or at some per- centage of the product's market value.) This comparison indicates that in 1953, liquidated damages ranged from 0.6 per cent of the farm value of cotton to 40 per cent in the case of figs. Table 5 summarizes the material pre- sented in table 4. It shows that at 1953 prices, 112 (94.1 per cent) contracts in our sample fix damages at under 30 per cent of the products' market value. At 1939 prices, only 64 (53.8 per cent) would set damages at under 30 per cent. The extent of damages varies not only among commodities but also among co- operatives marketing the same com- modity. In olives, one cooperative sets damages at $10 a ton, whereas another fixes damages at $60 a ton. These dam- ages represented 5.6 and 33.6 per cent, respectively, of average olive prices in 1953. In lemons, the assessable damages vary between $0.25 and $0.75 a box, and in oranges, between $0.25 and $0.50 a box. But for the most part, coopera- tives in a particular industry set iden- tical damages. In cotton, all four contracts inspected set damages at $1.00 a bale. In lemons and oranges, the great bulk of the associations fix damages at $0.25 a box. In deciduous fruits, the most frequent amount is $10.00 a ton. In some federated cooperatives, all local associations have identical liquidated damages provisions. This is true of wal- nut locals. But in citrus the locals of the country's largest association, Sunkist, use a variety of liquidated damages provi- sions. Because many agricultural prices fluc- tuate greatly, the relative costs of dam- ages to nonperforming farmers vary when contracts set damages of a fixed absolute amount. For example, in 1953, the $1.00-a-bale damage provision repre- sented only 0.6 per cent of the market value of cotton (table 4). But at 1939 prices, it represented 2.1 per cent. Simi- larly, liquidated damages in figs repre- sented 40 per cent of market value in 1953 contrasted to 76.9 per cent in 1939. Table 5. Estimated Number of California Marketing Contracts Having Liauidated Damage Provisions of Various Sizes: A Comparison with 1953 and 1939 Farm Prices Liquidated damages as a per cent of the price of the product 1953 farm prices of relevant products 1939 farm prices of relevant products No. of contracts in sample Cumulative per cent of total No. of contracts in sample Cumulative per cent of total 0- 9.9 . . 21 70 21 6 1 17.6 76.5 94.1 99.2 100.0 4 23 37 33 13 4 1 3 1 3.4 10-19.9 . . 22.7 20-29.9 53.8 30-39.9 . 81.5 40-49.9 92.4 50-59.9 . . 96.1 60-69.9 96.9 70-79.9 99.3 80-89.9 . . 90- 100.0 Total 119 100.0 119 100.0 [29] With damages of fixed amounts, the relative burden of nonperformance varies as prices vary. Therefore, patrons are least likely to sell outside their asso- ciation in times of relatively low prices. When damages are set at a fixed per- centage of the market value, the situa- tion is different. Then the relative burden of nonperformance remains unchanged as prices change. The preceding facts demonstrate a con- siderable range in the relative size of liquidated damage provisions. There is variation both within commodity groups as well as among various groups. Why do damages vary? Most varia- tion within commodity groups can be explained only by the preferences of the individual associations. For example, there is little basis for believing that the damage suffered by one citrus packing house due to nonperformance is likely to be three times as great as for others. Yet although most associations fix dam- ages at $0.25 a box, others set them at $0.35, $0.50, and even $0.75 a box. There seems to be no significant correlation be- tween extent of damages provisions and (1) size of association, (2) average member volume, or (3) age of associa- tion. Each of these variables was checked in the case of local citrus associations, where damages provisions ranged from $0.25 to $0.75 a box. But what of the differences from one commodity group to another? They may be explained in part by differences in the actual damages likely to result from nonperformance. Cooperatives perform- ing the smallest marketing job are likely to be least harmed by a given amount of nonperformance. For example, the cost of ginning a dollar's worth of cotton is less than the cost of handling, process- ing, storing, and distributing a dollar's worth of raisins. We would expect dam- ages provisions to reflect such differ- ences. But while such differences may account for some variation between com- modities, they do not account for all of the difference. For example, the costs of processing and marketing wine are much greater per dollar of sales than are hay- marketing costs. Yet the liquidated dam- ages provisions are twice as great in hay as in wine. Inspection of table 4 will suggest other, similar anomalies. The most significant measure of actual damages is not total marketing costs per unit but fixed costs per unit. If all costs are marginal costs, nonperformance by some members is not likely to raise the marketing costs of others very much. But usually associations with the highest total marketing costs per unit are also those with the highest fixed costs. The preceding discussion supports the conclusion that much of the variation in liquidated damages provisions is not ex- plainable primarily by differences in marketing costs. Other factors, which cannot be generalized, are responsible for these differences. Beyond the ques- tion of what practices do exist, there is the more important question of what practices should exist? How large should liquidated damages be? This question needs to be answered in both legal and economic terms. How large should damages be? Legal consideration. As pointed out ear- lier, most state statutes, as well as the common law, permit cooperatives to use liquidated damages as a remedy for non- performance. But such legal sanction does not insure that the provision for liquidated damages in every cooperative marketing contract is legal merely be- cause both parties have agreed to it. Legality is conditioned upon reasonable- ness. If the stipulated damages are wholly disproportionate to the actual damages, the courts may declare them "penalties" and therefore illegal (Packel, 1947, p. 155). This possibility may arise even if damage provisions are not dispropor- tionate when initially made. For ex- ample, at 1953 prices, failure to deliver raisins could have resulted in liquidated [30] damages of 36 per cent of their market price (table 4). But should raisin prices return to 1939 levels, liquidated damages actually would exceed their market value by 24 per cent. The courts almost cer- tainly would consider this a wholly dis- proportionate remedy and therefore a "penalty." The precise legal dividing line between penalties and legal damages is not clear. A California court permitted damages of $0.05 per dozen of eggs at a time when this represented about 20 per cent of their market value. 9 Another California court sanctioned damages of $0.50 per hundredweight of milk at a time when this was 25 per cent of its value. 10 Furthermore, the courts have not al- wavs agreed on the dividing line between liquidated damages and penalties. In 1926 a South Carolina court held dam- ages of 5 cents per pound of cotton exces- sive. In the same year, an Oklahoma court ruled that damages of 5 cents per hundredweight of cotton were not unrea- sonable. 11 Thus, it is impossible to predict what the courts will rule an excessive damages provision. But because courts are guided by the principle of "reasonableness," we can draw certain conclusions. First, damages equal to a member's share of his association's fixed costs are never likely to be declared illegal, for they closely approximate the associa- tion's actual damages. Second, in California, damages provi- sions for a specified percentage of the market value of a commodity are not likely to run into legal difficulties if they are about 20 per cent or less. 12 9 Poultry Producers of Central California v. Nilsson, 197, Cal. 245, 239 Pac. 1086. 10 Milk Producers Assn. v. Webb, 97 Cal. App. 650, 275 Pac. 1001. 11 South Carolina Cotton Growers v. English, 135 S.C. 19, 133 S.E. 542. Oklahoma Cotton Growers Assn. v. Salyer, 114 Okla. 77, 243 Pac. 232. 32 The Wisconsin Cooperative Marketing Stat- utes provide that cooperatives may fix damages Third, flexible damages provisions, fixing damages equal to the amount which would have been paid as a mar- keting charge, are also likely to be held reasonable by the courts. Here, the liqui- dated damages are likely to approximate closely the actual damages suffered. Fourth, liquidated damages provisions providing for fixed absolute amounts may not be enforceable when this amount becomes wholly disproportionate because of falling prices. Thus, purely on legal grounds, the first three methods seem preferable. But the shortcomings of provisions of the last- mentioned type can be overcome if they are adjusted as price levels change sig- nificantly. Economic considerations. But what about the economic desirability of the various methods and levels of damages? Economically, liquidated damages provi- sions have two important functions: (1) to discourage patron nonperformance, and (2) to compensate the association for diseconomies caused by the with- drawal of patronage by some members. Very high damages provisions achieve both of these objectives. In fact, the higher the damages, the more completely will these functions be performed. But to assure equity for both performing and nonperforming patrons, the liquidated damages should approximate the dam- ages resulting from nonperformance. Ideally, damages should equal the de- crease in net revenue suffered by per- forming members. In practice, however, it is impossible to set the exact amount of damages resulting from nonperform- ance before an actual breach occurs. This ideal measure can be approached, how- at "an amount equal to a certain percentage, not exceeding 30 per cent, of the value of prod- ucts which are the subject of breach." But in one case the Wisconsin Supreme Court held that a contract providing for damages up to 20 per cent was illegal because it did not specify a fixed percentage. John Hanna, The Law of Cooperative Marketing Associations (New York: Ronald Press Co.. 1931), p. 227. [31 ever, by setting damages equal to that part of an association's fixed costs which it would have charged against the non- performing patron, for performing pa- trons are harmed primarily because over- head costs must be spread over a smaller business volume. This is the correct measure of damages if three important assumptions are met: ( 1 ) that the association is selling in a perfectly competitive market; (2) that its marginal costs are constant over the relevant range; and (3) that the nonper- formance of some members does not prevent an association from meeting its own contract obligations to third parties. (1) When an association sells in an imperfectly competitive market, its mem- bers' returns depend not only on its costs per unit but its revenue per unit. Then the latter as well as the former will vary at different outputs. Consequently the appropriate measure of damages is the decrease in net revenue that performing members suffer because of some mem- ber's nonperformance. Under these con- ditions, actual damages might be greater or less than the nonperforming patron's share of fixed costs. It will depend on whether the association is operating short of, or beyond, its optimum output. Be- cause it is extremely difficult to determine these facts in practice, fixing damages equal to a patron's share of fixed costs is likely to provide a good approxima- tion of actual damages. This is especially true when the association's demand curve is quite elastic. (2) But what about our assumption of constant marginal costs? Empirical evi- dence suggests that it is valid over quite wide ranges of output for many market- ing establishments. (3) When this assumption is not met, it is impossible to determine accurately the amount of damages suffered by non- performance; they are even more haz- ardous to estimate well before a breach occurs. Because of this, liquidated dam- ages is an inadequate form of relief. Other types of relief are then needed (see page 14). Let us see how this ideal measure can be used in practice. In 1953 one Cali- fornia cooperative cotton gin estimated its total average cost at about $10.00 a bale. Its average fixed costs came to about $7.00 a bale. Suppose one of its patrons failed to deliver 100 bales he has pledged. Then, the $700 of overhead costs which otherwise would have been charged against him would have to be spread over performing members, and their costs would have increased by a corresponding amount. Consequently, he has damaged them to the extent of $700. He should therefore pay liquidated dam- ages of $7.00 a bale, or $700. (This is actually $6.00 more per bale than cotton gin contracts require, table 4). As pointed out above, seven associa- tions in our sample set damages in this way. But how well do the methods most commonly used achieve this ideal? Interestingly, the other legally most acceptable types of damages provisions may be least satisfactory economically. The fixed per cent of market value provi- sion may well result in the most dispro- portionate type of damages. For example, suppose that when an association adopts its marketing contract, fixed costs per unit are about equal to 20 per cent of its product's market value. Then, if mar- ket prices should fall 50 per cent a few years later, such a damages provision would be inadequate. Consider next contracts fixing dam- ages equal to the market charges which the nonperformer would have paid had he marketed through the association. The damages are not likely to be as dispro- portionate as in the case above, but some overstatement of the actual damages in- curred is inevitable unless practically all costs are fixed. Let us turn last to provisions fixing damages at a fixed absolute amount. Po- tentially, this type of provision can be quite equitable. If the initial damages [32] provision equals the association's aver- age fixed costs per unit, it will remain quite fair for some years despite changes in product prices. Thus, this method is less likely to result in inequities due to fluctuating product prices than is the fixed percentage method. This is not to say that inequities may not result. During periods of generally rising or falling prices, plant and other fixed costs will also change, eventually. Therefore such damages provisions should be revised periodically to insure equitability. Of course, inequities may always arise if damages provisions are initially set too high or low. Some associations' dam- ages provisions doubtless are higher than the "ideal" level, but some are also too low. All cotton contracts inspected set damages at $1.00 a bale. Yet average fixed costs are well above this level. Five dollars a bale certainly more closely ap- proaches the actual damages suffered be- cause of nonperformance. Experience with nonperformance. In recent years few California coopera- tives have collected liquidated damages from their patrons. Out of 218 respond- ing cooperatives, 197 (90.4 per cent) in- dicated that from 1949 to 1953, inclusive, they had not recovered any liquidated damages from patrons. This indicates either that patrons of California coopera- tives generally fulfilled their contracts, or else that cooperatives did not enforce their contracts in this way. Available data give no quantitative information on this point, but conversations with cooperative personnel suggest that the first reason is primarily responsible for the infrequent cases of liquidated damages. Inspection of the 21 cases in which liquidated damages were paid suggests that high damages provisions success- fully deter nonperformance. All but one of the cooperatives collecting damages had damages provisions of under 15 per cent of the 1953 market value of the com- modity involved. The one exception in- volved an olive association with a damages provision of about 27 per cent of the market value of olives, and it re- covered damages from only one member. On the other hand, the 20 associations having damages provisions under 15 per cent recovered damages from over 428 members. It is impossible to determine the exact number of patrons involved because four of the associations indicated only the amount of damages without stat- ing the number of patrons involved. Of the 45 California cooperatives in our sample having injunctions and spe- cific performance provisions, only five used specific performance as a remedy for nonperformance. Four of these asso- ciations resorted to specific performance only once, and the other association twice. No cooperatives in our sample re- ported using injunctions as a remedy during 1949-53. Although specific performance and in- junctions are seldom used, these remedies may still be important. When a coopera- tive has a contractual obligation to de- liver to a third party, liquidated damages from a patron may not give adequate relief. Often efficient operation demands that an association promise to deliver certain products long before members make delivery. Then if members do not deliver, the association may be unable to fulfill its own contracts. The damages it suffers then are greater than those sug- gested above. Not only are its per-unit operating costs increased, but it may also have to pay damages to its customers. Moreover, its inability to fulfill its prom- ises may irreparably injure its reputation in the trade. The great majority of dealers in the wholesale and retail trade are interested in adequacy and continuity of supply of products — especially of products sold under a trade or brand name. It may take a cooperative association years to build up a reputation for its products and its standing in the trade. The asso- ciation could lose its reputation and its [33] standing if its volume fluctuated so greatly from year to year, due to changes in producer-patronage, as to prevent it from regularly supplying its dealer cus- tomers with the quantities of products they needed. Because the extent of such damages cannot accurately be determined before an actual breach, the liquidated damages form of relief may be inadequate. It is in such cases that injunctions and specific performance are preferable forms of remedy. They insure the association of getting delivery. Therefore, associations having obligations of this type may, at times, find these remedies invaluable. This may explain why so many associa- tions (40 per cent in our sample) include such provisions in their contracts. Al- though associations seldom have to use them, these provisions provide an added form of insurance against the damages suffered by nonperformance. Payment of litigation costs. Most marketing contracts provide that if the association must bring a suit to enforce performance the patrons will pay the costs of such litigation. A typical litiga- tion expense clause reads: The Member hereby agrees to pay all expenses arising out of or caused by such litigation and a reasonable attorney's fee to be fixed by the court rendering such judgement and the Associ- ation shall be entitled to the benefit of any lien securing payment of any such judgement. Such a clause protects the association from being litigated into bankruptcy. VI. IMPORTANT INTEGRATING PROVISIONS Most discussions of cooperative mar- keting contracts deal only with their provisions regarding duration, delivery, and legal enforcement. While important, these provisions emphasize only one of the integrating functions of marketing contracts — that of delivery. This is cer- tainly the contract's most important function in most cases. It binds other- wise independent farmers together by guaranteeing each of the others' perform- ance. Emphasis on this function of mar- keting contracts has apparently led to neglecting the study of other functions, yet marketing contracts often can and do perform other important integrating functions besides insuring patron de- livery. As has been noted earlier, successful / vertical integration of farm enterprises through the cooperative method is a com- plex process. It is much more difficult than when individual business firms ex- pand vertically. When large numbers of farm businesses unite to form a jointly owned operation, it is very difficult to coordinate their production and market- ing operations. Yet close coordination may be essential to marketing efficiency for the group. As previously mentioned, when farmers form a cooperative, they must relinquish to it some sovereignty over certain of their production and mar- keting decisions. The extent of such subordination de- pends in part on the amount of co- ordination between patrons and their association necessary to insure operating efficiency. This depends largely on the peculiarities of the commodity the co- operative markets, the nature of the mar- keting functions it performs, and the character of the markets in which it oper- ates. For example, single-function asso- ciations may require little coordination. A livestock association whose only function is to sell need not be closely integrated with its patrons. When as- sociations perform many complicated marketing and processing functions, however, they may have to be closely in- tegrated with their patrons. Today, more and more associations perform more than a single function. In the following pages, we will look at vari- ous types of coordinating or integrating provisions included in California mar- keting contracts. We shall analyze them [34] so as better to understand their function. Finally, on the basis of our findings, we shall try to develop some principles to guide associations using marketing con- tracts. Delivery and acceptance provi- sions. Cooperative marketing contracts may perform many integrating functions. But their primary integrating purpose is to bind patrons to deliver part or all of their crop to their cooperatives during a specified period of time. As pointed out earlier, if members are not so required to patronize their association, coopera- tion may be a weak and often ineffective form of vertical integration. But when members must market through the asso- ciation for a period of time, they become closely integrated with it. They are then, in fact, an integral part of the associa- tion, and its management, assured of their continuing participation, can plan accordingly. The delivery and acceptance provisions of an association's marketing contract are the legal basis of such integration. They spell out the legal rights and duties of all association members in this re- spect, as well as those of the association to its members. Delivery provisions. Nearly all Cali- fornia cooperatives using contracts re- quire patrons to deliver all of a particular commodity owned or controlled by them. Usually the contract excludes that part of a commodity consumed on the farm. However, local dairy associations of federated cooperatives typically are di- rected to market all of their milk prod- ucts through the central except those sold in their "local market." Citrus locals are not given this right. In this study, "total delivery" clauses refer to a patron's ob- ligation to deliver his entire crop not consumed at home, as well as to local dairy associations compelled to market through their central associations all products not sold in "local markets." All but 14 of the 117 marketing con- [35 tracts analyzed included total delivery provisions (table 6). The following are typical total delivery provisions included in California marketing contracts: ... it shall be the duty of each member of the Association, and each member agrees to deliver to the Association for packing and marketing ... all fruit matured during membership upon the member's lands. (Citrus association) . . . the grower agrees to deliver to the Associa- tion at its ginning plant ... all cotton produced by or for him or acquired by him as landlord or lessor to be ginned by the Association. (Cot- ton gin) It shall be the duty of each member of the As- sociation ... to deliver to the Association for processing and marketing, and to market through the agency of the Association all of the milk and cream produced by the cows of such member during membership. (Dairy asso- ciation) Eight cooperatives not requiring or permitting total delivery of their patron's marketable crops were wineries. These associations require patrons to deliver specified absolute amounts of grapes (expressed in tons or acreage) rather than their entire crops. The six other associations not requiring or permitting total delivery were prune dryers. Acceptance provisions. Just as nearly all patrons must deliver their en- tire crops, so must most cooperatives accept delivery of their patrons' entire crops. Only 21 (17.9 per cent) of the 117 contracts inspected included specific pro- visions permitting cooperatives to limit the amount of their patrons' crops which they would market (table 6). Provisions permitting limited accept- ance due to "Acts of God" were not in- cluded in this count. In fact, many co- operatives include such provisions in their marketing contracts. A typical pro- vision of this type reads: In the event that either party to this agreement be unable to perform by reason of strikes, lock- outs, fire, explosion, war, Act of God, or other happenings or cause, beyond the reasonable control of such party, performance hereunder by such party shall be excused as long, but only so long and to such extent as performance be prevented thereby. ] *> c §3*- O OJ N q 00 l> W H rj °°^ c8 8 o6t>cr>TH^c5o«dT-i M S 00H«O^NtOHl»H £o| co tH c8 to 13 & l> MrlHMc7>H(NO)W iH ONOO^Nt-HOOH o& tH i-H H o f > CO COOi-IOOi-l©«0iH *u iH tH tH k "1 .£ :0 >>$ * 2 *3 3-5 o o ■* ••^tHt^OO'HiH'^O « u Png. 5 •- *2 a> ■- CO * > X .a s c3 "C3 "3. lO lONWOONH^d •£ ± P2 1 A CO C H © :0 O £ « 2£ a O OOCNOOCOOCOtH .5 6 c a- 0) £ CO C A 5 * JB M «^ S e8 • 3 bo +3 V O ► O ^OOOt-NCOt-OOO d Cal tegra ^ m h eg h cn nh o c *- — u S cs CO CD CO j a "fl to 3 > s s d 5 S '{ 5 ee c» a O W -u £> *R CD S w w 'B f p c 1 :0 O O eh ij O* W Q H Fourteen of the associations including limited acceptance provisions were the above-mentioned wineries and prune dryers. The wine associations establish specified amounts of various grape vari- eties which they will accept from mem- bers each year. Members cannot deliver more or less than such specified amounts without the special approval of the asso- ciation. The amounts to be marketed are usually agreed to annually or when con- tracts are renewed. Prune-drying associations need accept from members only amounts equal to the drying space they contract for, and mem- bers must supply up to this amount if available. Members having more prunes than can be dried in the space they have contracted for must dry them elsewhere if the association requests them to do so. The limited acceptance provisions in the contracts of the other seven associa- tions (marketing turkeys, eggs, beans and rice, olives, deciduous fruit, figs, and dairy products) permit the association to limit, when necessary, the amount it will market for its patrons. Such limited acceptance clauses are usually accom- panied by "prorate" clauses requiring that all patrons be treated alike when their cooperative decides not to accept total delivery. The following are further examples of limited acceptance clauses: . . . the grower shall sell to the Corporation each and every year after the date of this agreement, such number of tons of grapes as may be agreed upon from time to time between the Corpora- tion and the grower, it being understood and agreed that the grower shall have the privilege of selling and delivering to the Corporation from time to time such proportion of all the grapes which the Corporation shall, from time to time, decide to accept and receive as the number of shares of stock held by the grower shall bear to the total issued and outstanding stock. (Wine association) The association reserves the right to prorate the delivery of tonnage agreed to be delivered by the grower, and, if necessary in the sole dis- cretion of the association, to reduce the tonnage agreed hereby to be delivered, so long as the tonnage shall be prorated with other growers equitably. (Fig association) The producers agree, notwithstanding any other provision herein, upon notice via registered mail, to accept as an enforceable condition of this agreement, any maximum quota for de- livery of milk under this agreement, which shall be established, as needed, by the Board of Di- rectors. (Dairy association) When should associations limit acceptance? Although most California cooperatives do not limit the amount members may deliver annually, some do. Under what circumstances, then, should cooperatives set quantity limits? The correct answer to this question depends on a number of things. The most important of these are: the objectives of the association; the character of its mar- keting facilities; and the nature of the market in which it sells its processed products. First, how does the nature of an asso- ciation's marketing facilities affect this matter? If an association has very flexi- ble marketing facilities there may be little need to limit the amount of products members market through it. For example, associations acting simply as the broker or agent of farmers in selling their prod- ucts generally do not have to limit the amount they market for members. (Of course, efficient operation may require that members market exclusively through their association.) A livestock associa- tion representing members in an auction or other market can change its volume of operation from month to month, week to week, or even from day to day, with relative ease. It can do so because in its operations there are few "fixed" factors which rigidly control its scale of opera- tions. But all types of associations obviously do not enjoy such operating flexibility. Most California cooperatives perform one or more processing functions; and because processing involves plant facili- ties and equipment of various sorts, such associations have some fixed factors which may limit the scale of their opera- tions in the short run. Although all proc- essing plants have some fixed factors, [37] they may still have very flexible opera- tions. For example, a fruit-packing plant can vary its operations by changing the number of workers employed at a given time, by changing the length of hours worked by a given labor force, or by increasing the number of shifts. Most other processing plants have similar flexi- bility. And although temporary plant gluts may still develop, once a plant reaches its peak capacity, such gluts may be reduced by controlling members' har- vesting and/or deliveries. Such action seldom involves actual control over the amount members market through their association in a given season; rather, it involves modifying the delivery time of their supply (see page 41). If a plant is extremely inflexible as to the amount it can handle during the sea- son, and if the above method of modify- ing supply is impossible, an association may find it necessary to set absolute limits on the amounts members market through it each season. Next, how may the competitive nature of the market in which cooperatives sell require them to set limits on members' deliveries? Suppose, first, that an asso- ciation sells in a perfectly competitive market, that is, one in which it can sell unlimited amounts at prevailing market prices. If such an association's market- ing facilities were also completely flexi- ble, it would not have to set limits on the amount members could market through it because the association would get the same price for each unit it sold for its members. But suppose an association sold in something less than a perfectly competi- tive market — that is, one in which it could not sell unlimited amounts at go- ing market prices. This would come about because an association "differen- tiated" its product through advertising or otherwise. This might enable it to get a premium price for its product, but ob- viously it could not sell unlimited amounts at such premium prices. There- fore, it could maximize its members' profits only by limiting the amount they sold through their association. One way of accomplishing this would be to specify annually the amount members could mar- ket through it. Otherwise, members might expand their production until the association would be unable to sell all of their products at premium prices, thus defeating the purpose of its product- differentiation program. Thus, the advisability of limiting de- livery turns largely on the flexibility of an association's marketing facilities and on the competitive character of its mar- kets. How do California associations fare in these respects? We have not here studied the flexibility of California cooperatives or the nature of the markets in which they sell. But familiarity with California associations suggests that the bulk of these do have quite flexible processing and marketing facilities and do sell in highly competi- tive markets. 13 Insofar as this is true, it follows that most associations are follow- ing sound economic policy in not limiting their members' deliveries. However, some associations do limit deliveries and ap- parently have sound reasons for doing so. Let us look at the associations in our sample which most commonly place some 13 It should not be inferred that merely be- cause some California cooperatives market a large proportion of the total supply of some crops they have significant long-run market power, that is, face an inelastic demand. Co- operatives acting alone are unable to control the total supply of particular agricultural prod- ucts. Even if a cooperative does successfully control the supply of its members, it cannot control that of nonmembers. Consequently, even when an association markets a large share of total supply, it is usually forced to behave very similarly to firms selling in very competitive markets. As we saw above, such associations may gain nothing by limiting members' deliv- eries. The discussion in the text applies most directly to associations selling differentiated products. When you differentiate your product, you are, by definition, selling a product that no one else sells. Then, by controlling your supply, you are able to exercise some control over price. 38] restraints on the amount of products they will handle for their members — prune dryers and wineries. The amount of prunes that a prune association can handle each year is limited by two factors. One is the rela- tively short harvesting period after which the crops must be dried as soon as pos- sible. The other is the inflexible drying process; once all dehydrators are filled, the plant's capacity cannot be increased nor can the drying period be speeded up. This combination of factors definitely limits the volume of prunes that can be dried each year by plants with a given fixed investment. Associations must therefore annually limit the amount they handle for each member. No long-run limitation need be imposed in this case. Fixed plant can be expanded quite easily from year to year, so if members' acre- age increases or new members are added, additional capacity can be built before the next crop. Thus, the short-run inflexi- bility of the association's processing fa- cilities is chiefly responsible for limiting members' deliveries. Eight of the nine wine associations in our sample also limit delivery, but apparently for other reasons. Here it is not only inflexible plant capacity but also the character of demand that encourages them to limit members' deliveries. Wineries (both cooperative and non- cooperative) probably do not make very large long-run noncompetitive profits, for the large number of firms in the in- dustry and the ease of entry makes this an effectively competitive market. Some individual firms, however, may face an inelastic demand for their products. This results from product differentiation, which enables them to sell their products above bulk-wine prices. However, be- cause they cannot sell unlimited amounts at premium prices, the amount members market through their associations must be limited; otherwise, they might often be forced to operate at other than op- timum outputs. Wineries also have an incentive to control acceptance because their plants are relatively inflexible in the short run. Because the wine-aging process requires time, available storage space always fixes an upper physical limit on output. These two factors in combination may make it imperative for wineries to con- trol their volume. To do otherwise might cause them to operate very unprofitably in many years. Understanding of these basic economic conditions makes it clear why nearly all California cooperative wineries have included limited accept- ance provisions in their marketing con- tracts. They are following sound eco- nomic procedure in doing so. Today these factors are not always im- portant to all California cooperative wineries. Because many are operating well under capacity, there is little likeli- hood of their plants' being glutted in the near future. Because many do not sell differentiated products, they need not control their supply for the market rea- sons mentioned above. However, some associations do have long-term contracts with noncooperative marketing firms. When these call for the delivery of spe- cific amounts of wine each year, an as- sociation may have a definite need to limit members' deliveries. But if such contracts simply specify delivery of an association's entire output to a buyer, the association need not limit members' de- liveries. The one association in our sample that does not have a limited ac- ceptance provision has such an outlet for its wine. However, associations that have suc- cessfully differentiated their products have found it necessary to limit mem- bers' deliveries in order to reap maxi- mum benefits for their members. Quality-Control Integration Provisions An important factor determining the net revenue cooperatives are able to re- turn to patrons is product quality. Much [39] of a product's quality is determined by the skill and care exercised by the asso- ciation in processing and marketing. In many agricultural products, however, the quality of the end-product sold by the association, whether processed or not, is determined largely at the farm level. Therefore, maximization of the associa- tion's net returns may require that the association control some of its individual growers' production practices. Many California associations recog- nize these facts. They have inserted a variety of quality-control provisions in their marketing contracts. Most fre- quently these include: (1) setting quality requirements; (2) setting harvesting methods; (3) harvesting of patrons' crops by the cooperative. Quality requirements. Practically all cooperatives exercise some control over product quality, and about two- thirds of the contracts inspected specifi- cally gave the association such authority (table 6). Some cooperatives go further than others in this respect. For example, in one dairy association the Board of Di- rectors may "from time to time establish proper rules and regulations for the feed- ing, milking and caring for dairy herds." A winery's marketing agreement states: The Association reserves the power to set stand- ards of maturity, quality and sugar contents which must be met by all grapes delivered by the grower, and to provide reasonable penalties for differences therein. Harvesting requirements. Many fruit and vegetable associations go be- yond setting quality requirements. They frequently establish harvesting and han- dling practices as well. This insures that patrons will deliver products of the necessary quality. Practically all of the citrus associa- tions and about one third of the other fruit and vegetable associations in our sample permit the association to set har- vesting requirements (table 6). Harvesting of crop by associa- tion. In the citrus industry (and to some extent in deciduous fruits and in vege- tables) many associations go a step fur- ther. They actually arrange for the harvest or perform it themselves. About 80 per cent of the citrus associations in our sample are legally permitted to per- form this function (table 6). A typical provision giving authority to an associa- tion to harvest its patrons' crops reads: The picking, hauling, selling and marketing of said citrus fruit shall be done by the Associa- tion or under its direction in accordance with rules and regulations of the Association. Sometimes associations harvest their members' crops because they can do so more economically and efficiently than the members can. This occurs if special- ized harvesting machinery is needed which requires very intensive use to pay for itself. For example, a cooperative processing fruits and vegetables owns spinach-harvesting equipment because its members cannot efficiently operate their own, either because of the size of their crops or because they do not grow spinach every year. Why control quality? Quality- control provisions have two chief objec- tives. First, they aid individual patrons in getting a higher-quality product to the market. Second, they protect patrons from being harmed by the delivery of inferior products by some patrons. Co- operative associations whose chief objec- tive is the maximization of members' in- come may properly concern themselves with both objectives, although the latter is more important from the viewpoint of the entire association, and most quality- control provisions are apparently di- rected toward it. For example, grape quality is ex- tremely important to wine quality. If some patrons use cultural and harvest- ing practices resulting in poor-quality grapes, pooling of their grapes with those of other members might result in a low- [40] quality wine. Thus, all members could be harmed by the practices of a few. To avoid this, wine associations can set grape maturity, quality, and sugar- content requirements. In citrus, decay is a great enemy of quality. Decay is caused by blue and green mold spores, which cannot pene- trate healthy fruit (Gardner and McKay, 1950, pp. 30-31). If the fruit's skin is damaged, however, the spores are able to enter and start the decay process. Be- cause skins are easily damaged during picking, skilled and careful pickers must be employed. Pickers must wear gloves, use special clippers, and cut rather than pull the stem. These and other precau- tions must be taken to prevent fruit dam- age. Most California citrus cooperatives have met this problem by taking over the harvesting job for their patrons. Thereby they insure a final product of the highest possible quality. Timing of Delivery Efficient operation of many coopera- tives requires more than assurance that a given quantity and quality of a product will be delivered during the year. Timing of delivery may also be important for various reasons. Perhaps most fre- quently, timing of delivery is necessary to keep a cooperative's processing, stor- age, or other facilities from being peri- odically operated over or under capacity. In other cases, delivery time is important because the cooperative itself has an ob- ligation to deliver at some particular time. Finally, for an association to maxi- mize its patrons' returns, it may also have to control delivery in order to prevent temporary market gluts or to take ad- vantage of temporary shortages. For these and other reasons, successful member-cooperative integration requires the member to give up his control over delivery time. This decision must be made in the best interests of the entire association. Many California cooperatives recog- nize this fact and include specific provi- sions in their contracts giving this right to their association. A typical provision insuring delivery at the association's dis- cretion reads: The time or times when fruit shall be picked for marketing shall be determined in accord- ance with general rules to be established by the Board, which rules may be changed from time to time. Of the contracts inspected, 71 (60.7 per cent) give associations a legal right to set a specific delivery time (table 6). All but one citrus association and over half of the other fruit and vegetable as- sociations in our sample have such a provision. Of the other associations, only six in our sample — one nut, two field crop, one poultry, and two dairy associa- tions — have a legal right to set delivery time. Other associations have provisions requiring delivery before a particular date. These have not been considered here because they are less important in regard to integration. Associations marketing some products need not fix delivery time because pa- trons must deliver within a relatively short period in any event. Since dairy and poultry products, for example, must be delivered fairly quickly to prevent spoilage, no legal obligation setting de- livery time may be needed. But some associations whose contracts do not fix delivery time should legally be able to do so. About 40 per cent of the marketing contracts inspected did not give coopera- tives control over delivery time. Never- theless, many of these associations probably can legally set delivery time. Bylaws of many associations give the di- rectors and officers quite broad discre- tion in marketing patrons' crops. Such discretionary powers may well give as- sociations power to specify delivery time. We have found no legal cases setting forth the limits of a cooperative's rights in this respect. [41] Crop inspection. Judicious setting of delivery time and establishment of control over quality require the coopera- tive to have quite specific knowledge of its members' crops — their volume, qual- ity, and state of maturity. Some associa- tions make certain they receive this information by giving the association the right to inspect patrons' production oper- ations. Only 11 (10 per cent) of the contracts in our sample included such provisions. Ten of these were fruit and vegetable associations. The other was a turkey egg association. The following clause from an avocado association's contract gives it the right to specify delivery time and also to in- spect members' crops (this contract also includes a provision requiring members to report an estimate of their yields on request) : The time, place, manner and quantity of de- livery of avocados to Calavo are to be directed by it in order to enable Calavo to properly receive, pack and market the fruit of all its members. Calavo shall have the right, at rea- sonable hours, to inspect members' groves for the purpose of crop estimate and inspection. Cooperatives may have a legal right to inspect crops even when it is not speci- fied in the contract. The courts probably would rule that this right is implied in provisions giving associations the right to set delivery time and to harvest pa- trons' crops. (If this is the case, nearly all citrus and most other fruit and vege- table associations have this right.) Even so, it may be advisable to include such a provision for the patrons' information. Pooling and Grading Provisions Very often efficient processing, stor- ing, and selling require product pooling, that is, commingling by an association of its patrons' products. (Cooperatives also apply the pooling principle to patron expenses and returns.) By giving their association the legal right to pool, patrons permit complete physical inte- gration of their products. Of the contracts inspected, 89 (76.1 per cent) give the association a legal right to pool its patrons' crops (table 6) . These provisions permit several types of pools. Most frequently mentioned are pools by quality and time. Quality pools insure that members will receive pay- ments reflecting differences in market conditions at different times of the year. For example, the first strawberries of the season usually command a relatively high price. Therefore, strawberry associ- ations ordinarily establish separate pools during the season to reward early pro- ducers. A usual concomitant of product pool- ing is the averaging of returns to grow- ers. Under the pool principle, each grower contributing products of like quality to a particular time pool receives the same return per unit. This has the advantage of spreading price risks over the pool participants. Of course, it also has the disadvantage that it may decrease some patrons' returns. As noted earlier this possibility may at times encourage some patrons to market outside their as- sociation. Then, only the total delivery clause of the marketing contract may in- sure patron performance. Because pooling requires commingling of products of like quality, cooperatives must devise grading systems. Eighty-one (69.2 per cent) of the contracts inspected gave cooperatives the right to establish grading systems. Some associations re- serve exclusive rights to set up and in- terpret such grades to prevent grading disputes from causing poor member re- lations; others provide for arbitration in case of disagreement. A typical provision of the latter type reads: Any dispute over quality shall be settled by arbitration. Each party shall appoint one arbi- trator and said arbitrators shall jointly select a third and the decision of the majority of said arbitrators shall be binding upon the parties. All expenses of the arbitration shall be borne by the party against whom the decision shall be rendered. [42] Crop Size Reports Cooperatives must make many plan- ning decisions before members deliver their crops. They must often build to increase capacity. They must hire em- ployees. They must often contract with third parties. They may have to estimate the market price of the coming crop. Accurate decisions on such matters re- quire knowledge of future crop volume. Total delivery contracts give some infor- mation on this score, but not enough. They only tell how many patrons will deliver their crops in a given year. But the association must also know some- thing of the crop size of its patrons. Past crop sizes are not necessarily adequate guides because crop sizes of individual patrons may vary from year to year. Also, patrons may buy more land or sell some of their farm land. They may shift from one crop to another. Their yields per acre may vary greatly each year. For efficient operation the association must be kept closely informed of such changes. Many cooperatives realize this. Some feel that this information is so essential to efficient integration that they have given it a legal basis in their contracts. Thirteen (11.1 per cent) of the contracts inspected require their patrons to report the size of their operations from time to time (table 6). There are two types of crop-reporting provisions: one requires patrons to re- port the yield of their current crops; the other requires a report of any change in acreage from one year to the next. Provisions of the former type, permit- ting the association to plan ahead for the disposition of current crops, are in the contracts of eight associations (four mar- keting beans and one each marketing figs, peaches, nuts, and avocados). The following almond association's crop-re- port clause is typical: As soon as the fruit has formed upon the tree each year and whenever thereto requested by the Manager of the Exchange, the Member agrees to mail to the Exchange ... an estimate of the yields of almonds covered by this con- tract, and also, each year immediately upon the harvesting of such almonds to mail to the Ex- change a statement of the amount of such yield. Six associations (three olive and one each marketing avocados, hay, and dairy products) require their patrons to report changes in acreage or number of live- stock. In contrast to current crop-size information, this information is useful for longer-term planning. The following acreage-reporting provision of a hay- marketing association is typical: It shall be the duty of each member, and each member agrees, promptly to notify the Associa- tion in writing of any change in hay producing lands of the member within the market district resulting from the acquisition of additional lands or the disposition of lands theretofore farmed. Other Marketing Contract Provisions California cooperatives use a variety of contract provisions in addition to those already discussed. Some of these reflect other problems in successfully in- tegrating patrons with their cooperatives. Others are common to any contract in- volving transfer of ownership or the granting of agency. The following provi- sions are most often found in California cooperative marketing contracts in ad- dition to those treated above. We have not enumerated the frequency of all of these provisions. Association's independence of control. Cooperatives exist and operate for the benefit of their farmer-owners. For efficient operation, however, they should not be subject to too much inter- ference from individual patrons. Once the association elects its board of direct- ors, the board and its appointed manage- ment must have the right within the framework of broad policy decisions to pursue what they think is a desirable course of action. They must be able to handle and market their patrons' crops without continual interference from in- [43] dividual members. Simply put, their con- trol over operations must be independent of the actions of individual members. Without such independence, coopera- tion would often be an unworkable form of integration. Each patron could con- tinually make demands regarding the way he thought things should be done. To prevent this, many cooperatives in- clude in their bylaws provisions requir- ing patrons to give up control over their association's operating policies. Some place special emphasis on such independ- ence in matters pertaining to marketing by including appropriate provisions in their marketing contracts. This does not mean, of course, that members have no voice in management policy. On the contrary, each time they elect their board of directors, they ex- press themselves indirectly in this re- spect. Moreover, if the board of directors ignores the desires of an important seg- ment of the association, it faces the risk of losing its patronage. This threat may force consideration as well of the de- mands of a small minority which could not hope to force such recognition through the election process alone. But although the patrons ultimately exercise much control over management policy, independence-of-control clauses give an association's management a free hand in following its day-to-day oper- ating policies. The following clause from a dairy association's marketing contract gives it such "independence of control" : All matters pertaining to the handling and marketing of products shall be transferred solely in the name of the Association, or in the name of any agent or agency to or through which said products may be consigned or shipped for marketing or ultimately marketed. ... No member by virtue of being the owner of, or having furnished any products, shall ex- ercise any control over the Association in regard to either handling or marketing said products, or the conduct of the business of the Associa- tion. In all of such matters the Association may in good faith use its own discretion and judge- ment, free from any direction from the member furnishing the products. This particular contract is an agency contract. But some associations insert independence-of-control clauses even when they use purchase-and-sale con- tracts. For example, a hay association that uses a purchase-and-sale type of mar- keting contract includes the following clause: No member by virtue of having been the owner of, or having furnished any hay shall exercise any control over the association in regard to either the marketing of said hay, or the conduct of the business of the Association, in all of which matters the Association may, in good faith, use its own discretion and judgement, free from any direction from the member fur- nishing the hay. Such clauses may be included either in an association's bylaws or in its market- ing contract. But because they emphasize the fact that growers relinquish control over their products after delivery, they might most properly be included in the marketing contract. They would then be with the other provisions spelling out the member's duties and rights in mar- keting his crop. The cooperative method of op- eration. An important and integral part of all marketing contracts between an association and individual members is the basis on which members will contrib- ute to the capital needed by the associa- tion and to its operating expenses. These financial arrangements are spelled out in detail either in the bylaws or in separate marketing contracts or in both. These financial arrangements vary consider- ably between associations handling dif- ferent products or performing different services, and also sometimes between associations performing similar services. In general, marketing contracts specify that members contribute to the capital needed by an association pro rata to patronage, that is, according to the use each member makes of the services rendered by the association. Special pro- visions are usually included in contrac- tual documents to ensure the separate [44] identity of the equity of each member in the net assets of the association. Members also contribute to the annual operating expenses of the association on the basis of patronage. Cooperatives con- duct their affairs on the "operation-at- cost" principle. Again, specific provi- sions are made in the contractual docu- ments whereby any operating overages (the excess between deductions for ex- penses and actual expenses) will be pro- rated back to members at the end of a fiscal year. The association, as such, will not make any profit. The excess of operat- ing income over operating expenses at the end of a fiscal year may be returned to members either as a prorated patronage refund or as a prorated addition to the capital contributed by members. Such provisions leave no doubt as to the cooperative's financial obligations to its members (and in some instances also to nonmember patrons) . They guar- antee equitable treatment to all patrons. The following clause appearing in the bylaws of a dairy cooperative is typical (except for minor differences in word- ing) of clauses pertaining to operating costs: Section Four — Non-Profit Character. The gen- eral purpose of this association is to serve as agent for its members at cost, pro-rated accord- ing to volume and value of business done; and in accordance therewith its business and oper- ation shall be conducted at all times without profit to the association as such and upon a non-profit cooperative basis, for the primary benefit of its members, turning back to them all proceeds less incurred expenses on a pro- portionate volume or value basis. To this end, all proceeds from the sale of members' products less only the Association's expenses, are hereby expressly declared and acknowledged to be the property of members whose products are so sold. Marketing function cooperative is to perform. It is a common practice for marketing contracts to spell out the type of processing or other marketing functions which the cooperative is to per- form. Such clauses leave little doubt as to the marketing functions the association is to perform for its patrons. On the other hand, they also assure the patron that his products will be handled in a particular way or processed into a par- ticular product. The following clause from a winery's marketing contract is typical of the broad discretionary power given to the associa- tion's management in marketing mem- bers' crops: The Association agrees to manufacture such grapes together with the grapes delivered by other growers into wine, brandy or such other products as the association may determine . . . Industry marketing agreements. Many of California's perishable agricul- tural products have been, or are now, marketed under industry marketing agreements or orders. The main purpose of these government-regulated programs is to stabilize farm product prices through orderly marketing. These pro- grams are permitted by both state and federal legislation. The major laws af- fecting California farmers are the Agri- cultural Marketing Act of 1937 and the California Marketing Act of 1937. Before marketing agreements can be instituted, they must be assented to by a certain percentage of the producers. Under federal marketing orders, two- thirds (for California citrus and indi- vidual-handler pools in milk it is three- fourths) of the voters in a referendum must approve the order. Under the Cali- fornia Marketing Act, there are three ways of obtaining approval: (1) by writ- ten assent of 65 per cent of the total pro- ducers of the product covered by the order, who also produce at least 51 per cent of the product; (2) by approval in a referendum by 51 per cent of the total producers of the product, and by pro- ducers who produce 65 per cent of the product; and (3) by approval in a ref- erendum by 51 per cent of the producers of the product, who also produce 51 per cent of the total product. The California Director of Agriculture determines whether approval should be given by written assent or referendum. [45] Both the Federal and State Marketing Acts, however, permit a cooperative to give the approval of all of its members when authorized by them to do so. The California Marketing Act reads: In finding whether such marketing order is as- sented to in writing or approved or favored by producers, the director shall consider the approval of any nonprofit agricultural coopera- tive marketing association, which is authorized by its members so to assent, as being the assent, approval or favor of the producers who are members of, or stockholders in, such nonprofit agricultural cooperative marketing associa- tion." The Agricultural Adjustment Act as amended, reads as follows: Whenever . . . the Secretary is required to de- termine the approval or disapproval of pro- ducers with respect to the issuance of any order, the Secretary shall consider the approval or disapproval by any cooperative association producers, bona fide engaged in marketing the commodity or product thereof covered by such orders, or in rendering services for advancing the interests of the producers of such com- modity, as the approval or disapproval of the producers who are members of, stockholders in, or under contract with, such cooperative association of producers. 15 When a farmer gives such authority to his association, he, in effect, agrees to abide by the majority decision of the association on the question of industry marketing agreements. This gives the association a stronger voice than it other- wise would have. It permits an associa- tion's directors to speak and act as the representatives of the entire association on these matters. The individual farmer's agreement partially to relinquish his power over this decision is another important form of in- tegration. But in principle it is no dif- ferent than when he agrees to let his association establish quality, delivery, or other requirements affecting his produc- tion or marketing. He relinquishes his rights over such decisions because he 14 Agricultural Code of California, revised to Sept. 9, 1953, 1300.16 (3). 15 Public Law No. 320-74th Congress, section 80 (12). believes this will result in greater over- all operating efficiency, which in the end is to his economic benefit. Furthermore, an association's directors are not likely to vote for an agreement unless they be- lieve the bulk of the members favor it. Otherwise, they run the risk of stirring up membership dissatisfaction. Very often associations poll their members at annual meetings or in other ways to find out how the membership feels on an im- pending marketing agreement or order. How many California cooperatives are integrated in this way? Our available evidence does not permit a very accurate estimate on this score. For although this is essentially a marketing contract pro- vision, apparently few California coop- eratives include it in their marketing contracts. Of the fruit, vegetable, nut, and dairy marketing contracts inspected, only three include such provisions. The other types of associations in our sample do not handle products affected by state or federal marketing agreements. Such provisions in marketing contracts are rare not because the cooperatives fail to use them but, rather, because this authority is generally included in the by- laws, among the powers of the boards of directors. We inspected the bylaws of 34 fruit, vegetable, and dairy associa- tions, 18 of which gave the associations' boards of directors the discretion to as- sent to marketing orders on behalf of their members. These consist of 8 of the 20 citrus associations, 9 of the 11 other fruit and vegetable associations, and 1 of the 3 dairy associations. (We did not inspect any nut association bylaws be- cause those in our sample use separate marketing contracts.) This small sample suggests that more than half of such asso- ciations give their directors this author- ity. A typical bylaw clause gives the direc- tors the following powers: To assent in writing or otherwise, on behalf of the members of the Association and all pro- ducers of fruit marketed or to be marketed by [46] Association to any marketing order or amend- ment thereto pertaining to and regulating, di- rectly or indirectly, the marketing of fruit marketed by Association, made or proposed to be made by a commission, committee, individ- ual, government agency or officer, pursuant to any present or future law of the State of Cali- fornia or of the United States including, but not limited to, the California Marketing Act of 1937, as amended, and the Agricultural Pro- rate Act of California (Chapter 754, Statutes of 1933), as amended. By the foregoing provi- sions, the members of Association intend, among other things, to authorize Association to assent to marketing orders on behalf of such members, as producers, as such assent is re- ferred to and provided for in Section 1300.16 of the Agricultural Code of California. Whether or not such authority should be included in an association's bylaws or its marketing contract is largely a matter of preference. Legally, it makes no dif- ference. The California law simply re- quires that the association show proof of its authority to act for its members in this respect. The United States Market- ing Law does not require such proof. It seems, however, that such provisions would be more appropriate to the market- ing contract, where several associations have put them. This has the advantage of placing them with other important legal provisions integrating the marketing ac- tivities of the association. Method and time of payment. Most contracts include payment provi- sions of one sort or another. Of the con- tracts inspected, 87 (74.4 per cent) in- cluded specific payment provisions. Fre- quently these provisions call for the asso- ciation to make a payment at the time of delivery or shortly thereafter. For ex- ample, a raisin cooperative's contract reads : Ten days after the receipt of said raisins by Buyer L Association] at the place mentioned above, Buyer agrees to make Seller as large an advance per pound therefore as in its judge- ment financial and market conditions will justify. A subsequent provision of this associa- tion provides: Progress payments in due proportion shall be made as respects each pool from time to time as rapidly as in the judgement of Buyer it is practical to make such payments and such payments shall be continued from time to time until the accounts of each pool are fully settled. Termination and Rejoining Provisions All but 10 of the 117 contracts in our sample include provisions setting forth the way in which patrons can terminate their contracts. These usually are part of the "duration" clause. But only 59 (50.4 per cent) spell out the way in which the association can cancel the contract or refuse to renew it. Quite frequently contracts also include a clause setting forth the conditions for rejoining a cooperative after a patron leaves it. Usually these require a waiting period of one year and the consent of the board of directors. Customarily, termination clauses also spell out the association's duties concern- ing the repayment of the grower's invest- ment in the association. The following "termination" clause of a bean association includes all of the items mentioned above. It is quite typical of California contracts. This Agreement and Membership in the Co- operative may be canceled and terminated by any signer hereof, not indebted to the Coopera- tive, by notifying the Secretary of the Coopera- tive in writing prior to June 1st of any year. The effective day of cancellation and termina- tion will be the 1st day of January next fol- lowing receipt of such notice. The member withdrawing in accordance with the provisions hereof shall be paid the amount contributed by him as a Membership fee within sixty (60) days after the effective date of such withdrawal. Such Member shall also be paid the amounts contributed by him to the Revolving Fund at the time or times as same would have been paid had he continued as a Member. Any Member so withdrawing shall not be eligible to be a Member again until the next year following the effective year of his withdrawal and then only by a vote of the Board of Directors of the Cooperative. In this connection the bylaws of some associations provide for the expulsion [47] or cancellation of membership of mem- bers who do not comply with certain conditions. For example, the bylaws of a poultry association provide that: The Board of Directors shall have authority to, and may, cancel the membership, and/or expel, a member for the reasons and subject to the procedures outlined herein. Following this are several paragraphs that give the reasons for termination or expulsion and the procedures to be fol- lowed. One of the reasons for termination would be failure to patronize any de- partment of the association in the mini- mum amount of $100 in any one year. Members are assured of the right of hearing before termination or expulsion. This type of provision is frequently written into bylaws because an associa- tion has certain minimum expenses in connection with record-keeping even for members who are no longer active. In an industry like the poultry industry, where there is a relatively heavy turn- over among poultrymen, it gives an asso- ciation an opportunity to eliminate from its membership persons no longer ac- tively engaged in poultry production or who in other ways are not using the facilities of the organization. Transfer of obligation to per- form. In most fruit associations (and in several other types), at time of join- ing or when they sign a marketing agree- ment members are required to designate the land or lands from which they will be obligated to deliver fruit. They are, how- ever, relieved of such delivery obligations should they make a bona fide sale of any portion of such lands — provided they give written notice of such sale to the association. The bylaws or marketing agreements of many fruit-marketing associations, however, provide for the transfer of de- livery obligations if land of a member is transferred in any way other than by bona fide sale — for example, by gift or death of a member. The following is a typical provision in such cases: . . . the obligation of the member in respect of the fruit produced on the transferred lands which was existing immediately prior to such transfer, shall continue and run with such fruits and the lands on which grown and shall repre- sent a right therein of the association, and such obligation shall be binding upon the suc- cessor of interest or transferee; and such fruit and the transferred lands shall vest in and be held by the transferee or transferees, including any personal representative, heirs, legatees, devisees, surviving joint tenant receiver and trustee in bankruptcy, subject to the same rights and obligations as existed immediately prior to the transfer, but also subject, never- theless, to the right of withdrawal by such transferee or transferees upon the notice, at the time, and in the manner provided in Sec- tion 4.01 (c). Guarantee of control. Many con- tracts include a clause requiring that the patron actually have control of the crop in question. A typical "control" clause reads : This grower expressly warrants that he is now in a position to control said crops and would be able to deliver according to this agreement; and that he has not heretofore contracted to sell, market or deliver any of the said (crop) to any person, firm or corporation. If he has so contracted, he shall so state at the end of this agreement; and any crops covered by any such existing written agreement shall be excluded from the terms hereof to the extent and for the time then indicated. Such clauses are designed to protect the association against double contract- ing. They make it clear to a grower that he should contract for only that part of his crop not already contracted to some- one else. [48] VII. HOW MUCH INTEGRATION IS DESIRABLE? The preceding discussion demonstrates that California cooperatives include a variety of integrating provisions in their marketing contracts. The question is, to what extent should the production, har- vesting, and marketing activities of indi- vidual patrons be integrated with those of the entire association? The answer to this question differs, depending on the assumptions we make about the objec- tives of cooperative associations. If their objective is to maximize their patrons' net revenue, the chief guiding principle is clear: Patrons should relinquish par- ticular production or marketing deci- sions to their association when such in- tegration promises significantly greater long-run operating efficiency for the asso- ciation as a whole. For if it does, net re- turns of patrons on the average will be increased. Many California cooperatives do, in fact, use integrating devices to insure greater operating efficiency. Most fre- quently these involve provisions affecting product volume, quality, delivery time, and pooling. But if control of these reve- nue-affecting factors is so important, why do not more associations use them? There seem to be at least four important reasons. First, not all of the above-mentioned forms of integration are important to all cooperatives. For example, harvesting methods are extremely important to qual- ity in fresh fruits, but they are less im- portant in nuts. Or when an association does not pool its patrons' products, as in livestock, the association as a whole may be unaffected by the quality of an indi- vidual member's products. Therefore, close integration on matters of quality is not important to efficient operations. Second, in some cases, fuller integra- tion may cause grower dissatisfaction. For example, it may be desirable from the revenue standpoint of most members for an association to have strict quality control over patrons' production or har- vesting. If an important minority objects to such action, however, the association may forego strict quality control in favor of greater membership harmony. For example, it has been known for many years that the washing of eggs reduces their keeping quality. A large poultry association in California carried on an educational campaign among its mem- bers for several years before introducing a quality-control program under which members received a lower price for washed than for unwashed eggs. At pres- ent nearly 100 per cent of all eggs re- ceived from members are unwashed. Failure to adopt a particular integra- ting provision in this case may or may not have been due to the abandonment of the profit-maximization principle. If operations are modified simply to in- crease some members' "satisfaction," the profit principle probably has been aban- doned. The association may have aban- doned it in favor of some other principle, such as general membership harmony. But if the majority is willing to modify its operations because such dissatisfac- tion would be reflected in lower operating efficiency (due, for example, to lower membership), the profit principle would still be operative. The association would then be operating in the most efficient manner consistent with the conflicting interests of some of its members. An educational program might permit an association to modify its operations in the future. Differences in members' views toward particular integrating de- vices may arise wholly because of differ- ent interpretations of their effects. But often conflicts arise because some forms of integration affect some members dif- ferently than others. For example, some members may find it preferable to grow a lower-quality product (or actually im- possible to do otherwise) than is de- sirable from the viewpoint of the entire [49] association. For example, there is con- siderable variation in the size and quality of lemons (and other citrus fruit) grown in different parts of southern California due to a number of factors. Very often there are serious conflicts among the in- terests of patrons with large and small enterprises. Education is of little help if there are such real conflicts of inter- ests among different members. Often, however, even apparently irreconcilable conflicts of interest among patrons can be reconciled. Quality conflicts, for ex- ample, can most often be reconciled by paying on a grade basis and increasing the number of product pools. Third, not all associations are guided by the principle of maximizing their members' incomes. In some associations a primary objective of the management may be the desire to operate the largest marketing organization in the field — possibly because of a vague notion that market control increases with size. With this as an important objective, associa- tions may shy away from any integrating devices tending to limit membership. This may result in growth at the expense of operating efficiency. In yet other instances the majority of members of an association may believe that strict integrating procedures are alien to the cooperative way of business. Finally, some cooperative associations may not use certain integrating devices simply because the managers do not ap- preciate their importance or their effect on patrons' incomes, or they may be un- willing to require members to subscribe the additional capital for further inte- gration. Unfortunately, available information does not permit generalizations regard- ing the importance of the above-men- tioned factors in limiting fuller integra- tion of farming operations of patrons with the marketing operations of their cooperatives. But each association should be able to answer this question of inte- gration to its own satisfaction. If it is interested in operating efficiency, it must find an answer. If particular integrating devices promising higher returns are not used, the association should know why. When noneconomic considerations influ- ence an association's decisions, the man- agement should carefully think through such considerations and assess their im- portance to operating efficiency. Only then can the association know whether it is including the proper integrating pro- visions in its marketing contracts. VIII. USE OF MARKETING CONTRACTS BY SUPPLY ASSOCIATIONS Nine out of ten California coopera- tives use marketing contracts, and, as this study has shown, they have sound economic reasons for doing so. Up to this point we have dealt almost exclu- sively with their use and function by marketing associations. But how about their use by supply cooperatives? Only one of the eight purchasing (sup- ply) associations in our sample uses a contract. This is a "central" of a fed- erated supply association, which has a five-year contract with its "locals." It is proper to ask why all the other local and centralized purchasing associations do not use contracts with members. For, certainly, if members purchased a high proportion of their needs from their as- sociation, it would operate more effec- tively. There are two main differences be- tween marketing and supply associations which generally rule out the use of mar- keting contracts by the latter. First, there is less need for contracts in supply than in marketing associations; second, the objection by patrons to the use of con- tracts is greater in supply than in mar- keting associations. Supply cooperatives involve a looser form of integration than do marketing associations. Few activities of members [50] and their associations need be integrated. With supply associations, there is noth- ing comparable to the quality, harvest, and delivery-time integrating require- ments so essential to many marketing operations. The only comparable need is that of maintaining volume. But even here supply associations' problems differ. With marketing associations the chief need for total patronage contracts is to protect against short-run threats to per- formance. (Long-run threats — consist- ently lower returns — cannot be warded off by contracts.) Contracts are espe- cially important when marketing coop- eratives use product pools. For when prices fluctuate from day to day, some members often have an incentive to sell outside their association to benefit from prices temporarily higher than average pool prices. In supply cooperatives this incentive for nonperformance generally is not present, and when it is, it is less important. For one thing, pools are less often used in supply associations. More- over, supply prices generally fluctuate less than farm-product prices. But perhaps the chief reason supply associations do not use contracts is that there is strong patronage resentment against them. Potential patrons are un- willing to bind themselves to buy all their supply needs from one association. A single supply cooperative often handles a great diversity of products, ranging from fertilizer and feed to refrigerators and gasoline. Most patrons would con- sider it entirely unreasonable if their association required them to agree to buy all their needs of all products supplied by their association. This is much dif- ferent from marketing associations which customarily handle only one or two prod- ucts for members and do not require members to give up sovereignty over such a great number of their decisions. Although none of the local supply as- sociations in our sample use contracts, three deciduous fruit marketing associa- tions also handling orchard supplies do use such a contract for supplies. Their supply business, however, differs from that of the general supply associations in that only a limited line — chiefly fertilizers and orchard sprays — is involved. This is apparently why the members are willing to accept such contracts. Although con- versations with the manager of one of these associations indicated that the con- tracts are not enforced very vigorously, neither are they meaningless, for the association had recently expelled one member for not buying his orchard sup- plies from it. The penalty for nonper- formance in the contracts of these three associations is expulsion; no liquidated damages provision is included. It should be emphasized that these three associations are exceptions to the rule in California. All the other market- ing associations in our sample, which also do a supply business, do not require members to buy from them. This is true of all the citrus and poultry associa- tions, which handle large amounts of supplies for members. APPENDIX A Nature of Sample Much of the general information in this study is based on a questionnaire mailed to 525 California cooperatives. Thirteen questionnaires were returned unclaimed, and we assumed that these co- operatives are no longer in operation. Another 33 associations to which we sent questionnaires were later found to have discontinued operations by 1954. Three concerns reported that they were not co- operatives. After making the above de- ductions, we have assumed that our uni- verse is made up of 476 California mar- keting and purchasing associations. This may still somewhat overstate the actual number operating today. The Farmer [51] Cooperative Service reported 461 coop- eratives of all types in California in 1953-54 (Gessner, 1956). The 228 associations which returned usable questionnaires had a combined membership of 70,200, or about 54 per cent of the membership in all California cooperatives in 1953-54. This estimate is based on the membership of respond- ing centralized cooperatives and locals of federated cooperatives. Actually the number of members is somewhat higher than this because six replying associa- tions did not report the size of their mem- bership. The centralized cooperatives and the federations of local cooperatives from which we received information re- ported a business volume of about $730 million, or about 63 per cent of the total business of California cooperatives of these types. The centralized cooperatives and the locals affiliated with centralized cooperatives from which we received in- formation reported a business volume of about $445 million, or about 56 per cent of the business of all cooperatives of this type. Thirteen returned questionnaires did not give this information. The above comparisons of membership and business volume were made by com- paring the information received from our sample with the estimates of mem- bership and business volume of Califor- nia cooperatives made by Gessner (1956). On the basis of the above comparisons, it appears that our sample of returned questionnaires is somewhat biased in favor of larger associations. For, whereas this sample represents about 48 per cent of all California associations, these re- spondents have about 54 per cent of the state's cooperative members and handle about 56 per cent of its cooperative busi- ness. However, this bias does not seem serious because our sample also includes a high percentage of California's small associations — over 40 per cent. APPENDIX B Example of Purchase and Sale Type of Cooperative Marketing Contract (Headings for the various provisions did not appear on the original contract but have been added by the authors.) MARKETING CONTRACT This Agreement, made this day of 19 , between SUN-MAID RAISIN GROWERS OF CALIFORNIA, a non-profit coopera- tive association organized and existing under the laws of the State of California, hereinafter called Buyer, and hereinafter called Seller. Witnesseth 1 . Purchase and Sale of Products That the Buyer hereby purchases from Seller, and Seller hereby sells to Buyer (except as hereinafter otherwise specified) all of the raisin grapes to be produced during the continuance of this contract commencing with the year 19 , on the following described land in County, California, to wit: [52] at and for the prices to be paid to the Seller determined as hereinafter set forth. 2. Requirements regarding production on land other than above If Seller shall own or control, or hereafter shall own or control, raisin grapes to be produced during the continuance of this contract on any other land, Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, such raisin grapes by executing another contract or contracts therefore similar to this contract, provided, however, that in no event shall this clause require or have the effect of continuing this contract for a period longer than that now or hereafter permitted by law. 3. Quality and Delivery Time Requirements Except as may be otherwise provided in the by-laws of the association, all of said raisin grapes purchased hereunder shall be by the Seller thoroughly and properly dried and cured into raisins, or, in the case of currants, into dried currants, of good color, in original condition, and free from damage of any kind, and after they are cured and made into raisins, or, in the case of currants, into dried currants, shall be delivered upon demand by the Buyer at any time, but not later than December 1st in each year to the receiving station designated by Buyer. Buyer, at its option, may accept delivery tendered after said date, but shall not be required to accept any deliveries after said date, and its failure to accept deliveries after said date shall not release Seller from Seller's obligations to make deliveries as required by this contract. None of said raisins shall be delivered in the form of Bleached raisins. 4. Form in which Product is Marketed Subject to the provisions contained in this paragraph, the Seller shall have the privilege of marketing the whole or any portion of said raisin grapes in any year as fresh grapes for conversion into wine, grape juice or distilled spirits, or for use or consumption in such fresh form, but not otherwise. The privilege herein granted to Seller may be revoked or reinstated by Buyer from year to year by written notice to Seller given in the month of July of each year in which such privilege shall be revoked or reinstated. 5. Buyer to Establish Grades Buyer, on or before October 15 of each year, by resolution of its board of direc- tors, will establish grades for each of the varieties of raisins which are to be handled or dealt with by Buyer, under this contract, and similar contracts executed by other Sellers, including Muscat, Thompson Seedless and Sultana raisins and dried cur- rants, and will determine the standards necessary to be met for each of said grades, and will determine which of said grades in each case shall constitute the standard grade, and will establish a scale of differentials to be paid, not less for the highest grade than one-quarter cent per pound for any Muscat and Thompson Seedless raisins or dried currants, delivered to Buyer which are better than standard grade, and will establish a scale of differentials to be deducted as respects any raisins and dried currants delivered to Buyer which are of less than standard grade. 6. Payment on Grades and Arbitration of Grade Disputes If any of the Muscat or Thompson Seedless raisins or dried currants delivered by Seller to Buyer are better than standard grade, which fact is to be determined by Buyer at the time of delivery thereof, Seller shall be entitled to receive ten days after the time of delivery a bonus per pound for such extra quality Muscat or [53] Thompson Seedless raisins, or dried currants, equal to the differential established by Buyer as aforesaid for the grade into which the extra quality raisins or dried currants delivered by Seller fall; and if any of said Muscat, Thompson Seedless or Sultana raisins or dried currants delivered by Seller to Buyer are of less than standard grade, proper deduction from the price for standard grade shall be deter- mined at the time of delivery according to the grades and differentials established as hereinbefore set forth, and shall be taken out of the first advance made by Buyer on said delivery. Any dispute as to the bonus to be paid, or the deduction to be made, shall be settled by arbitration. Each party shall appoint one arbitrator and said arbitrators shall jointly select a third and the decision of the majority of said arbitrators shall be binding upon the parties. All expenses of the arbitration shall be borne by the party against whom the decision shall be rendered. 7. Buyer to Make Advances Ten Days After Delivery Ten days after the receipt of said raisins by Buyer at the place mentioned above, Buyer agrees to make to Seller as large an advance per pound therefor as in its judgment financial and market conditions will justify. 8. Title Passes to Buyer This instrument is intended by the parties to pass to and vest in the Buyer a present title and right of possession to all of the crops of raisin grapes covered hereby. The Buyer shall at all times have the right to enter upon said premises and remove the said crops therefrom; but the right of the Buyer to so enter and remove said crops shall not affect the obligation of the Seller to pick, cure and deliver the same as above provided. 9. Operation Methods of Buyer The Buyer agrees properly to process and pack said raisins for the marketing thereof. Any thereof not suitable for marketing as raisins may be marketed for other uses. Buyer, after the processing and packing aforesaid, shall sell the said raisins and dried currants, together with raisins and dried currants received from other Sellers under contracts similar to this contract with which said raisins and dried currants have been pooled, as rapidly as practicable, and for such lawful prices as Buyer may be able to obtain therefor and shall approve, and from time to time, as sufficient proceeds are accumulated, in the judgment of Buyer, to warrant dis- bursement thereof, shall pay the net proceeds over to the Sellers named in this and similar contracts, according to the quantities and varieties of raisins, or if dried currants according to the quantities and grades thereof, received from the respective Sellers, after deducting : a. Any advance or advances previously made to Seller; provided, however, that no bonus by this contract agreed to be paid, and paid, to the Seller for extra quality raisins or dried currants shall be regarded as an advance to be deducted as aforesaid; b. Any deduction which under the terms of this contract is to be made from pay- ments to Seller by reason of the delivery by Seller of raisins or dried currants of less than standard grade; c. The Seller's pro rata share of all losses and expenses of Buyer incurred in its operations ; d. The deferment for the Buyer's Working Capital Revolving Fund, which, under the terms of the by-laws of Buyer is provided to be deferred from the said pay- ments to Seller and the amount of which deferment shall be determined in accordance [54] with the terms of the by-laws of Buyer relating thereto, and said deferment shall be credited, handled and dealt with and ultimately paid in accordance with the terms of the by-laws of Buyer relating to said Working Capital Revolving Fund; e. The deferment for the Buyer's Fixed Capital Revolving Fund to be determined in accordance with the provisions of the by-laws of Buyer relating to its Fixed Capital Revolving Fund, which deferment shall be credited, handled and dealt with and ultimately paid in accordance with the terms of the by-laws of Buyer relating to its Fixed Capital Revolving Fund; f. Any payments properly chargeable to Seller's account by reason of payments made to discharge liens or encumbrances against the raisins or dried currants delivered to Buyer by Seller and to pay expenses in relation thereto; g. Any payments properly chargeable to Seller's account by reason of the pay- ment of any orders of Seller accepted by Buyer; h. Any amounts properly chargeable to Seller's account by reason of any mar- keting agreement, order, program or plan adopted under any state, federal or other law or by voluntary action of Seller and other growers of raisin grapes or producers of raisins or dried currants whether for expenses of the board, committee or other agency administering such marketing agreement, order, program or plan, or for any other payments or expenses required to be paid or which incurred for Seller's account by reason of such marketing agreement, order, program or plan. 10. Liquidated Damages for Nondelivery The parties hereto fully understanding and admitting that it will be impracticable or extremely difficult to fix the actual damages to the Buyer, which will result from the breach of this contract by the Seller, hereby expressly agree and stipulate that in the event of the Seller's neglect, failure or refusal to deliver to the Buyer the raisins and dried currants purchased hereunder, the Seller will pay to the Buyer the sum of three cents per pound for all raisins and dried currants covered hereby, and so undelivered, as liquidated damages for such breach; any judgment recovered against the Seller in any suit to enforce the contract or any right thereunder to include all costs of court, and all expenses arising out of or caused by the litigation and a reasonable attorney's fee to be fixed by the Court rendering such judgment, and shall be entitled to the benefit of any lien securing any payment hereunder. 11. Specific Performance and Injunction to Insure Delivery The parties hereto agree that in the event of a breach or threatened breach, by either of them of any provision, or covenant hereof, the other party shall be entitled to an injunction to prevent such breach, or further breach hereof and to a decree for specific performance hereof; and the parties agree that this is a contract for the purchase and sale of personal property under special circumstances and conditions; that the Buyer has invested large sums of money in the construction of plants and equipment to carry on its business of processing and packing the products herein mentioned, and is expending and will be compelled to expend, further large sums of money in the operations necessary for the carrying on of its said business, and will yearly enter into contracts for the sale of said products; that Buyer, on account of the character of its operations as a non-profit cooperative association, and its obligations under this and similar contracts, cannot go to the open market and buy raisins to replace any which the Seller may fail to deliver; and that the failure of the Sellers named in this and similar contracts, of which there are several thousand, to deliver such products to the Buyer as therein required will result in irreparable loss to the Buyer. [55] 12. Pooling of Raisins The raisins received under this contract shall be mingled or pooled and sold with other raisins of like variety purchased by the Buyer under contracts similar to this contract. Separate pools of the various varieties of raisins purchased by Buyer under this and similar contracts shall be set up for each crop year and said pools shall be accounted for separately. 13. Pooling of Currants Any dried currants received hereunder shall be mingled or pooled and sold with other dried currants purchased by Buyer under contracts similar to this contract and separate pools of the dried currants purchased by Buyer under this and similar contracts shall be set up for each crop year and said pools shall be accounted for separately. 14. Method of Payment for Pools The amount to be paid to Seller as respects each pool shall be based upon the average price per pound at which all raisins of like variety, or grade if dried cur- rants, in the pool shall be sold. Progress payments, in due proportion, shall be made as respects each pool from time to time as rapidly as in the judgment of Buyer it is practicable to make such payments, and such payments shall be continued from time to time until the accounts of each pool are fully settled. 15. Relations of Buyers and Sellers under Marketing Agreements Anything elsewhere in this contract to the contrary notwithstanding, it is agreed that Seller and Buyer shall comply with any lawful requirements of any marketing agreement, order, program or plan relating to the production, drying, processing, marketing or accounting for the proceeds of the marketing of said raisin grapes, raisins and dried currants heretofore or hereafter adopted or put into effect accord- ing to the provisions of any state, federal or other law, and that there shall be set aside and dealt with, as may be required by such marketing agreement, order, program or plan such free, reserve, surplus or other pools as respects said raisin grapes, raisins and dried currants affected by this contract as may be necessary, and that the plan of settlement herein provided for as respects said raisin grapes, raisins and dried currants shall be modified as may be required by such marketing agreement, order, program or plan and as respects such free, reserve, surplus or other pools, and as respects the actions of Seller and Buyer. It is further agreed in this connection that if, when any raisins or dried currants are delivered to Buyer, any marketing agreement, order, program or plan, or any code, license or other action made, adopted, issued or taken under any state, federal or other law shall by its terms or operations require Buyer or Seller to withhold from immediate sale, or to hold for, or deliver to, any board, committee or other agency any part or percentage of such raisin grapes, raisins or dried currants, or to make any pay- ment out of the purchase price or otherwise to any such board, committee or other agency or otherwise, this contract shall be subject to such requirement, and any such withholding, holding, delivery or payment may be done or made by Buyer at Seller's expense and for Seller's account, or as otherwise may be required by law. 1 6. Operation under Government Price Programs Should the state or federal government fix, or shall have fixed, a maximum price for any raisin grapes, raisins or dried currants agreed to be sold by this contract (a) to be paid to Seller, or (b) to be charged to or by Buyer, or to the jobbing [56] trade which shall be or represent less than the price otherwise to be paid, then the price otherwise to be paid is to be reduced in case (a) to the price so fixed and in case (b) to a price based on and having a proper relation to the price so fixed. Should the state or federal government limit the quantity of raisin grapes or raisins or dried currants Seller may deliver or Buyer may accept, then the provisions of this contract shall be modified in accordance with such limitations. 17. Each Portion of Contract is Separate Should any portion of this contract be determined to be unlawful, provided that such portion of this contract is severable, it shall be eliminated from this contract and the other provisions of this contract nevertheless shall continue in effect. 18. Deliveries made in Name of Seller All deliveries of said raisins are to be made in the name of the Seller unless notice in writing to the contrary is given to the Buyer by the Seller, and all payments or advances hereunder are to be made to the person in whose name such deliveries are made, or upon orders signed by him and duly accepted by the Buyer; provided, however, that if at the time of such delivery there stands of record a crop mortgage covering the crop so delivered, such payments or advances may be made as directed by request in writing signed by both mortgager and mortgagee, or as otherwise may be required by law. If adverse claims to said payments or advances are made, payment may be withheld pending settlement of such adverse claims without liability for interest or other liability by reason of such withholding. 19. Termination Rights of Buyer and Seller Subject to the limitation of the period of time now or hereafter prescribed by law during which this contract may continue in effect, this contract shall continue in effect until terminated by either of the parties hereto as herein provided. Between December 20 and December 31 of any even numbered year Seller may file with the Buyer a written notice of his desire to withdraw from this contract and there- upon this contract shall be cancelled as to the crops of succeeding years; between February 20 and March 1 of any odd numbered year, Buyer may give written notice to Seller of Buyer's desire to withdraw from this contract and thereupon this con- tract shall be cancelled as to crops of that and succeeding years; provided, however, that in no event shall this contract continue in effect for a period longer than that now or hereafter permitted by law. 20. Notices The notices herein provided to be given shall be deemed to have been given to the Buyer when mailed to its office in Fresno, California, and to the Seller when mailed to his address as noted hereon. 21. Succession of Obligation This contract shall bind the heirs, administrators, successors or assigns of the respective parties hereto; provided, however, that the same may not be assigned by party of the first part except to a non-profit cooperative association or corpora- tion organized and existing under the laws of the State of California, or any corpo- ration or organization of a cooperative nature which may be authorized by law. 22. Definition of Raisins and Raisin Grapes The terms "raisins" and "raisin grapes" herein shall include the following and [57] only the following, varieties, to wit: "Thompsons," "Muscats," "Sultanas" and "Currants." 23. Buyer May Borrow on Pools Seller agrees that the association shall have the power to borrow money for any purpose of Buyer on the raisins and dried currants handled by Buyer in any of the pools established by Buyer, or on any other property to which Buyer has title; and that Buyer may exercise any and all other rights of ownership without limitation, and may sell or pledge for its own account or as security for its own debts or other- wise, all or any part of said raisins and dried currants handled by Buyer in any of said pools. 24. Seller Bound by Articles of Incorporation and By-laws Seller, as a member of, or upon becoming a member of Buyer, shall be bound by the provisions of the articles of incorporation, by-laws and rules and regulations of Buyer as now existing, or as hereafter during the life of this contract amended or adopted. 25. Litigation Costs In any litigation between Seller and Buyer, Seller shall pay all costs, premiums for bonds, and other expenses and reasonable attorney's fees as fixed by the Court incurred by Buyer in such litigation, provided that Buyer prevails therein. 26. Previous Contracts Cancelled Any and all crop contracts heretofore entered into by the parties hereto and cov- ering the above described raisin grapes, or any portion thereof, are hereby cancelled as to all crops hereafter to be produced. 27. Contracts to Incorporate Changes Necessary by Laws The parties hereto agree that any modifications of or changes in this contract hereafter required to be made by any state, federal or other law or laws, or by any Court having jurisdiction, shall be deemed to be and are hereby incorporated herein. 28. Contract is Application for Membership The execution of this contract by Seller is also an application by Seller for mem- bership in Buyer and such application shall be deemed to be accepted by Buyer when Buyer shall have executed this contract. IN WITNESS WHEREOF, the parties hereto have executed this contract as of the day and year first above written. (Buyer) SUN-MAID RAISIN GROWERS OF CALIFORNIA (Seller) By Address Witness to Seller's Signature: Address Address [58] APPENDIX C Example of an Agency Type of Cooperative Marketing Contract (Headings for the various provisions did not appear on the original contract but have been added by the authors.) CROP AGENCY AGREEMENT This Agreement, Made this day of 19 , between CALIFORNIA ALMOND GROWERS EXCHANGE, a corporation herein- after called the Exchange, and of hereinafter called the Member. Witnesseth : Member to Deliver to Exchange That for and in consideration of like promises on the part of other members of the Exchange, the Member hereby promises and agrees to harvest, hull, thoroughly dry, clean and deliver to the Exchange at its nearest receiving station, in accordance with the By-Laws and with any and all rules adopted, or that may hereafter be adopted, by the Board of Directors of said Exchange, year by year, and as soon as they can be harvested and prepared for delivery, all of the almonds to be pro- duced during the term of five years beginning on the first day of April 19 , and any extension or extensions thereof on any and all lands now or which may here- after be owned, leased, operated or controlled by the Member including the follow- ing described land in County, California, (owned, or leased or operated or controlled) by the Member, to-wit: to be marketed and sold by said Exchange as the agent of the Member. Exchange Appointed Agent And the Member hereby appoints the Exchange the sole and exclusive agent of the Member and also as the attorney in fact of the Member, for the said purposes and the purposes hereinafter set forth, with full power and authority in its own name, in the name of the Member, or otherwise to transact such business and take such action as may be necessary, incident, or convenient for the accomplishment thereof, including the power to pool said almonds and to borrow money thereon or upon any of them for the corporate purposes of the Exchange and to pledge, mortgage or hypothecate the same, coupling such appointment with a direct, finan- cial interest as the common agent and attorney of all members hereunder, and with- out power of revocation, for the full term hereof. Exchange to Market Crops The Exchange on its part agrees to prepare for market and to market and sell said almonds as agent of the Member, and to divide the proceeds of the sale of said almonds and of other almonds pooled therewith among its various members at the same rate per pound for like variety and grade and in accordance with the provisions of the By-Laws, after first deducting from said proceeds the expenses, [59] expenditures and appropriations of the Exchange in doing and performing the things hereby required to be done and performed by it and incidental thereto, or in pro- viding for and carrying on the business, operations and corporate purposes of the Exchange as may from time to time be determined by the Board of Directors thereof in accordance with the By-Laws. Nonmember Business The Exchange agrees that during the term of this contract it will not accept for sale or deal in any almonds except for the account of members of the Exchange, and then only under contracts similar in form to this contract, or such other form as heretofore may have been adopted or as in the future may be adopted by the Board of Directors of the Exchange in accordance with its By-Laws, for general use in dealing with its members, provided, however, that in the event of the death of a member, or the termination of the membership of any member, or any other contingency preventing delivery by a member, the Exchange may nevertheless, subject to the limitations of the By-Laws, accept for sale the almonds covered by the crop agency agreement of such member; and further provided that when any almonds grown or delivered to the Exchange by members of the Exchange are insuf- ficient in quantity or quality to meet any unfilled orders held by the Exchange, or when for any other reason the Board of Directors deems it appropriate, the Exchange may purchase, acquire, accept for sale or deal in almonds produced by nonmembers, always provided that almonds grown by nonmembers shall not be dealt in by the Exchange to an amount greater in value than such as are handled by the Exchange for its members. Liquidated Damages for Nondelivery The parties hereto, fully understanding and admitting that it will be imprac- ticable, or extremely difficult, to fix the actual damage to the Exchange, which will result from the breach of this contract by the Member, hereby expressly agree and stipulate that in the event of the Member's neglect, failure or refusal to promptly deliver to the Exchange as herein required the almonds which are to be delivered under this contract, or any thereof, the Member will pay to the Exchange the sum of five cents per pound for all almonds covered hereby, and not so delivered, as liquidated damages for such breach; any judgment recovered against the member in any suit to enforce this contract or any right thereunder shall include all costs of Court, and all expenses arising out of or caused by the litigation and a reasonable attorney's fee to be fixed by the Court rendering such judgment. The Exchange shall have the right to bring successive actions and recover successive judgments for each neglect, failure or refusal by the member to deliver almonds to the Exchange in accordance with the provisions hereof. Crop Report As soon as the fruit has formed upon the trees in each year and whenever thereto requested by the Manager of the Exchange, the Member agrees to mail to the Ex- change at its office at Sacramento, an estimate of the yield of almonds covered by this contract, and also, each year immediately upon the harvesting of such almonds to mail to the Exchange a statement of the amount of such yield. (As amended October 21, 1938). Quality Requirement for Delivery Should the Member fail to properly harvest, hull, dry or clean the almonds to [60] be delivered hereunder, or to do any of the things required of the Member here- under, the Exchange may elect to do what may be necessary in that behalf and may charge the cost thereof to the Member, or may elect to decline acceptance of such almonds, or of almonds in a deteriorated condition or of inferior quality or grade, or almonds otherwise unfit to be pooled with the other almonds handled by the Exchange, or if already delivered, may return them to such Member, at his expense, or may notify the owner thereof and hold the almonds subject to his orders and at his expense. Specific Performance and Injunctions to Insure Delivery The parties hereto agree that in the event of a breach or threatened breach by either of them of any provision, or covenant hereof, the other party shall be entitled to an injunction to prevent such breach or further breach hereof and to a decree for specific performance thereof; and the parties agree that this is a contract for the delivery of personal property under special circumstances and conditions; that the Exchange has invested large sums of money in the construction or establish- ment of plants and equipment to carry on its operations, and is expending, and will be compelled to expend, further large sums of money in the operations necessary to the carrying on of its said business, and will yearly enter into contracts for the sale of said almonds; and that the failure of Members named in this and similar contracts to deliver such products to the Exchange as therein required will result in irreparable loss to the Exchange and to the members thereof. In consideration of the agreements on the part of the Exchange, the Member agrees that this contract is made for the benefit of, and is beneficial to, the land herein described and/or any other lands now or which may hereafter be owned, leased, operated or controlled by the Member and devoted to the growing of almonds, and to the interest and estate of the Member in such lands, and a lien is hereby created upon all of the said lands and all parts thereof, and the estate and interest of the member therein, in favor of the Exchange to secure payment of all sums becoming due hereunder from the Member and performances of the obligations herein contained upon the part of the Member, which said lien shall continue for the full term of this contract and until such payments have been made and said obligations fully performed, and such lien may be enforced in the same manner as other liens upon property, regardless of the ownership of said lands. Termination Rights of Exchange The Exchange may terminate this contract at the end of the contract period above specified by giving to the Member written notice by registered mail of such termi- nation at any time before the end of such period, and the Member may terminate this contract at the end of the contract period above specified by giving to the Exchange written notice by registered mail of such termination at least sixty days before the end of such period, and upon the giving of such notice by either party and the full payment to the Exchange of all just claims and demands, the Exchange shall execute and deliver to the Member or to the owner of the land, a certificate to the effect that such contract has been terminated effective at the expiration of such period, which said certificate shall, at the request and expense of the Member, be acknowledged before a Notary Public so that it may be recorded. In the absence of such notice of termination of this contract by either party as herein provided, it shall continue in full force and effect for a further term of five years with the like right upon the part of either party hereto to terminate it by notice as afore- [61] said, at the end of such further term. And in the absence of such notice, before the end of said further term of five years, it shall continue in full force and effect for a further term or period of five years. Provided, however, that the Exchange may waive or release the lien herein provided for whenever in the judgment of the Board of Directors of the Exchange such waiver or release may be necessary or proper. Termination Rights of Members In addition to the foregoing provisions for termination of this contract, the member may terminate it as of April 1 of any year but in no event as of a date prior to the end of the second year of his membership in the Exchange, upon com- plying with each and all of the following conditions precedent: First, that the member gives the Exchange written notice by registered mail of such termination at least sixty (60) days before such date, second, that prior to the effective date of such notice the member also gives the Exchange as liquidated compensation for any and all loss and expense it may incur or suffer by reason of such withdrawal a written waiver in form and execution satisfactory to the Exchange of any and all rights the member may have to repayment of any and all sums withheld by the Exchange for purposes of the reserves mentioned in Article III of its By-Laws during the contract period or further term of the contract current when the above men- tioned notice is given and not payable or for which a date for payment prior to the effective date of said termination shall not have been fixed prior to the giving of said notice as well as of any and all rights the member may have to interest on account of the money in said reserves unpaid at the time of the giving of said notice, and in addition if any amount of the member's share of any or all of the aforesaid reserves has been made the subject of an assignment whether voluntary or by opera- tion of law which the Exchange has recognized or is entitled to recognize, furnishes the Exchange evidence satisfactory to it that a complete reassignment to him has been made or in the alternative pays to the Exchange the amount so assigned together with the amount of any interest payable on account of the amount so assigned for the interest period current when such notice is given, and, third, that prior to or on the effective date of the notice of termination the member pays to the Exchange the full amount of all just claims and demands which it may have against him. The liquidated compensation aforesaid shall be applied against the expenses of the Exchange for the crop for the calendar year in which the termina- tion becomes effective or in the event the Exchange should be dissolved without handling such crop, then against the expenses for the last crop handled by the Exchange. Upon the member's complete compliance with the foregoing provisions and not otherwise the Exchange shall execute and deliver to the member or to the owner of the land a certificate that said contract has been terminated as of the effective date of said notice of termination which certificate shall, at the request and expense of the member, be acknowledged before a Notary Public so that it may be recorded. Termination Upon Dissolution In addition to the foregoing provisions for termination of this contract, the Ex- change may terminate this contract on the first day of April of any year in the event that at least two-thirds of the members shall have theretofore voted for dissolution of the Exchange, such termination to be effective by giving to the Member written notice thereof by registered mail. [62] Noice of Termination Notice of the termination of this contract or any extension thereof upon the part of the Member shall be deemed to include and constitute notice of termination of membership under Article XI of the By-Laws of the Exchange. Miscellaneous The Member hereby acknowledges receipt of a copy of the By-Laws of the Ex- change and assents thereto and agrees to be bound thereby and by any amendment thereto adopted as provided in Article XV thereof. This contract shall bind the heirs, executors, administrators, successors, assigns or grantees of the respective parties hereto; provided, however, that the same may not be assigned by the Exchange except to a non-profit, co-operative association organized and existing under the laws of the State of California, or a corporation or organization of a co-operative nature which may be authorized by law. It is agreed that this contract contains the whole agreement between the contract- ing parties and no statements or representations are of any force or effect unless set forth herein. CALIFORNIA ALMOND GROWERS EXCHANGE By Secretary Sign Here WITNESS to Member's Address Signature: Add ress Address I, the undersigned, having an interest in the above mentioned lands and crops, hereby consent to and join in the execution of the foregoing contract, and agree that such interest shall be fully bound by and subordinated to said contract. In the event the right of possession of the above named grower in or to such lands or crops may be terminated with resulting reversion to me, I shall be bound by said contract during the remainder of the term thereof. I further agree that any transfer I may make of my interest in said lands and crops shall be made subject to said contract. WITNESS to Signature: Address [63] LITERATURE CITED Bakken, Henry F., and Marvin A. Schaars 1937. The economics of cooperative marketing. New York: McGraw-Hill Book Co. 583 p. Cochrane, W. W., and R. H. Elsworth 1943. Farmers cooperative discontinuances. Wash., D.C.: U. S. Farm Credit Admin. Misc. Rept. 65. Gardner, Kelsey F., and A. W. McKay 1950. The California fruit growers exchange system. Wash., D.C.: U. S. Farm Credit Admin. Cir. C-135. Gessner, Anne L. 1957. Statistics of farmer cooperatives, 1954-55. U. S. Department of Agriculture, Farmer Co- operative Service Gen. Rpt. 23. Hood, Rorin 1927. Liberalizing the members' contracts. Cooperative Marketing Journal 1 :287-293. Hulrert, L. S. 1942. Legal phases of cooperative associations. Wash., D.C. : U. S. Farm Credit Admin., Co- operative and Service Division Bui. 50. Jesness, O. B. 1923. The cooperative marketing of farm products. Philadelphia: J. B. Lippincott, 292 p. Johnson, George F. 1924. The cooperative marketing contract. Wisconsin Agr. Exp. Sta. (Processed) MacCurdy, Rahno M. 1925. The history of the California fruit growers exchange. Los Angeles: G. Rice and Sons, printers. 106 p. Nourse, Edwin G. 1927. The legal status of agricultural cooperatives. New York: The Macmillan Co. 555 p. Packel, Israel 1947. The law of the organization and operation of cooperatives (2d ed.) . Albany: Matthew- Bender and Co. 389 p. Phillips, Richard 1952. Economic nature of the cooperative association. Unpublished doctoral dissertation. Iowa State College, Ames, Iowa. Steen, Herman 1923. Cooperative marketing. New York: Doubleday-Page. 366 p. In order that the information in our publications may be more intelligible it is sometimes necessary to use trade names of products or equipment rather than complicated descriptive or chemical iden- tifications. In so doing it is unavoidable in some cases that similar products which are on the market under other trade names may not be cited. No endorsement of named products is intended nor is criticism implied of similar products which are not mentioned. 7£m-3,'58(332)BEB [64]