The New Zealand Ministry of Agriculture and Forestry (MAF) has commissioned the New Zealand Institute for the Study of Competition and Regulation (ISCR) to investigate the role and significance of cooperatives in New Zealand agriculture. Contemporary factors encouraging or discouraging the adoption of cooperatives in New Zealand agriculture are also discussed.
Main Findings
Comparisons are also made with the extent of cooperative activity in a sample of other non-agricultural sectors in New Zealand. Although this question, and many beyond, would benefit from further research, we are unable to conclude from this analysis that the extent of co-operative involvement in New Zealand agriculture is either beneficial or detrimental.
Cooperatives Defined 1 Cooperative Principles
Cooperative Origins
Rochdale Principles
In the spirit of the "Rochdale Pioneers", the ICA adopted the following seven cooperative principles in 1995: 1. They achieve limited investment returns where at least part of the share capital is shared.
US Principles
Profit must be allocated (among other things) to benefit members in relation to their transactions with the cooperative. The fourth ICA principle refers to the idea that cooperatives are autonomous self-help organizations.
Principles Contrasted with Investor Ownership
Functional Definitions
It should be noted that this functional cooperative definition makes no assumption about the cooperative's legal form. The essence of such ownership arrangements is, by our definition, collaborative, despite their particular legal form.
Comparative Legal Definitions
- New Zealand
- Other Jurisdictions
In other respects, a co-operative company is equivalent to a company registered in terms of the Companies Act. 5 A comparison of the Co-operative Companies Act and Industrial and Provident Societies Act is given in Co.
Features and Criticisms of Traditional Cooperatives
- Features
- Criticisms
In a traditional cooperative, the right to the remaining cash flows of the cooperative is tied to ongoing patronage, usually by an individual. This problem arises when the claim of the patron owner to the remaining earnings of the cooperative is short.
The New Generation Cooperative (NGC)
Traditional cooperatives lack some of the means available to IOFs to mitigate the problems that arise when there is separation between an organization's owners and those who manage the organization on their behalf (i.e., managers)—the classic principal-agent problem . This suggestion is consistent with the observations of Hansmann (1996) who argues that even traditional cooperatives enjoy such an advantage over IOFs.
A Cooperative Typology
In addition, the owners are obliged to patronize the cooperative in proportion to their investment. The first three of the five models, like traditional co-ops, retain patron control over the co-op at the cost of limiting the co-op's access to outside capital (other than capital).
Cooperatives in New Zealand Agriculture
The latter two reverse these trade-offs, allowing access to external capital—most importantly equity (which then increases the cooperative's debt capacity)—but at the cost of ultimately diluting patron control to some extent. Chaddad and Cook suggest that the latter two non-traditional cooperatives carry an inherent tension—in that different ownership classes will have conflicting goals of profit maximization and patronage return maximization.
Policy Implications
Specific examples of cooperatives operating across these types of activities in the New Zealand agricultural sector are provided in Section 5. Such receptivity may well be useful if IFRS rules are not changed to better reflect the economic substance of cooperative capital and continue with treating redeemable equity as debt, in which case legislative changes such as the Companies Act may be justified (e.g. clarification of the application of the solvency test for cooperatives).
Factors Affecting Cooperative Evolution 1 An Institutional Framework
Institutions and Institutional Change
Therefore, to ascertain the superiority of an organizational form on the basis of its persistence requires the elimination of such alternative explanations. This criterion “leads the public policy analyst to present a superior possible alternative,” while also allowing for any implementation costs in the net benefit calculation.
The Economics of Vertical Integration
Such costs of ownership must be weighed against the costs of alternative trading through the markets (either through spot markets or contracts). Other things being equal, these costs will be minimized if ownership is allocated to the class of patrons for whom the costs of market reasoning are the worst.
Arguments for Cooperative Formation
- Survey of Theoretical Cooperative Strategies
- Applying the Economics of Ownership
One of Hansmann's more interesting conclusions is that the latter consideration seems less decisive than the other three in the emergence of agricultural production cooperatives. When agricultural production cooperatives deal with multiple products (or product qualities), they usually limit costs and returns for each as a means of mitigating conflicts between farmers supplying different products (or qualities).
Model of Cooperative Evolution
Under the third, emphasis is placed on value-added activities and measures that mitigate the five ownership-related problems identified above (such as valuing shares at fair value and increasing share liquidity).
Contemporary Drivers of Cooperative Evolution
- Trade Liberalisation and Increasing Competition
- Changing Consumer Preferences
- Producer Board Dismantling and Organisational Competition
- Cooperative Adaptations
Traceability of an otherwise homogeneous product to the farm, for example, may be sufficient to convert it to a value-added product. Dairy farmers in New Zealand (Fonterra), Australia (Bonlac and Murray Goulburn) and the UK (Milk Marque) have been quick to adopt or strengthen co-operative structures in response to dairy regulation.
Policy Implications
Because cooperatives are not used as a policy tool – for example to increase competition – changes in the cooperative form do not risk undermining policy objectives or exploiting related policy preferences. However, if co-ops provide endogenous and flexible, farmer-driven responses to each of these issues, then the transaction costs they entail are clearly not prohibitive.
Theoretical and Empirical Literature on Cooperatives
Efficiency and Financial Performance
- Studies based on Economic Efficiency and Other Measures
- Summary – Efficiency and Financial Performance
Lerman and Parliament (1990) examine the comparative financial performance of cooperatives and IOFs in the US fruit and vegetable processing and dairy industries on controlling for size differences, based on such ratios. Except in the dairy sector, cooperatives had lower asset turnover (i.e., lower efficiency) than IOFs, as predicted due to the need for cooperatives to maintain greater peak capacity than IOFs.
Competition and Competitiveness
- Competitive Effects of Cooperatives in Mixed Industry Structures
- Implications of Mixed Industry Structures for Procurement
- International Competitiveness of Cooperatives
- Summary – Competition and Competitiveness
It also means that the cooperative's market share is greater than it would be if it maximized the total profit of its members. In a mixed oligopoly consisting of a cooperative and an IOF, when farmers are heterogeneous in terms of efficiency, the cooperative will tend to attract less efficient farmers (indicating a potential weakness of open membership cooperatives).
Product Differentiation, ValueAdded and Innovation
- Product Differentiation
- ValueAdded and Quality Choice
- Innovation
- Summary – Product Differentiation, ValueAdded and Innovation
Despite this, the importance of cooperatives in helping farmers engage in value-added downstream activities is widely recognized (for example, the Tatua dairy cooperative is the most specialized of the three, producing value-added consumer products and ingredients.
Governance
- Agency Cost Problems
- Impact of Member Heterogeneity
- Information, Adversity and Trust
- Summary – Governance
Like Hansmann (1996), Hart and Moore argue that cooperatives work well when their activities are narrowly defined, but they cope poorly with significant change (when members' interests are more likely to diverge). They note that cooperatives are often established in declining industries, or cooperatives appear to be sustainable in relatively low ones.
Access to Capital, Investment, and Growth
- Access to Capital
- Investment
- Growth, and Failure Risk
- Summary – Access to Capital, Investment, and Growth
Finally, Kyriakopoulos and van Dijk (1997) present evidence on the use of innovative capital raising techniques by entrepreneurial and market-oriented agricultural co-operatives in the EU. It is modeled that IOFs have a greater interest in the future well-being of the firm than cooperative members.
Cooperative Evolution
- Nature and Incidence of Cooperative Reorganisations
- Drivers and Success Factors
- Obstacles to Cooperative Evolution
- Summary – Cooperative Evolution
Pritchard (1998) paints a different picture from Kerr (1999) of the changing role of agricultural co-operatives in Australia, examining the restructuring of the Australian dairy and wheat sectors in the 1990s. The formation of growers' cooperatives in the Australian wheat industry has been an important new phenomenon.
Policy Implications
Under such circumstances, cooperatives are predicted to enjoy managerial advantages over IOFs and solve agency cost problems via close monitoring, where ownership constraints mean that they cannot use strong incentives instead. Conversely, cooperatives are predicted to become less economically viable than IOFs as the industries in which they operate become competitive.
Cooperatives in New Zealand Agriculture
Background on New Zealand Agricultural Organisation
- Cooperatives in the Late Nineteenth and Early Twentieth Centuries
- The Development of Statutory Producer Boards
- Transition to New Industry Structures
Stephens (1936) provides a glimpse of co-operative activity in New Zealand in the late nineteenth and early twentieth centuries. In the following discussions of the role and importance of cooperatives in each of the main sub-sectors of New Zealand agriculture, we will also consider how some of these changes have affected the current industrial organization.
Dairy
- Milk Processing
- Downstream Processing
- Other Industry Activities
- Discussion
Corporate dairy farmer Synlait plans to increase its milk production to 1% of New Zealand production by the 2007/2008 dairy season. The dominance of cooperatives in milk processing in New Zealand fits well with standard explanations for cooperative formation.
Beef, Lamb and Venison
Some of the arguments supporting the formation of milk processing cooperatives also apply to meat processing. For all these reasons, the case for co-operative ownership is less compelling than in the dairy industry, which is reflected in the significantly lower market share of co-operatives in meat processing both in New Zealand and in many other meat-producing countries, albeit with notable exceptions such as Denmark and Norway.
Wool
Good industrial research and development in New Zealand is now carried out through Wool Equities Limited, IOF, which was originally owned by non-Merino sheep farmers and listed on the NZX alternative stock exchange, NZAX. Such trading has been facilitated by the use of independent testing to objectively classify the characteristics of wool staples, for example by the New Zealand Wool Testing Authority Limited.
Fishing and Aquaculture
AFL owns half of New Zealand's largest integrated fishing company, Sealord, with the other half owned by Nippon Suisan Kaisha. Indeed, federalized or umbrella bodies such as the New Zealand Seafood Industry Council (SeaFIC) are also common, indicating benefits for cross-species collaboration.
Horticulture
- Kiwifruit
- Apples
The New Zealand apple industry may represent a more extreme example of the fragmentation of an industry that is possible through the elimination of a single outlet. In addition to these adverse market factors, industry fragmentation and uncoordinated export competition among New Zealand apples.
Forestry
Integrated listed IOF forester and wood processor/pulp and paper manufacturer Carter Holt Harvey is New Zealand's largest forest owner with 12% of the total exotic forest plantation. Add to this the fact that foresters in New Zealand vary considerably in terms of scale, location, forest maturity (and thus expected harvest date), level of involvement in downstream processing and/or other supply commitments.
Rural Supplies
It is unclear why New Zealand land supply companies must have a higher market share than other countries, where only the strongly cooperating Denmark reaches a market share close to the cooperatives in New Zealand. New Zealand rural utilities are less active than their overseas counterparts in providing animal feed (given New Zealand's greater reliance on pastoral agriculture) and agricultural fuels.
Fertiliser Production/Importation
Rural supply trading is dominated by the three main co-operatives, although PGG Wrightson has a larger presence in the rural sector given its other activities including livestock and wool trading, grain and seed supply, financial services, property real estate and irrigation. The rationale for rural supply co-operative businesses has traditionally focused on ensuring that farmers have access to a range and quality of supplies that IOF providers may find impractical to supply consistently, or to enable farmers to share any profits from rural supply marketing rather than pass them on. to third party investors of IOF.
Comparison with Other Sectors
- Agricultural Cooperatives Overseas
- Cooperatives in New Zealand NonAgricultural Sectors
To illustrate the range of organizations that classify themselves as cooperatives in New Zealand, Table 5.1 summarizes the extent of cooperatives by economic sector using membership data provided by the New Zealand Cooperatives Association (NZCA). It is worth noting that many electricity transmission companies in New Zealand are organized as functional cooperatives, where they are formally set up as IOFs owned by electricity consumer trusts.
Summary of New Zealand Agricultural Cooperative Survey
Evans and Meade (2005) report that 19 out of New Zealand's 28 electricity line companies – including the largest network company, Vector – are organized in this way. The homogeneity of most fertilizers used in New Zealand, and possible regional market power due to transport costs, may explain cooperative dominance in this sector.
Policy Implications
Areas for Further Research
In particular, research on new NGC arrangements, including NGC capital structures, would also be fruitful. The interaction between compulsory industry cooperation (eg through the Compulsory Taxes Act) and co-operative governance would also be worth examining to determine the extent to which co-operative organization is encouraged or replaced by other such co-ordinating devices.
Conclusions
Screening, competition and the choice of the cooperative as organizational form. Journal of Agricultural Economics. Imperfect competition in agricultural markets and the role of cooperatives: a spatial analysis.American Journal of Agricultural Economics.
