94th Congress 1
2d Session J
MARKETING ALTERNATIVES FOR
Is There A Better Way?
PREPARED FOR THE
SUBCOMMITTEE ON AGRICULTURAL PRODUCTION,
MARKETING, AND STABILIZATION OF PRICES
COMMITTEE ON AGRICULTURE AND FORESTRY
T TTTrIn- %r" r' A '--rTnrT f lrN.T A '-rT-l
2iANA I L
APRIL 7, 1976
Printed for the use of the Committee on
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1976
COMMITTEE ON AGRICULTURE AND FORESTRY
HERMAN E. TALMADGE, Georgia, Chairman
JAMES 0. EASTLAND, Mississippi
GEORGE McGOVERN, South Dakota
JAMES B. ALLEN, Alabama
HUBERT H. HUMPHREY, Minnesota
WALTER D. HUDDLESTON, Kentucky
DICK CLARK, Iowa
RICHARD B. STONE, Florida
PATRICK J. LEAHY, Vermont
ROBERT DOLE, Kansas
MILTON R. YOUNG, North Dakota
CARL T. CURTIS, Nebraska
HENRY BELLMON, Oklahoma
JESSE HELMS, North Carolina
MICHAEL R. MCLEOD, General Council and Staff Director
HENRY J. CASSO, Chief Economist
CARL P. ROSE, Counsel
JAMES W. GILTMIER, Professional Staff Member
WILLIAM A. TAGGART, Professional Staff Member
DALE L. STANSBURY, Economist
THOMAS REESE SAYLOR, Economist
JAMES C. WEBSTER, Chief Clerk and Press Secretary
PHILLIP L. FRAAS, Assistant Counsel
STEPHEN E. STORCH, Assistant Counsel
RoY FREDERICK, Economist
STUART B. HARDY, ProfessiOnal Staff Member
REIDER J. WHITE, Research Assistant
DIXIE LEE TALLEY, Finance Secretary
BETTY M. MASON, Clerical Assistant
HELEN A. MILLER, Clerical Assistant
LAURA D. RICE, Clerical Assistant
MARGARET KELLEY, Clerical Assistant
DENISE A. LOVE, Assistant Clerk
MAUREEN T. BURKE, Clerical Assistant
NANCY W. WHITEHEAD, Clerical Assistant
ANN C. BOND, Clerical Assistant
DIANE G. COVINGTON, Clerical Assistant
Jo R. PATTON, Clerical Assistant
* "S fitf l0lITtEE ON AGRICULTURAL PRODUCTION, MARKETING, AND
" '. ..'-... ... .. '* STABILIZATION OF PRICES
D ... K 'i
,,... WA 1ff D. HUDDLESTON, Kentucky, Chairman
' GEOE McGOVERN, South Dakota
JAMES 0. EASTLAND,-MiLsissippi
aUBERT H. HtnPHRt^Y',.1iinnesota
IICK CLARK, 'IWa ...'
RIUCARD B. STQON'I*tMrida
I W. G' ,E"
HERMA&!4 .g AIMA.DGE, Georgia
3%* . "
MILTON R. YOUNG, North Dakota
HENRY BELLMON, Oklahoma
ROBERT DOLE, Kansas
JESSE HELMS, North Carolina
LETTER OF TRANSMITTAL
NEW YORK STATE COLLEGE OF AGRICULTURE AND
Ithaca, N.Y., February 11,1976.
Senator WALTER D. HUDDLESTON,
Chairman, Subcommittee on Agricultural Production, Marketing, and
Stabilization of Prices, Committee on Agriculture and Forestry,
U.S. Senate, Washington, D.C.
DEAR SENATOR HUDDLESTON: Agricultural markets and the basic
agricultural marketing system have suffered numerous jolts during the
past 3 or 4 years. I know you are acquainted with the situation as your
Subcommittee on Agricultural Production, Marketing, and Stabiliza-
tion of Prices has been actively investigating many of the specific
aspects of the problem such as the boxcar shortages, and retail food
The National Agricultural Public Policy Committee, chaired by
Wally Barr of the Ohio State University, also recognized that our
agricultural marketing system was under pressure and this commit-
tee recommended that an analysis of the situation and possible
opinions be undertaken. Subsequently, an ad hoc committee of 26
agricultural economists from land grant universities and the U.S. De-
partment of Agriculture was formed to assess the question, "Is there a
better way for farmers to market their products?"
I am pleased to transmit the resulting papers to you for use by your
subcommittee. They are written to be controversial and to provoke
thought and discussion. They should not be considered as definitive
nor final. The authors hope for feedback. Not only would this be bene-
ficial to the committee in its deliberation, but would be beneficial to
the authors as they continue to develop their statements. The ad hoe
committee of authors will incorporate feedback to the extent it con-
tributes to the issue at hand into the next writing. The intended final
product is a set of educational leaflets which will be available for
distribution and use by the extension services of the various states by
There are 12 individual papers. The first paper, "The Situation
Now" attempts to identify the concerns that farmers, agribusiness and
the public have about the marketing system, real or imagined. Each
of the next 10 papers discusses one or more specific policy issues which
could affect substantially the market options open to farmers. There
are many contrasts among them. Some involve rather narrow and
specific proposals of interest to a few commodities. Other proposals,
such as the industrial restructuring paper, are bold, sweeping, even
controversial and have implications for everyone in the economy.
Some of the proposals suggest making the competitive open market
*system work better. Others, in effect, suggest abandoning the competi-
tive open market through the development of farmer group action
and market power. Most of the proposals focus mainly on the domestic
market, although one considers the possibilities of a more centralized
control of export trade.
Each of the options discussed is believed to be an alternative consis-
tent enough with the stated objectives of farmers to be worth consid-
eration in some part and occasionally in all of agriculture. Second,
none is presented as the solution for any part. and certainty not all, of
agriculture. Third, this set of proposals is not designed to be the coin-
plete set which ought to be considered. Rather it is a sampling of
Three papers suggest institutional arrangements designed to im-
prove market access, increase and improve the amount of information
available concerning markets to farmers, and improve the process of
value or price determination. They are titled. "Centralized Remote-
Access Markets," "Forward Deliverable Contract Markets," and
"Mandatory Public Reporting of Market. Transactions."
The market institutions discussed in five of the papers would in-
volve group action and, in some cases, substantial change in legisla-
tion to make more group action possible. The five papers are "Exclu-
sive Agency Bargaining," "Vertical Integration Through Ownership,"
#"Joint. Ventures Among Cooperatives and Non-Cooperative Market-
ing Firms." "Marketing Orders." and "Marketing Boards." These
institutional arrangements would be designed to obtain market access
and to influence price stability through cooperative effort. The use of
marketing boards and the expansion of marketing orders to coordinate
the quantity and quality of production with market opportunities is
'examined. Marketing boards are discussed as a possible means of
influencing international trade in agricultural commodities.
Two of tlie papers concern themselves with very broad regulatory
issues affecting the working of much of the economy. The paper on
"Industrial Restructuring: A Policy for Industrial Competition" is a
sweeping proposal to change by legislation the nature of the competi-
tive game by reducing the size of some of the large players. The paper
on "Fine Tuning the Present System" includes a set of suggested
administrative actions to improve tlhe wav the present agricultural
marketinff system works.
Implicit in each of the 1)apers is the assumption that the establish-
-ment, or the extension of the institutional arrangement will have direct
,and indirect impacts on the performance of tlhe marketing system
which would in turn have an impact on farmers' and consumers' wel-
fare. Since the arrangements have not been actually tried, conse-
quences presented are the authors' best educated estimates and thus
must l)e considered as tentative.
On behalf of the ad hoc committee and authors I thank you, your
committee and your staff for publishing these papers as a Committee
Print. Hopefully they will provide the basis for a useful and con-
OLAx D. FORKEB,
Professor of Marketing and Chairman, Ad Hoc Comnmittee.
The American agricultural producer and the marketing system
that delivers his products to consumers across the Nation and around
the world are testimonials to modern technology and organization.
The 215 million American consumers enjoy the widest variety of
wholesome foods and at the most reasonable cost that any group of
consumers has ever enjoyed in the history of mankind. At the same
time, this American food and fiber machine has been able to supply
a good share of its production to a hungry world.
On the whole, these achievements have gone unnoticed. We all have
come to expect quality fruits and vegetables on our grocery shelves
year around. We want choice beef, pork, and poultry every day just
as we expect our milk, eggs and other products to always be fresh.
While the achievements are accepted as commonplace. tihe recent
disruptions in this marketing system have not gone unnoticed. Since
the first large Russian grain deal-the signpost of the changing sit-
uation-agricultural prices have become unstable and generally in-
creased. In the nearly 4 years since the Russians came, we have also
experienced a succession of unexpected and complicated marketing
problems. The worst weather conditions in history played havoc
with supplies in 1974, and the energy-crisis has totally distorted the
cost relationships for production and marketing, to cite just two.
The persistent tight supply position and higher production costs
have impacted on retail prices of food. The long-term downward
trend of consumer expenditures on food as a share of disposable
income basis has been reversed. This reversal has focused the attention
of everyone on our food marketing system.
The Subcommittee on Agricultural Production. Marketing, and
Stabilization of Prices of the Committee on Agriculture and Forestry
has, for nearly 2 years, been working on this complex question. We
recruited the Department of Agriculture and numerous scientists
from across the country to prepare a descriptive analysis of our mar-
keting system and established the functional costs of each of the
marketing steps. In addition, we have compiled a large number of
empirical analyses of the impacts of market changes upon consumers,
processors, and producers. The subcommittee held field hearings
on this question in Colorado, Texas and Kentucky in February and
March of 1975. There we saw, first hand, the production, processing,
and distribution of food products and also heard about the problems
from dozens of representatives of every sector of the food marketing
system including producers and consumers.
Because of the complexity of the issues, we are the first to admit
that our findings are not conclusive. No single villain stands out. Nor
can we suggest that increased costs are a short-term phenomenon. It
is evident, however, that the "system" is interdependent. It is also
clear that without the system, the welfare of all Americans would be
Although no quick panacea is at hand, there are problems and a
tuneup is in order. In fact, major modifications might be demanded
due. to the changing economic and technological circumstances.
However, any such modification must be done with care and with
awareness of the impacts. As a result, as chairman of the subcom-
mittee, I requested that the Department of Agriculture begin an assess-
ment of current marketing practices and to focus on alternative mar-
keting systems that might more efficiently deliver agricultural products
to consumers. This effort is now underway and will provide needed
information over the next 2 years.
This effort seems especially important because a large share of the
increased costs of food and fiber is due to cost factors between the
farmer's gate and the consumer's kitchen. In fact, about 60 cents out
of every dollar consumers spend on food goes to market functions-
for transportation, packaging, processing, energy, labor, and profits.
It also seems appropriate because of the distressing fact that while
farm prices go down as well as up, the cost of the marketing functions
only go up. A fairly typical example of this fact is seen in the last
quarter of 1975. During that 3-month period, the farm cost of a typical
market basket of food declined about 7 percent. However, the total
retail price of that market basket of food increased by 11/ percent.
Clearly improved efficiency in the marketing system would be of
benefit to the consumer and also the producer. The consumer would
realize lower costs or better quality products and producers could ex-
pect more equitable returns. Equally important, this could be achieved
without depriving the marketing system of its needed financial returns.
The question of marketing alternatives and the potential benefits
of change in the current marketing system has also been recognized
by scientists in our universities and at the Department of Agriculture.
The National Agricultural Public Policy Committee that is chaired
by Wally Barr of the Ohio State University recommended the forma-
tion of a committee to assess the question of marketing alternatives.
About a year ago, an executive committee was formed for the purpose
of finding a way to carry out the charge. Subsequently, an ad hoc
committee, made up of 26 agricultural economists, under the leader-
ship of Dr. Olan D. Forker, Professor of Agricultural Economics
at Cornell University, has proceeded to do an analysis of marketing
Their operating premise was a simple question, "Is there a better
way?". The ad hoc committee looked at the current situation as re-
viewed in the first paper in the print and from this point, these agri-
cultural marketing experts looked for and at the options.
I believe they followed a legitimate and laudable approach. The
12 papers they have produced provide insight into many current prob-
lems and a virtual feast of food for thought. It should also be noted
that their efforts to assess the possible options are balanced with state-
ments of potential costs as well as gains.
In true academic tradition, the authors disclaim any final conclu-
sions and suggest their papers are working papers. However, I think
they are well-thought-out products that can be of value to anyone
who is interested in our marketing system and they are imperatives
for anyone who wants to assess the possible alternatives that might
improve the system. For these reasons, I am happy to have this oppor-
tunity -to publish the 12 papers as a committee print. As chairman of
the Subcommittee on Agricultural Production, Marketing, and Sta-
bilization of Prices, I wish to extend my appreciation to each of the
individuals and their supporting institutions or agencies for their
contribution in this effort.
Further, I believe that all the materials contained herein are
soundly based on theory and empirical evidence. However, the Mem-
bers of the subcommittee do not necessarily agree with all of the asser-
tions made in this publication, nor do these views necessarily reflect the
official position of any of the associated institutions or agencies.
WALTER D. HUDDLESTON,
Chairman, Subcommittee on Agricultural Production,
Marketing, and Stabilization of Prices.
Digitized by the Internet Archive
Letter of transmittal----------------------------------------------- III
Foreword ---------------------------------------------------------- v
The situation now------------------------------------------ 1--------
Is there a better way-------------------------------------------- 1
The winds of change--------------------------------------------- 2
A want list---------------------------------------------- ----- 4
Ten marketing alternatives---------------------------------- 7
Centralized remote-access markets-- ----------------------------------- 9
Introduction -------------------------------------------- 9--------
Electronic trading------------------ ---------------------------- 10
How and where electronic trading is used------------------------- 11
The necessary elements for success------------------------------- 13
Anticipated results of electronic marketing: Gains and losses------- 14
Implementation of electronic marketing systems------------------- 15
Forward deliverable contract markets--------------------------------- 17
Introduction --------------------------------------------------- 17
A definition of FDCM------------------------ ------------------- 17
The applicability of FDCM------------------------------------- 19
Some examples------------------ ------------------ ------------20
Expected economic consequences of FDCM------------------------- 22
Implementation ------------------------------------------------ 26
Conclusions ------------------------------------------------ ---- 27
Mandatory public reporting of market transactions--------------------- 28
Introduction --------------------------------------------------- 28
A mandatory market reporting system---------------------------- 29
How and where mandatory reporting is applied--------------------- 33
Conditions for implementation--------------- -------------------- 34
Results expected----------------------------------------------- 35
What would be necessary to get mandatory reporting- ------ 36
Conclusions ---------------------------------------------------- 37
Exclusive agency bargaining----------- ------------------- ----------38
Introduction --------------------------------------------------- 38
A definition of exclusive agency bargaining------------------------ 38
Why exclusive agency bargaining is a useful tool--------------- ---- 39
Examples of exclusive agency bargaining-------------------------- 39
Areas of potential use and alternative institutional arrangements- .- 40
Advantages and disadvantages of exclusive agency bargaining------ 41
The design of enabling legislation-------------------------------- 44
Operations of associations---------------- ----------------------- 46
Methods of achieving exclusive agency bargaining----------------- 47
Vertical integration through ownership-------------------------------- 49
Introduction --------------------------------------------------- 49
Individual and group integration--------------------------------- 50
Requirements for success---------------- ------------------------52
The consequences of vertical integration-------------------------- 52
Methods of achieving vertical integration----------------- --------55
Joint ventures among cooperative and noncooperative marketing firms--- 57
Examples of existing joint ventures---------------- --------------- 58
Conditions necessary for joint-venture success.---------------------- 60
Potential impact on joint-venture participants---------------..------- 61
Potential impact on nonparticipants------------------------------- 63
Implementation ----------------------------------------------- 64
Marketing orders-------------------------------------------------- 66
Introduction --------------------------------------------------- 66
Possible future uses of market orders------------------------------ 68
Conditions for implementation------------------------------------ 70
Potential impacts--------- ------------------------------------- 71
How to achieve expanded marketing-order programs---------------- 71
Marketing boards----------------------------------------- --------- 73
Introduction --------------------------------------------------- 73
Establishment and use of marketing boards------------------------ 74
Implications of marketing boards for the United States------------- 78
Establishment and successful operation--------------------------- 80
Fine tuning the present system--------------- ----------------------- 82
What is a fine-tuning strategy?----------------------------------- 82
Fine tuning to reduce effects of monopoly in agriculture------------- 83
Fine tuning to improve the producers' market position--------------- 86
Fine tuning to improve market information and pricing------------- 87
How to achieve fine tuning--------------------------------------- 88
Effects of fine tuning------------------------------------------- 89
Limits of fine tuning---------------------------------- ---- -----90
Industrial restructuring: A policy for industrial competition------------ 91
Introduction --------------------------------------------------- 91
The current status of antitrust legislation, enforcement, and concen-
tration ------------------------------------------------------ 91
Alternatives for dealing with market power------------------------ 93
Basis for diffusing concentrated industries------------------------ 94
Implementing restructuring-------------------------------------- 95
Consequences of reducing market power--------------------------- 96
Concluding thoughts---------------------------------- ---- -----99
The options in perspective------------------------------------------ 104
The marketing problems addressed------------------------------- 104
Producer initiatives versus government involvement---------------- 105
Commodity applications---------------------------------------- 105
Can combination be used-------------------------------------- 107
How will benefits be distributed?--------------------------------- 107
Implication of benefits for policy--------------------------------- 109
THE SITUATION NOW
(By V. James Rhodes1 and Olan D. Forker 2)
Is THERE A BETTER WAY
"There must be a better way to market my products!" Such is the
bitter cry of an isolated producer unable to obtain more than a single
bid for his crop. It is also the optimistic assertion of a young, com-
petent farm manager who believes his many achievements in improving
his productive efficiency can surely be duplicated in his marketing
program. Whether the search for better marketing alternatives reflects
a do-or-die crisis or rather a simple seeking of improvements, it is
common to many producers and others in the marketing system.
The search goes down many avenues. Important-and sometimes
impossible-demands are made on the performance of the marketing
system. Prices and pricing are frequently at the head of the list. How
do I, as a farmer, ensure that I obtain a truly competitive price for my
products? When there are only two or three readily accessible handler
markets and their offer prices are usually the same, is that a com-
petitive price? Or even if there are many handlers, but they sell to only
two or three processors, am I getting a competitive price reflected back
Price fluctuations, always important, have increased in magnitude
the past few years. Once there was only a little embarrassment when
a neighbor's cattle brought 50 cents more on Wednesday than mine
brought the following Monday. Now, when the possible price difference
is $2 to $4, one asks is there any equity in such a marketing system?
Why do we farmers always have to be price-takers? How can we gain
some influence over pricing-as the dairymen have done-and level out
these wild price fluctuations? Why should I have to take $4 a bushel
less for my soybeans in June than I could have received at the combine
last fall ?
Are there opportunities for bettering the price-quality relationships
in the market place? Researchers say a high-cutability steer is worth
50 percent more than a low-cutability steer. I have the know-how and
the production system to produce those more valuable cattle. How can
I develop a marketing plan that will pay me more accurately for the
quality delivered, whether it is cattle or wheat or fresh vegetables?
I'm basically a corn-soybeans producer on this 600 acre Iowa farm,
but I farrow and feed out 100 litters of pigs a year. A few of my
neighbors ship their hogs to the terminal market, but that's too costly
and inefficient a marketing method to suit me. There are five buying
points within a ten mile radius, so I get on the telephone to them
when I'm ready to sell hogs. I'm fairly satisfied with the competitive-
1Professor, Department of Agricultural Economics, University of Missouri.
2 Professor, Department of Agricultural Economics, Cornell University.
ness of their bidding. I do get downright disgusted when I sell at
$2 or $3 less than if I had sold a week later. Those price fluctuations
are too big and unpredictable. I don't think the quality premiums are
half what they ought to be; grade and yield selling in the meat makes
the most sense to me. If we farmers had some kind of an organization
to police grade and yield selling I might give it a try.
I'm a Kansas wheat producer. The farm is paid for, and I figure
I can stand the ups and downs of wheat prices and the yearly fluctua-
tions in yields. It does bother me when I see how little of the price of
a loaf of bread or a box of breakfast cereal ever gets back to me. More-
over, I'm still a little mad about the Russian Wheat Deal. The hard
work is in the production and the money is in the marketing. And
then, when the export market makes production attractive consumers
complain about high prices, so the President arbitrarily closes the door
to exports and prices fall. If farmers would unite together, we ought
to be able to change that.
I grow green peas utinder contract to a local proprietary food proces-
sor. The price is set prior to harvest. My only choice is to grow or not
to grow. The processor, of course, does take all the market risk of a
price change between planting and harvest time. The contract price
is not competitively determined because I have no choice and little
basis for comparison. There must be a way to bring competitive forces
to bear on the contract price determination taking place before
I am an egg producer. My price is determined by a private news
reporter who indicates through a price quotation his view of the cor-
rect market value on any day. Only one, small-volume, organized
exchange functions for the industry. Volume is too low for me to have
much confidence in the price information it generates, and I don't feel
very comfortable with the omnipotence of the private news reporter.
How can we develop more trading volume on the organized exchange
so I can feel comfortable about the values determined there?
Milk marketing has come a long way since the chaotic days of the
Depression. Milk marketing orders have stabilized prices and helped
ensure an adequate supply of milk for fluid uses. But milk selling-
prices appear to change slowly and not always in relation to changes
in supply or market conditions. Vertical and horizontal integration
through organized cooperatives has progressed farther in milk than
for any other commodity group. Yet some cooperatives continue to
have financial problems, and there are continual problems in the bal-
ance of power and control over their operation and the manner in
which the costs/benefits of cooperatives are shared among producer-
members. Although many point with pride or envy to what has hap-
pened in marketing policy toward milk, there must be a better way
even here. Other commodity groups have their own unique set of prob-
lems and opportunities. Often it is not clear if a change in institutions
or institutional arrangements will provide a better way for farmers
to market their products.
THE WINDS OF CHANGE
It would be easy to overstate the extent of new agricultural market-
ing problems. Some are as old as the country itself. Problems of market
access, lack of buyer competition, inadequate market information, and
extreme price fluctuation have never been totally absent. Likewise, new
marketing institutions have developed from time to time to meet per-
ceived problems. Even as the terminal livestock market, one of our
most venerable institutions, fades away it is well to remind ourselves
that less than a century ago it was a flourishing new answer to utiliz-
ing the new railroad system as a route to Eastern markets. Thus, it is
useful to re-examine periodically the particular changing environment
of our day which shapes the opportunities for new answers to old
The changing size and specialization of farm units is a most im-
portant factor. Larger size eliminates much of the need for the assem-
bling and consolidating of shipments, functions once provided by
many small handlers. Larger size and specialization permits more
interest and expertise of the producer in marketing. But these factors
also increase market risk and sensitivity to large swings in price.
Of likely greater importance is the continued growth of the sophisti-
cated systems agribusinesses use to organize the procurement of farm
products. While these systems are at varying stages of development,
there is a growing degree of vertical coordination of many products.
Many agribusiness firms have the depth of finance and management to
coordinate, and sometimes integrate, the flow of products from farm
to retail. For some products, such as canning-vegetables, agribusiness
handlers and processors have set up such extensive acquisition systems
the managerial role of the farmer is sharply curtailed. In the extreme,
as in broilers, the independent farmer has access only to a market for
his labor, not to a market for broilers.
Larger, more sophisticated and centralized cooperatives are part of
today's marketing environment. Cooperatives are central to marketing
products such as milk. A few cooperative brand names are now well
enough accepted to give them merchandising leverage at retail. On the
other hand, some bargaining cooperatives, handle a sufficiently large
fraction of a product to negotiate effectively with handlers. There is
renewed interest among farmers in cooperatives to use the system as a
way to gain market influence and forward integration. Yet many
farmers still tend to believe such group action is a fine thing-for other
farmers-but maybe not for themselves. Even as cooperatives are ac-
complishing more, there are renewed questions in government about
the role and power of cooperatives. Group efforts by farmers run the
risk of encountering very limiting regulations.
There is a new awareness among farmers of a problem that might be
called market security. There was a time when one need not ask if there
would be a demand tomorrow for a farm product. After all, people
have to eat, and there will always be a demand for pork, beef, bread,
cream, and butter. But the recent and dramatic decline in per capital
consumption of the last two items has shaken that confidence. We live
in a merchandising world where items sell because they are sold as
much as they are demanded. Accordingly, there is more and more in-
terest in both agribusiness and independent farmers in having control
of those merchandising activities which do today's selling and there-
by influence tomorrow's demands. Thus there is more farmer interest
in forward integration, and "marketing" is concerned with the whole
system-all the way to the consumer-rather than stopping with a
satisfactory sale to the first handlers.
Finally, the recent withdrawal of the Federal Government's heavy
influence on market prices and supplies of basic commodities has stimu-
lated new interest in industry do-it-yourself programs. Those govern-
ment programs affected the prices and supplies of livestock and poultry
and even of many competing specialty crops, so that their impact was
quite widespread. Much of the recent wild price fluctuations, not only
in corn and wheat, but also in livestock, poultry, and even in annual
fruits and vegetables, can be attributed to the jump in our exports and
the elimination of Commodity Credit Corporation grain stockpiles.
A WANT LIST
A complete list of the objectives of farmers, agribusiness firms, and
of the general public for agricultural marketing policy alternatives is
not possible. Fortunately, neither is it necessary for the task at hand.
Rather, a statement of some basic objectives or expectations gives a
useful check list as various marketing options are discussed later.
Expectations of farm-ers.-Numerous values of farmers are reflected
in their expectations of a marketing system. A farmer tends to be a
maximizer. He wants the best possible price. A farmer-like almost
.everyone-has strong feelings about equity. These concerns may in-
vlude objections to certain practices as "unfair"; demands that all
sellers in comparable situations be treated equally; resentment that
agribusiness gets more than its share of the market decision-making
and monetary rewards.
Many farmers emphasize their personal freedom as entrepreneurs.
Such farmers may prefer maintenance of many options and a system in
which they make all the decisions up to the point of sale. Other farm-
ers are reconciled to making trade-offs which lessen risks or to achiev-
ing more personal security by accepting the discipline of an agri-
business contract or the discipline of group effort. The variation among
farmers' expectations is affected by their accustomed marketing en-
vironment. Farmers who have always sold in open markets are more
likely to have expectations geared toward such markets than are farm-
ers who operate in bargaining or vertically integrated environments.
Regardless of the type of market system, a farmer generally desires
a system that-
1. (a) treats him and his fellow-producers equitably, that is, a
system of pricing and market access based upon his products'
market performance rather than the personal attitudes of the
buyer or contractor toward him as an individual;
(b) provides adequate prices in view of production costs. While
endless controversy can be generated by the conflicting views of
what constitutes adequacy, this objective is frequently voiced.
Perhaps there would be most agreement on the importance of
realizing reasonably predictable prices at the time production
decisions are made;
(c) reflects to him the quality-price differentials paid by con-
(d) rewards his contribution as adequately as it rewards mar-
keting firms for their contributions.
In addition, a farmer selling in what purports to be a competitive,
open market generally desires-
2. (a) access to conveniently located market outlets;
(b) a viable choice among valid competing buyers;
(c) the ability to move to market and/or sell any amount that
he may choose at any time;
(d) sufficient timely and adequate market information so that
he may obtain the best available offer at any given time and so
rationally time his sales; and
(e) sufficient confidence in marketing processes and institutions
so that lie feels the system is not working against him nor against
A farmer operating outside the open market (producing for a
contractor or selling through a bargaining association) places his reli-
ance upon a set of forces different from those of competing buyers
and has a different set of objectives to add to those listed in 1. He
3. (a) bargaining power equal to or, preferably, exceeding that
of the procurement agency with which he, his marketing coopera-
tive or his bargaining associations, deals; and
(b) the ability as an individual to obtain equitable'treatment
vis-a-vis other l)roducers within the contracting or marketing or
bargaining process. Where there is group marketing or bargain-
ing, such individual equity may depend much upon the rules of
the game enforced within the group.
Various other objectives are entertained of course. Many a farmer
in group situations would like to be a free rider who reaps the benefits
of group action without any of the disciplines. It may be true that
a farmer desires accurate quality-price differentials only when he
has a premium product, and that when he pleads for "equity,"' he
really wants better treatment than his neighbors.
Such obviously unrealistic expectations can be readily dismissed.
However, less obviously unrealistic expectations may present difficul-
ties. On occasion farmers may have as good a marketing system as is
within their political and economic power to achieve, but they may
continue to be involved in various abortive attempts to change it be-
cause of "too high" expectations.
Expectations of Agribisiness firms.-TliThese expectations vary ac-
cording to a company's size and complexity. Some firms, such as small
family-run elevators, may be operated by individuals who share with
many farmers basic concerns about entrepreneurial freedom and
equity of treatment. However, much of agribusiness is larger corpora-
tions operated by professional management. Their expectations and
their efforts exert strong forces upon the types of marketing options
open to farmers in various market situations.
While an agribusiness firm is also a maximizer, it may be equally
concerned with growth. It aims for an adequate and, frequently, a
growing stream of profits and sales. A growing firm will attract better
caliber management and will motivate and reward managers more
Security of the firm is given a large premium. Managers do not like
large risks. They generally resist large fluctuations in sales and profits,
preferring smaller, more stable sales and income streams to larger,
more viable ones. Likewise, a vertically controlled system is frequently
more appealing than dependence on the uncontrolled open market.
Managers are expected to manage, and they like to minimize environ-
mental factors which are outside their managerial control.
Managers perceive the market channel as a power system. They gen-
erally believe they can maximize the security of the firm and increase
their market options by actions and arrangements which increase their
control through the market channel. Examples are many. Develop-
ment of strong brands with good consumer acceptance is a prime way
for processors to increase their power and security in a market chan-
nel. Vertical integration, forward and backward, generally increases a
firm's power within a channel. Various contractual measures to insure
the continuity and stability of farm products procured may increase a
processor's power within the marketing system.
The amount of agricultural products supplied constitutes the size
of the current demand for the handling, processing, storage, and trans-
portation services provided by most agribusiness. Fixed facilities and
costs are ordinary quite important, so a big crop is almost always more
profitable than a small one. Hence the short-term interests of farmers
and agribusiness conflict.
Timely and accurate information about all relevant supply and de-
mand conditions are regarded very highly by agribusiness firms. Their
attitudes toward the public versus private provision of that informa-
tion vary. In many situations large firms could probably increase their
own profits and market power by development of a proprietory system
available only to themselves. Where a public information system is
available, agribusiness firms expect to use it, of course. But agribusi-
ness firms generally have more and better information about demand
conditions than is presently available to producers, and they tend to
guard such information as a private asset.
While several objectives of agribusiness motivate some form of ver-
tical integration into agricultural production, there are frequently
some important deterrents. The amount of risk in agricultural produc-
tion is one of the most important. WVhile agribusiness involves many
firms with very large assets, their capital is still small compared to the
possible annual production losses in major products such as grains and
livestock. Consequently, firms may be interested in marginal efforts to
control supplies, but may be very reluctant to enter into large-scale
commitments involving significant increases in risks.
Expectations of the general public.-Consumers expect adequate
supplies of food at reasonable prices. While an adequate supply of food
in the aggregate at an overall reasonable price level is sufficient for the
prevention of hunger for most of the population, what about fluctua-
tions in the supplies and prices of individual foods? Sharply higher
prices of major expenditure items such as beef or milk or baked goods
is likely to cause considerable dissatisfaction. Presumably similar
"shortages" of cranberries or carrots is of relatively less concern.
How to define "reasonable price" is a moot question. One consumer
standard for a reasonable price is what it was last year, so sudden and
large price increases are very likely to be regarded as unreasonable.
Another standard of reasonableness is price in relation to consumer in-
come. A nation accustomed to spending a smaller proportion of its dis-
posable personal income each successive year on food is likely to resist
a reversal of that trend. Yet another standard of reasonableness is re-
lated to farm and agribusiness income. Non-agrarians have a consider-
able reservoir of good will toward farmers-they do not expect to eat
cheaply at the expense of reasonable incomes to farmers and farm labor.
That expectation is two-edged, of course. Consumers can easily be
irritated by evidence that monopoly returns are being earned by those
producing and/or marketing their food supply.
Consumers have long shown a taste for variety, for new products,
and for convenient labor-saving items; however during the 1974-75
recession, there were drops in sales of numerous specialty and con-
venience items. Perhaps the message is that consumers want variety
and welcome the opportunity to try new items, but they expect value
commensurate with cost.
Consumer activists voice numerous specific expectations about in-
dividual products and about the general working of the food produc-
tion-marketing system. On the other hand, the mass of consumers seem
little interested in many of these detailed aspects. Perhaps many
would agree that the public expects accountability: they want evidence
that the food system is providing safe, palatable food in a rational,
Implications of these expectations.-A marketing process or institu-
tion cannot be all things to all people. Conflicts among the expectations
of farmers, agribusiness, and consumers are inevitable. Yet it is diffi-
cult to imagine the existence of a food marketing system which does
not meet some of the basic aspirations of each group. These propor-
tions need not be equal. Some marketing systems exist that are biased
toward the aspirations of farmers and others toward those of agri-
business, depending upon which group has the greater muscle to
achieve its ends.
The message to farmers considering new marketing alternatives is
clear: First, the proposed alternative must sufficiently meet farmers'
aspirations to receive their support. Second, it must meet the aspira-
tions of agribusiness or farmers must have the muscle to withstand the
economic and political power of agribusiness to put it over on their
own. Third, failure to meet the basic aspirations of the general public
may lead to political defeat. That these three conditions are formida-
ble cannot be denied. In fact, in numerous situations around the coun-
try, they eliminate serious consideration of the alternatives described
in the papers which follow. The task is to find those situations where
a new marketing alternative presents real opportunities to farmers.
TEN MARKETING ALTERNATIVES
Each of the ensuing ten papers discusses one or more specific policy
issues that do or could effect substantially the market options open to
farmers. There are many contrasts among them. Some involve rather
narrow and specific proposals of interest in a few commodities. Other
proposals, such as industrial restructuring, are bold. sweeping, even
controversial, and have implications for everyone in the economy.
Some proposals involve making a competitive, open-market system
work better. Others, in effect, abandon the competitive open market,
and develop a basis for farmer group action and market power. Most
of the proposals focus mainly on the domestic market, although one
considers the possibilities of more centralized control of foreign trade.
Contrasts aside, the selection criteria give some commonality to the
proposals. First, each is believed to be an alternative consistent enough
with the stated objectives of farmers to be worth consideration in some
part, and occasionally in all, of agriculture. Second, none is presented
as the solution for any part and certainly not for all of agriculture.
Third, this set of proposals is not designed to be the complete set which
ought to be considered. Rather, it is a sampling of marketing alter-
natives. Time limitations of the authors, cost limitations of the spon-
sors, and patience limitation of the readers dictate a selection rather
tlian a census. Not all readers, nor even all of the authors, will agree
that this selection is necessarily the best one. We hope that after read-
ing the papers you will agree they are a useful, thought-provoking
discussion of a set of marketing alternatives relevant to much of
Market mechanisms concerned with determining price and main-
taining market access for individual farmers are discussed in:
Centralized Remote-Access Markets;
Forward Deliverable Contract Markets; and
Mandatory Public Reporting of Market Transactions.
The next set of market institutions evaluated generally involve
group action. Some involve attempts to obtain market access and to
influence pricing stability through cooperative marketing or bargain-
ing. The possible uses of marketing orders and boards to coordinate
the quantity and quality of production with market opportunities are
also examined. The papers are:
Exclusive Agency Bargaining;
Vertical Integration Through Ownership;
Joint Ventures Among Cooperative and Non-Cooperative Mar-
Marketing Orders; and
The last two papers concern very broad regulatory proposals affect-
ing the working of much of the economy. Industrial restructuring is a
sweeping proposal to change by legislation the nature of the competi-
tive game by reducing the size of some of the largest players. Fine
tuning includes a set. of suggested administrative actions to improve
the way the present agricultural marketing system works. The pro-
posals are covered in:
Industrial Restructuring: A Policy for Industrial Competi-
Fine Tuning the Present System.
CENTRALIZED REMOTE-ACCESS MARKETS
(By Dennis R. Henderson,' Lee F. Schrader,2 and Michael S. Turner 3)
Thin markets are characterized by low volume, lack of competition
among bidders, inadequate information, unaccessibility to traders, and
a high potential for price manipulation. In such markets the validity
of prices erodes to the point where they often do not closely reflect true
market conditions, that is, prices generated in thin markets frequently
are not representative of actual supply/demand pressures, are not
accurate measures of product value.
Thin markets result from a movement away from centralized mar-
kets to country markets, local auctions, direct buying, and contract
production. A major problem occurs when many want to use market
prices as the basis for establishing product values but few are using
an open market for buying and selling. Centralized, remotely-acces-
sible markets offer an alternative which combines many of the ad-
vantages of direct buying and decentralized markets with the pricing
accuracy normally associated with large, open markets.
Imagine, if you will, a marketing system with the potential to ex-
pose the offering and bid of each seller and each buyer; a market that
moves products directly, or nearly so, from seller to buyer; a market
that can be entered by both buyers and sellers wherever they are; and
one that provides a ready source of instant market news. A tall order?
Yes, but clearly within the realm of possibility. These are electronic
markets and some, as will be noted, are already in use.
Essential to these markets is the separation of two distinct but
often combined marketing functions: negotiating the trade, and physi-
cal transfer of the product from seller to buyer. In most markets-
grain elevators, livestock auctions, terminal markets-these functions
are often performed simultaneously out of tradition, but not necessity.
In order to achieve a high degree of pricing accuracy it is necessary
to have a highly competitive market environment with large numbers
of buyers and sellers. But the assembly of buyers, sellers, and products
at a single exchange point is costly and inefficient. The implications
are clear: develop a market system centralizing the process of negoti-
ating trades; allowing products to move directly or nearly so from
seller to buyer; and accessible to buyers and sellers wherever they are.
How can this be done? It's not difficult if the products can be de-
scribed in terms meaningful to both buyers and sellers. This allows
trading without personal inspection by the buyer. Description selling
is not new, and grades and standards facilitating it exist for most
Professor, Department of Agricultural Economics, Ohio State University.
SProfessor, Department of Agricultural Economics, Purdue University.
s Professor, Department of Agricultural Economics, University of Nebraska.
agricultural commodities. What is new, or at least relatively so, is the
technological capability to centralize description selling in a way that
is easily and readily available to all potential traders, regardless of
their location. This is where modern electronic communications and
computer technology can be directly applied to marketing.
While there are many variations electronic markets can take, they
all follow the same general model. Sellers describe their products con-
sistent with standard grades. (Third party inspectors are used where
grading is complex.) Grading can occur on the farm or at a local
assembly point, with similar products from different sellers com-
mingled into truckload or carload lots prior to being offered for sale.
Commingling may occur at a local assembly point prior to sale or "on
paner" for actual assembly after the sale, but prior to delivery.
Offers to sell are disseminated to potential buyers at remote locations
through two-way telecommunications. Through the same communica-
tions medium buyers bid against each other until acceptable terms or
a stalemate is reached. Offers to sell can be negotiated with buyers
auction style, with or without a minimum "No Sale" price being estab-
lished by the seller, or can be offered at firm prices, with buyers select-
ing among available offers. Conversely, buyers can first present buy
orders with sellers subsequently offering products competitively to fill
the orders. After a sale is negotiated shipping arrangements are made,
either directly to the buyer or through an assembly point.
Variations in this general model include the use of different com-
munications media and methods of negotiating sales, frequency of sales,
and geographic and commodity coverage. Telephones and teletype are
the major communications alternatives. Sale frequency can range from
continuous through daily or weekly to special sales scheduled on an
"as needed" basis, depending upon the commodity. For example,
slaughter hogs might be traded on a continuous basis, eggs daily, lambs
weekly, and feeder calves on a special fall-spring schedule. To date,
most electronic markets are limited to single commodities because of
the rather unique requirements of each, although multiple commodity
systems are conceptually feasible and might develop in time. Single
systems could be established to serve local, regional, national, or even
continental markets. Clearly, the larger the market the greater the
competitiveness, but also the greater the development and operating
Methods for negotiating sales range from relatively simple to
Manual tradinghouses, where market personnel match tele-
phoned bids and offers.
Telephone auctions, where offers-to-sell are auctioned via a con-
ference telephone connection to potential buyers.
Teletype auctions, where sellers' consignments are listed on a
teletype network of potential buyers, then offered at a steadily
declining price until a buyer activates the "Buy" key on his tele-
Computerized tradinghouses, where traders communicate direct-
ly with a computer via telephone and/or teletype. The computer
accepts, compiles, and stores bids and offers, and completes trans-
actions by matching bids and offers.
These electronic markets vary dramatically in complexity and ca-
pacity. The choice depends upon the conditions in a market: number of
traders; volume traded; geographical market coverage; frequency of
sales; and resources available for market development.
How AND WHERE ELECTRONIC TRADING Is USED
Several markets have evolved which facilitate centralized, remote
access trading. Commodity futures markets are the best-known exam-
pies. In these markets trading is centralized, but buyers and sellers can
submit bids and offers from remote locations. Futures trading is a
special case, usually concerned with a specific commodity grade, a
limited delivery area, distant delivery dates, specified contract size, and
speculative trading and therefore is not a satisfactory example of the
potential applications of centralized remote-access trading.
Recently, several market systems have been developed similar to
those discussed above. These vary in commodity, geographic area, as-
sembly and grading procedures, as well as in methods of operation.
They all allow remote access by traders to centralized trading, and
result in direct or nearly direct shipping from sellers to buyers. These
systems do not cover all possibilities, but do provide insights into how
such markets can be organized. Some examples merit a closer look.
MAanual tradinghmioses.-This is best illustrated by the Egg Clear-
inghouse, Inc. (ECI) of Durham, New Hampshire. ECI was estab-
lished primarily by egg producers to fill the need for a competitive
price discovery mechanism. It is a manually operated telephone clear-
inghouse which accepts bids and offers, and matches trades between
members anywhere in the 48 contiguous states. Trades are made on
gradable nest-run eggs, with quality and weight specified for each lot
based upon a test sample. Direct delivery is arranged once the trade
is completed. Price information is disseminated based upon ECI trad-
ing. Trading on the present basis began in 1971 with volume building
slowly. During 1975 an average of 30,000 cases per month was traded.
Telephone auctions,.-Probably the most poI)ular of the electronic
selling methods used in the United States to date is the telephone auc-
tion, or "teleauction". The Virginia Tel-O-Auction, first developed in
1962, is apparently the oldest. Originally established for marketing
slaughter hogs and feeder pigs, it has since been used for slaughter
cattle, feeder cattle, and market and feeder lambs. The feeder-pig and
market-lamb auctions have proved the most popular, with about
400,000 pigs and 90,000 lambs sold in 1975. There are successful feeder-
pig teleauctions in at least seven other states, accounting for a total
volume exceeding 1 million head per year. Teleauctions are being con-
sidered or developed by producers in several areas, with most interest
focused on market lambs and feeder cattle.
These markets are very similar. They all utilize conference tele-
phone calls for simultaneous two-way communications between an auc-
tioneer and widely separated bidders. Conference calls are generally
limited to a maximum of 15 separate locations, thus some markets
require that several buyers meet at a common bidding location while
others allow individual connections for each bidder. All Lell on the
basis of grades or standards. Some assemble and commingle livestock
at local yards prior to the sale, while others inspect the livestock on the
farm prior to consignment and physically assemble buyers' lots after
thle sale. Generally, when livestock is sold on-farm, buyers can choose
any delivery date within a specified period following the sale, and
sellers often can elect a "No Sale" price.,
Use of these markets has been voluntary, and they have become
important local market alternatives where they exist. Their signifi-
caniice with respect to the total market, however, has not been great.
Teletype aucwt;os.-Perhaps the most successful of the electronic
sellin- methods to date has been the teletype auction, used extensively
and almost exclusively for marketing butcher hogs in Canada. The
first market was developed by the Ontario Hog Producers Marketing
Board in 1961 and has since been adopted with some modification in
Alberta, Manitoba, and the Maritimes. These have been established
by producer referendum, and their use is essentially mandatory with
limited by-pass possible. About 75 percent of Canada's hogs are sold
through these markets.
Teletype auctions are very similar to telephone auctions. The major
differences are that each buyer has his own direct teletype connection,
thus greatly expanding trading capacity; and that typically, a Dutch
or regressive auction is used rather than a progressive or English
auction, thus accelerating the selling process. As with the teleauc-
tions, standard grades are used. Some provincial systems assemble hogs
prior to sale, while others sell prior to assembly. No application of this
system has yet been made in the United States.
Computerized tradinqghouses.-This is one of the more innovative
of electronic marketing methods and offers almost unlimited trading
potential. Computers can handle vast amounts of information very
rapidly and facilitate direct trader interaction with conventional tele-
type terminals, TV-like cathode-ray terminals, and verbal telephone
responses through "talking computers." These markets function much
like manual tradinghouses, but with significantly greater capacity.
Truly national or even continental markets are feasible.
To date one computerized trading system has been developed for
agricultural commodities, TELCOT, operated by the Plains Cotton
Cooperative Association (PCCA) in Lubbock, Texas. On TELCOT
cotton buyers are interconnected to the exchange via cathode-ray
terminals. Sellers place their offers and minimum acceptable price on
the market by contacting a PCCA operator via a WATS telephone
call. The offers are then entered into the TELCOT computer that dis-
seminates them over the network of buyers' terminals. Buyers submit
bids to the computer via their terminals, and the computer accepts
the highest bid submitted within a specified bidding period-usually
15 or 30 minutes-depending upon the volume of trading. If the high-
est bid is below the seller's minimum offer price no transaction occurs.
If the bid is satisfactory delivery is arranged after the sale with the
computer handling the' paperwork. Trading and price information
is available to all traders. Proposals for similar systems have been
developed for eggs, slaughter hogs, and feeder cattle.
The brief descriptions, though understated, are illustrative of ac-
tual electronic marketing systems, and provide a basis for evaluating
the conditions under which such systems can be successful and the
resulting market performance.
THEI. NECESSARY ELEMENTS FOR SUCCESS
Several conditions appear to be important to the success of elec-
tronic markets for agricultural commodities. These include character-
istics basic to the commodity or industry, plus conditions established
by the design and operation of the electronic market itself. Some of
the conditions necessary for successful implementation must pre-exist
within the system.
Potentially competitive markets.-Electronic marketing appears to
be ideally suited to situations where there is an imbalance in market
power between buyers and sellers, providing the powerful side accepts
the system. But the potential for a competitive bidding process must
exist. Such systems offer few advantages in situations where a single
seller or buyer dominates.
Trader interest.-Traders must perceive a need for a more competi-
tive market, be willing to trade on a description basis, abide by their
commitments to buy or sell, and have confidence in the system. Re-
duced personal contact with marketing intermediates may render
trader interest difficult to maintain.
Accurately describable commodities.-Products to be traded must
have characteristics that can be accurately described in terms mean-
ingful to buyers and sellers. Too, commodities traded should be capa-
ble of maintaining a relatively stable condition from the time they are
described and offered for sale to the time they are delivered to the
High volume.-Commodities must be produced, bought and sold in
relatively large quantities, and traded on a frequent basis in order to
provide market liquidity and interest. This suggests that such sys-
tems might not be compatible where production and distribution are
In addition, the following conditions should be created within the
marketing system in order to achieve successful implementation.
Trader education.-Electronic selling is complex and foreign to
most potential traders, thus an educational program is essential to
help people better understand the potential benefits associated with
electronic markets and the mechanics of trading.
Performance guarantees.-To achieve trader confidence and fiscal
integrity it is necessary to assure that traders perform as promised.
Contracts between the market agency and traders, bonding, and penal-
ties for misfeasance are ways to accomplish this.
Grading systems.-Development or adoption of meaningful grades
and standards and a method for third-party inspection is essential to
assure market integrity and clear communication among traders.
Large volume trading.-Not only is the potential for high volume
needed, the market must achieve it. Large volume is essential to achieve
an accurate price and efficient trading. This may require mandatory
trading, as in the Canadian systems, at least on a specified percentage
of each buyer's or seller's business.
If the above conditions exist or can be established, an electronic
exchange system may be feasible. A market organization would have
to be established, a selling method selected that best fits the industry
characteristics, and the actual mechanism developed to facilitate trad-
ing. But then, it must be asked, is it worth the cost and effort?
ANTICIPATED RESULTS OF ELECTRONIC MARKETING: GAINS ATD LOSSES
Several potential benefits can accrue to buyers and sellers, to others
in the industry, and to the public in general from the use of electronic
marketing methods, provided the necessary conditions for successful
operation are met. Likewise, there are some potential costs, or limita-
tions. Some of the relevant performance criteria include pricing ac-
curacy, market coordination, marketing efficiency, equity and fair-
ness, and societal gains.
Pricing accuracy is a measure of how well prices reflect the broad
spectrum of supply and demand forces at the time of trade. Probably
the greatest single advantage of remote access electronic markets is
their ability to centralize price negotiations of very large quantities.
This creates a price determination process that accurately reflects the
actual market conditions at the time of trade. Conceptually, the poten-
tial for accurate prices is greater in electronic trading than in any other
system. It does not generate stable prices, per se, but it does maintain
a system of fluctuating prices which helps assure price changes reflect
actual market conditions.
To the extent that electronic trading would help create larger geo-
graphical markets, the process of arbitrating prices between various
areas in the country is greatly enhanced. Geographical price differ-
ences not justified by transportation or quality differences would
quickly disappear. Furthermore, centralized trading enhances the col-
lection, dissemination and accuracy of information on prices and other
market conditions. Superior information may be one of the most im-
portant results. As such, it could replace many existing information
services, both public and private.
Market coordination refers to how well resources are allocated among
the multitude of industries and firms contributing to a given consum-
able product, relative to the ultimate demand for that product. The
major advantage of electronic markets in this area stems from the im-
proved communications between buyers and sellers about desirable
product characteristics that. results from the use of product grades and
standards. This is not unique to electronic selling, but certainly is en-
hanced because of the importance of accurate product description in
these markets. Product quality should improve, as a result, as prices
more accurately reflect quality/value differences. Furthermore, it could
enhance coordination among non-users, if any, by providing an im-
proved base for determining transfer prices.
On the negative side. there is nothing inherent in an electronic mar-
keting system that would reduce uncertainty about future market con-
(litions. And, if mandatory, it would preclude the use of non-price co-
ordination practices, such as contracting and vertical integration, that
max be 1uFe(d to reduce costs or facilitate merchandising programs.
Additionallyv, an inflexible and unprogressive industry could result if
grades and standards become overly rigid.
Marketing efficiency concerns performance of the marketing job at
the lowest cost. The potential to reduce marketing costs is great if a
large volume covering a wide geographical area is handled. More nearly
direct seller-to-buyer movement of the product can be achieved because
the sale is negotiated and the ultimate destination determined before
it leaves the farm or assembly point of origin, thus transportation, han-
dling, and assembly costs can be minimized.
Collecting market information is less costly because the price nego-
tiation process is centralized. Timing of deliveries can be easily ad-
justed to more closely fit the buyer's needs, thus increasing his opera-
tional efficiency. Remote access reduces the time and costs for buyers
and sellers to negotiate trades. Transaction costs may be reduced be-
cause selling can be concentrated in a single organization, reducing
duplication of facilities and services. Smaller market facilities are
needed because physical accommodations for traders aren't necessary
and, when on-farm selling is used, shipments can be spread over sev-
eral days. -
Contrariwise, some existing markets would become obsolete. And,
if the system was voluntary, it might primarily attract higher quality
products, forcing lower quality goods into more costly market channels.
Equity and fairness.-An important feature of remote access mar-
kets is the "equalizing" of traders' power-the ease with which traders
can enter the system-and the high degree of competitiveness that ob-
tains. Sellers' equity can be improved markedly compared to local
markets dominated by one or two buyers. Experience with the Virginia
lamb Tel-O-Auction, for example, has demonstrated a 6-10 percent
price advantage for sellers primarily because of more competitive
With on-farm selling products don't have to move to a market to be
offered for sale, thus increasing sellers' control over when-to-sell deci-
sions. Small traders are on more even ground vis-a-vis their larger
counterparts through actual or on-paper conriniffling and direct
access to other traders. Performance guarantees enhance the integrity
of the market, and opportunities for exclusive dealings are reduced-
eliminated in mandatory systems. Local monopolistic traders, of
course, would lose their economic advantage.
Social consequence is an assessment of the net economic gain or loss
to society resulting from a change such as the adoption of a new mar-
keting method. This evaluation suggests a successful electronic market
would result in more efficient use of economic resources bv lowerintr the
costs of buying, selling, and transportation. Improved coordination
means resources would be used for more nearly optimal purposes. And
economic power would be more evenly distributed. Theoretically, all
segments of society benefit from economic gains in any part of the
economy. How sudh gains would actually be distributed among people
is a complex and difficult question to answer, and beyond the scope of
IMPLEMENTATION OF ELECTRONIC MARKETING SYSTEMS
If the merits of electronic markets are deemed worthy and the con-
ditions for success feasible, how can one be implemented? Most im-
portant are commitments bv potential traders to use it and by someone
to finance its development. Start-up costs are high, and volume trading
There are two basic alternatives for gaining these commitments-
voluntarily and by mandate. Voluntarily, producers and/'or buyers can
organize, develop a workable model fitting their product characteristics
and geographical area, gain contractual commitments from enough
- traders to assure a reasonable chance of success, then interest a new
or existing market agency in providing the service.
There are several alternatives for gaining a mandatory or quasi-
mandatory system. Potential users could seek a governmental or insti-
tutional grant to finance development and subsidize the initial oper-
ation. Legislation could be sought enabling a government agency to
develop and operate the system, authorize a marketing board to de-
velop it, and mandate its use if approved by a vote of producers; or
market order legislation could be amended to order such a market for
at least a specified percentage of all trades.
To date, the most successful electronic markets have been the
Canadian hog markets, mandated by law. Conceptually, voluntary
markets are feasible. Some are already in use on a limited scale. Real-
istically, some mandated use may be necessary to achieve sufficient vol-
ume for maximum benefits. Given the "public good" nature of the im-
proved information and other benefits that would accrue, mandatory,
or at least quasi-mandatory, use and government subsidization may be
Forker, Olan D., "Price Determination and Processes: Issues and Evaluation."
U.S. Department of Agriculutre, Farmer Cooperative Service Information Bul-
letin 102, September, 1975.
Hawkins, M. H., et al., "Development and Operation of the Alberta Hog Pro-
ducers Marketing Board." The University of Alberta, Department of Agricultural
Economics and Rural Sociology Bulletin 12, revised December, 1972.
Holder, David L., "A Computerized Forward Contract Market for Slaughter
Hogs." Michigan State University Agricultural Economics Report No. 211, Jan-
Johnson, Ralph D., "An Economic Evaluation of Alternative Marketing Meth-
ods for Fed Cattle." Nebraska Agricultural Experiment Station Bulletin SB 520,
FORWARD DELIVERABLE CONTRACT MARKETS
(By Thomas L. Sporleder1 and David L. Holder')
Modern technologies in production, processing, and distribution of
food and fiber require coordination of numerous activities within and
among firms before potential efficiencies can be realized. As a result.
many agricultural and related firms are turning from conventional
spot-market transactions to contracts as a means of buying and selling.
With quality and quantity already determined, spot-market trans-
actions are based largely on price and are made on a day-to-day basis
as a product is available for delivery. Contract transactions, usually
initiated by processors, are for longer term commitments, made prior
to product delivery, and often before production begins. Contracts may
specify volume, acreage, planting or breeding dates, variety of seed
or breed of livestock, husbandry practices, quality factors, time and
method of harvest, and timing of delivery to the processor. The proc-
essor is thus able to minimize processing costs and achieve a high
degree of quality control. Contracting is expected to become more
widespread in years ahead. It is a potential means to develop better
coordination between production and market demands and thus im-
prove efficiency in the food and fiber industry.
Price is often but not always specified or agreed upon at the time
of the signing of the contract. It is the problem of price or value
determination which is at issue in this paper. Often contracts are nego-
tiated in secret. The farmer sometimes has little information on cur-
rent, let alone future, market conditions. The free market forces
normally at play in the determination of prices or value cannot surface
or be expressed. Thus, the process for short run price or value determi-
nation for the commodity being contracted is imperfect. This paper
describes and evaluates the probable performance of the concept of
a forward deliverable contract market, hereafter referred to as FDCM,
as one solution to the problem of lack of competition in price deter-
mination for forward contracts.
A DEFINrITION OF FDCM
Comparison with futures mnarkets.-In some respects a FDCM
would resemble a futures market. It would be a market for a contract
but in the case of the FDCM the contract would be between the person
who would deliver the product and the person who would actually
plan to receive it. Both types of markets consist of an open market
1 Professor, Department of Agricultural Economics, Texas A&M University.
'Agricultural Economist, Farmer Cooperative Service, U.S. Department of Agriculture,
exchange where buyers and sellers froni all parts of thle nation, even
tlhe world, trade standardized contracts for future delivery. The con-
tracts specify terms of sale, e.g., quantity and quality specifications, and
tille anlld place of delivery, and are traded at a base price with speci-
fied premiums and discounts for quality variations from a specified
Th'le major difference between a FDCM and futures market would
be that tlhe FD)CM contract specifies and assumes delivery. Although
tlie fixtures contract specifies delivery, delivery does not usually occur.
A hlilgh percentage of deliveries reduces the usefulness of a futures
market since it is designed to-facilitate forward p)ric(ing through liedg-
ing ailld speculation. Tihe futures market is therefore not designed to
facilitate delivery. In most cases it is difficult for a processor to pro-
culire raw agricultural commodities through the futures market.
Tle whole purpose for F)DCM, on the other land, is to create a
market for contracts that would facilitate delivery by creating a multi-
plicity of delivery points and offer a variety of standardized contracts
for a single commodity in each delivery month to meet varied needs
of a large number of processors. FDCM would grant processors the
option of specifying time and place of delivery. FDCM would not be-
come a party to each contract as a clearinghouse in futures markets, but
would immediately and directly pair thle )uyer and seller when tihe
contract was executed so that delivery could be made.
Producers and processors would probably enter FDCM directly,
without the services of a broker. In futures markets the broker, initial
margin, and variation margin are used to enforce contracts; in FDCM
certified financial strength and integrity of producer and processor, as
well as various penalties for noncompliance, would l)e used to enforce
the contract. Certification, as well as a variety of allowable contract
conditions, delivery points, and pairing of individual buyers and sell
ers at the beginning of a contract would make FDCM unattractive to
speculators who would probably continue to be attracted to futures
Produt;on and markl,'tiglq con tracrts.-FDCM- could be designed to
handle either production or marketing contracts. Production con-
tracts-made for a specified period before production begins-would
emphasize quality, specific cultural practices, marketing and delivery
procedures. Marketing contracts-traded after production begins-
would be limited mainly to specification of quality, quantity and tim-
inty of deliveries. Price would be determined through participation in
Pj'/c;'g and /ran.smton,.-There are four alternatives for trading
and thus determining. thle price of FDCM contracts: a computerized
matching of producer offers and processor bids; a telephone exchange;
a teletype auction : and a "trading pit", as used in most futures markets.
Given the technology already available, a centralized exchange, man-
ual or computerized, has the greatest potential for improving pricing
Holbrook Working, "Futures Tradin aqnd Hedging," American Eeonomic Review,
June 1953, p. 315. T. A. Hieronymus, "The Desirability of a Cattle Futures Market," un-
published paper, n.d.
and operational efficiency. Modern technology in telecommunications
and computers makes it technologically possible to have one central-
ized market for the entire United States, or even the world.
Access to the computer could be gained by touch-tone telephone units
located in the offices of most traders. (Teletype or television-like equip-
ment could also be used by hligh-volume traders.) A producer could call
the market computer, receive an up-to-the-second market report, and
enter information about the commodity he wished to sell, including
his offering price. The computer would process the offer by searching
for a similar or higher bid from a processor.
If a satisfactory buyer's price was found, the sale would be con-
firmed and both parties notified at once. If no bids were available at
the desired price, the producer's offer would be placed on file to await
a higher entry by a processor. If no higher bids were made within a
-desired period of time, the producer would have to adjust his price
downward in order to make a transaction. Both buyers and sellers
would adjust bids and offers until an acceptable match was found.
The FDCM would keel) accurate records, prepare all necessary
paperwork for sale confirmation, title transfer, and transfer of funds.
Manpower requirements of a computerized FI)CM would be relatively
low but equipment costs relatively high. A large volume of trades
would be necessary to keepl) down per-unit transaction costs. A small
volume FDCM could use a manual matching process.
Since FDCM would operate over a broad geographic area, provision
could be made to automatically adjust all bids and offers for a trans-
portation differential from origin to destination. Such an automatic
adjustment would expand significantly the potential trading area of
buyers and sellers. However, FDCM would not be expected to dramati-
cally change the physical movement pattern of most commodities. Most
production would still tend to go to processors in the immediate area
of production to minimize transportation costs.
THE APPLICABILITY OF FDCM
Contracts, as used by processors and producers, are used to specify
quality to improve quality control; to specify and improve scheduling
of activities in production, processing, and distribution; and to reduce
price risk or transfer price risk from one party to another. A FDCM
would be a means to formalize the process of contract negotiation and
broaden the range of competition over the terms of the contract and the
price. It would be applicable to any subsector now using contracts, such
as vegetables or fruits for processing or sugar beets (Table 1). Even
though extensive contracting does not currently occur in hogs, cattle,
sheep, eggs, or turkeys, a FDCM might offer an opportunity to im-
prove coordination for these commodities. FDCM appears much less
applicable to commodities such as food and feed grains where the prod-
uct is not perishable and the market channel from producer to processor
includes several types of firms that handle the product.
TABLE I.-ESTIMATED PERCENTAGE OF OUTPUT PRODUCED UNDER PRODUCTION CONTRACTS AND
UNDER VERTICAL INTEGRATION, UNITED STATES, 1960 AND 1970
Production contracts Vertical integration
Crop 1960 1970 1960 1970
Feed grains----..--....---.---------------------------- 0.1 0.1 0.4 0.5
Hay and forage----------------------------------- .3 .3 -------................
Food grains-...-- ---------------------------------- 1.0 2.0 .3 .5
Vegetables for fresh market-------------------------- 20.0 21.0 25.0 30.0
Vegetables for processing--------------------------- 67.0 85.0 8.0 10.0
Dry beans and peas----.--------------------------- 35.0 1.0 1.0 1. 0
Potatoes----------------------------------- -- 40.0 45.0 30.0 25.0
Citrus fruits---------------------------------- 60.0 55.0 20.0 30.0
Other fruits and nuts-------.----------------------- 20.0 20.0 15.0 20.0
Sugar beets--..-------------.---------------------. 93.0 98.0 2.0 2.0
Sugarcane---. ---------------------------------- 40.0 40.0 60.0 60.0
Other sugar crops. -------------------------------- 5.0 5.0 2.0 2.0
Cotton--------------.... ---------------- ---------- 5.0 11.0 3.0 1.0
Tobacco-----. ---------------------------------- 2.0 2.0 2.0 2.0
Oil-bearing crops- -------------------------------- 1.0 1.0 .4 .5
Seed crops-------------------------- ------------ 80.0 80.0 .3 .5
Miscellaneous crops-------------------------------- 5.0 5.0 1.0 1.0
Total crops-------------------------------- 8.6 9.5 4.3 4.8
Feed cattle---..---------------------------------- 10.0 18.0 3.0 4.0
Sheep and lambs------------.. --------------------- 2.0 7.0 2.0 3.0
Hogs. ------------------------------------------ .7 1.0 .7 1.0
Fluid-grade milk. --------------------------------- 95.0 95.0 3.0 3.0
Manufacturing-grade milk--------.------------------- 25.0 25.0 2.0 1.0
Eggs------------------------------------------ 5.0 20.0 10.0 20.0
Broilers--------------------------------------- 98.0 90.0 5.0 7.0
Turkeys----- ---------------------------------- 30.0 42.0 4.0 12.0
Miscellaneous---.--------------------------------- 3.0 3.0 1.0 1.0
Total livestock items '------------------------- 27.2 31.4 3.2 4.8
Total all items --.-.- ---...-----------.. 15.1 17.2 3.9 4.8
1 The estimates for individual items are based on the informed judgments of a number of production and marketing
specialists in the U.S. Department of Agriculture. The totals were obtained by weighting the individual items by the relative
weights used in computing the ERS index of total farm output.
2 Final totals for production contracts and vertical integration were obtained by combining the total estimates for crops
and livestock after adjusting for double counting of farm-produced feed crops consumed by livestock. As in the ERS
index of total farm output, crops represent about % of the final weight and livestock 3.
Source: R. L. Minghell and W.S. Hoofnegle," Contract Production and Vertical Integration in Farming, 1960 and 1970,"
ERS-479, USDA-ERS, April 1972.
Without a contract commitment with price specified before planting,
the producer bears the risk of price changes during the production
period; contracting with price specified shifts the risk but does not
eliminate it. Of course, if the futures market has a futures contract
on the commodity involved, a buyer or seller can offset a commitment
in the FDCM market.
Futures markets, currently functioning for many commodities, (Ta-
ble 2), generally are active if there is an "active" spot market for a
commodity. Active spot markets and futures markets are identified by
a high ratio of units traded per unit of production. If contracting and
a FDCM would become common, spot-market and future-market ac-
tivities would possibly decline.
A discussion of the economic consequences and potential applica-
bility of the introduction of a FDCM where other producer-first han-
dler exchange arrangements now exist will be used to illustrate the
FDCM concept. Three commodities (tomatoes for processing, hogs,
and wheat) are chosen because they represent a broad array of com-
modity and trading characteristics.
Tomatoes for Processing are seasonal, perishable, cannot be eco-
nomically transported great distances from the production area, and
have no active spot or futures markets. Contracts are now signed prior
to production between processor and producer in private negotiation
or through producer bargaining associations.
FDCM would not represent a substantial departure from established
exchange arrangements but would create an open market for contracts.
Because of the commodity's perishability, a computerized system for
trading production contracts most likely would be established in each
major production area. Processors desiring to contract would choose
one of several standardized contracts best suiting their needs and enter
an offer to contract over the exchange. Price could be determined
either by bid/offer or auction. All offers and actual transactions would
be immediately and simultaneously available to both processors and
TABLE 2.-LEVEL OF ACTIVITY IN FUTURES MARKETS AND SPOT MARKETS, SELECTED PRODUCTS
Active futures Little or no activity in futures
Active spoL-....-- Grains Wheat, corn, soybeans, oats, barley,1 rye,1 Fresh fruits: Apples, peaches, pears, grapes,
rapeseed,'flaxseed.1 oranges, watermelon, plums, apricots, grape-
Processed products: Soybean oil, soybean meal, fruit.
pork bellies, boneless beef, orange juice, iced Fresh vegetables: Lettuce, carrots, cucumbers,
broilers, coffee, cocoa, sugar, peppers, onions, celery, sweet corn.
Livestock: cattle, hogs. Other: Nuts, fish, sheep, wool.2
Other: Cotton, potatoes.
Little or no ----..---..----------. --------------------- Fruits for processing: Cherries, peaches, pears,
activity in tomatoes.
spot. Vegetables for processing: Peas, snapbeans, sweet
Other: Broilers (live), sugarcane, sugar beets,
milk, eggs,2 seed crops.
2 Only commodities in "little or no activity" in futures with futures markets actually operating.
Slaughter Hogs are produced throughout the country and marketed
continuously throughout the year on a spot basis when hogs are ready
for slaughter. Many Hogs move directly from producer to packer, a
method of marketing that is increasing as production units become
large enough to ship in truckload lots. The majority of hogs still moves
to packers via dealers, agents, and public markets. Contracts are cur-
rently used for only about one percent of all hogs sold.
If a FDCM were in existence, production or marketing contracting
might expand. In an FDCM contract quality specifications could be
in terms of measurable carcass features such as weight, length, ind
backfat thickness. Prices of contracts could be negotiated in terms of
a base carcass of specified weight, length, and backfat. Enough dif-
ferent contract specifications could be used to permit trading on the
market to determine the value of the major product characteristics.
Carcasses that varied from the base within each contract category could
be priced according to a pre-established premium-discount schedule.
The premium-discount schedule would have to be revised occasionally
as comparative values changed. To satisfy the demands of a large num-
ber of packers having different carcass specifications, two or three
standardized contracts with different bases could be offered for bar-
rows and gilts and an additional contract for slaughter sows.
Carcass trading would improve pricing efficiency by .paying for hogs
according to thle value of each carcass sold, would serve as a direct in-
centive for producers to produce what thile market demands, and would
facilitate direct movement from producer to packer by eliminating
A single FDCM for slaughter hogs could handle all transactions
within tilhe United States. Tlhe results of such widespread use would
I)N more competitive and accurate pricing, and price certainty for pro-
ducers beginning when the contract is entered. Improved scheduling
of hogs from farm to plant would reduce daily, seasonal, and cyclical
gluts and scarcities and their effects on marketing and processing
Wheat is marketed worldwide. The commodity is produced season-
ally. is storable, and can be economically transported long distances
from production areas. There are domestic and world spot markets as
well as active futures markets. Producers rarely place their crop under
production or marketing contracts. Unlike the marketing channel for
either tomatoes for processing or slaughter hliogs. the channel for
wheat includes numerous businesses between l)roducer and miller.
These businesses engage in storing. risk-Learing, assembling large quan-
tities, and transporting wheat to export markets or domestic millers.
In this process, ownership may pass through agents, brokers, coopera-
tives, or large grain-handling firms.
Use of FDCM for wheat would be a radical departure from thle cur-
rent spot market arrangement, and exclusive use of FDCM is not likely
because of the complex nature of the distribution system for the com-
modity. In food and feed grains, three or four pricing points exist
prior to the processor or export market, while for most fruits and
vegetables for processing only one pricing point exists between produc-
er and processor. For wheat, pricing points exist at tlhe local eleva-
tor. terminal elevator, and miller or export level. Because of this. posi-
tioning of the FDCM most likely would be just prior to the miller
or export level, rather than tlhe l)roducer-first handler level. FDCM
for whlieat probably would not be addressed directly by a producer but
rather by his cooperative, terminal elevator, or a large grain-handling
Even if FDCM were operable at this level for feed or food grain,
only modest operational or technical efficiency could be expected conm-
pared with the current, primarily spot market, transaction system. At
best, FDCM for wheat would have only little net benefit for producers.
EXPECTED ECONOMIC CONSEQUENCES OF FDCM
Operational and pricing efficiency.-Efficiency in marketing is of
two types: operational efficiency, which refers to how efficiently various
physical activities-processing, storing, transporting, grading, and
packing-are conducted; and pricing efficiency, which refers to the ac-
curacy and speed with which prices are reflected to and among par-
ticipants in a marketing channel. For example, if accurate informa-
tion concerning supply and demand conditions is not readily and
equally available to all participants in a marketing channel, then
price may not be accurate. Or, if mechanisms do not exist to readily
reflect new market conditions, price may be accurate but not avail-
able in time to have an appropriate influence on production or market-
ing decisions. Either of these cases could result inm "inefficient" pricing.
A FDCM for production or marketing contracts could improve
operational efficiency by enabling better coordination in production
and processing activities. It could also and more importantly improve
pricing efficiency by expanding or increasing the exposure of potential
producers (sellers) and processors (buyers) to each other.
For the processor who relies on contractual arrangements rather
than spot-market purchases for raw-product procurement, some in-
crease in production efficiency would be expected as more control over
quality, quantity, and timing of deliveries could be gained. As a result,
more efficient use of plant, equipment, and labor would be realized.
Processors may gain some efficiency in merchandising their output
because they could assure more uniform quality input. All these
effects would be expected to lower long-run average cost for proces-
sors through the ability to better coordinate and allocate resources
necessary to produce a given output.
In comparison with spot markets FDCM could provide several
improvements in exchange efficiency. FDCM could be a high-volume
exchange system that would centralize transactions over a broad geo-
graphic area. Physical handling within the FDCM system would be
separated from transaction activity and in many cases handling could
be reduced as more direct shipments from producer to processor would
be encouraged. Commodities that still required handling and assembly
prior to delivery could be scheduled to meet buyer needs. Scheduling
deliveries could be arranged to minimize assembly time, labor, shrink,
and need for facilities.
FDCM could conduct all transactions electronically and all trading
would be on a description basis. The need for each potential buyer to
travel to low-volume sales markets or to individual sellers and visually
inspect the commodity would be eliminated. Travel expenses and the
number of buyers employed by each processor could thus be reduced.
FDCM could also reduce the need for brokers, merchants, and other
handlers often used to bring buyers and sellers together.
Procurement decisions made several months in advance of delivery
would require the processor to do some advanced planning which
does have a cost. The processor would also face new uncertainty in
forecasting arid meeting future needs. However, processors should be
in a better position than producers to make these decisions because of
superior market intelligence of product markets.
Both producer and processor could save by completing transactions
quickly and at low cost in a computerized trading system. The actual
operating costs of a FDCM could be less than exchange costs of spot
transactions. For example, Holder estimated the cost of pairing buyers
and sellers at about $1.10 per head in terminal market transactions for
hogs.4 For auction markets, costs are estimated between 65 to 80 cents
per head, while transactions in local dealer markets cost about 35 to
55 cents per head. In contrast, a computerized forward contract mar-
ket, similar to FDCM, was estimated to have an exchange cost of
4 Dovid L. Holder. "A Computerized Forward Contract Market for Slaughter Hogs,"
Agr. Econ. Rpt. No. 211, Dept. of Agricultural Economics, Michigan State Univ., Jan. 1972,
40-45 cents per head on an annual volume of 5 million head, 20-25
cents on 25 million head, and 15-20 cents on 50 million head.
Whether or not coordination of supply and demand at the producer-
first handler level would be substantially improved depends on several
circumstances. If the FDCM was not an exclusive market and traded
only marketing contracts then little improvement would be anticipated.
If the FDCM was an exclusive producer-first handler exchange mech-
anism and all contracts were made prior to production, then supply
and demand would be significantly more coordinated than under spot
market conditions. The improved coordination could significantly re-
duce processing costs. In addition, the operating efficiency of FDCM
would put downward pressure on marketing costs.
FDCM would significantly increase the amount of information on
market conditions compared with dispersed spot markets or private
treaty contract negotiations. Comparison of prices over quality, quan-
tity, location, and time would be facilitated. Market reports generated
from a FDCM would be more timely and accurate because they would
be more up-to-date and more broadly based and because price quota-
tions would be for specified quality and terms of trade.
Price could more effectively communicate supply and demand con-
ditions through FDCM. Allocation of available supplies of each
quality among various demands by processors could be more system-
atic. Also, because the FDCM would generate an array of prices-one
for each future delivery time-producers would have more informa-
tion regarding the most profitable delivery time. The broader geo-
graphic area over which FDCM would operate should mean that price
differences among geographic areas more nearly reflect the differences
due to transportation cost only.
Competition, market power, and market access.-The presence of
many sellers (producers) and few buyers (processors) in most local
spot markets enhances the opportunity for buyers to exert downward
pressure on prices paid for a commodity. In contrast, FDCM would
expose each producer's offer to many buyers, thereby increasing compe-
tition among buyers and decreasing their aggregate market power.
Thus, in FDCM, producers should gain market power relative to proc-
essors simply by increased competition. For commodities that cur-
rently have solely a spot market at the producer-first handler level,
FDCM would represent an additional market or alternative.
Market access is the ease with which buyers or sellers can partici-
pate in a market and the availability of alternative markets in which
to participate. Producers and processors would both have an initial
difficulty in entering FDCM because the reliability of the seller and
the credit worthiness of the buyer would have to be established prior to
participation. Once a new participant's status was verified, however,
access would be easy.
Allocation of risk.-Both producers and processors are likely to con-
sider the new risks assumed under contracting to be greater than the
risks avoided. Producers would have less price risk by contracting
through FDCM than selling on spot markets because FDCMk would
allow price to be known and assured prior to a production decision.
However, quality, quantity, and timing risks would arise because non-
price terms of the contract would have to be met. One strategy of pro-
ducers might be to produce more product than demanded by the
Processors are relieved of quality, quantity, and timing risks, but
assume price risk. Processors might use a number of methods to elimi-
nate or reduce price risk. First, processors could hedge in futures mar-
kets for the input purchased on contract through FDCM and transfer
price risk to professional speculators. Second, processors could hedge
in futures markets for finished products they are producing. Other
product futures markets could be developed as needed by the trade.
Third, with assurance of input supply through FDCM, processors
would have an opportunity to make forward contracts with whole-
salers and retailers. Fourth, an options market, similar to the options
market for corporate securities, could be developed to parallel FDCM.
A processor buying a contract in FDCM could offset his price risk by
buying an option to offset the contract. The option might have to be in
the product market as options in raw products would require a paral-
lel spot market to permit option writers to honor their contracts. Fifth,
price insurance is another possibility, but again it might have to be
on the finished products if raw product prices do not exist. An "in-
surer," in this case largely a speculator, would guarantee the processor
a minimum selling price. The insurance premium would reflect the
probability of a price decline and resulting claim against the insur-
External effects.-Spot markets might decline as contract markets
such as FDCM increase in use. Spot markets would become a "resid-
ual quantity market" if a major portion of the total production of a
commodity was contracted. This could result in wide price swings in
the spot market because price would depend on the supply of and
demand for the residual noncontracted production, potentially highly
volatile over time. Also, the per-unit costs of using spot markets could
increase as the volume of transactions declined.
The impetus for ownership through vertical integration by proc-
essors into production may be reduced by having FDCM as an alter-
native to the spot market. Contracting, as already described, allows
processors to closely coordinate delivery of quantities of specific qual-
ities with processing plant needs. If existing spot markets now lead to
backward ownership integration, this movement could be met and
overcome through contracting.
Effects on consumers.-Consumers could ultimately benefit from a
shift in transactions from spot market to FDCM. The absolute amount
of benefit would depend upon per-unit cost savings by FDCM, the ex-
tent of FDCM use within a particular marketing channel, and the
extent of market competition at all other levels within the marketing
channel. If a competitive environment exists throughout the market-
ing channel for a commodity, then consumers would benefit from lower
transfer and processing costs that accrue through use of FDCM at the
producer-first handler level. Lower costs at this level would lower retail
prices by some lesser amount.
SConsumers could benefit from increased pricing efficiency realized
through quality premiums and discounts used in contracts because
they would more accurately signal price differentials for qualities
most demanded by consumers. Relative to the spot market, FDCM
could more directly reflect consumers' quality desires to processors
FDCM could enable buyers and sellers to price commodities before
production rather than at the time of delivery to a spot market. When
prices are determined after production, they are partially a residual of
quantity produced rather than a cause of the quantity produced. If,
through FDCM, production cycles could be dampened, prices at all
levels within the marketing channel would be more stable.
FDCM could be established by existing commodity exchanges as a
new formalized forward-selling technique that would parallel and
possibly replace traditional raw product futures markets. The ex-
changes have the advantage of experience in establishing and operat-
ing contract markets, but they also have a strong vested interest in
futures markets whose clientele and day-to-day operating procedures
differ from the proposed FDCM.
Producers could take the initiative by organizing a cooperative to
establish and operate FDCM. The cooperative approach would give
producers an opportunity to make input into specification of contracts
and operating procedures.
The federal government could also institute FDCM. If the bene-
fits are significant for improving the efficiency, and perhaps the equity,
of our food and fiber production and marketing system, Congress
could pass the necessary enabling legislation, and FDCM could be
instituted by a new government corporation similar to the Commodity
Credit Corporation (CCC) or by a federal market order.
Financing would be needed to develop, promote, and operate FDCM.
Developmental and promotional funds could come from corporate
stockholders, cooperative members, or the federal treasury, depending
on the form of organization that would arise to implement FDCM.
Private organizations could also borrow funds or possibly sell bonds.
Operating monies could come from fees charged FDCM users, regard-
less of organization form.
Requlation.-FDCM would come under the purview of the Com-
modity Futures Trading Commission, the Securities and Exchange
Commission, the U.S. Department of Agriculture, and state depart-
ments of agriculture. Compliance with all applicable regulations
would be necessary regardless of which organization or group might
FDCM represents more than shifting transactions from spot to a
contract basis. FDCM implies an organized, computerized exchange
mechanism for trading forward deliverable contracts. The potential
economic impact of FDCM on efficiency, competition and market
power, access to markets, and risk varies substantially from commod-
ity to commodity. Potential operational efficiency increases are greater
for a forward-contract market trading exclusively in production rather
than marketing contracts. Exclusive production contracting could be
most easily adopted for many fruits and vegetables for processing and
least easily adopted for food and feed grains.
For commodities now primarily under contract at the producer-
first handler level, the most significant economic impact on marketing
would be realized from additional and more accurate market infor-
mation inevitably generated by FDCM. For commodities now traded
primarily in spot markets, the most significant economic impact would
occur from the shift to contracting. While some generalizations can be
made, the net benefit for producers and consumers from an institution
such as FDCM depends on the circumstances surrounding the market
for each commodity.
MANDATORY PUBLIC REPORTING OF MARKET
(By Kirby Moulton1 and Daniel I. Padberg2)
The performance of our competitive food system is of vital impor-
tance to all Americans. Why their concern?
Consumers, because prices are higher than necessary and prod-
uct choices restricted;
Farmers, because marketing alternatives are limited and eco-
nomic returns variable;
Businessmen, because profit opportunities are obsecured and
planning processes frustrated; and
Public policy makers, because monitoring is difficult and policy
These concerns become more clearly recognized as our economic
system changes. In the past, many sectors of our economy-and par-
ticularly the agricultural sector-were comprised of numerous inde-
pendent firms and organizations. Market participants could not in-
dividually influence total market results. These disaggregated (or
dispersed) markets were not necessarily efficient or competitive. In-
stances of local monopolies and discriminatory pricing were-and
are-all too evident; however wherever a free flow of market infor-
mation existed, the opportunities for discrimination were reduced.
Information was the lubricant for efficient market coordination.
In time our system changed. Technological advances led to larger
firms, vertical integration occurred, and economic concentration re-
sulted. Many traditional activities of the marketplace were internal-
ized by large firms. Individual market participants could now influ-
ence final market results as "conscious cooperation" became the
mechanism of economic coordination. Significant amounts of mar-
'ket information formerly provided through open market transactions
became hidden and lost in private contract negotiations and internal
This change process has resulted in a mixed system containing a
spectrum of markets ranging from concentrated to disaggregated. It
has also resulted in a highly variable market-information system. In
some markets the quality of publicly reported information is adequate
for production and marketing decisions, but in others reported trans-
action information is far too skimpy or unreliable to be useful in main-
SEconomist, University of California Cooperative Extension, and on the Giannlni
Foundation of Agricultural Economics, Berkeley.
2 Professor and Chairman, Department of Agricultural Economics, University of Illinois,
training competitive conditions. Consequently, economic and public
policy decisions are made with less information of variable quality.
As the availability and quality of information declines, the market-
ing system works less well. Private trading is more uncertain in relat-
ing supplies and demands. As risk and uncertainty increase, they add
to marketing costs. Consumers pay more, and farmers get less as a
result. In addition, questions of "accountability" arise. Without ade-
quate information our basic competition is less effective.
What can be done to improve this system? That is the focus of this
paper. Specifically, we examine a proposed mandatory market report-
ing system and its potential for providing a fuller range of market
information needed for public and private decision-making. Implicit
in our approach is the belief that market information programs are
part of our national policy toward competition. They provide infor-
mation needed by farmers, processors, distributors, and consumers to
facilitate competitive performance; and they provide essential infor-
mination if society is to continually appraise and correct our market
economy. Without information, the market alternatives facing farm-
ers, as well as all others in our competitive system, are dim and
A MANDATORY MARKET REPORTING SYSTEM
The maintenance of a competitive private market economy is a key
objective of our national economic policy. Assuring the availability of
information needed for such a market is the function of a market
reporting system. If a voluntary reporting system is unable to generate
needed information, then a mandatory system may be necessary.
The test for determining what information ought to be provided
is a difficult one. Some concept of net public benefit is needed-a con-
cept compatible with a private market economy. The mandatory re-
porting system we describe is considered in the context of this
The reporting system discussed here is an extension of the present
Federal-State Market News Service. It is mandatory because the
present voluntary system does not produce adequate information for
competitive market behavior. Some important markets are not re-
ported at all, and others are reported incompletely, and possibly
In determining the design of a market information system, more
detail is needed concerning decision-making requirements. It will do
American farmers little good if the information provided is suitable
only for economic researchers. We are concerned with two important
classes of decisions:
Those related to product marketing, such as when and where to
sell and buy; and
Those related to planning and investment activities, such as
crop enterprise planning and facility acquisition.
Deficiencies in the present system.-Our current government-
operated information system for agricultural markets had its begin-
ning over fifty years ago. Its objective was and is to provide market
information needed for better operation of agricultural markets. From
a modest start, the Federal-State Market News Service expanded to
- cover important markets for our principal commodities. Reports of
prices, volumes, and general market conditions are based on observed
transactions in auction markets and voluntary reports in other mar-
kets. Information is gathered by reporters, usually using telephone
The market information provided has resulted in better decisions in
many markets but still falls short of what is needed. Numerous trans-
actions are not reported. Many small markets are not covered even
though they are important to local producers. For example, flower
growers in California, with multimillion dollar annual shipments,
lack information at the first-handler level. Potato growers lack infor-
mation about the processed potato market which heavily influences the
demand for raw potatoes.
In some cases market information is lacking because major buyers
refuse to report transactions as in the Midwest where some major
meat packers with highly decentralized cattle-buying operations will
not report prices and volumes. As a result, producers must sell in
relative ignorance of what "true" market is. In another case a major
packer of bacon in Wisconsin will not cooperate in providing market
data to market reporters. The finger of fault should not be directed
only toward processors and middlemen: some farmers also fail to co-
operate in providing information for crop surveys and market reports.
These information gaps provide serious impediments to efficient
Because the present system is voluntary, cooperators can be more
selective about the information provided. Those reporting transactions
may report prices favorable to themselves, or fail to report quantities,
or aggregate over several grade standards to obscure price spreads.
The net result is inadequate information for buying and selling
Structural changes have decreased the flow of market information.
While public markets yielded information which could be reported,
newly evolved private markets, using contracts and individual negotia-
tion, create no public signals. An example is the transition of fresh
produce distribution from organized wholesale markets to a system
of field buying by major food distributors. The wholesale market
created information which was carefully measured in terms of price
and quantity and in some cases quality, creating an important stream
of market information. The field buying operations involve most of
the same physical functions and handling processes, but the public
information is not generated. Without mandatory reporting programs,
market news agencies find it very difficult to identify the terms of
trade, quantities, or qualities moving in this "closed" market system.
Contracts are an important integrating device in our new market
systems. Many markets utilize both cash and contract transactions.
Cash transactions may be reported, but contract transactions generally
are not. More and more, seasonal and multiseasonal "supply" contracts
are being used in agricultural markets. Supply contracts, by definition,
do not fix price but generally specify the means for its determination.
In some cases the settlement price may be tied to an outsider price as in
sugar beets where prices are based on average refined sugar prices. In
other cases the contract price is tied to the average market price re-
ported in the market at time of delivery.
The dilemma in this situation is evident. Farmers may deliver a
crop with no assurance of price determination until a later date. Even
if a market price is known it may -be the result of a few transactions in
the cash market rather than many transactions in the contract market.
In the case where farmers contract individually with processors or
other buyers, they may do so with no knowledge of what terms are
being offered to other farmers in the same or neighboring markets.
Without this knowledge-information of this nature is not generally
reported-the farmer is at an economic disadvantage to the buyer.
Additional problems develop when contract prices are tied to cash
market prices. If the source of market information is primarily proces-
sors, growers fear the ability of processors to manipulate reported
cash prices by selectively reporting transactions. In other instances,
processors are worried about the ability of competitors to manipulate
raw product prices upward by purchasing small quantities at high
prices in order to establish a reported price.
In some cases transactions are relatively straightforward and re-
porting not difficult; but closed transactions can be much more com-
plex as buyers and sellers often agree to payment systems which
essentially share the risks between them. These arrangements may
have the buyer making a partial payment at the time of product de-
livery and, depending on eventual pack-out and sales price, an addi-
tional payment later. In these much more complex closed transactions,
mandatory reporting may be very difficult and yield less useful
These problems can be reduced in a mandatory reporting system by
requiring that processors report volume represented by price quoted,
by obtaining more information from producers in addition to proces-
sors, and by confirming prices through a second source.
Decisions relating to investment and public policy require the most
comprehensive sets of information. Investment decisions require in-
formation permitting estimation of the profitability of alternative in-
vestments. Public policy decisions require information about profits
earned through various economic activities in order to gauge system
efficiency relative to accepted norms.
Business line reporting and transfer price reporting could provide
much information needed for investment decisions. With such infor-
mation farmers, for example, could make a more intelligent decision
about investing in processing plants or shipping facilities. In similar
fashion, other firms outside the industry could evaluate the oppor-
tunity of entering the industry. In both cases, barriers to entry result-
ing from informational gaps would be reduced.
Business line reporting may emerge as the result of other competi-
tion policy decisions, but is unlikely to be initiated solely for the pur-
poses discussed in this paper. Such information gaps will continue to
obscure the existence of market opportunities and reduce our ability to
evaluate market performance.
Information concerning product end use is also needed to facilitate
investment and marketing decisions. For example, farmers consider-
ing investment in hop production should know about the sale of beers
using hops relative to the sale of beers not using hops. A farmer should
know if observed beer shipment increases imply a correspondingly ex-
panded market requirement for hops. In a similar vein, information on
the movement of granola cereals utilizing almonds is of special interest
to potential almond growers.
A mandatory reporting system could improve the availability of
end use information. For example, information concerning the volume
of tomatoes processed into paste, whole products, and juice facilitates
estimation of the marginal value of raw tomatoes, hence an equitable
farm price. The proposed system could improve the classification of
product movement to include relevant price lines and product specifica-
tions which influence raw product requirements.
Hierarchy of information, necds.-A great deal of additional infor-
mation is needed to remedy the deficiencies of our present market-
reporting system. We see a hierarchy of information needs which must
be satisfied if our information flow is to approach that of an open
market economy. Needed are:
1. Adequate reports covering price, volume, and relevant prod-
uct specifications in cash and contract agricultural market trans-
2. Reports of market transactions at the next higher and next
lower level in the distribution chain;
3. Detailed end use data suitable for evaluating raw product
4. Reports of relevant transfer prices and transactions in verti-
cally integrated market organizations; and
5. Line of business reporting by conglomerate firms.
This hierarchy of information needs represents a series of objectives
which our information programs should be directed toward if they
are to be an effective part of our competition policy. A mandatory re-
porting system is not likely to achieve all these objectives without
other policy changes; however as lower level information needs are
satisfied, the requirements for transfer price and line of business re-
porting should be carefully assessed.
Voluntary versus mandatory reporting.-Large amounts of infor-
mation are required in the system we have described. Whether or not
our existing report procedures are appropriate for the additional in-
formation volume is open to question. Particularly at issue is the volun-
tary character of our current system.
Voluntary reporting forms the basis for our current agricultural
market reports and for most other public reports of economic trans-
actions. The motivation for cooperation varies. Many of those who pro-
vide information assume the costs of doing so are at least offset by
the value of aggregate market information returned to them. Pre-
sumably., others provide information in belief that voluntary coopera-
tion is less onerous and will forestall a mandatory reporting system.
For example, the state of Wisconsin requests processors to submit con-
tracts to the state for review and summary purposes. Compliance with
this request is not required by statute, however the state has authority
to obtain contracts and related material in cases of contract dispute.
Industry members apparently believe that acceding to the request is
preferable to the potential demand for contracts in the event of dis-
putes. Compliance is close to one hundred percent.
Reporting of contracts and internal prices presents some problems
which may not be overcome by a voluntary reporting system. One
problem is the natural reluctance of firms to divulge internal infor-
mation. WIhile the Wrisconsin experience suggests contract informa-
tion can be obtained through a semi-voluntary system, we are skeptical
that transfer prices or line of business data can be obtained in that
manner. The second problem arises from difficulties in sampling the
complex transaction in private markets. Because such transactions
are characterized by a wide variety of product specifications, delivery
terms, and payment schedules, careful sampling is needed to produce
reliable market reports. Voluntary reporting is not likely to produce
the sample dimensions needed for reliable estimation of market
Two approaches are apparent for obtaining market information.
One is to require that all specified transactions be reported; the second
is to require that information be supplied whenever requested. A man-
datory reporting of all transactions would be extremely burdensome.
The reporting system would have difficulty in collecting data, inter-
preting it, and communicating the resulting information. Enforcing
compliance would necessitate a large staff. We believe the expense of
this approach would exceed its benefits by a considerable margin. The
second approach makes more sense. Refusal to give full transaction in-
formation when requested would be considered an unfair trade prac-
tice, thus the basis for enforcement already exists under current trade
practice policies. Unnecessary reporting would be reduced, and the
inflow of data maintained within organizational capabilities. This
approach would require determination of valid sampling programs
to assure credible market reports.
How AND WHERE MANDATORY REPORTING Is APPLimED
We have little experience to draw on in evaluating a mandatory re-
porting system. If such systems are operating in foreign markets, we
are unaware of them.
Some efforts in the direction of mandatory reporting have been
made within the United States. We have described previously the con-
tract reporting program established in Wisconsin. The summarized
contract data is published periodically, but too late to influence plant-
ing or current year contracting decisions. The reports do provide a
base line comparison for use in subsequent contracting decisions.
North Carolina statutes require processor contracts to contain
clauses stipulating delivery conditions, methods of payment, dispute
procedures, arid other terms considered basic to good contracting pro-
cedures. Compliance is obtained by requiring fruit and vegetable
processors to submit contracts to the state for approval prior to mak-
ing offers to growers; however the state does not collect data on prices
at which the contracts are ultimately negotiated.
New York requires vintners to announce a price for their supply
contracts on or before September 15. The objective of this require-
ment is to prevent price determination after grapes have been deliv-
ered for crush. In practice, however, the major purchaser continues
to announce prices about the end of July. The impact of the law falls
onlv on wineries who lag behind the leader in announcing prices.
Within California. the Federal-State Market News Service collects
and disseminates contract information which some processors provide
to them. Coverage is limited and reported irregularly for wine grapes
and other fruit as available.
These state efforts are tentative steps to contract-price reporting, but
do not provide information as to how a price reporting system should
work. Several useful pieces of information emerge, however. In North
- Carolina contract terms apparently have tended to standardize, mak-
ing price comparisons more informative. If this tendency should
occur as contract reporting is expanded then a source of considerable
complexity for such reporting would be removed. By analogy, one
could argue that transfer and other internal price reporting require-
ments would tend to standardize appropriate accounting procedures.
The Wisconsin experience demonstrates that mandatory reporting
requirements may not be necessary to obtain cooperation. The Cali-
fornia experience suggests the willingness of some market partici-
pants to voluntarily provide contract information in the absence of
any statutory requirement.3
CONDITIONS FOR IMPLEMENTATION
An improved market reporting system cannot be achieved unless
several conditions are met. Among these conditions are a recognition
of the need for information; resolution of legal questions regarding
mandatory reporting; a willingness to enforce the rules; and the equi-
table application of policy to agricultural and nonagricultural sectors.
Mandatory reporting as a concept must be subject to some notion of
cost-benefit analysis. Costs are easier to measure than benefits. They
are measured in dollars and relate to the additional friction put on
the system by a supervised, regulated system of transaction reporting.
Benefits are more illusive because they are spread among market and
The reporting system must account for varying information require-
ments if it is to be supported. For farmers, information needs vary
according to market institutions and procedures. Farmers selling on
volatile cash markets have a vital need for timely and comprehensive
market reports. Those selling on contract markets at bargained prices
may have little need for frequent price and movement information.
Farmers need to know the negotiated price in order to compare esti-
mated returns against alternative crop enterprises. They would like
to know prices in other areas in order to evaluate the effectiveness of
their bargaining association.
The legal implications of a mandatory reporting system remain to
be tested. The privacy of contracts and internal accounting informa-
tion has long been respected in the United States, and generally
.abridged only through subpoena power or confidential tax reporting
A willingness to enforce the rules is an essential condition for an
effective reporting system. Voluntary compliance has been an impor-
tant factor in the success of our national tax system. This compliance is
partly the result of the visible willingness of the Internal Revenue
Service and Justice Department to enforce tax rules. The flouting of
Congressional intent about distributing the benefits of federal irriga-
tion systems results from failure to enforce. acreage limitations within
certain irrigation districts. For a mandatory reporting system to work,
the rules must be equitable and they must be enforced.
If and when the system encompasses mandatory reporting of trans-
fer prices and business line results, then it must apply to nonagricul-
S The existence of a viable Forward Deliverable Contract Market as described In the
paper by that title in this series would be a source of information on contract value.
tural sectors as well. To do otherwise would result in a discretionary
economic policy. Compliance under such a condition would be difficult,
if not impossible to obtain.
Clearly, establishing a mandatory market information system would
not be an easy task. Further study of the legal implications and the
appropriate sampling procedures are needed. The comprehensive sys-
tem we have described might be implemented by first trying to report
contracts, as done in Wisconsin, then expanding it to report contract
prices when negotiated. Subsequently, reports of next level domestic
and export movement could be initiated. Finally, appropriate legisla-
tion could be undertaken to permit reporting of transfer prices in
vertical and conglomerate firms using a system tested by contract
The expected effect of mandatory reporting of market transactions
is to make a structurally mixed system work more like a system con-
taining many small firms which are coordinated by a market. Even
though there would be large, integrated, and conglomerate firms in
the system, they would provide the same kinds of information made
public through transactions among small firms in open markets. This
information would influence the actions of farmers, buyers, investors,
and regulatory agencies, and increase consumer confidence.
More complete and reliable public information about prices, quan-
tities, and qualities would improve market access for farmers. If one
market location, product use, or marketing channel gave higher prices
than another, this public information would give farmers a better
basis for marketing decisions. Their production and selling adjust-
mients would result in more profitable resource use and a more effi-
Market uncertainty would be reduced by better public market infor-
mation. Since today's commercial farmers have large expenses for
inputs they must buy, money borrowed at high interest rates is a major
element in farm management. Financing these productive but expen-
sive inputs will be greatly facilitated if market price uncertainty can
Prices resulting from more informed actions of buyers and sellers
would likely be more equitable or fair. This is true where prices are
determined by market forces (livestock) and where bargaining is in-
volved (cannery crops).
Farmers would have a better basis for evaluating the benefits of
integration or other initiatives if reliable public information on prices
and costs were available. Many times farmer initiatives have been
taken with only sketchy information concerning prices and costs.
Operation of a mandatory reporting system for major agricultural
crops would have costs. The costs of operating the system would even-
tually have to be borne by the public taxpayer or shared by producers
and consumers. Undoubtedly the mandatory system would cost more
than the present voluntary system, but the results would provide more
complete and accurate information.
Mandatory collection and dissemination of appropriate information
could enable farmers to make better production and marketing deci-
sions and improve competition. It is frequently argued that the basic
policy for farm production and marketing is an outgrowth of very
specialized political activities. In past times of less general communi-
cation flows and more isolated rural people, the "farm bloc" was a
functional special interest group. As the nature of rural and urban
constituencies change-with much greater participation in higher edu-
cation and more communication in general-the very agrarian focus
of farm policy is being lost. New participants in the policy formula-
tion process include labor unions, consumer groups, and other sectors
more broadly representative of society as a whole.
As consumers become a more active and vocal part of the emerging
"food policy," the question of consumer confidence becomes an issue of
significance. Public accountability of the food marketing sector is in-
evitably going to receive more careful scrutiny in the future than it has
in the past. To the extent that these issues and political realities rise
in significance, priorities must change. An approach to complex orga-
nizations in agribusiness requiring the disclosure of basic factual in-
formation as a cost of doing business, to be weighed against efficiency
advantages of these large organizations, may become more tenable.
Even if agribusiness firms recognize the need for accountability and
public responsibility, it is difficult for them to achieve it alone. Infor-
mation flowing from a mandated disclosure policy is much more credi-
ble to the public than voluntary disclosure of the same facts. There are
appealing arguments for a partnership between public and private
initiatives in developing an information system. A mandated market
information program would allow standardization which is essential
if the reported facts are to be useful in analysis.
Another consequence of mandatory reporting of market facts would
be its effect on our national competition policy. In many cases, contro-
versial trade practices persist in situations where public information
about prices and quantities is unavailable. When market information is
made public, these practices come out in the open, and both regulatory
agencies and market participants have a better view of what is going
on. Where basic market information is publicly available, actions of
responsible executives, board of directors, and regulatory agencies
usually result in the reduction of unfair trade practices.
WHAT WOULD BE NECESSARY To GET MANDATORY REPORTING?
Mandatory reporting would require new laws. Are the benefits
worth the work to get the laws changed? What is the case for this pro-
posal? As a society, we tolerate a wide range of private initiative in
developing different organizational arrangements within the industry
structure. Whv? Because we have a basic belief in the usefulness of
private initiative in the evolution of economic efficiency. Yet for private
initiative to be effective, individual investors need information. If
access to private opportunity is to be broadly spread, this information
must be public. So the complex organizational form represents a
dilemma: it is usually technically efficient, but it usually erodes the
quality and quantity of public information.
The challenge is to weigh the efficiency advantages to society against
the cost of providing to the public the information lost in the trade. A
most direct way to do this would be to legally require complex firms to
absorb the cost of providing basic information to the public. If the
cost of providing the "lost" information outweighed any technical
benefits, then firms wouldn't integrate, and society would be left with
a simpler industry structure. On the other hand, if the benefits within
the integrated structure outweighed the cost of providing basic in-
formation to the public, then we would have a real benefit to society
from the complex organization. It does not seem appropriate for the
public to subsidize large private organizations by doing without the
basic facts needed by farmers, buyers, consumers, investors, and public
The need for publicly reported market information has long been
recognized. Also, we understand how complex firms and marketing or-
ganizations reduce the quantity and quality of marketing information
available to the public. Yet we have relatively little experience in de-
signing and implementing a system requiring basic information to be
made public. A further-and perhaps more damaging-problem is
that we have not carefully developed a rationale for requiring private
firms to provide information to the public.
We conclude that it may be within the public interest to require pri-
vate firms to bear the cost of supplying the information which their
complex structure removes from the public sector. Further experi-
mentation is required in the design and operation of a data system com-
bining the initiative of public and private organizations. This experi-
mentation and its cost may be justifiable as a part of our national
EXCLUSIVE AGENCY BARGAINING
(By James D. Shaffer1 and Randall E. Torgenson')
In recent decades the structure of the food and fiber sector of the
economy has changed from a decentralized, atomistic system to a ver-
tically coordinated marketing system dominated by large-scale food
chains and processors who demand assurance of adequate supplies on a
regular basis. To assure supplies, these volume buyers arrange for
partial- or full-supply contracts with producer associations or engage
in contracting with individual farm operators. Such dealings are noted
for the disparity in size and market power between the large-scale pur-
chasers and the individual contract producers.
Besides the problem of disparity in marketing power, contract pro-
visions are becoming increasingly complex. Contracts are known to
differ among producers from the same region, depending on which firm
they are contracting with. Contracts with different provisions are also
offered by the same acquiring firm. It is generally recognized that
handlers are not so concerned with the level of prices as with the fact
that they are not paying more for similar products than are their
Invariably, contracting also encounters problems of enforcement.
Complex contract provisions may not be carried out to the letter by the
parties involved. A need has been felt by producers for a code of unfair
trade practices to handle disputes over condemnations, weighing prac-
tices, contract cutbacks or cutoffs, and prompt payment for deliveries.
The natural outgrowth of each of the foregoing situations-the im-
balance. of marketing power between large-scale purchasers and in-
dividual contract producers, the need for standardized contract terms,
and the need for a means to settle contract disputes-serves to identify
the background for consideration of an exclusive agency bargaining
arrangement in agriculture.
A DEFINITION OF EXCLUSIVE AGENCY BARGAINING
The basic concept of exclusive agency bargaining includes as a mini-
mum a bargaining unit consisting of a group of farmers producing a
common product; a bargaining association which has the authority to
represent in trade all farmers in a bargaining unit, whether members
of the association or not; and a set of rules establishing rights and
obligations of members, non-members and handlers.
Exclusive agency bargaining differs from voluntary collective bar-
gaining by the fact that the exclusive agency bargains for price and
1 Professor of agricultural economics, Michigan State University.
2 Staff Economist. Agricultural Marketing Service, U.S. Department of Agriculture,
other terms of trade which apply to all who are defined within an as-
sociation, members and non-members alike. Collective bargaining with
the exclusive agency grants more power and responsibility to the bar-
gaining association than is usually possible under voluntary bargain-
ing. It is similar to the rights of a union with an agency shop operating
under the National Labor Relations Act where a worker does not have
to join the union but must work under union-established conditions and
must pay for union services.
WHY EXCLUSIVE AGENCY BARGAINING Is A USEFUL TOOL
At its most basic level, vertical coordination involves the synchroni-
zation of supply and demand. Future demand and supply are uncer-
tain, and coordination under uncertainty results in unsatisfactory sys-
tem performance. By organizing farmers to contract for the future
delivery of commodities to meet future demands, coordination of the
food system can be significantly improved.
In order to carry out this coordination, the uncertainty of future
supplies-the production decisions of other farmers and the weather-
must be dealt with directly. Whereas individual contracting does little
to deal with these basic uncertainties, exclusive agency bargaining
deals explicitly with them. Under individual handler and farmer con-
tracting large quantities of a product are outside of the contract sys-
tem, and contracts are difficult to enforce. In such situations, handlers
uncertain about future quantities and prices. However, an exclusive
agency bargaining arrangement would allow the guaranteed perform-
ance on the supply side of the contracts, within the contingencies im-
posed by the environment. There would also be enforcement and polic-
ing of contract terms on the buying side that would contribute to the
establishment of an effective contracting system. Vagaries of weather
would be dealt with through terms-of-trade schedules.
In addition to these special features, exclusive agency bargaining
with future production contracts offers producers better information
on which to base production and marketing decisions, and shifts de-
cisions about future demand forward in the marketing channel. The
agency can allocate supplies in cases of market surplus and can ne-
gotiate to harvest and deliver only those quantities that will result
in a return above variable costs. Demands for new products tailored
to specifications can also be more easily accommodated through com-
munication and price signals by the agency. Clearly, coordination
and resource allocation are improved by use of exclusive agency bar-
gaining through establishment of more reliable future prices around
which farm operators and other market channel participants-each
of whom have sizable investments-can avoid the uncertainty associ-
ated with otherwise gyrating prices.
EXAMPLES OF EXCLUSIVE AGENCY BARGAINING
Exclusive agency bargaining examples can be found where an or-
ganization, federation, agency-in-common or some combination of or-
ganizations is designated as exclusive bargaining agent for all farmers
in a defined group. This arrangement may exist in a variety of struc-
tural forms under specific legal sanction, and/or under formal or in-
formal agreements between producer organizations. Instances are re-
latively few, and may be viewed as part of the cutting edge of new
pricing arrangements sought by farm operators.
An example is the 1973 Michigan Agricultural Marketing and Bar-
gaining Act which provides for exclusive agency bargaining for per-
ishable fruits and vegetables through sanctions of a state board. Under
the act a cooperative certified by the board is given legal rights to act
as an exclusive bargaining and sales agent for all farmers, members
and non-members alike, in a defined bargaining unit. Several other
states have enabling acts supporting limited bargaining by farmers.
Another version of this concept is found in milk markets where co-
operatives band together through a common marketing agency that
negotiates over-order premiums with handlers for all member organ-
izations selling milk on that local or regional market. A less formal
arrangement can be identified in the division of labor between farm
groups in California where the fruit and vegetable bargaining associa-
tions-to which operating cooperative members also belong-establish
effective field prices for raw products moving to processors through
negotiations with proprietary handlers. Finally, situations can be
identified in European countries where general farm organizations,
through formal agreement, have been given exclusive bargaining
rights to represent all of agriculture in establishing wholesale prices
through periodic negotiations with government authorities.
It is obvious from the examples cited that exclusive agency bar-
gaining differs from traditional group action by farmers by virtue
of a higher and more sophisticated level of organization, more ex-
plicitly defined rules that sanction and govern the activity, and by
virtue of the focus on pricing activity at the farm gate or field level.
The Michigan Act represents the most formal structure for ex-
clusive agency bargaining. Less formal arrangements involve the
voluntary meeting of the bargaining agent with product buyers or
government authorities on a regular basis to determine contract terms
for goods and senrices furnished to them. Often the benefits of such
pricing accrue to the non-joiners in the market as well as to the asso-
ciation members. While certain equity problems may exist in such
informal negotiating arrangements, the association or exclusive bar-
gaining agency nevertheless in effect represents all producers in the
market through its actions.
AREAS OF POTENTIAL USE AND ALTERNATIVE INSTITUTIONAL
The appropriate institutional framework for exclusive agency bar-
gaining is dictated by the organizational discipline, custom, legal en-
vironment and nature of the contracting involved. In situations where
contracting is the major method of marketing crops and no acceptable
pricing arrangement exists, exclusive agency bargaining has the unique
capacity to establish a climate for price discovery as well as the en-
forcement of those prices through the bargaining unit.
Highly perishable commodities produced in localized regions-fresh
and processed fruits and vegetables for example-lend themselves most
easily to use; however, the concept is not limited by these conditions or
to these crops. As more livestock for slaughter is contracted or is mar-
keted direct to packers, a situation is established that lends itself to
exclusive agency bargaining. Similarly, contract broiler production in
which a marketable product is not involved easily lends itself to nego-
tiations over growout fees and other terms of contract.
In some areas of the western United States custom dictates that a
farm operator maintain a dual membership in a bargaining associa-
tion and a marketing cooperative a bargaining association to negotiate
field prices with processors, and a marketing cooperative for all or part
of his marketing. Since the marketing cooperative is an integrated
entity, no field price is determined. The farmer in this instance re-
ceives the residual price after operation and finance commitments are
deducted from the selling price. Through dual membership, the bar-
gaining association in effect plays a role as the exclusive bargaining
agency by negotiating field prices for the whole industry. Prices nego-
tiated by it alongside state or federal marketing orders become the
prevailing field prices for these commodities.
In several European countries, the structural and functional dual
membership role in pricing is more formalized.3 The general farm or-
ganizations-as professional associations-have for over twenty-five
years assumed, through formal agreement, a role as the farmers' nego-
tiating agent vis-a-vis the government in establishing farm prices for
the coming year. Products are extensively marketed through coopera-
tives organized along commodity lines and structured through regional
and national levels, but it is the professional associations with support
of the cooperatives, that are exclusive bargaining agents for all farm
operators in the country. Prices in this institutional framework are
negotiated by a farm delegation and a delegation of government offi-
cials on an annual or biannual basis. If prices paid by farm operators
escalate or if industrial wage earners' pay advances to a point where
farm operators are placed in a less equitable position, negotiation be-
tween the delegations reconvene. Farm prices vary throughout the
year according to seasonal supply and demand patterns around the
In the case of milk marketing, cooperatives in this country have
banded together through a common agency for in-common marketing.
These marketing agencies are the exclusive pricing and sales agents for
fluid milk sold to handlers in regions or major metropolitan areas on
behalf of cooperative members located within an area defined by fed-
eral milk marketing orders. In some instances the agency-in-common
has negotiated premiums commonly called "over-order premiums,"
above the "minimum" federal order milk prices. In this institutional
arrangement pricing occurs in association with an existing marketing
mechanism, the federal marketing order which prices products uni-
formly to all handlers.
ADVANTAGES AND DISADVANTAGES OF EXCLUSIVE AGoF.NCY BARGAINING
It is difficult to list the advantages and disadvantages of exclusive
agency bargaining because of the many different ways it might be or-
ganized and regulated. The design of the enabling legislation and the
actions taken by farmers and their associations will determine the
$ For a more lengthy description, see Randall E. Torgerson, "Farm Bargaining," Oslo:
benefits and costs. Also, an assessment of advantages and disadvant-
ages must be carried out in the context of who benefits and who pays
the cost, as well as in comparison to some relevant alternative. Limits
of space preclude an extensive comparison. Thus, the comparison is
with the current mixed-marketing system. In the following analysis
we will assume national commodity-wide bargaining for pre-produc-
Possible benefits or advantages to farmers
1. An assured market at acceptable terms of trade before current
production decisions were made.
2. All farmers would be assured equal access to marketing informa-
tion, a major benefit of the proposal.
3. Farmers would have input in determining acceptable terms of
trade and quantities to be marketed. Because all terms of trade could
be negotiated, farmers would be able to avoid some of the extreme un-
certainties of the market, avoid large losses due to unanticipated
market prices and, in general, be able to plan on the basis of certainty.
4. Exclusive agency bargaining is a self-help program and would
involve relatively little cost to the federal treasury. Unlike federal
price support programs, farmers would receive benefits through the
market. They would participate in the economy more on a par with
large corporations, organized labor, and professional groups.
5. The exclusive agency would represent all producers of a given
commodity and reduce the proliferation of competing organizations
and the associated costs.
6. Non-joiners would be required to share the costs of collective bar-
gaining and thus eliminate the costs and problems of the free rider
who benefits from other farmers' investments in building and main-
taining a bargaining association.
Possible costs or disadvantage to farmers
1. As compared with an open market the individual farmer has less
choice by having to accept terms negotiated by his association. Non-
members may feel they, especially, have lost independence of action.
2. Substantive costs are involved in organizing and operating bar-
gaining associations: members must be recruited; presentations must
be made before hearings; records must be kept; information must be
supplied to unit members; data must be collected and analyzed; col-
lective decisions must be made; and long hours of negotiations must be
3. There are inevitable conflicts of interest among bargaining unit
members. Settling these conflicts can cause ill will and impose costs on
those whose preferences or interests are less well-served by the
4. A bargaining association can make mistakes. When a mistake is
made, large numbers of members suffer, in contrast to an individual
farmer suffering from his own mistakes. The association will have the
characteristics of a bureaucracy and will not be completely respon-
sive to its members' needs and preferences.
5. The organizational procedures are sophisticated; there is a lack
of experience; standard operating procedures have not been estab-
lished and are shrouded in legal technicalities. The legislation and
specific actions would be tested in court. Uncertainty and costs would
increase during the period of court testing.
6. For some commodities exclusive agency bargaining would be a sub-
stitute for vertical integration into the marketing channel by farmer
marketing cooperatives. Farmers would have to look at the trade-
offs between bargaining and vertical integration.
7. The actions of some farmers or farm groups to use an exclusive
agent law would likely be viewed by others as a direct effort to take
away their rights.
Possible benefits or advantages for buyers
1. Processors and retailers could improve the reliability of supplies
of highly specified products, thereby reducing uncertainty and increas-
ing their efficiency. They could also better plan production and
2. A mechanism would be established for government enforcement
and association policing of contracts.
3. The association would assist in assembly, in identifying available
supplies, and in negotiation of contracts-services that now must be
purchased by buyers.
4. The process of negotiation would generate much better informa-
tion about future supplies and commodity-wide demand and thus re-
duce the risks of mistakes by processors and retailers.
Possible costs or disadvantages to consumers
1. In dealing with an organized group, buyers might be forced to
pay higher prices and lose some independence of action. They could no
longer profit from having information superior to that of individual
2. Buyers, too, would have costs associated with negotiating and
Possible benefits and advantages for consumers
1. Consumers could expect to get a more uniform and reliable
supply of a commodity with less variation in price and quality
2. Improved coordination could result in reduced costs between the
farm gate and the consumer and thus lower prices.
3. Lower prices could also occur to consumers by reducing risk and
uncertainty to farmers.
Possible costs or disadvantages to consumers
1. Consumers might pay higher prices on the average if farmer asso-
ciations were able to bargain for higher prices which exceed cost
2. Consumers may suffer from disruptions in the flow of bargained
commodities during the "learning period" for bargaining associations.
If farmers expect too much, or if handlers attempt to "buck" bargain-
ing associations there may be temporary costs to consumers. There is
likely to be a period of time during which both farmers and handlers
must adapt and learn to relate to one another in a new framework.
Possible benefits and adantages for the government
1. Congress could take the position that it provided a mechanism for
farmers to help themselves and thus could avoid the conflict between
consumers and farm groups involved in establishing farm price and
2. The drain on the treasury for support programs could be reduced.
3. The bureaucracy established for farm programs could be reduced
along with the costs of storage programs and associated risks.
Possible costs or disadvantages to the government
1. The cost of the board and associated legal costs involved in estab-
lishing the new system would be the responsibility of government as
would the ongoing administrative costs associated with maintenance of
the board and its research needs.
2. Political conflict would arise over the appropriateness of the leg-
islation and the conduct of the board and associations.
THE DESIGN OF ENABLING LEGISLATION
A national Agricultural Bargaining Board (the board) could be
established within the Department of Agriculture and would be re-
sponsible for implementing the law and supervising activities under
the law. This is one possible way to establish an exclusive agency bar-
An important function of the board would be the definition of ap-
propriate bargaining units. A bargaining unit, petitioned by a group
of farmers, could be defined in a variety of ways ranging from all of a
specific commodity sold to a single buyer to all of a commodity sold in
the United States. The definition could also be for all of a specific
product sold in a geographic area, or the unit could be defined in terms
of variety of the commodity, the use of the commodity (all potatoes
sold for processing or for making potato chips, for example) or be
limited to a particular season of the year (all late onions, for exam-
ple). The board would be instructed to define the largest bargaining
unit consistent with the desires of the producers and the workability
of the bargaining unit i.e., the potential conflicts of interests among
groups of farmers within the unit, the potential for identifying and
separating the commodity, and the feasibility of getting the necessary
information identifying producers and buyers.
No bargaining unit could include more than one commodity. This
would limit the market power of a bargaining association.
The definition of a bargaining unit would also determine the inclu-
sion or exclusion of commodities produced by handlers and sales to
cooperatives. Since cooperative members would benefit from establish-
ing prices and other terms of trade for the commodity, it is not illogical
to include them within the bargaining unit even though they would
theoretically be bargaining with themselves.
A mechanism would be established to modify the definition of the
bargaining unit based upon changes in conditions and farmer
A procedure would be established for accrediting an association of
farmers to be the exclusive bargaining representative of all farmers
within the defined bargaining unit. The procedure suggested is that
an association would have to provide valid evidence of signed con-
tracts from more than 50 percent of the farmers who were in the bar-
gaining unit the previous year and who produced more than half the
commodity within the bargaining unit the previous year. The con-
tracts would clearly state that the farmer was naming the associa-
tion as his exclusive bargaining representative and that he understood
that it would place him under the rules of the bargaining legislation.
Rules established to regulate the accredited associations would in-
clude: (1) no farmer could be excluded from joining the association
(2) all members would have equal rights to vote and have equal access
to the benefit of the associations (3) democratic by-laws would have to
be established (4) the association could not discriminate among mem-
bers within the bargaining unit (for example, it could not negotiate
terms of trade for members of the association which differ from those
of non-members), and (5) all bargaining authority would be vested
in a bargaining committee which would consist of only members of the
bargaining unit and be elected by members of the association.
Accredited associations would be entitled to negotiate price and all
terms of trade. They would not be allowed to limit entry into the bar-
gaining unit but would be allowed to establish marketing quotas in
order to tailor supplies marketed to the demand at the negotiated
terms of trade.
The board would establish dates by which time negotiations would
have to be completed. These dates would be flexible according to the
situation of each commodity and could be adjusted to the changing
annual situation. If negotiations were not settled by a specified date,
mediation and fact finding would be required. If settlement were not
accomplished by a stated date, compulsory arbitration would be re-
quired. A procedure appointing a "fair" arbitrator or arbitration
panel would be specified. Arbitration is necessary for agricultural com-
modities because of their perishability.
It would be illegal for any farmer to sell a commodity defined within
the bargaining unit except on terms negotiated by the accredited as-
sociation and it would be illegal for any buyer to buy a covered com-
modity except at these terms.
A procedure for losing accreditations would be established. If an
association failed to meet the accreditation requirements of represent-
ing 50 per cent of the producers who sold 50 per cent of the commodity
within the bargaining unit for two successive years it would lose its
accreditation. Similarly, if a grievance were filed by a member of the
bargaining unit claiming the association was not meeting requirements
for democratic procedures or for non-discrimination, a hearing would
be held. If the association were found to be in non-compliance it would
be warden and, if adequate remedy were not taken, the board could
The board would define the buyers' negotiating unit consisting of
those buying commodities covered by the bargaining unit. Buyers
would be required to register with the board and the bargaining asso-
ciation. The negotiating unit for processed products would usually be
the processors (rather than assembly buyers, for example), and for
fresh products the negotiating unit could be retailers or associations
of retailers or wholesalers. Intermediate buyers would be designated as
agents for the negotiating units and would be required to buy on the
terms established by negotiations, allowing for a fair return for the
service they perform. The appropriate negotiating units will vary
from commodity to commodity and according to the use of the com-
modity. Determining the appropriate level for negotiation would be
an important and difficult task of the board.
Bargaining prior to mediation would be between individual buyers
and the association; however, the association would be obligated to in-
form all buyers of any settlements in order to avoid discrimination. If
mediation or arbitration were required, buyers could be represented by
an association of buyers organized under procedures established by the
board. Guidelines would be established for representation of the buy-
ers' association and to assure equitable treatment, adjusting among
buyers for differences in transportation, quality, Or service.
The law would exempt associations of farmers and buyers from
antitrust laws for those activities sanctioned by the board. As a trade-
off for the antitrust exemption, settlements under the act would be sub-
ject to review for undue enhancement of price by a three-person com-
mission appointed by the President. A precedent for this exists in the
The board, responding to the initiative of an accredited association,
would establish one of the three types of bargaining, based upon the
market situation for each commodity and bargaining unit:
The first type of bargaining would be for forward deliverable con-
tracts. The guidelines for the board would be to adopt this type of bar-
gaining whenever feasible. Contracts would be negotiated prior to im-
portant production decisions by farmers and would result in produc-
tion decisions consistent with the anticipated demands of buyers, a
major breakthrough in coordinating supplies and demands for farm
products. The association would thus act as an agent in determining
the quantities of commodities bargaining unit members would be will-
ing to supply under different terms of trade. Contracts could be nego-
tiated with contingencies to deal with variations in supply due to
weather or other unforeseeable events.4
The second type of bargaining would be for the association to nego-
tiate the terms of trade, provide information about supplies and de-
mands to producers and buyers, but leave the actual marketing up to
the producers and buyers. The association would not disrupt estab-
lished relationships but would establish the conditions under which
exchange would take place. This type of bargaining would attempt to
set terms of trade consistent with anticipated conditions of supply and
demand. These negotiated terms of trade could also allow for contin-
gencies of weather and other unforeseen factors affecting supply and
The third type of bargaining would be similar to the second except
that the association would act as the exclusive sales agent for the
bargaining unit members and would be obligated to find markets for
all products and to allocate supplies among buyers. This would grant
more power to the associations and would result in bargaining to as-
sure that supplies and demands matched. It would be a less effective
coordinating mechanism than the forward deliverable contracts but
more effective than simply establishing the terms of trade. It would
also be much more demanding on the association.
OPERATIONS OF ASSOCIATIONS
Enabling legislation providing the framework for exclusive agency
bargaining is a farmers do-it-yourself marketing policy kit and is
very flexible. The outcome would depend to a large extent on the
ability of farmers to organize effective, responsible associations.
4 See also, Sporleder and Holder, "Forward Deliverable Contract Markets" in this series.
The decisions of farm organizations and farmers in defining the
bargaining unit, in determining the type of bargaining (i.e. over for-
ward contract terms, acting as exclusive sales agent, or simply es-
tablishing terms of trade), and in setting marketing quotas and many
other aspects of strategy would be critical in determining perform-
ance. The costs of organizing and the internal management problems
would be greatest for an association representing a bargaining unit
for all of a product produced in the United States and bargaining for
terms for forward contracts. This alternative would also provide the
greatest opportunity for effective coordination of supply and demand
and capacity for the association to establish favorable terms of trade
for its farmer members.
Least costly in organization and management would be bargaining
establishing terms of trade for a single buyer. This also offers limited
advantages in both setting terms of trade and as a coordinating
mechanism. An association would not wish to impose terms of trade
which would put a buyer at a disadvantage compared to his competi-
tors. At the same time, bargaining could assure that producers were
getting terms of trade equivalent to those offered by other buyers,
could assure equal treatment for all producers selling to the buyer and
could establish delivery schedules, quality characteristics and other
important non-price terms of trade.
Many possibilities lie between these two extremes of individual buy-
ers and national bargaining. The type of bargaining which would
evolve for each commodity would depend upon the circumstances of
each market situation and the preferences of the majority of farmers.
METHODS OF ACHIEVING EXCLUSIVE AGENCY BARGAINING
A very substantial amount of work would be required to obtain
exclusive agency bargaining legislation. Since the design of the legis-
lation is critical, time, effort, analysis, and debate will be required
to determine appropriate and workable rules. Farmers will have to
recognize the rights of buyers and consumers and make adequate pro-
visions for their protection. Farmers must also invest their time and
money in developing responsible and competent associations to repre-
sent them as exclusive bargaining agencies.
Major organizational and information efforts would be required to
put across this concept to farmers. Once farmers were convinced this
was a desired approach, a major public relations and lobbying ac-
tivity would be required.
Because of the uniqueness of the exclusive agency bargaining ap-
proach, it would probably be desirable to gain experience on a smaller
scale within a state and with limited commodities before adopting
a general national policy. The bargained contract system would need
to evolve from the success and failure of these efforts. Since the gains
from limited efforts are marginal and costs substantial, farm groups
will have to be willing to invest in the experiments.
The ma.or payoff to society from the exclusive agency bargaining
concept is in supply planning and management. As a production plan-
ning mechanism, this system organizes the marketing process in a
Sway that provides for discovery of terms of trade, including price,
as well as efficiency in commitment and use of resources over the
We have outlined the major provisions of possible legislation estab-
lishing exclusive agency bargaining as a national policy and specified
some standard operating procedures for bargaining associations op-
erating under this legislation, important because the rules and operat-
ing procedures are critical in determining the effectiveness and ac-
ceptability of exclusive agency bargaining. Note that exclusive agency
bargaining in the exact form we have outlined does not exist, thus we
cannot give empirical evidence of success, failures, and problems as-
sociated with this alternative. As with all the alternatives discussed,
the authors are describing an alternative and are not advocating its
Shaffer, James, "Farm Bargaining Legislation in the Public Interest, Bar-
gaining Cooperatives." January 13-14,1974.
Shaffer, James, "Michigan Agricultural Marketing and Bargaining Act of
1972," Michigan Farm Economics Pamphlet. Department of Agricultural Eco-
nomics, Michigan State University, February 1973, No. 361.
Shaffer, James and Hamm, Larry, "Exclusive Agency Cooperative as a Vertical
Coordination Mechanism." To be published as a North Central Region Project
No. 117 in the winter of 1976.
Torgerson, Randall E., Farm Bargaining. (Oslo: Landbruksforlaget, 1971).
VERTICAL INTEGRATION THROUGH OWNERSHIP
(By William E. Black1 and James E. Haskell )
To integrate means to combine two or more stages in the production-
processing-servicing-marketing complex under one management. In-
tegration is of two types: horizontal and vertical. Horizontal integra-
tion achieves economy of scale and market power by (horizontally)
combining similar functions. An example of this is cattle feeders who
forego individual feeding operations and turn to a large feedlot to
feed out their own cattle as well as custom feed. Horizontal integra-
tion is not part of this paper.
Vertical integration is defined as ownership-participation in two or
more steps in the total production-processing-servicing-marketing
complex by a single business organization. Vertical integration may be
either forward or backward. This paper focuses on forward integra-
tion (toward the retailer) by producers for their products rather than
backward integration (toward the producers) by the food processor,
converters, or retailers for the products they need. From a producer
viewpoint, vertical integration means financial participation in facili-
ties and operations of two or more production, processing, or market-
ing stages for the commodity he produces. Some farmer cooperatives
engage in backward integration into the farm input supply industries
by owning oil wells, phosphate and potash mines, and manufacturing
Vertical integration can also be achieved under centralized manage-
ment through the use of contracts or agreements. Here the decision
of two or more firms is coordinated through contracts or agreements
although ownership may not necessarily be passed from one firm to
Vertical integration is not new. It was the common method of agri-
culture among our self-sustaining settlers who produced, processed,
and consumed their food within the family. Later, as the era of special-
ization emerged, more and more of the functions were transferred out
of the home or off the farm. Separate specialized businesses were cre-
ated. At first these tended to be single-function businesses. Still later,
more and more functions were combined to bring about economies and
control in the operation. The English woolen industry was perhaps the
first instance of modern vertical integration. Here a single firm carried
on all processes, from the preparation of the raw material to weaving,
dyeing, and finishing.
SProfessor, Department of Agricultural Economics, Texas A&M University.
'Agricultural Economist, Farmer Cooperative Service, U.S. Department of Agriculture,
This paper is concerned only with vertical integration by producers
through ownership. Vertical integration through contracts or agree-
ments is not considered. Separate papers examine these marketing
INDIVIDUAL AND GROUP INTEGRATION
Farmers and ranchers may engage in vertical integration through
ownership either as individuals or as a member of a group. Individual
integration includes self-sufficiency practices of canning and freezing,
on farm retailing-including pick-your-own-preconditioning, and
feeding out calves formerly sold at weaning time. Individually owned,
vertically integrated businesses are usually internally developed pri-
vate proprietorships, that is, the owner adds step-by-step to his own
creation, not through purchase.
Group integration opportunities are much greater than individual.
The steps in the integration complex may be purchased or developed,
and the group-integrated organization may be partnerships, a regular
corporation, or a cooperative corporation.
Ownership integration requires more than a mere investment for its
success; it also requires patronage. In a marketing cooperative, for
example, producer members must deliver their production, including
title, to the cooperative. Critical further handling, processing, and
marketing decisions are assumed and made by the cooperative. These
commitments are spelled out in a marketing agreement between mem-
bers and the cooperative and are enforced by the board of directors.
Examples of vertically-integrated ownership by farmers include:
Individual Vegetable Grower Shippers.-Larger, more successful
vegetable growers extend ownership in their crop through harvesting,
sorting, sizing, packaging and shipping by investing in operations to
make direct sales to a retailer or hotel-restaurant-institutional distrib-
tor or by contracting to have certain functions performed by someone
else. Producers who grow vegetables without a contract and turn their
crop over to someone else to market are few in number. By combining
marketing with production the grower strives to extend his control
over the pricing and the marketing processes, reduce costs, and in-
Cooperative Corporation.-Formed in 1973 through a consolidation
of three local ginning organizations in west Texas, the American
Cotton Growers (ACG) rapidly expanded into a completely inte-
grated, producer-owned cooperative. Initial objectives were to increase
the profitability of cotton farming by reducing off-farm handling costs
and by marketing better cotton and cotton by-products. The producers
recognized that ginning, compressing, storage, and marketing were
separate profit centers, each operating independently and each taking
a bite out of the value of their crop. They therefore created a single
organization to control all post-harvest operations for their products.
Each member commits cotton acreage to the cooperative and is respon-
sible for growing, harvesting, and storing the crop.
ACG assumes responsibility for all subsequent functions-loading
and hauling seed cotton, ginning, packaging, lint transportation, stor-
age, and marketing. In conjunction with the gin, ACG also operates a
*Joint venture arrangements, a form of Integration, is discussed in a paper In this
series titled "Joint Ventures Among Cooperative and Non-Cooperative Marketing Firms."
burr pelleting plant which converts that by-product into cattle feed.
All cotton is placed in a seasonal pool for merchandising and distribu-
tion flexibility. Each producer receives the average selling price for
the crop, less all costs and any capital retains approved by the board
of directors. From some 40,000 cotton acres originally committed to
ACG, the cooperative now draws from more than 250,000 acres. In
addition, ownership-integration has advanced to a textile facility that
will process cotton into finished denim fabric. From ownership of his
product through only immediate post-harvest a few years ago, an
ACG farmer-member can now derive benefits through the sale of
cloth to cloth manufacturers.
Corporation.-Monfort of Colorado started as a cattle feeding op-
eration in 1927. While the feeding operation grew in size, it remained
essentially unchanged in form until the 1960's. At that time the com-
pany integrated backward into feed grains by acquiring elevators in
Kansas and Nebraska. These served as sources of feed supplies. In
1960 Monfort established a packing plant near the feedlot. Feedout
capacity increased steadily until it reached 110,000 head in early 1970
when a second feedlot of equal capacity was built, boosting total feed-
ing capacity to 220,000 head at one time. Packing-plant capacity was
also expanded. At the same time Monfort began selling meat through
company-owned purveyors. With its feed-grain procurement system
and meat-marketing system, Monfort became a vertically integrated
operation. The nature of Monfort's vertically-integrated-through-
ownership operation was concisely described in a 1970 prospectus pre-
pared by underwriters of Monfort's public stock offerings:
The Company principally engages in purchasing feeder or young cattle, feeding
them until they are ready for slaughter, slaughtering, breaking, fabricating and
portioning cattle and lambs and selling individual serving cuts, fabricated cuts,
primal cuts and dressed carcasses of beef and lamb and their by-products to
wholesalers, retailers, and others throughout the country and in foreign markets.
Marketing Cooperative.-American Rice, Inc. (ARI), a centralized
cooperative, was incorporated in the State of Texas in 1969 to market
members' rice. It first developed and implemented uniform, statewide
grading standards and then added a statewide market information, in-
ventory, an analysis system. In 1971 ARI initiated a successful state-
wide cooperative marketing program for rough rice with 475 rice
farmer members representing about 23 percent of Texas' rice-produc-
ing acreage. Producer-members were required to commit their rice
production on a marketing agreement and pooled basis. In 1973 ARI
expanded its marketing service to include Louisiana growers, and, a
year later, engaged in custom milling of members' rice. In July, 1975,
ARI acquired Blue Ribbon Rice Mills, Inc., a cooperative. At that time
it had approximately 325,000 acres of production under marketing
agreement with 75 percent in Texas and 25 percent in Louisiana. It
now markets milled rice under Blue Ribbon and other established
brands. ARI returns to members consistently higher prices than non-
The above are examples of specific integration indeavors and pro-
vide and represent only four means out of many possible ways in which
farmers can integrate forward. But what is necessary for success in
- forward integration ?
REQUIREMFTS FOR SUCCESS
There are a number of factors that would tend to make vertical inte-
gration successful. The most important include:
A Permissible Environment.-The general public plays a part in
determining how agriculture is structured and controlled. Actions-
or lack of them-by the government ma reflect public attitudes
toward integration of the food and fiber system. Integration
through ownership would face severe obstacles if these attitudes were
Ownership of all phases involved in the vertically integrated process.
The key here is to own the product through as many pricing points as
possible, even though necessary handling or processing facilities may
not be owned by the integrator. For example, a firm might ship grain
through an export elevator on a per bushel fee basis without owning or
controlling that port facility; however the firm owns the grain until
purchased directly by the foreign buyer.
Capable Management and Staff.-Because vertical integration ex-
tends ownership, sophisticated management is required. Most critical
is marketing expertise in the many cases where a firm is engaged in
product rather than commodity marketing. Decisions of the firm are
guided primarily by information derived from the market place, not
production information. This becomes especially clear when vertical
integration includes dealing directly with retailers and consumers.
Predictable Supplies.-Vertical integration is economically unsound
if supplies are uncertain either in terms of quantity or quality. Long-
term marketing arrangements cannot be consummated without supply
assurance. Corporate planning for physical, financial, and management
efficiency is also constrained by uncertain supplies.
Adequate Capital.-Vertical integration requires additional capital
for financing physical facilities, management, and the commodity it-
self. While capital needs for vertical integration are initially quite
large, financing the integrated operation after it is successfully estab-
lished is usually not difficult.
Efflciency.-The vertically-integrated process must be operated effi-
ciently to remain competitive. Key considerations include the scale of
operation necessary to achieve economies in production, sufficient mar-
ket impact, and increased output relative to inputs. Vertical integra-
tion can bring together technologically complementary production
processes under single ownership and management. It eliminates some
sales transactions and increases profits to other transactions. Efficiency
also can be achieved by improved coordination of the rates, amounts,
and quality of output at successive stages.
Market Access and Growth.-A market must be found, maintained,
or expanded for products produced by farmer-owners. Vertical inte-
gration can achieve market access faster if the product has an in-
creasing demand, that is. a higher percentage of the population con-
suming the product or consuming it at a higher rate or both.
THE CONSEQUENCES OF VERTICAL INTEGRATION
Effects of a partially or fully integrated agriculture would be felt
with varying intensities by many different individuals and groups:
farmers and ranchers, integrated firms, consumers, the community, and
the general public. Since producers own, and presumably control, the
businesses in an industry vertically integrated through ownership,
consequences to farmers and integrated firms are considered together.
The Participants.-Producers involved with integrated firms might
lose some of their on-farm decision-making prerogatives. The critical
decisions on assembling, processing, servicing, and marketing could
be transferred to the firm center. Most of the decisions remaining with
the farmer would relate to production, but even some of those-when
and how much to produce, and variety planted-might be made beyond
the farm level. As a member of a cooperative, the producer would have
some input about what decisions are transferred to the cooperative.
Farmers and ranchers are also expected to make firm commitments
to the integrated system. Part of this commitment may be the require-
ment that the participant deliver all or a major part of his total pro-
duction to the system and purchase most of the supplies needed in
production from that same organization. Other commitments may be
in terms of contributing money, either through direct investment or by
capital retains. The integrated firm must have these types of commit-
ments to carry out its stated objectives; however the competitive suc-
cess of integrated firms depends more on what the producer delivers
than what he invests.
Participation in vertically integrated firms should provide farmers
and ranchers sufficient benefits to compensate for loss of marketing
freedom. One benefit is the transfer of the risk of some price fluctua-
tions away from the producer. Prices for farm products in an inte-
grated firm are determined by formula, pools, blends, or other methods
outside the traditional open market and represent some kind of "aver-
age" price over the marketing period. No longer would the farm-gate
price determine success or failure of the farming operation.
Producers also share in any profits (or losses) generated at pricing
points added to the integrated system. Vertical integration increases
the market power base of producers by extending ownership control
of assets and products. Other potential advantages accrue to vertically
integrated business, including more efficient resource allocation, reduc-
tion in costs, and incentives for technological advance.
An industry vertically integrated through ownership does not re-
flect commodity and product prices at the various stages of the system.
Several groups might be interested in those prices for different rea-
sons-producers, consumers, the competition, and perhaps even the
government. Many integrated firms accumulate profits at only one
stage of the total operation, accounting for other transfers at cost;
others make no attempt to determine prices at each level. When inte-
grated operations account for a large part of total industry volume,
it is nearly impossible to accurately reflect prices associated with the
product or commodity. This makes it especially difficult to monitor
or control, even by producers, integrated operations from an equity
In many cooperative marketing arrangements only partial payment
is made to the producer at time of delivery. The balance is paid after
the cooperative sells the product. Producers might find it difficult to ad-
just to a system which doesn't pay on delivery. Many producers prefer
to use the open market price as a continuous barometer of how they're
doing pricewise in marketing their production.
Vertical integration can increase or decrease competition within an
industry, depending on the concentration of that industry at the time
integration is introduced. If the industry is already dominated by a few
large firms, integration would tend to increase competition; but entry
of vertically integrated firms into a dispersed market structure can
lead to decreased competition in the industry, particularly if the num-
ber of firms in the industry is reduced as a result of that integration.
The extent of integration also affects the conditions of entry and exit
of firms. If vertical integration is successful and captures a significant
portion of the market, other firms will find it difficult to enter the in-
dustry, especially if the integrated firm captures that market share via
a brand product. Entry into many industries is virtually closed today
because of the existence of successful integrated firms.
Finally, successful integrated firms are market oriented. In effect
this means the firm combines business and marketing functions with
the tools of management in a mix that best serves consumer wants and
needs and is still consistent with the objectives of the producer-owners.
Vertical integration can provide access to the retail shelf. The goal of
market orientation is to own the product through as many pricing
points as the integrated firm can convert into profit points. The latter
point serves as a guideline for further vertical integration. There is an
incentive to expand only so long as ownership through another pricing
point is profitable. The economic limit to ownership-integration is de-
termined in that manner.
To summarize, producers can potentially benefit from a vertically
integrated system by higher profits (a combination of reduced costs,
more efficient resource allocation, and ownership of the commodity or
product through more than one pricing); reduced risks; and market
power. Most of the disadvantages arise from a necessary change in the
traditional way of doing business. Producers lose some of their
decision-making power in marketing; have to make binding product
and financial commitments to the system; and lose the option of selling
their production in the open market.
The Comm wnity.-Vertical integration by farmer cooperatives
might aid in preserving existing rural community patterns by main-
taining the role of the individual farmer. Because ownership of pro-
ductive resources remains at the local level there is greater producer
involvement in decisions to locate additional production and marketing
facilities. Integrated businesses located in a community create a larger
tax and employment base and increase service demands. On the other
hand, some communities would suffer by not having the businesses
located in their proximity, or by having supply procurement take place
outside the area. Increased integration through ownership would result
in some reduction of the total work force in agriculture-related func-
tions, and local decision-making could be lost if integration was
brought about by outsiders.
The Consumer.-Integrated systems have the potential to achieve
greater cost savings from coordination of production, processing, and
distribution, and the elimination of unneeded facilities, but lower costs
of food and fiber to consumers cannot be assured. It may prove socially
and economically detrimental to consumers. Producers might gain and
consumers suffer higher prices if the market power achieved by the
integrated firms is used to reduce competition and restrict supplies. On
the other hand, if consumer demands are accurately identified, the pro-
ducer-owned system could quickly respond with more and higher qual-
ity products. Producers are more apt to engage in new product develop-
ment, marketing innovations, and other consumer responses if they are
part of a vertically integrated system.
The General Public.-Integrated firms would be expected to take on
a larger share of research, development, and education programs now
funded through state and federal taxes. The complexities and individ-
uality of integrated operations require greater research on their part.
Widespread vertical integration might also reduce needed government
expenditures for the price support program.
METHODS OF ACHEVING VERTICAL INTEGRATION
Farmers and ranchers who want to be a part of an integrated system
can either do it as an individual or as a member of a group. Those who
wish to go it alone must develop the system over time. Those who opt
for membership in a group can also develop the system over time; or,
they can buy it. Most commercial farmers engage in vertical integra-
tion through ownership as a member of a group because risk can be
spread out over more producers, capital requirements per farmer are
less, and the opportunities for success are enhanced through a bigger
scale of operation, export management, and marketing skills.
One-Person Integration.-Farmers and ranchers can, and have, de-
veloped integrated businesses on their own. This is illustrated by the
cow-calf producer who decides to retain ownership beyond weaning.
Assuming part of his land is suitable for cultivation, he could reduce
his cow numbers and put some land into small grains for feeding after
the calves are weaned. (Supplemented grain may be fed while calves
are on the small grain.) If the land of the cow-calf producer is not
suitable for cultivation he can still integrate vertically by custom
grazing his calves on someone else's land at so much per pound of grain.
Regardless of which practice is followed, ownership in the calves is
retained. After preconditioning, calves are normally sold. The degree
of vertical integration can be extended by retaining ownership through
the feedlot. If followed this system would extend control by the cow-
calf rancher (he participates in more than one pricing point) and
reduce the number of sales the calf goes through. It could increase
efficiency and profits and/or decrease costs.
It is important that producers who want individual integration
recognize how conditions change from their usual mode of operation.
First, more money is required over a longer period of time. When-
ever additional functions are assumed, the capital requirements also
increase. In the cow-calf example, the producer must obtain capital
to purchase the machinery and supplies required to raise grain, or to
pay rent if he decides to custom graze the calves and carry the inven-
tory longer. Second, the type and quality of management required to
run an integrated operation differs from a nonintegrated, traditional,
production-oriented farm operation. New management skills must be
learned or acquired. Finally, producers must be willing to live with
postponed income, especially for the first year or two. Benefits from
ownership integration are not immediately available because it takes
time and money to develop an effective and profitable system. Initial
cash flow problems may be eased somewhat through careful attention
to accounting methods. For example, it might be easier for an indi-
vidual to integrate forward if he changes from the cash to the accrual
basis of reporting taxable income.
Group Integration.-Producers at times can more easily integrate
forward through ownership as a part of a group. A producer can either
join other producers in common ownership of corporation or become a
member of a marketing cooperative. The organization may already be
integrated through more than one pricing point-marketing, proc-
essing, and retailing-or may be a single function operation. In other
cases, farmers can join together to form a brand new integrated or-
ganization: by combining their money and ideas, they can either pur-
chase an operation outright or develop what they want over time.
Farmers and ranchers have many good reasons for joining together
in an integrated system rather than trying to develop it as individuals:
they can probably achieve the efficiencies of economies to scale; they
can hire expert management; marketing decisions can be moved up
to more appropriate levels; large capital investments for physical
facilities can more easily be made; members have the opportunity to
share in marketing profits; and participants are protected, to some
extent, from price fluctuations for their particular commodity.
Farmer cooperatives currently face the danger that legislation un-
dergirding their very existence might be seriously eroded by either
legislative, judicial, or administrative action. The Capper-Volstead
Act is of greatest concern. Without it farmers could not even form
a cooperative for the purpose of jointly marketing their products. If
farmnners and ranchers desire to continue to use cooperatives as a means
of integrating forward then they must insure continuation of the kind
of treatment provided by Capper-Volstead.
Bowersox, Donald J. and McCarthy, E. Jerome, "Strategic Development of
Planned Vertical Marketing Systems," Vertical Marketing Systems. Ed. Louis P.
Bucklin, Glenview, Illinois; Scott, Foreman and Co., 1970.
Harris, Marshall and Massey, Dean T., "Vertical Coordination Via Contract
Farming." U.S. Department of Agriculture, Misc. Pub. 1073, March 1968.
Mighell, Ronald L. Hoofnagle, William S., "Contract Production and Vertical
Integration in Farming, 1960 and 1970." U.S. Department of Agriculture, ERS-
479, April, 1972.
Mighell, Ronald L. and Jones, Lawrence A., "Veitical Coordination in Agri-
culture." U.S. Department of Agriculture, ERS Agr. Econ. Report 19, Feb. 1963.
JOINT VENTURES AMONG COOPERATIVE AND
NON-COOPERATIVE MARKETING FIRMS
(By Lester H. Myers,1 Michael J. Phillips,2 and Ray A. Goldberg3)
Coordination of marketing activities may be obtained through joint
ventures between agricultural marketing cooperatives and non-co-
operative agribusiness firms.4 Joint ventures are defined here as as-
sociations between two or more participants organized for the purpose
of implementing and conducting a specific marketing operation or
enterprise. The identities of the participants remain apart from their
co-ownership or co-participation in the venture. Participants share-
on an agreed basis-expenses, profits, losses, risks, and some measure
of control over the conduct of the venture operation. Various forms of
business organization (partnership, corporation, or cooperative) may
be adopted for the conduct of the venture's business. While the veil-
ture may perform one or more of a variety of marketing functions, it
is assumed here that the activities involve either a direct marketing
function or the procurement or manufacturing of inputs needed in
the processing and/or marketing functions. Contract agreements for
the sole purpose of assuring a supply source or a market outlet are
not considered joint ventures within the context of this paper.
Many factors may serve as motivating forces for the creation of
joint ventures between cooperatives and non-cooperative firms. Pro-
ducer cooperatives may see the venture as a way of gaining access to
consumer markets, some assurance of potential price premiums, and
the opportunity to realize the benefits of economies of scale. Agri-
business firms may be looking for partial insulation from uncertain
commodity supplies, for access to lower credit costs, or possibly for a
way to minimize the effects of possible governmental price freezes and
other regulatory policies.
Joint ventures between cooperative and non-cooperative corpora-
tions have received further impetus as producer groups and off-farm
operators attempt to coordinate not only the United States domestic
commodity systems but the international ones as well. It is very pos-
sible that some of the more meaningful joint ventures may develop
between commodity producers in the United States and multi-national
agribusiness firms in other countries and vice-versa.
Associate Professor, Food and Resource Economics, University of Florida.
Agricultural Economist, Farmer Cooperative Service, United States Department of
SGeorge M. Moffett Professor of Agriculture and Business, Harvard Business School.
4 EDITOR'S NoT.-Joint venture arrangements imply ownership by two or more corporate
entities. Agricultural economists tend to refer to this as integration in the sense that
one firm has now entered into partial ownership of another stage in the production or
In the following section, several examples of existing joint ventures
are summarized. These particular examples are selected to illustrate
diverse motivations, types of projects, and degrees of success associated
with joint ventures.
EXAMPLES OF EXISTING JOINT VENTURES
Agway-Curtis-Burms-Pro-Fac.-In 1960, Agway, a producer co-
operative based in Syracuse, New York, was instrumental in consum-
mating a merger between Curtis Brothers and Burns Alton, two small
fruit and vegetable canners. Agway took a 58 percent stock interest in
the new company and then formed Pro-Fac, a cooperative that supplies
raw commodities to Curtis-Burns.
Curtis-Burls leases the plants owned by Pro-Fac, processes the
crops of Pro-Fac grower members, sells the finished products, and
pays Pro-Fac from the proceeds. Curtis-Burns also uses funds bor-
rowed from Pro-Fac as working capital. This arrangement gives Cur-
tis-Burns high capital leverage.
Pro-Fac grower members supply about 90 percent of the crops
processed and sold by Curtis-Burns. Members' principal crops are
green and wax beans, corn, beets, green peas, cabbage, asparagus,
tomatoes, potatoes, and apples. Curtis-Burns sells about 60 percent of
its volume directly to chain buyers and the remaining 40 percent to
brokers. About 90 percent of its products are processed for the pri-
vate label trade. Growers are paid 50 percent of the estimated commer-
cial market value of their crops 30 days after delivery of their entire
crop. Commercial market value (CMV) is defined as the average of
what the industry is paying in the appropriate market area. An addi-
tional 25 percent is paid within 120 days after delivery, and to the ex-
tent earned, the balance of the CMV is paid as soon as is practical
after the close of the fiscal year.
While net proceeds from Curtis-Burns sales fell below commercial
market value in 1970, the growers have received price premiums above
CMV from 1971 through 1974.
The major advantages of this joint venture are:
A guaranteed market for Pro-Fac grower members and the
potential for price premiums.
An assured supply of raw product to Curtis-Burns from the
cooperative avoids underutilization of processing capacity.
By owning the facilities as well as supplying the raw product,
the cooperative can transfer the savings to the producer who is
taxed on an individual basis, thus generating a faster cash flow
The management team and certain other employees of the
Curtis-Burns company can be given incentives through stock
options, not available to cooperatives.
Pro-Fac growers are able to expand production because of the
broad product line capabilities of Curtis-Burns.
The maior disadvantages of this joint venture are:
It severely limits the processor's raw materials supply options
and the cooperative's market outlet.
If the venture is successful it may become the price leader for
the raw product and leave an insufficient price mechanism to
determine an equitable transfer price from the company to the
Florida Orange Marketers-Minute Maid.-In 1969 an agreement
was reached between Florida Orange Marketers (FOM), a producer
cooperative, and the Coca-Cola Company's Food Division, of which
Minute Maid is a part, in an attempt to establish a fair transfer price
for oranges. The agreement provides that the income to the co-op
member and to the company will be based on the FOB prices of pri-
mary and by-products at the time of shipment from Minute Maid. The
company procures approximately one-third of its orange supply from
FOM. Because of brand image and quality control, Minute Maid
orange juice has enjoyed a price premium in the market place. Despite
higher advertising and marketing costs than private label packers,
much of the price premium is passed back to the producer. Histori-
cally, FOM growers have realized five to seven cents per pound of
orange solids above the industry average. The company's share of the
FOB price is limited to an amount covering its processing, marketing,
and R&D costs connected with the utilization of the oranges. FOM
maintains some control over the final utilization of the oranges, and
Minute Maid has the authorization to limit the quality and amount of
oranges they will accept from FOM.
The advantages in this kind of joint venture are:
The company is assured a steady supply and the co-op is guar-
anteed a market, like many joint ventures of this type.
Since the cooperative shares in the end-product profitability,
the producer benefits from the company's research and its adver-
tising and promotion skills.
The disadvantages in this kind of joint venture are:
The producer assumes all risk of fluctuations in FOB prices
since the processor is guaranteed a processing and marketing
Growers are more directly affected by the growing labor tur-
moil in agroTiculture. By joining forces with a major brand com-
pany, which is vulnerable to a national boycott, growers may be
Growers may have to find other markets for some of their
production since Minute Maid negotiates for fixed volumes of
Heublein-United Vintners.-Allied Grape Growers, a California
cooperative with about 1600 members, acquired United Vintners (UV)
in 1959. UV provided the processing and marketing skills needed by
the growers to market their grapes effectively.
After the merger the wine industry underwent changes, including
the development of new products and mechanization of grape harvest-
ing and processing. Thus growers experienced a need for expanded
capital reserves to finance mechanized vineyard production and, in
addition, to finance new processing equipment and marketing programs
associated with their processing cooperative.
To expand and compete more effectively, Allied Grape Growers be-
gan to seek sources of capital other than that provided by its members'
revolving fund. Heublein was interested in getting into the domestic
wine business and made Allied an offer for UV. Allied's board indi-
cated no interest in a sale, but was receptive to a joint venture with
Heublein. As a result Heublein acquired an 82 percent interest in UV,
and Allied retained an 18 percent interest.
The key element of the deal, assuring producers of a market and
Heublein of a source of supply, was a pre-merger contract drawn up
between Allied Grape Growers and United Vintners. The twenty-year,
renewable agreement called for Allied to be the exclusive supplier of
domestic grapes for UV at the quoted average market price plus a pre-
mium equal to twenty percent of UV pretax profits.
Over time this venture has not performed to the satisfaction of both
parties, and its status is in current litigation. Because of the unre-
solved issues concerning this venture it is not feasible to speculate in
this paper on the causes of the unsatisfactory performance. For what-
ever reason, since the venture began UV has not realized a profit. Thus,
the illustration that joint ventures are not automatically successful.
The advantages in this kind of joint venture are:
The marketing firm enters a new business which is complemen-
tary to its existing product line and marketing skills.
The cooperative gains access to needed capital, to broader mar-
ket distribution, and to an established brand franchise.
The disadvantages in this kind of joint venture are:
Unequal equity interests by the two participants can lead to
little or no management control by the party with the minor
Since the contract calls for the minority interest party to be
paid a premium based on the venture's profits, the determination
of those profits could lead to one party or the other or both being
dissatisfied with the transfer price.,
CONDITIONS NECESSARY FOR JOINT-VENTURE SUCCESS
Joint ventures, like any other business enterprise, are not auto-
matically successful. While all factors contributing to a successful ven-
ture probably cannot be identified, a number of important ones are
outlined in this section.
Equitable Agreement.-Perhaps the most important aspect of a joint
venture is the original agreement between the cooperative parties. Ex-
treme care must be taken to safeguard against unfair dominance by
one firmn or the other. Specifically the agreement should assure the
(a) Terms of ownership. Each party should have clearly speci-
fied claims to the venture's equity and capital assets.
(b) Management control. Voting rights of both partners should
be specified. In general, the closer the voting proportions are to
being equal, the more likely the chance for success.
(c) Supply and market contracts. The producing cooperative
S must assure a certain level and quality of raw products while the
marketing firm must agree to market the output from the venture.
It may be desirable to allow the venture to secure supplies from
growers outside of the participating cooperative during certain
periods to maintain an efficient operation and to assure continuous
(d) Equitable pricing formulas. Growers should have a clear
understanding of the transfer price determination. If the price
includes a premium based on the profit performance of the ven-
ture, the agreement should specify how profits are to be measured,
and growers should maintain sufficient management control of the
venture operation to assure pursuit of the profit objective.
(e) Unusual changes in the economic or agronomic environ-
ment may lead to adjustments in the joint venture. Machinery
should be established for making these changes as a joint-venture
is a dynamic and changing relationship.
Operation and Management.-The venture enterprise must be ex-
pertly managed. It is quite likely that both participating firms may
need to look outside their respective organizations for management
personnel. The operation must be large enough to operate efficiently. It
must serve an industry need; that is, it should either provide an exist-
ing service more efficiently or provide a new service.
Adequate Capital.-Joint ventures sometime require additional
capital for acquiring facilities, management, and the raw product.
This should not be too difficult because the partners in the venture can
exploit each other's financial resources. The company can make use of
the Bank for Cooperatives, and the cooperative has access to the com-
pany's many sources of funds.
Market Access.-A market must be found, maintained, or expanded
for the products of the venture. Emphasis for the cooperative partner
must be on delivering a commodity to the corporate partner that meets
the needs of the market.
Social and Political Environment.-Public attitudes toward joint
ventures between producer cooperatives and non-cooperative firms are
important factors in determining whether or not this type of structure
will develop and persist. An important aspect is the ability of the co-
operative to remain a cooperative and not be jeopardized by the venture
agreement. Governmental action, reflecting public opinion, must be
favorable if such ventures are to succeed.
POTENTIAL IMPACT ON JOINT-VENTURE PARTICIPANTS
Expected economic, financial, control, and management implications
resulting from a joint venture depend, to a critical extent, on the par-
ticular characteristics of the involved firms, the economic environment
within which they operate, and the nature of the joint venture. This
section considers likely effects on the producer cooperatives and non-
cooperative firms actually involved in the venture.
Management Innovations.-Joint ventures almost certainly result
in management revisions for the involved participants. The project
may result in a consolidation and/or transfer of certain marketing,
transportation, and processing function. This in turn might facilitate
coordination of the production and marketing functions resulting in
tighter management control. It may also mean a loss of some manage-
ment freedom of choice on the part of one or all partners with respect
to choice of market, source of supply, and/or timing and quality of
production. A trade-off may develop between better coordination and
cost control and the loss of freedom to choose the most advantageous
market or supply source.
Both firms will have to learn to make joint management decisions
with respect to the operation of the venture. Quite often conflicts may
develop because of the differing goals of the participating firms. The
ability to overcome these conflicts should result in positive benefits to
both growers and agribusiness.
In general, one would expect the necessary management innova-
tions for a successful venture to have beneficial impact on all
Monetary Impacts.-The joint, project may have a financial impact
to the cooperating partners. Cost efficiencies would likely result from
better coordination of the supply, processing, and marketing functions.
Finally, costs may be lowered because of reduced uncertainty with re-
spect to supply procurement and market outlet.
Joint ventures may also alter normal pricing mechanisms. Products
which previously passed through an open market may now become
essentially an intermediate (output) input. The price attributed to
this intermediate product may be based on the value of final output less
processing charges; a specified formula based on quality, volume, and
final use characteristics; or an "arm's length" competitive price. Thus
the venture may result in pricing efficiencies or pricing inefficiencies,
depending on the unique aspects of the venture agreement.
Another financial factor involved in joint venture decisions relates
to credit and cash flow alternatives. Depending on the venture agree-
ments, the non-cooperative participant may gain access to the coopera-
tive's credit sources and to some or all of the cooperative's non-equity
surplus. Cash flow may be faster because of the standard cooperative
law requiring producers to pay a single tax on earnings. Access to the
non-cooperative's capital reserve and credit sources may allow coopera-
tive grower members more capital to devote to production activities.
Sharing of Risk..-All parties to a joint venture will probably realize
some changes in the risks they usually bear. Producers, through the
cooperative, may become insulated from the usual short-term fluctua-
tions in farm-level prices. Grower prices, based on the actual sales
value of the final processed product less processing and storage charges,
will normally be less variable, than farm-gate cash-sales prices. Thus,
the timing of producer sales become less critical. However, by having
his price based on processed product. values, the producer assumes all
risks of price changes at the wholesale level; or, depending on the
nature of the venture, at the retail or consumer level. Since prices tend
to be less variable as the pricing points move closer to the consumer
level, the net effect to producers should be a decrease in the risks as-
sociated with price variability.
The non-cooperative partner should realize a decreased risk cost.
Some of the price variability risk associated with open-market supply
procurement will be eliminated and some will be passed back to pro-
ducers. The joint venture with a producer cooperative will also de-
crease some of the uncertainty problems associated with undependable
raw product supplies.
Product and Market Enhancemen.t.-The venture may result in a
successful product innovation. This may take the form of quality im-
provement, packaging and processing changes, some degree of brand
differentiation, and/or supply stability. The net effect would be an
increased consumer demand for the products produced by the joint
venture participants in which case all participants to the joint venture
would realize benefits from the expanded demand.
Some negative effects are possible. Should the joint venture result
in a national-label brand-franchise, growers may suddenly find they
are producing a product easily identified by consumers. While this has
positive aspects, it could also make the producers more vulnerable to
sudden changes in consumer preferences. Examples include boycotts,
health scares, and labor disputes.
Market Structure and Performance.-As with integration through
ownership, joint ventures might decrease or increase competition
within an industry. The joint venture might represent the only feasible
way of entering a segment of the subsector dominated by a few large
firms. On the other hand, the venture itself may be large enough to
be a dominating force. In the latter case, entry possibility by compet-
ing firms may be decreased, hence less competition.
For most of agriculture it would appear that joint ventures would
lead to more equalization of market power between producer groups
and large marketing firms. This in turn should result in negotiated
sales terms which are more equitable to both producers and consumers
than when the market power is concentrated at one level in the market
POTENTIAL IMPACT ON NON-PARTICIPANTS
The economic effects of a joint venture external to the immediately
Involved partners must also be considered when determining the worth
of the structural arrangement to society. Unlike the traditional family
farm, which can act pretty much in its own self-interest with little
noticeable effect on society, actions taken by large producer coopera-
tives and large agribusiness corporations do have a ripple effect
throughout the economy. The results may have implications with re-
spect to pricing efficiency, accessibility to markets, informational flows,
volume and quality of consumer goods produced, freedom of producer
and consumer choice, and governmental regulation.
Non-participants Witkin the Industry.-Consider first the possible
effects on competing growers, processors, and distributors. The net ex-
ternal effects to'this sector are dependent upon the ultimate result of
the joint venture. For example, assume that the venture results in a
demand-enhancing product innovation. If the venture expands its
market via a branded product, competing firms may experience a de-
creased market share and more difficult conditions of entry. On the
other hand, the product innovation may be diffused rapidly through-
out the industry with an overall market gain.
Ventures that result in cost efficiencies will give the participating
firms an economic advantage over competing firms. Depending on the
relative market share of participating and non-participating firms,
outside firms could find themselves at a disadvantage serious enough
to either force them out of business or into an integrated or joint-ven-
As with ownership integration, joint ventureswhich control a domi-
nant market share may result in the loss of market information at one
or more pricing points within the marketing system.5 Thus producers
5 "Mandatory Public Reporting of Market Transactions" in this series discusses this
and marketers outside the venture may have difficulty determining
equitable transfer prices. An opposite effect could occur when the ven-
ture resulted in increased competition within the industry.
Consumers.-The consumer could benefit from joint ventures in
several ways. Improved coordination of supply, processing, and mar-
keting activities will result in cost efficiencies, some of which will be
passed on to the consumer in the form of either lower prices or a wider
choice of product or both. Many times an integrated firm may be able
to respond more quickly to changes in consumer preferences than the
open market system because of better communication between market-
ing and producing entities.
Negative results for the consumer could occur if the joint venture
results in a concentration of market power to the extent that economic
gains are not passed forward and the market mechanism is no longer
able to adequately reflect changes in consumer wants and needs.
Government.-Joint ventures could result in a loss of public infor-
mation as more open market functions become internalized. This loss,
in turn, may result in higher governmental costs of regulation.
Positive benefits could accrue from the improved coordination with-
in thle system or increased competition. This may result in less need for
agricultural commodity programs at the federal level.
The exact procedure for implementation of a joint venture is, of
course, unique to the particular circumstances. In this paper we can
only suggest some very general guidelines.
For producer cooperatives who want to become a part of an inte-
grated system via a joint venture, the primary requisite is to find a
partner. To do that the cooperative must have something to offer the
partner in the venture and vice-versa. For example in the FOM-
Minute Maid example, FOM had the quantity and quality of oranges
required by Minute Maid and Minute Maid offered FOM a needed
market outlet with the added benefits of an established brand fran-
chise. In the Heublein-United Vintner example, United Vintner had
a processing-marketing system and Heublein offered a larger market
and adequate capital.
To be in a position to offer a potential partner something unique,
as the previous examples indicate, usually requires investment by the
cooperative. Farmer-members must be willing to invest in processing
facilities, patents, or quality control programs that signal to a po-
tential partner further up the .marketing channel the cooperative
has something to offer which complements their operation.
Prior to n joint venture agreement, the management of both partners
should explore the areas of possible conflict between the firms. They
should also develop a clear statement, understood by all partners, of
the marketing objective to be fulfilled by the venture. Those two imple-
mentation steps are essential to the minimization of serious conflict
of interest after the venture becomes operational.
Implementation also involves decisions regarding location of facili-
ties, size of operation, and capital needs. Outside consultation services
may be required to assist in these decisions.
Goldberg, Ray, "Profitable Partnerships: Industry and Farmer Coops." Har-
vard Business Review, March-April, 1972, pp. 108-121.
Hulse, Fred E., Phillips, Michael J., "Joint Ventures Involving Cooperatives
in Food Marketing." Marketing Research Report No. 1040, Farmer Cooperative
Service, U.S. Department of Agriculture, Washington, D.C., May 1975.
"The Broiler Industry," Vol. 38, No. 8 (August, 1975), pp. 23-34, Garden State
Publishing Co., Sea Isle City, N.J.
(By Walter J. Armbruster, Truman F. Graf,2 and Alden C. Manchester 3)
In the 1930's the seasonal and annual price swings associated with
the quantity variability of agricultural products were compounded by
weak farmer bargaining power. This resulted in wildly fluctuating
farm prices over long periods of time, and production cycles in which
excesses were followed by deficit supplies. The uncertainty about
whether prices would be above or below costs of production was un-
acceptable, thus federal and state marketing-order programs were
initiated in an attempt to bring orderly conditions to chaotic markets.
Since their inception the programs-used for milk, fruits, vegetables,
and specialty crops-have met a stated need, but changes in the market-
ing system and economic situation have resulted in recent pressures
to re-evaluate the purposes of or even eliminate marketing order
Marketing orders provide a mechanism by which producers may
initiate programs to regulate marketing of their commodities through
unified action. Orders can be requested by farmers on a federal or state
level, and can be implemented by a vote of those affected. The regu-
lated crop, production area, or specified utilization is defined in the
market order, and the regulations are obligatory on all sales of the
covered commodity. Use of a marketing order to institute regulations
makes all producers who benefit from the program share the burden
of activities used to achieve the gains. The Secretary of Agriculture
administers the orders and usually on the advice of a Board of farmers.
The costs of administering the programs are collected on a per-unit
basis from handlers and farmers, with no tax funds involved.
Marketing orders are often referred to as farmer self help programs.
The intent is to provide a means whereby farmers can exercise some
degree of control of the quality and quantity that goes to market so
that their incomes will be more stable and the quantity and quality
going to consumers would be more stable and uniform.
Federal orders for milk set minimum prices, while those for fruits,
vegetables and specialty crops affect price through quantity and qual-
ity regulations. The administration of federal milk orders is carried
out through operating rules that cause changes in prices when cer-
tain conditions are met. Fruit and vegetable orders are administered
by establishing periodic levels of regulation based on recommenda-
tions made by market order committees comprised of industry mem-
SAgricultural Economist, Economic Research Service, U.S. Department of Agriculture,
SProfessor, Department of Agricultural Economics, University of Wisconsin.
3 Agricultural Economist, Economic Research Service, U.S. Department of Agriculture,
bers. Provisions of state market orders vary among states more than
do provisions of federal orders in the different states.
Minimum Price-Setting for Milk.-Federal milk-marketing orders
set minimum prices for raw fluid grade milk which must be paid by
processors to dairy farmers (usually through farmer cooperatives).
State orders set minimum farm, wholesale, and retail prices, depend-
ing on the state involved. Most fluid grade milk produced for fluid use
is priced under state or federal orders; prices for manufacturing
grade milk, produced specifically for butter, cheese or powder pro-
duction, are determined in an open market environment.
Minimum prices according to product use are established for federal
and state marketing orders on the basis of specified relationships to
the Minnesota-Wisconsin manufacturing grade milk price.4 With a
few minor exceptions, prices for all milk including fluid grade milk
that is used in manufactured dairy products are at or near the Minne-
sota-Wisconsin price base, while prices for milk for fluid use, usually
specified as Class I, are higher by fixed differentials. The differential
partially reflects differences in costs of more expensive production fa-
cilities required to meet the sanitary regulations for Grade A milk,
and differences in marketing and transportation costs.
Since 1958, farmer cooperatives have negotiated "super pool" pre-
mniums over minimum order prices in many federal market order areas.
These premiums are intended to cover production costs that may be
above the minimum price set by the market order.
Regulations for Fruit and Vegetables.-Federal market-order pro-
grams for fruits and vegetables are designed to deal with product
variability and to fit fluctuating supplies to market demand. They rely
primarily on quality control, market flow, and volume management to
enhance the level and stability of producer returns.5 These provisions
regulate supply variables to take advantage of markets differing in
quality requirements, the form in which a product is to be used, the
timing of demand, and location.
Quality control regulations specify minimum grades and sizes mar-
ketable. By improving the degree of uniformity and reliability in
general quality, prices increase, and the price of higher quality prod-
ucts is kept above what might otherwise occur. Market flow regula-
tions, primarily used in citrus marketing programs, limit fresh market
shipments in periods of greatest product availability in an attempt to
prevent low prices and product waste. Volume management regula-
tions restrict supplies of storable dried fruits and nuts going into
primary markets-usually the fresh or domestic markets-either
through reserve pools, producer market allotments or diversion of
excess supplies to alternative outlets, such as export or nonfood use.
Several supplementary provisions are widely used to improve physical
characteristics, the image of the commodity, and its marketing system,
thereby reducing costs or increasing returns. These provisions specify
standard packs and containers, fund research and development activi-
4 This is the average price paid for manufacturing grade milk by a specified number
(sample) of plants that buy milk directly from farmers as reported by the agency of the
U.S. Department of Agriculture.
5 Twenty-two of the 48 existing market order and agreement programs for fruits,
vegetables, nuts, and specialty crops contain provisions for direct regulation of quantities
marketed. -Most quantity regulation orders also contain provisions for grade and size
regulation, however 26 orders allow only grade and size regulation.
ties, and provide a funding mechanism for commodity advertising and
PossnixB FUTURE USES OF MARKET ORDERS
Marketing orders provide a means through which farmers can gain
better access to markets and improve market performance and pricing
efficiency. While milk price-setting and quantity and quality regula-
tion for fruits and vegetables are the principal current uses of market-
ing orders, they could be extended to cover additional commodities of
the same types now covered, or to cover commodities not now covered,
such as livestock, grain, and fish. Or provisions authorized under the
orders could be applied to commodities or situations where they are not
now being used. The classified pricing system used for milk could be
used for fruits, vegetables, and meat, with fresh products priced at
levels different from processed. Or the marketing order could be ex-
tended to provide funds for new tools such as the development and op-
eration of a centralized remote access market. A discussion of some of
the more important possibilities follows.
Expand National or Regional Coverage.-Marketing orders could
be established to obtain more national or regional market coverage.
Orders encompassing the entire commercial production area for fruits
and vegetables, whether in one state or several, appear to be the most
successful because they eliminate the possible problem of competing
production areas expanding production in response to temporary
price gains achieved under an order. A major problem facing federal
milk orders is uneven Class I utilization between markets, coupled
with rapid conversion of manufacturing grade milk to Grade A and
its association with federal order pools causing geographic disparities
in farm milk prices. Although the present pricing and pooling system
for milk has kept blend prices in reasonable alignment relative to
transfer costs, significant modifications will be needed in the future. If
new ways are not devised so that newly converted Grade A milk can
share in fluid outlets in an orderly way, disorderly marketing condi-
tions will be created all over the United States. We now have over fifty
federal milk orders. No more than ten, and possibly as few as five,
would possibly best serve the needs of the industry and the purposes
of the public.
Extent to Cover Processing Commodities.-Through the political
strength of processors most processing fruits and vegetables are now
exempt from market order coverage. When one use of a commodity is
regulated and others are not, the nonregulated portion often interferes
with the orderly marketing of the regulated portion. Futhermore the
exemption results in an unequal availability of marketing options
among groups of producers. Elimination of the exemption now writ-
ten into the legislation would make it possible for all producers of all
commodities to enjoy similar benefits and facilitate the orderly mar-
keting of more products.
More Funds for Promotion and Advertising.-Producer "check-offs"
for promotion and advertising are being made in approximately one-
half of the federal and state milk orders, and one-fifth of the fruit and
vegetable orders. These check-offs provide a mechanism for funding
industry-wide generic advertising. The current market order legisla-
tion limits authority to cover only selected commodities. Thus some
commodities, such as potatoes and eggs have recently obtained special
legislation not connected with the orders to authorize industry wide
check-offs. It would be more efficient if all commodities had the same
enabling legislation to establish procedures for requesting and voting
for advertising or promotion programs.
Most advertising programs are not evaluated. It is difficult and can
be costly. Some studies of milk advertising have indicated positive
returns to producers above the cost of the program. Although a num-
ber of fruit and vegetable generic advertising programs exist, little
analysis of their effects has been accomplished. Without analysis farm-
ers do not know whether their programs are beneficial or not.
Promotion and advertising are recognized marketing tools that
could be important options for agricultural producers, but, there is a
critical need to determine both the applicability and benefits of these
tools for basic agricultural products. However, where such programs
are in operation, every effort should be made to make sure that the
dollars collected are being properly and effectively spent so as to pro-
vide farmers a proper return.
Support of Electronic Exchange Systems.6--Marketing order legis-
lation could be expanded to authorize and support the operation of
exchange mechanisms. Funds could be collected under the order to pro-
vide capital and operating funds for the establishment of centralized
remote access market arrangements. Electronic remote access ex-
changes increase market access, and speed the flow of price information
thus increasing the price knowledge of farmers. Marketing orders
could also be used to require that all or a portion of a commodity be
traded across an electronic exchange. This would increase the exposure
of sellers to buyers and buyers to sellers.
Data Gathering and Reporting Market Transactioans.7-Because
many commodities are marketed under contract arrangements for
which prices are not reported it is increasingly difficult to determine
market prices. Even when commodities are marketed through direct
channels, prices derived from a relatively small number of sales at some
central market are not representative nor do they necessarily reflect
market conditions. A marketing order program could require reporting
of prices and related information on all transactions, whether con-
tracted or open market sales. This information could be made public
without disclosing source. This could provide a more efficient market-
ing system, allow producers to make better informed price decisions,
and provide reported prices which could be used in formula pricing.
To Strengthen Bargaining Associations and Marketing Coopera-
tives.-Many bargaining associations or marketing cooperatives now
bear the cost of market regulation programs for the whole industry,
including "free riders." Market order regulations can help spread the
burden to all industry participants who benefit from the programs. For
example, milk marketing cooperatives now perform a number of serv-
ices which include delivery scheduling of desired quantities to individ-
ual fluid milk processors, and to the market as a whole, and the bal-
ancing of supplies to fluid and manufacturing outlets. Service charges
incorporated into the minimum prices for milk paid by processors
would remove some of the advantages now held by nonmembers or
6 See Henderson, Schrader and Turner, "Centralized Remote-Access Markets."
7 See Padberg and Moulton, "Mandatory Public Reporting of Market Transactions."
smaller cooperatives who do not participate in the costs of programs
from which they receive benefits.
Over-order payments have come under increasing attack in recent
years as evidence of the monopoly power of cooperatives. By incorpo-
rating those parts of over-order payments which are charges for mar-
keting services rendered into federal order prices, the economic and
legal basis for them could be established. Marketing order legislation
could be expanded to strengthen cooperatives and remove the "free
To Include Production Allotment Programs.-Producer market
allotment programs are authorized for three commodities: hops,
Florida celery, and cranberries. Production allotment programs are not
authorized for any commodity. Market allotment programs can influ-
ence production through the allocation of markets. But farmers can
still produce beyond the needs of the market. If supplies are to be
truly tailored to market needs, independent of market price, produc-
tion needs to be controlled or regulated. The authorization of produc-
tion control or allotments would require major legislation changes in
the order legislation.
Expand Quality Upgrading.-Almost all fruit and vegetable mar-
keting orders currently contain provisions for minimum grade, size,
and/or maturity regulations for fresh marketing. Similar provisions
could be established for other commodities. Quality regulation em-
phasizes quality improvement to increase consumer demand for a com-
modity. Sales of lower quality or smaller sizes, sold in competition with
larger sizes or better quality, can lower the price for an entire crop.
Specify Uniform Packaging.-A widely used provision of market
order programs specifies uniform packing and container regulations.
The major purpose of this regulation is to prevent deceptive practices
involving shipping containers, and to encourage uniformity in pack-
ages used for shipping commodities to market. This provides efficien-
cies in handling at all levels of the marketing channel. This provision
could improve efficiencies in food marketing even more if used or was
authorized to be used for more commodities.
Standards for packing within containers are provided in legislation.
Such regulations specify how many of a certain kind or size of com-
modity are to be packed in containers labeled in various manners.
Pack regulation is especially important for commercial food service
establishments desiring to control portions. Growers gain by consist-
ently providing a fairly uniform pack so buyers get the size range de-
sired and the expected number in each package. More emphasis on
uniform packaging provisions in market orders would be beneficial.
CONDITIONS FOR IMPLEMENTATION
Marketing orders need to be tailored to particular situations. Pro-
ducers desiring to use marketing orders in the ways considered above
need to carefully analyze the potential impacts and desirable features
for their economic situation. Obviously, not all of the above possibil-
ities fit all commodities, and, for some commodities, marketing orders
in the present form and in the proposed uses would not work.
Marketing orders as traditionally used provide a mandatory ap-
proach to coordinating the production-marketing sequence in those
commodities where conditions exist favorable to organizing and iden-
tifying a set of mutually agreeable objectives. Implementation of suc-
cessful marketing-order programs require: (1) A well-defined produc-
Lion area which is geographically concentrated so that at least the
majority of production falls under the same economic conditions, and
so that production in one area will not be increased to offset gains
achieved in another area; (2) different uses for the commodity and
different price reactions to changes in quantities marketed, so that
regulating quantity between uses may result in greater total revenue;
(3) progressive, competent leadership capable of coordinating produc-
tion-marketing activities to meet the goals of the producers; (4) dif-
ferent seasonal demands having different price-quantity responses
which allow income increases through rate of flow regulation; and (5)
funneling commodities through few outlets to provide easier control
over the marketing system.
Hard questions must be dealt with in attempting to bolster farmer
profits under marketing order programs:
What are the potentials and limitations of the various programs
for different commodities and economic situations?
What are the costs and benefits obtainable by farmers, handlers,
Each situation will require careful analysis by individuals thorough-
ly familiar with the industry.
With changes that have occurred in food costs, the economic-social-
political climate in which United States agriculture now operates dif-
fers markedly from a few years ago. Legislators, economists, regula-
tory agencies, and the consuming public question the impact of farm
programs and the distribution of gains among large and small pro-
ducers; consumers have become better organized to challenge rising
retail food costs; and public interests question the consistency, ade-
quacy, and public costs of agricultural programs. It is in this setting
that evaluation of the usefulness of expanding market order programs
must be undertaken. Marketing order programs which have as their
goal substantial limitation of supply or substantial price enhancement
for the benefit of farmers at the clear expense of consumers are not
likely to be acceptable.
The implications for farmers and their use of the programs discussed
indicate emphasis should be put on programs to expand markets, do-
mestic and foreign; programs to increase efficiency in marketing; and
programs which permit farmers to capture profits in the marketing
system or attain better prices from handlers through improved produc-
tion marketing practices, without substantial enhancement of prices at
retail. Most of the suggested uses of marketing orders described in this
paper could fall into these categories.
How TO ACHIEVE EXPANDED MARKETING-ORDER PROGRAMS
The expansion of marketing order provisions into areas or to cover
commodities for which the enabling legislation already exists requires
an organized effort by a group of farmers or farm leaders to develop
rules acceptable and advantageous to a sizeable majority of all pro-
ducers that would be affected. Further legislation would be necessary
to permit expanded use of the order provisions to cover commodities
not currently authorized to use federal marketing orders. New or
amended legislation would also be required to permit the marketing
order approach to be used to support exchange mechanisms, expand
promotion efforts, support specific data gathering and market informa-
Armbruster, Walter J., "Federal Marketing Orders for Fruits and Vegetables."
Proceedings of the Western Agricultural Economics Association 48th Annual
Meeting, July, 1975.
Graf, Truman F. and Jacobson, R. E., "Resolving Grade B Conversion and Low
Class I Utilization Pricing and Pooling Problems." R 2503, Univ. of Wisconsin,
Manchester, Alden C., "Milk Pricing." Agricultural Economic Report No. 315,
Economic Research Service, U.S. Dept. of Agriculture, November, 1975.
"Milk Pricing Policies and Procedures: Part I, The Milk Pricing Problem;
Part II, Alternative Pricing Procedures." Report of the Milk Pricing Advisory
Committee, U.S. Dept. of Agriculture, March, 1972 and March, 1973.
"Price Impacts of Federal Market Order Programs," Report of the Interagency
Task Force, Special Report 12, Farmer Cooperative Service, U.S. Dept. of Agri-
culture, January 7, 1975.
(By Martin E. Abel' and Michele M. Veeman )
The institutions known as "marketing boards" are one of many
types of possible agricultural marketing policy instruments, and are
long-established institutions in Australia, New Zealand, Canada, and
the United Kingdom. In these and a large number of other countries,
a legislative framework, experience, and familiarity with the wide
number of uses of this type of policy instrument have gradually
evolved. Marketing boards are not, however, the only instrument of
agricultural marketing policy in these countries, nor are they a com-
plete replacement for government controls or interventions.
Marketing boards perform a number of functions which are carried
out by farm and commodity organizations, bargaining groups, and by
government agencies in the United States. Although the system of
government under which they have evolved differs from ours, the
problems they were designed to solve are common; thus this instru-
ment of agricultural marketing policy holds some lessons for us.
The definition of a marketing board tends to vary from country to
country. In some countries, public or quasi-governmental bodies, which
consist entirely or largely of government representatives, are con-
sidered to be marketing boards, whereas in other countries these
would be considered government agencies and the term "marketing
board" reserved purely for producer-controlled bodies. Despite dif-
ferences such as these, one common feature of all marketing boards is
that they are compulsory bodies, set up under government legislation
to perform specific marketing functions. In view of the time and
space limitations, this paper will focus primarily on producer mar-
A producer marketing board may be described as a horizontal, pro-
ducer-oriented organization established under government legislation
which gives the board various legal powers of compulsion over pro-
ducers and, in some instances, over manufacturers and handlers of
primary or processed agricultural commodities, and which operate
in the interest of agricultural producers. The degree of compul-
sion over producers and others in the marketing chain, the type and
extent of marketing functions undertaken by a board, and the extent
of autonomy that a board has in carrying out its functions vary
greatly between different commodities and different countries. This
description of a producer marketing board as a "producer oriented"
1 Professor, Department of Agricultural and Applied Economics and Director, Economic
Development Center, University of Minnesota.
2 Associate Professor, Department of Rural Economy, University of Alberta, Edmonton,
rather than as a "producer controlled" organization encompasses
bodies such as the Canadian Wheat Board which is, strictly speaking,
a crown (or government) corporation which operates under the di-
rection of government appointed commissioners, though with the
guidance of an advisory committee of elected producer representatives.
This description also includes as boards, bodies known as marketing
commissions. A more restrictive definition of a producer marketing
board as a "producer controlled" or "producer elected" body would
exclude such boards, even though they function independent of gov-
ernment financing and in the direct interests of producers.
ESTABLISHMENT AND USE OF MARKETING BOARDS
1l7'y Boards are Establishled.--Marketing boards have generally
tended to be established following periods of depressed and uncertain
agricultural prices which in turn have been associated with producer
discontent with the structure and functioning of the agricultural
marketing system and suspicion of existing marketing intermediaries.
The earliest boards were established in Queensland, Australia, and in
New Zealand in the early 1920's following producer discontent with
the declining prices that followed World War I. These, as well as
some later boards, were established after unsuccessful producer ef-
forts to seek "market power" or "orderly marketing" through the es-
tablishment and use of producer cooperatives. Depressed economic
conditions in the 1930's also provided an impetus for more widespread
pressure for agricultural marketing boards by producers. The ex-
perience of relatively more favorable and stable agricultural prices
in many British Conmmnonwealth countries under government-to-gov-
ernment export sales and controlled domestic marketing during World
War II was also a factor leading many producers to accept or advo-
cate continued use of more centralized marketing mechanisms during
the late 1940's.
In short, the primary objective of most agricultural marketing
boards is to improve the price and income situation of agricultural
producers. For many boards, this is the sole objective of their opera-
tions; however, some marketing boards have the secondary objectives
of reducing variability in agricultural prices and, in some cases, of
1Wodicinag a degree'of equity of market opportunities between dif-
How Boards are Established.-Marketing boards may be estab-
lished for some commodities through specific legislation that provides
for the establishment and specifies .the membership, functions, and
powers of that particular board. Alternatively, in most countries, gen-
eral enabling legislation has been passed which provides for proce-
dures under which specific marketing boards may be established. In
most instances, producers' approval is required and is determined by a
vote or referendum before the establishment of a particular marketing
plan or marketing board. The membership of most marketing boards
is determined by )producer vote, though the legislative provisions under
which a number of boards are established provides for government
appointment of members rather than their direct determination by
producer vote. Some boards' legislation provides for government ap-
pointment of certain members who are charged with the representa-
tive of public or consumer, rather than producer, interests. The legis-
lative provisions applying to some boards (as for example in Aus-
tralia and the United Kingdom) have in some instances provided for
representation of manufacturer or handler interests.
Major Functions of Marketing Boards.-There is great diversity in
the number and type of functions performed by different marketing
boards and, therefore, in the type and extent of the powers possessed
by different boards. In this section of the paper, various functions
which different boards perform are briefly surveyed. Most boards per-
form some combination of the following functions though few, if any,
boards perform all these functions.
1. Collection and dissemination of market information is an ac-
tivity performed by many marketing boards, generally in combina-
tion with one or more other functions.
2. Product promotion of existing forms of the product in existing
markets or uses is another fairly common function of marketing
boards. With some boards this function is more specialized and is
extended further to development and promotion of new forms or uses
of the product in new markets.
3. Research and dissemination of information. A number of mar-
keting boards conduct or sponsor research on production and market-
ing problems that apply to particular commodities. Dissemination of
such information to producers via board-sponsored journals or other
publications is another activity carried out by many boards. Some
boards provide a more formal technical advisory service for producers,
manufacturers or handlers on the adoption and maintenance of in-
novations with cost-reducing and efficiency-improving effects.
4. The establishment and implementation of grading standards has
been a function carried out by a number of boards. The encouragement
of quality control through the establishment of grading systems has
been an important function of some export control boards.
5. Operation or supervision of selling facilities. In circumstances
where market institutions or sales facilities have been considered in-
adequate for effective price discovery, some marketing boards have
been charged with the supervision or even the operation of the selling
mechanism. An example is provided by various provincial hog mar-
keting boards in Canada which, by operating teletype auction systems
through which all slaughter hogs must be sold, attempt to maintain a
degree of competition between purchasers.3
6. Collective bargaining and price negotiation. When it is deter-
mined that there is a disadvantage to producers in facing a more con-
centrated purchasing sector, a number of marketing boards negotiate
the conditions of sale and prices for produce on behalf of all their
producers. This is a common function of fruit and vegetable market-
ing boards. In some instances, the bargaining power of such boards
will be reinforced by the possibility of diverting produce to secondary
markets or secondary uses or by powers to apply production or mar-
keting.quotas; however, these powers are not available to all negotiat-
ing boards. A similar collective bargaining function is carried out by
other boards with respect to producers' purchases of input supplies
For a discussion of exchange mechanism see the "Centralized Remote-Access Markets"
paper in this series.
or services. Examples here are provided by a number of export control
boards which have, as one of their functions, the negotiation of terms
of carriage and freight rates with shipping companies.
7. Purchase, storage and sale of product. All boards are not em-.
powered to trade in the commodity they are concerned with. Some
boards have no trading powers at all, some are empowered to trade
only in particular circumstances or special markets; however, a num-
ber of boards are required to act as the sole purchaser from producers
and to sell on their behalf. Whether export or domestic trading
boards, these bodies generally have a wide number of sub-functions
and extensive powers.
In pursuit of the general objective of reducing price fluctuations,
some boards are empowered to operate buffer stock type operations
(purchase, storage and sale programs designed to even out price fluc-
tuations even though full trading activities may not be undertaken).
The New Zealand Wool Marketing Corporation is a marketing board
which pools sale proceeds (a different pool applying for every differ-
ent grade) from sales of wool every season-a procedure which mini-
mizes fluctuations in producers' prices within that season and equalizes
market opportunities between different producers. This procedure is
common with export trading boards.
In pursuit of the general objective of increasing producer prices and
returns, some trading boards are able to follow a trading and pricing
strategy or price discrimination between markets which have different
demand characteristics. The Canadian egg marketing board influences
the returns to egg producers through price discrimination between
fresh and breaker egg markets. Dairy boards might influence returns
through price discrimination between fluid milk and processing milk
markets-an activity facilitated by the fluid milk quotas applied by all
but one of the provincial milk marketing boards in Canada.
In pursuit of the same objective, some board are empowered to limit
marketing by applying production or marketing quotas. This activity
recognizes the inelasticity of market demand that prevails for most
agricultural products and is designed to increase total revenue to
quota-holding producers. This type of board sometimes has the power
to directly determine prices to be paid to producers by manufacturers
or handlers-it may set prices by means of a formula or by means of
some measure of cost of production. This is not a function performed
by all boards. It is generally restricted to some domestic trading
The first five operations listed above are basically "facilitating
functions" which may, to the extent that they lead to decreased costs
or decreased marketing margins, have beneficial effects for consumers
as well as producers. More controversy is involved with functions in-
volving price discrimination and production or marketing quotas. The
exertion of market power by boards in this manner has been particu-
larly subject to adverse comment by consumers in inflationary periods.
The issues of distortion of efficiency in resource allocation, capitaliza-
tion of quota benefits into quota values and consequent cost structure
increases for farm firms, and restriction of entry to new producers
into quota-controlled industries are side effects of these types of pro-
grams, whether carried out by marketing boards or by other
Types of Marketing Boards.-Promotion and advisory boards. An
example of this type of board is the New Zealand Wool Board. This
body largely consists of elected woolgrower representatives; an ap-
pointed government representative is also a member. This board's
activities are partial funding of the International Wool Secretariat
(an international body which conducts market promotion, technical
research, and technical advisory services in major wool markets) ; local
market promotion; research and provision of technical advisory serv-
ices to local manufacturers; and provision of a shearer training serv-
ice. The board has links with other institutions which include its
collaboration with the Meat Board in conducting economic surveys of
producers and its representation on the directorate of the Wool Mar-
keting Corporation, a national body with trading powers.
Regulatory and facilitating boards. Two somewhat different exam-
ples of this type of board are provided by the Australian Meat Board
and the Alberta Hog Producers' Marketing Board. The Australian
Meat Board is a federal body (as distinct from those Australian
boards established under state legislation). While members of the
board are appointed, producer representatives predominate, though
there is a government representative and two meat exporter repre-
sentatives. The board's activities are primarily funded by a levy on
slaughtered livestock. The board conducts market development and
promotion activities domestically and abroad. It has engaged in trad-
ing activities (for example, with communist countries), but its major
activities lie in regulation of. rather than conduct of, sales. The board
controls the export of meat by issuing licenses to exporters and by
approving North American importers. Export control by license gives
the board control over both the type of product exported as well as its
destination. These controls are used in the board's market development
strategy and have been used to ensure compliance with U.S. import
quotas. The board has operated a market diversification program
whereby exporters earned entitlements to export to the higher-priced
U.S. market by selling a proportion of their product in other markets.
Other major activities of the board include participation on the
Australian Shippers' Council. which negotiates freight rates and re-
lated issues, and its participation in developing a carcass classification
system of grading.
The Alberta Hog Producers' Marketing Board performs somewhat
different functions. This board was established under legislation of
the Province of Alberta in Canada. Board members are elected pro-
ducers. The board is funded by a levy on slaughter hogs. Although this
board carries out promotional activities and has encouraged the devel-
opment of export marketing of hogs under contract sales to Japan.
its major function is to operate the mechanism of sale of all slaughter
hogs produced in the province. This system was instituted because of
a pre-board situation where a small number of hogs passing through
terminal markets gave an insufficient indication of total supply and
demand and yet served as the basis of price determination for the
whole industry. The board operates a teletype auction system through
which all slaughter hogs must be sold.
Export trading boards. The Australian Wheat Board-a federal
board-provides an example of this type of board. Most members of
this board are elected producer representatives; there are also three
government appointees, one of whom represents flour mill owners and
one represents employees. The board is the statutory authority with
the sole right to market wheat in Australia and Australian wheat and
flour overseas. The board operates the government's wheat industry
stabilization plan which involves administration of the government's
guaranteed price for wheat for a specified quantity of exports and
local sale of wheat at prices determined on the basis of a measure of
cost of production. When export prices exceed the guaranteed price,
a portion of the excess is paid into a stabilization fund which is drawn
on when export prices are less than tlhe guaranteed price. The board
controls the handling, storage, and shipment of wheat; it pools pro-
ducer payments on an annual basis, and it engages in promotional
activities and has entered into long-term sales agreements with a
number of importing countries.
Domestic trading board. A large number of examples of this type of
board are available. Fluid milk and poultry boards are often of this
type. These boards typically engage in promotion and sponsor re-
search, but their major activity tends to be as the sole purchaser and
seller of the commodity concerned. They may be empowered to set
production or marketing quotas. Problems of quota use were briefly
described in the preceding section.
IMPLICATIONS OF MARKETING BOARDS FOR THE UNITED STATES
While marketing boards have not been an element in marketing U.S.
agricultural products, they do represent a marketing option. We will
discuss in some detail the role of only one type of marketing board, an
export marketing board for grains, to illustrate the role such an in-
stitution might play. Similar considerations would be involved in the
establishment and operation of export marketing boards for other
products. As a simplification, the theoretical export marketing board
would have sole control over U.S. grain exports only; domestic trade
in grain would continue to be carried out by private firms and coopera-
tives. Considerable interest has been expressed in the establishment of
such an organization in recent years.
A grain export marketing board could be either exclusively a gov-
ernmnent agency or basically a producer organization. In the case of
the former type of organization, a government agency would have re-
sponsibility for export sales and producers or other groups would not
have a direct input into the management of the board. In the case of
producer boards, producers would play a major role in the operations
of the board. There may also be representation on the board of govern-
ment, consumer, and possibly domestic food and feed grain marketing
and processing interests. Our discussion will focus on the producer-
type export marketing board.
The primary responsibility of the board would be its exclusive au-
thority for making all U.S. grain export sales. In addition, the board
might be a vehicle for implementation of certain government price, in-
come, and foreign food aid policies. The government might want the
board to implement price support programs for grains when they are
applicable, to carry reserve stocks, and to be the organization through
which foreign food aid exports of grains are handled.
It would be important for the board to distinguish in its operations
those functions that it performs for producer members, such as com-
mercial exports sales, and those that it performs for government, such
as price support activities and maintenance and management of re-
serve stocks. Such a distinction among different functions would per-
mit proper evaluation of the board's operations from the standpoint of
producer and public interests. Better coordination between the board's
and government's activities could result in better planning of export
sales. Also, information concerning sales could be made available to
the domestic market sooner than under the present system thereby re-
ducing the opportunity for a few private firms to reap profits at the
expense of producers and consumers under certain market conditions.
Second, the domestic market for grains would continue to operate
basically as it now does with private firms and cooperatives having the
responsibility for the marketing and processing of grains. Futures
markets for grain would continue to operate serving both domestic in-
terests and those of the board. The performance of futures markets
with respect to their role of determining expected demand, supply, and
price conditions could be improved if a grain export marketing board
were to provide to the market more accurate and more timely informa-
tion about export sales than occurs under the present system.
Third, the board could utilize cooperatives and private firms in as-
sembling and shipping export grain. It would not have to duplicate
existing capabilities for performing these functions. Thus, private and
cooperative interests would not be completely excluded from the grain
export business, but only from performing the sales functions. Close
cooperation between cooperatives and the board might be an indirect
way for cooperatives to become more active in the grain export
The consequences of a grains export marketing board are numerous.
The board would replace private firms and cooperatives in their role
of making export sales. In doing so it would have to develop a world-
wide market information and sales network to replace the existing pri-
vate one. This would represent a substantial cost to the marketing
board and might take several years to develop a complete and well-
trained staff. The potential benefits would have to offset these costs for
it to be feasible.
Fourth, producers could be required to make compulsory deliveries
to the board in order for it to meet export sales commitments. Most
likely, the size of grain delivery commitments to the board would be
related to a level of production base established for each firm. Compul-
sory deliveries to the board might have to take precedent over sales in
the domestic market to ensure that the board had adequate supplies
of different types and grades of grain to meet export commitments.
The board might also buy grain in the open domestic market, but
may not want to rely primarily on this source of export grain because of
uncertainties about producers' sales behavior and, therefore, market
Fifth, and closely related to the possibility of compulsory deliv-
eries, is the requirement that grain export marketing board keep con-
tinuously appraised of the domestic supply of different types and
grades of grain and their domestic requirements. The board's export
sales should be as consistent as possible with both producer and con-
sumer grain price objectives in the United States as well as overall
producer returns. The board should conduct its sales program in a way
that does not unduly disrupt domestic markets.
Sixth, the grain export marketing board could pay farmers an aver-
age price for each quality of grade of grain for each of the marketing
seasons. Producers could receive a partial payment for their grain at
the time it was delivered to the board. Subsequent payments would be
made to producers after the crop had been marketed and the board's
receipts and expenses known. With respect to exports, this system of
"price pooling" eliminates seasonal fluctuations in prices, but it also
delays the time when farmers know the final price they receive for
Finally, as with any form of public monopoly which a marketing
board is, one has to be concerned with accountability to both producers
and consumers which the monopoly serves. Producers have to be con-
cerned with whether or not the board is operating efficiently and in
their interests. Consumers would be concerned with whether or not
the board exercises "excessive" economic power, i.e., whether or not
the marketing board is maintaining prices above either free market
levels or those that would prevail under current patterns of govern-
mental intervention. Representation of various interest groups on the
board, together with close coordination of the board's activities with
government agencies responsible for domestic and foreign policies rele-
vant to grains, could ensure "responsible" behavior of the board with
respect to both producer and public interests.
ESTABLISHMENT AND SUCCESSFUL OPERATION
The establishment of a grain export marketing board in the United
States would require national legislation. This legislation would give
the board exclusive authority to handle grain exports. The legislation
would also determine representation on the board and provide basic
direction as to what the board can or cannot do.
Because a grain export marketing board would represent a sig-
nificant departure from current practices, Congress would have to be
convinced of several things before it is likely to give serious considera-
tion to passing legislation to establish a board: one is widespread pro-
ducer support for the new institution, another is that the board could
adequately reflect producer, consumer, and the nation's domestic and
foreign economic interests and would better serve these interests than
the present export system.
For the board to be a viable organization it would have to be ac-
cepted by producers and the public alike. This means that producers
would have to accept such basic principles of operation as compulsory
delivery of grain to the board (or, at the least, that the board be the
compulsory purchaser and seller for the export market) and price
pooling. It also means that the public would view the operations of the
board as consistent with broadly accepted domestic and foreign eco-
nomic policy objectives. Mechanisms would have to be developed to
ensure accountability of the board's operations to producers and the
public. This will undoubtedly require representation of different
groups on the board and that a considerable amount of the grain ex-
port marketing board's activities be reported to the public.
Campbell, Keith 0., "Agricultural Marketing and Prices." Melvourne, Cheshire
Publishing Pty. Ltd., 1973, Chapters 8, 9, 10.
Department of Agricultural Economics and Farm Management, Faculty of
Agriculture, "Market Regulation in Canadian Agriculture." (Papers presented
at the Marketing Board Seminar, January, 1972). Occasional Series No. 3.
Winnipeg, The University of Manitoba, May, 1972.
Hiscocks, G. A. and Bennett, T. A., "Marketing Boards and Pricing in Canada."
Canadian Farm Economics, Vol. 9, No. 3, June, 1974, pp. 15-22.
Morley, J. A. E., "Marketing Boards," in T. K. Warley, ed., "Agricultural Pro-
ducers and Their Markets." New York, Augustus M. Kelley, 1967, pp. 341-351.
National Farm Products Marketing Council, "Proceedings of the Federal-
Provincial Marketing Seminar." (Held at Banff School of Fine Arts, Banff,
Alberta, January, 1974). Ottawa, National Farm Products Marketing Council,
Walker, Hugh V., "Bargaining Through Marketing Boards: The Canadian Ex-
perience," Bargaining in Agriculture: Potentials and Pitfalls in Collective A,-tion.
North Central Regional Extension Publication 30. University of Missouri Ex-
tension Division, June, 1971, pp. 40-44.
FINE TUNING THE PRESENT SYSTEM
(By Ronald D. Knutson 1, Dale C. Dahl Jack Armstrong )
It is frequently suggested that major changes in legislation or struc-
tural changes in agriculture are not necessary to improve the compe-
tition in agricultural markets. All that is required is that we do a better
job of administering and enforcing existing laws and thereby facilitate
greater competition and equity in producer markets-whether on the
input or output side.
WHAT Is A FINE TUNING STRATEGY?
Fine tuning implies a multitude of government-facilitating and
regulatory strategies that can be pursued through existing legislation
to improve the position of farmers in the marketplace and an emphasis
on government, administrative and/or producer action to make the
markets in which farmers deal more competitive. In essence it is a
"'ring and valve job" for government programs to assist farmers in
marketing their products.
In our concept of fine tuning the farmer faces three major problems:
1. Insufficient competition in the markets where he buys his inputs
or sells his products. The root of this problem lies in the relatively
high levels of concentration and market power of sellers of inputs and
buyers of farm products.
2. Producers are in an inferior negotiating position. This is the result
of the concentration and market power facing farmers and the fact
that farmers have not exercised market initiatives to gain a relative
balance of market power.
3. Producer access to markets is becoming increasingly restricted.
Higher levels of concentration and more fully-integrated systems of
production and marketing are the primary contributors to problems
of producer market access.
This paper explores these problems and suggests they may be rem-
edied by reducing the effects of monopoly in agriculture; by increas-
ing the market power of producers to place them in a balanced nego-
tiating position with that of input supplier and/or food processors
and retailers; and by improving the quantity and quality of informa-
tion at the producers' disposal to make marketing decisions. To a sig-
nificant extent this can be done within the present legislative author-
ity-if we have the will. It is recognized that to be publicly acceptable,
tlhe results of the suggestions made here must be in the interest of con-
sumners as well as producers.
I Professor. Department of Agricultural Economics, Texas A&M University.
2 Professor, Department of Agricultural and Applied Economics, University of Minnesota.
As-istant Administrator, Farmer Cooperative Service, U.S. Department of Agriculture,
FINE TUNING To REDUCE EFFECTS OF MONOPOLY IN AmGRICULTUrm.
Many of the markets from which farmers purchase inputs and into
which they sell their production are controlled by a relatively small
number of firms. Many are localized thus allowing the farmer few
market alternatives. The problem is compounded by large input sup-
pliers or marketing firms dealing in many different local and regional
markets. These firms are frequently in a position to affect the local,
regional, as well as national level of input and farm-product prices.
Increasingly, powers of these firms are magnified as they integrate
into production by either contract or ownership.
Existing regulations, properly enforced and administered, provide
numerous opportunities to remedy problems of monopoly in agricul-
ture. These opportunities fall in three major categories: improved en-
forcement of regulations currently administered by the Secretary of
Agriculture; clarification and modification of our antitrust policy
with respect to the food industry; and the removal of government-
authorized or imposed monopolies.
Agricultural market regulations currently enforced by the Depart-
ment of Agriculture contain many provisions designed to foster com-
petition. The full competition-enhancing effect of these regulations is
not being realized. Provisions relating to fostering competition and
preventing monopoly are sometimes ignored completely.
In other cases, enforcement activities of the department are more
cosmetic than effective. Rather than being used as a monitoring device
or determinant, USDA market regulatory agencies react only after a
complaint of abuse. Usually the producer is in no position to com-
plain, either because he fears retaliation or because the effect is of
such a general nature that he cannot prove a cause and effect relation-
Why is this the case? Too often the Department of Agriculture has
viewed agricultural input suppliers, marketing firms, processors, and
retailers as part of its constituency. This advocacy role conflicts with
its regulatory role. The result is that regulation suffers at the expense
of advocacy and conflicting clientele interests.
The following specific suggestions are made to fine tune regulations
of the Department of Agriculture:
1. In order to protect competition in the food industry an agency
should be established with expertise to monitor input, farm, and food
prices for evidence of abuses to producer and public interests. Such an
agency should devote particular attention to evidence of undue price
enhancement by cooperatives in violation of the Capper-Volstead Act,
and to evidence of price rigidities which prevent changes in farn-n-level
prices from being reflected in wholesale and/or retail prices. Where
evidence of legal abuse is found it should be referred to relevant law
enforcement officials in the Department of Justice or the Federal
Trade Commission. In other cases, simply focusing public attention on
the situation mav be sufficient to bring about a more responsive system.
2. The Agricultural Marketing Apreement Act of 1937, as amended,
specifically charges the Secretary of Agriculture with protecting the
public interest in marketing order and agreement provisions and/or
decisions. Seldom has any Secretary of Agriculture taken overt action
to effectuate this charge. For example, under fruit and vegetable
Marketing orders the decisions of the administrative committee-made
up of producer and shipper interests-with relatively few exceptions
-have had the force of law. Under milk marketing orders the authority
given the Secretary to establish rules of competitive conduct have
never been utilized. The public interest responsibilities under these
laws could be more effectively enforced.
3. The Packers and Stockyards Act has been the main device for
regulating competition in the meat packing industry. From time to
time serious questions have been raised concerning the extent to which
this law and its enforcement priorities is being enforced. Dramatic
structural changes of horizontal, vertical, and conglomerate dimen-
sions have occurred: the basis for pricing in the meat industry has
become progressively shallow; contracting is becoming increasingly
prevalent; rate-making still continues an important function of the
act despite a larger number of alternate outlets available to the pro-
ducer. Little has been done to address the issues raised by these
changes. The reason, it is frequently suggested, is that questions of
jurisdiction exist between the USDA, the Department of Justice, and
the FTC. While this is true, nothing is accomplished as long as each
agency uses the same excuse for not acting on problems of critical im-
portance to producer and public interests.
4. Other Department of Agriculture regulations require initiative to
protect competition. Certain regulations are not enforced unless a pro-
ducer is willing to divulge his identity and risk substantial economic
retaliation and injury. Under the Perishable Agriculture Commodi-
ties Act and the Agricultural Fair Practices Act the department las
been unwilling to allow a producer association to render a complaint
on behalf of its producers unless the affected producers are specifi-
cally identified. Greater initiative should be exercised in such cases
to protect producer interests. Where the department serves a licensing
function, a systematic method for monitoring the extent to which the
provisions of the law are being carried out should be an integral part
of the program. If clarification of legislation is required in order
to proceed, the department should be an active advocate of such
The main responsibility for enforcement of these regulations cur-
rently lies in the Department of Agriculture. This can be justified
,on the grounds that special expertise exists within the department to
understand, analyze, and evaluate agricultural programs. Resolution
of these problems requires more vigorous enforcement, and coopera-
tion with other agencies of government such as the FTC and the De-
partment of Justice.
If the USDA cannot or does not effectively enforce the laws over
which it has responsibility, consideration should be given to either
the establishment of a new regulatory agency outside the department-
as was done in the case of the Commodities Futures Trading Com-
mission-or to transfer enforcement responsibility to the FTC or
the Department of Justice. It seems apparent, however, that the De-
partment of Agriculture, with its specialized expertise, should be able
to administer these laws better than any other government agency.
Antitrust regulations applied to food industries are currently
enforced in stringent-if not doctrinaire-fashion cases of mergers
or acquisitions of firms at the same market level. Such enforcement
has not stemmed the trend toward increased concentration, accom-
plished by internal firm expansion. At the same time, it has tended
to force large growth-oriented firms to either expand vertically-
backward or forward-or conglomerate into new product lines. Both
types of growth have the potential not only to distort the structure
of agriculture but also to lead to less competition thus placing the
Producer in an even more disadvantaged position. In the long run,
uncontrolled vertical integration has the potential for completely
removing the independent farmer as a viable force in agriculture.
Vertical integration, whether by contract or ownership, has many
desirable coordinative and efficiency-enhancing attributes; therefore,
a doctrinaire approach to vertical and conglomerate growth could
be as harmful as a doctrinaire approach to horizontal growth. Despite
this fact, several states have taken steps to prohibit corporate owner-
ship of agricultural land.
On the other hand, there has been no substantial federal action to
curb vertical integration by contract or ownership. It seems doubtful
any precise policy can be developed and applied equally to all indus-
try situations. An aggressive case-by-case approach aimed at develop-
ing a body of case laws to cover vertical and conglomerate integration
in food industries would appear to be a desirable strategy. Such an
approach should be pursued in the early stages of development on a
case-by-case and industry-by-industry basis.
Government authorized, regulated, or enforced monopolies are par-
ticularly prevalent in the food industry or in closely allied industries
such as transportation. To an important extent, the problem is one
of overregulation and duplication of regulatory authority: Federal
marketing orders duplicate state marketing orders in milk, fruits, and
vegetables; federal licensing laws are piled atop state and local licens-
ing laws; sanitation labeling and inspection requirements duplicate
and sometimes conflict with one another. Frequently, state laws are
applied in a discriminatory manner to foreclose an out-of-state product
from a market.
The Department of Agriculture, the Department of Health, Edu-
cation and Welfare, the Department of Justice, and the Federal Trade
Commission should move vigorously against regulations that impede
competition, sanction monopoly, or discriminate against producers
and firms in other states or localities. In many cases these laws can
be struck down on the basis of federal supremacy. An ad hoc com-
mission may be needed to identify priority areas of abuse. Educational
programs to alert consumers to the negative impact of such laws
should be encouraged and developed.
In the end, the key to effective regulation lies in constant adjust-
ment to changing conditions for the common good. Bad regulations
come into being not by design but by default: regulatory officials fail
to change with the times. Such default creates economic distortions
and incentives contrary to the public interest. This comment applies
to the regulation of railroads as well as to milk, meat, and grain.
Complete de-regulation is not the answer. The answer instead lies in
recognizing the direction in which we want to change and by progres-
sively moving in that direction with a balanced package of regulatory
change and assistance.
FINE TUNING To IMPROVE THE PRODUCERS' MARKET POSITION
New initiatives are needed by producers to develop a more promi-
nent role as competitors and, in limited instances, to become more
effective bargaining agents on their own behalf. In the past, much of
this initiative has come from cooperatives, but the cooperative com-
munity is not changing as rapidly as required to meet the needs of
modern agriculture. The cooperative movement needs to be revital-
ized-to become a major force in grain export marketing, to effectively
represent producer interests in livestock marketing, and to reassert its
competitive leadership in areas where it has traditionally had strength.
New producer initiatives should not be aimed exclusively toward the
advancement of cooperative involvement in markets. Instead, they
should address a wide range of organizational forms, including indi-
vidual producer integration, the formation of producer corporations,
partnerships, and limited partnerships. To this end a separate agency,
the Farmers Marketing Service, should be established within the De-
partment of Agriculture.
The Farmers Marketing Service would have three primary roles:
1. To conduct applied research on new opportunities for producer
initiatives in marketing. Suggested areas for initial exploration could
include the formation of producer-owner export cooperatives to repre-
sent producer interests in the highly-concentrated and corporate-
dominated export market, the reestablishment of producer initiative
in the livestock industry, and the expansion of direct farmer-to-
2. To educate and provide assistance to producers in cooperation
with federal and state extension services so they may take advantage
of these marketing opportunities.
3. To marshal within the Department of Agriculture and other
government agencies the necessary financial and marketing assistance
to get producer initiatives on a firm economic base. If a substantial
producer export cooperative were established, the Foreign Agricul-
tural Service should look on such an organization as a significant new
client for its market development and sales referral efforts. Purchas-
ing activities by state-trading nations could be channeled directly to
the producer and thereby expensive middlemen functions could be
bypassed, coordination could be improved, and profits could be chan-
neled to the producer level.
There are times when government sanction of bargaining would ap-
pear to be a necessary producer strategy for fine tuning producer inter-
ests. Such are the cases of processed fruits and vegetables and poultry
produced under contract with an integrator where the grower does
not hold title to the produce he produces. In many instances the pro-
ducer finds himself at the mercy of the processor, financially as well as
for a market. In cases where integrator control is essential for coordi-
nation and efficient production of a uniform product, government sup-
port for bargaining activities-including education, research, and even
legislation-would appear essential. If this support is not given, these
piece-wage laborers could be organized by labor unions-an option
considered contrary to the public interest since it would establish
monopolizing control over production resources.
FINE TUNING To IMPROVE MARKET INFORMATION AND PRICING
Intelligent and informed producer decisions foster more competition
as well as efficiency in the allocation of resources. At a time when mar-
ket conditions change on an hourly basis, up-to-date information for
decisionmaking is even more critical. While the United States has one
of the most advanced market information systems in the world, there
are still major gaps in it. Too, the producer is frequently not in the
best position to access or interpret market information. The following
suggestions are designed to at least partially remedy these problems: 4
1. Purchased inputs constitute an ever-increasing portion of produc-
tion expenses; yet our information system is nearly devoid of data on
purchased input prices. At any single point in time, there is greater
variation in input prices than product prices. Lack of information is at
least partially responsible for this wide variation. Public price report-
ing of purchased inputs such as fuel, formula feeds, fertilizer, chemi-
cals, and farm machinery is recommended.
2. With contract and ownership integration becoming increasingly
prevalent, terms of trade other than price become more and more criti-
cal to the producer contemplating entry into such arrangements. The
reporting of contract terms on a timely basis is virtually nonexistent.
This leaves the growers of broilers, turkeys, and processed vegetables
with no objective basis for evaluation and comparison. Two steps are
suggested as remedies. First, it is recommended that the USDA begin
reporting the terms of contracts prior to and during sign-up periods,
and second, it is recommended that a standard contract be prepared by
the USDA representing prevailing industry practices and producer
interests. Such a contract would serve as a standard for producer con-
3. Improved price reporting is at least partially dependent on the im-
provement of grade standards used in product descriptions and identi-
fication. Major revision is needed for many grade standards to reflect
producers consumer and/or industry quality attributes and values
in the form of appropriate price levels and differentials. A few exam-
ples needing immediate attention can be cited: grain grades should be
modified to better reflect differences in protein content and product
end-uses; consumer grades and standards for pork should be estab-
lished; and fresh fruit and vegetable grades should reflect maturity
and internal nutritional and eating quality rather than external ap-
4. Since the 1972 Russian wheat sale, significant advances have been
made in reporting international transactions; yet the fact remains
that sales are not reported until after transactions are consumated.
During the period of negotiations, the opportunity exists for a major
buyer to act with more knowledge of pending changes in market de-
mand and price conditions than other buyers or sellers. The ability to
4 Other papers in this series provide more detail on some of these suggestions.
thus use information to one's own advantage might enable him to reap
substantial benefit. To at least partially remedy the above problems,
three suggestions are made:
(a) In order that news of a substantial sale may be immediately
reflected in the market, it is suggested that the daily limits on the
movements of prices on futures markets be removed.
(b) The increasing prevalence of state traders in international
markets puts a producer in a much more vulnerable position. Ac-
cordingly, it is recommended that before a state-trading nation or
a representative of a state-trading nation approaches a company
for United States grain it be required to report its intentions to
the Government, including an estimate of its purchases in the cur-
rent transaction as well as for the remainder of the crop year. Such
intentions would then automatically be made public by the
(c) Much of the international intelligence on crop and potential
demand conditions is transmitted to the United States by the agri-
cultural attaches stationed in countries with which we have diplo-
matic relations. These reports have been a fairly accurate indicator
of pending developments in international trade of significance to
the United States producer. With their already-existing world-
wide intelligence networks, it is apparent that major grain ex-
porters have better access to such information than do producers.
Accordingly, it is recommended that all agricultural attache
reports on crop and demand conditions be made public at the time
they are received.
5. Currently, local market prices are not available to producers in
most areas of the country. As local market areas expand through im-
proved transportation, it becomes increasingly difficult for a producer
to be informed of price differences within his market area; therefore,
improved price reporting at the producer level is needed, including the
reporting of contract terms at the local level. The importance of televi-
sion as a medium for transmitting market information has not been
realized. Expanded use of separate public or cable television channels
for market news in rural areas needs to be explored. The direct and
continuous broadcast of agricultural news service teletypes would be
possible. This would provide up-to-date information on prices as well
as major market and news developments.
6. Market information is useless unless it is integrated into the de-
cision framework; therefore the continued and upgraded support for
activities to improve the economic aspects of producer decisions is
How To ACHIEvE FINE TUNING
The suggestions made in this paper do not require legislation; they
require only administrative action. Some exceptions may exist in cases
where clarification of existing legislation is needed or in instances
where the Secretary of Agriculture or other responsible agency head
cannot, should not, or does not enforce a legislated responsibility. In
the latter case it would be necessary to seek legislation to transfer that
responsibility to another agency.
To get one or more of the above actions implemented will require
producer initiative. Some will require more initiative than others be-
cause of variation in the level of bureaucratic resistance to change or
pressure placed on an administrator by those adversely affected by the
action. In some instances, pressure on elected as well as appointed offi-
cials will be required not only to get the attention of responsible ad-
ministrative officials but also to get the appropriations needed to carry
out expanded programs.
EFFECTS OF FINE TUNING
The objectives of the fine tuning suggestions made herein are to
improve market access, to enhance competition for farmers' products,
and to bring about a better balance of the farmer's position in the
market without injuring consumers. The magnitude of the effect is
dependent on which suggestions are implemented and to what degree.
Producers would be in a more favorable market position if the sys-
tem is fine tuned. While not assured of a. substantially higher price,
they would be assured of a more competitive price and access to all
alternative markets. Also, they would be less vulnerable to corporate
takeover. With more information available, farmers would have a bet-
ter basis to make decisions. Production would be more oriented to the
needs of the market, although not as much as in the case of full
The consumer's position in a finely tuned market place would not
substantially change. A more competitive producer price passed
through to the consumer means higher consumer prices. On the other
hand, reflecting price advances and declines at the producer level
through to the retail level likely means somewhat lower prices. Con-
sumers would be protected against exploitive market abuses of pro-
ducers and agribusinesses. Improvements in grading would provide
improved consumer decisions and production of products in the con-
Agribusiness is the most probable loser if fine tuning is imple-
mented, but its losses can easily be exaggerated. With increased de-
pendence on exports, maintaining our competitive position in inter-
national markets is dependent on maintaining an efficient domestic
production-marketing system. Elements of monopoly and imperfect
knowledge foster stagnation and inefficiency. They impair our ability
to compete in a world market. Despite this word of caution, the fine
tuning suggestions do place producers on a more even plane with agri-
business; thus agribusiness is a relative loser.
Rural communities would benefit from the suggested fine tuning
approach as the thrust is toward decentralization. The results would
be more farms and more jobs in the rural areas and thus a larger tax
base. More rural communities would have a basis for sustained growth.
The general public would balance on the benefits of fine tuning. The
costs would be somewhat higher levels of government activity and in-
volvement while long term benefits would be greater competition and
less centralization of power in the hands of a few.
LIMITS OF FINE TUNING
Certain problems cannot be solved by the fine tuning strategy and
therefore would require legislative action if they are to be solved by
government. Included are the basic problems of uncertainty, price
instability, and cycles, such as the hog and cattle cycles. However solv-
ing such problems would require considerably higher degrees of gov-
ernment intervention than presently exist. The other papers in this
series provide other suggestions most of which go beyond the fine tun-
ing approach herein. Fine tuning is a process that is continuous, a
process that corrects or causes more inefficiencies or inquities, depend-
ing on the skill of those involved. To facilitate fine tuning requires
that information be made public and that the public administrators
and representatives keep the public interest in mind.