3.  Cooperatives

Cooperatives (in the case of Producer Boards) are distinguished from other firms by the fact that they are owned by their suppliers, capital is non-tradeable, and shareholding and voting rights are linked to supply. If a producer changes their supply to the cooperative, his/her share entitlements will change in proportion to their change in supply.

The Dairy Board currently has a cooperative ownership structure and is owned by dairy companies. Dairy companies must be cooperatives to own shares in the Dairy Board. Although the Apple and Pear and Kiwifruit Boards do not currently have a defined ownership or corporate form, they are likely to propose implementation of cooperative ownership structures in the near future.

The cooperative form is a structure which provides bargaining power and accountability that tends to be well suited to small, “intimate” firms. The Boards have outgrown this status and are now large semi-commercial organisations. It is normal for aggregations of capital of this size to be publicly listed companies because, in such large organisations, cooperatives tend to have several inherent disadvantages:

1. because members are unable to trade their shares, their liquidity (in terms of their shareholdings in the Boards) is extremely limited;
2. they often have confused objectives, including (i) per-unit return maximisation; (ii) receiving and selling all product grown and intended for export; (iii) maximisation of profit and shareholder value; and (iv) ensuring “equitable sharing” of returns between producers. Profit maximisation is different from per-unit return maximisation in that maximising per-unit returns may require greater reductions in sales volumes. In many cases this decreases both producer profitability (by decreasing the amount of their produce sold) and overall profitability (by not selling some produce which could have added to total profit but would decrease the average (per unit) return. From an economic and industry point of view, profit (and therefore value) maximisation is preferable[26];
3. the requirement to receive all product and share returns “equitably” tends to focus attention on volume marketed, rather than profit earned. It also tends to generate a political, rather than commercial, approach to making some commercial decisions;
4. the threat of take-over – which is a strong driver of performance for listed companies – does not exist. Measurement of performance is more difficult and commercial accountability is muted (Porter and Scully 1987). This may lead to inefficient operations;
5. they may face a more severe capital constraint than a normal corporate because they are generally unable to raise equity capital from external parties. This becomes more important as industries grow and mature, needing more capital in the process. It is a major reason why cooperative mutual companies have been demutualising and raising more capital from owners over the recent past;
6. the restriction to trading in a certain product prevents the cooperatives from diversifying their businesses. In increasingly risky and difficult agricultural markets, this intensifies the risk which members, as shareholders, face on their capital investments;
7. market price signals are distorted by a tendency to (i) bundle profits from off-farm capital into per-unit returns, thereby artificially raising the price paid to producers; and (ii) pool sales revenue and average returns across products (eg different varieties of apple) or time.[27] The Thurman study estimated that these practices impose an economic cost of $20 million per year in the case of kiwifruit; $34 million per year in the case of apples and between $11 million and $21 million per year in the case of dairy. ACIL and Tasman Asia Pacific (1996) have estimated the loss for dairy at $68 million, considerably more than Thurman’s estimate[28].

The relative performance of cooperatives has an impact on producer welfare. Any inefficiency or ineffectiveness will be directly reflected in either lower farmgate returns or lower returns on capital (and, therefore, producers’ shareholding) (see Godden 1987; 185).

International evidence on the relative performance of cooperatives is mixed. Some studies have found that cooperatives use resources up to 30% less efficiently than corporates (Porter and Scully 1987) whereas others have found that their performance is similar (Lerman and Parliament 1990). However, these studies have been conducted in an environment where cooperatives and investor-owned firms coexist and compete against each other.

There are some argued benefits of the cooperative form – including that they are a way of preventing profit-motivated buyers who are in a dominant position from forcing down the farmgate return. However, this effect can also be achieved by a reasonable degree of competition for supply. A desire to share in profits from downstream activities – including processing and marketing – can also be achieved by investment in standard shares.

Producer Boards, however, are “compulsory cooperatives” – ie the cooperative form is dictated by statute – and do not compete for producers’ supply against other organisations with a different form. The problems outlined above are therefore likely to be exacerbated by statutory compulsion; especially by the fact that many current producers were not voluntary members of Producer Board cooperatives because they were required to join to be able to export their produce. It should be noted that some Boards – especially the Dairy Board through its Business Development Plan – have actively sought to overcome some of the problems associated with bundling and pooling.

Deregulation will not remove the ability of individuals to form cooperatives. However, deregulation will allow choice, competition and comparison between alternative organisational forms, which is likely to drive better performance.