To Co-operate or Not

by Allan Nation

The earliest modern farm co-operatives were "boxcar co-ops." Groups of small farmers would pool their money so they could order farm supplies, lime and fertilizer in carload lots. At the turn of the century rail freight was a fraction of the cost of drayage and is still the lowest cost overland freight mode. Saving freight charges gave co-operative farmers a slight "unfair advantage" over non-co-operative farmers.

Usually the local County Agent held the farmers' money and accepted the responsibility of paying both the farm supplier and the railroad. With the county agent seen as a trusted government employee, both the suppliers and the railroads felt comfortable that they would be paid and readily shipped goods to faraway destinations with few questions.

In modern-day terms, Joel Salatin's Metropolitan Buying Clubs are similar to these boxcar co-ops in that they are buying pools designed to minimize freight (travel) on the part of both the customer and the farmer. Similar buying co-ops exist today for difficult-to-find organic supplies.

The key to success with these co-ops is that they are simple, single purpose, short-lived, have a good reputation for payment and have no continuing overhead or paid staff. They come into business, do their thing and then quickly go out of business.

The other early farm co-operative was the marketing co-op. Whereas the boxcar co-op was designed to facilitate buying, the marketing co-op was designed to facilitate selling.

In the early 20th century, dairymen had to find retail customers on their own. However, due to particular environmental advantages dairies tended to cluster in certain locales rather than being evenly spread over the countryside. This produced gross over-supply in one area and milk shortages in others. Large cities were particularly dairy deficient.

By pooling their milk into carload lots the dairymen could use low-cost rail freight to ship their milk to the higher priced urban markets. This worked great as long as demand was in excess of supply. No one seemed to notice that a marketing co-op required a permanent staff and considerable permanent overhead investments that had to come out of the farmers' milk check.

However, the real problem was that the marketing staff was necessarily located near the urban customers and was far removed from the farmers. This created a major communications problem.

Marketers love to sell. With the urban markets swelling with immigrants, the urban marketers exhorted the dairy farmers to produce more.

Farmers love to produce. Freed of the responsibility of having to create a local customer for every quart of milk they produced, they became totally oriented toward increasing production. They made long-term fixed investments in silos and infrastructure based upon that day's milk price.

Of course, this happy scenario only lasted while demand exceeded supply.

The major weakness of the capitalistic economy is that it doesn't have a painless way of dealing with product oversupply. Inventory in excess of sales always creates economic pain and is the root cause of economic recessions and depressions.

In Peter Senge's holistic business book, The Fifth Discipline, he describes how slight shortages in supply soon create massive increases in production.

For example, an urban retailer needs a couple of more quarts of milk a day but yells at the co-op for more milk because he doesn't want to miss a single sale. The co-op yells at the farmer for more milk because they don't want a single disgruntled customer. The farmers respond by producing an additional railcar of milk. Of course, this is far in excess of what the retailer wanted and so the price collapses.

Unfortunately, once an increase in supply has been created bringing it back into balance with demand is a rather long-term process. One cannot turn cows off and on like a water spigot.

In fact, a spigot is an apt analogy for inventory balancing.

Senge said that supply balancing is like trying to adjust the temperature on a shower with a delay between when you turn the handle and when the water heats up or cools down. The longer the delay the more likely you are to be alternately scalded or frozen.

A marketing co-op, because it involves multiple suppliers in often remote areas and a far-removed marketing staff, is similar to a long-lag shower. It is almost inevitable that you will get burned.

How do such far removed players communicate? How do we fine-tune production to match daily market fluctuations? The only way the free market has found to communicate with producers is through price changes, and yet marketing co-ops are typically formed under the premise that they will end the market price roller-coaster.

When an over-supply inevitably develops the moment of truth begins. We shared the good times, now how do we equitably share the bad times?

Who do you know who is willing to voluntarily cut back production so that his neighbors can continue to go full-bore? What about the farmers' recent increase in debt load for infrastructure to increase production on the bequest of the marketing people? The current problems are not of the farmers' making. Shouldn't the marketing people take all the pain?

Conversely, is the marketing staff willing to take a cut in pay so the farmers can continue to get a premium price for their production? What about the new office tower they just built? Why should they have to cut back so that a bunch of hayseeds they scarcely know won't have to? If the farmers hadn't gotten greedy and over-expanded, they wouldn't be in this mess. Shouldn't the farmers take all of the pain?

You know the answer.

In any buy/sell relationship the one doing the buying has the majority of the leverage. The only refuge for a seller is to try and find a kindlier and gentler buyer somewhere else.

In the long-run, marketing co-ops can only thrive where they have total market hegemony. This is why they continually try to reduce their farmer members' marketing options by merging or purging their competitors out of business.

In the end, marketing co-ops that were started to expand a farmer's market inevitably wind up working to limit them. This is because the co-op inevitably becomes a living thing into and of itself. Like any living thing, it is primarily interested in its own survival.

The beauty of an owner-operator who markets his own production is that his communication chain is extremely short. He can feel the water in his shower gradually changing and can avoid getting scalded.

This is not to say an owner-operator won't misjudge a market but when he does there is no time lost in recriminations about whose fault it is. He knows how to allocate the pain because the pain is all his.

Now, I know a lot of you will be asked to join and finance new marketing co-ops to develop new markets for grass fed meats and milk. If you are a large scale producer in a remote area, you may not have any choice if you want to participate in this market.

There could be several years of good prices for co-op members but keep your feet on the ground. Don't take on debt and infrastructure costs based upon these market premiums because they won't last.

Use these early market premiums to make productivity investments that will allow you to continue to profit at lower prices. A good rule of thumb to use is to always plan on a price five years in the future that is 30 percent lower than what you are currently receiving.

Keep trying to develop your own personal markets and keep your costs low enough so that you can use the established commodity markets as a supply balancer. Be particularly careful about participating in a co-op with a species of livestock that does not have an alternative commodity market outlet.

If you only have one market outlet for your production, it is inevitable that you will eventually get squeezed. No, this is not just business. It is, however, human nature.

In conclusion, I believe that all the co-ops that truly work for the farmer are simple, single-purposed and short-lived. No business person has ever been able to completely transfer the marketing responsibility for their production to someone else, somewhere else and thrive in the long-run.

by The Stockman Grass Farmer

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