- -   AGRICULTURE CORE CURRICULUM   - -

(CLF1000)  Advanced Core Cluster:  AGRICULTURAL BUSINESS MANAGEMENT

    (CLF1500)  Unit Title:  COOPERATIVES

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    (CLF1503)  Topic:  ECONOMICS OF               Time                 Year(s)
                       COOPERATIVES             1 Hour                   3 / 4
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           Topic Objectives:  Upon completion of this lesson the student
                              will be able to:

           Learning Outcome #:

              (M-2)  -  Describe how cooperatives have acted as pacesetters 
                        and power balances in agribusiness.

           Special Materials and Equipment:

           References:  Agricultural Council of California.  EXPLORING FARMER 
                          COOPERATIVES (Chapters 2 and 3).

                        Cobia, David W. (Ed.).  (1989).  COOPERATIVES IN  
                          AGRICULTURE.  Englewood Cliffs, NJ: Prentice-Hall.

           Resources:   THE COOPERATIVE STORY: HISTORY, a 12-minute VHS tape 
                          describing the development of many kinds of 
                          cooperatives in the U.S.  Available from: California 
                          Farm Bureau, Ag in the Classroom Program, 
                          1601 Exposition Blvd., Sacramento, CA 
                          95815.  (916) 924-4380

           Evaluation:  Unit Exam

TOPIC PRESENTATION:  ECONOMICS OF COOPERATIVES

A.  Commodity Sector

    1.  A commodity sector includes the whole set of activities associated 
        with the production and marketing of that commodity, from input supply 
        to final consumers.

        a.  A commodity sector extends backward from the farm production level 
            to the suppliers of fertilizer, agricultural chemicals, and other 
            production inputs.

        b.  A commodity sector extends forward from the farm production 
            level to the marketing level--the packers, processors, 
            wholesalers, retailers, and the final consumers of agricultural 
            products.

        c.  Farmers are both buyers and sellers in each commodity sector.  
            They buy farm inputs from the supply level and they sell primary 
            commodities to the marketing level of the sector.

B.  Imperfectly Competitive Markets

    1.  A primary characteristic of a competitive market is that there are a 
        large number of active buyers and sellers on both sides of the market.

    2.  The production process for many products on the supply and marketing 
        levels of commodity sectors is such that plants must be large (and 
        thus few in number) in order to produce at minimum cost.  Examples are 
        farm equipment manufacture, fertilizer manufacture, petroleum 
        refining, and food processing.

    3.  Numerous and relatively small farmers often trade with a few large 
        sellers at the supply level and a few large buyers on the marketing 
        level.  These markets are imperfectly competitive.

C.  Farmers lack market power.

    1.  Market power is the ability to influence price, raising it above the 
        cost of production.

    2.  Individual farmers lack market power relative to the large firms they 
        trade with at the supply and marketing levels.  They are price-takers, 
        not price-makers.

    3.  By joining together in cooperatives, farmers can increase their market 
        power.

D.  Cooperatives enable farmers to vertically integrate.

    1.  Vertical integration occurs when a business extends its operations 
        into other levels of a commodity sector.

        a.  Backward integration occurs when a business supplies its own 
            production inputs.

        b.  Forward integration occurs when a business moves into production 
            stages closer to the consumers.

    2.  Most farmers are not large enough to vertically integrate 
        individually. 

        a.  It would not be sensible for an individual farmer to produce farm 
            inputs such as farm equipment, agricultural chemicals, or 
            fertilizer.

        b.  Building a processing plant for a single producer's output is 
            usually not feasible.

    3.  By joining together in agricultural cooperatives, farmers can 
        vertically integrate into the supply and marketing levels of commodity 
        sectors.

E.  Joint vertical integration through cooperatives often benefits farmers.

    1.  Farmers are able to share in profits from other levels of commodity 
        sectors.

    2.  The addition of a cooperative firm to a commodity sector makes it more 
        competitive.

        a.  Because cooperatives operate on a cost-of-doing-business basis, 
            they provide a "competitive yardstick," that is, a standard to 
            which the prices of other firms may be compared.

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        ACTIVITY:

        1.  Have students draw diagrams of commodity sectors familiar to 
            them, identifying the supply and marketing levels of these 
            sectors.

        2.  Have each student interview a farmer about his/her involvement 
            with agricultural cooperatives.  This can be facilitated by 
            providing the students with a sheet of basic questions to ask, 
            for example, "What cooperatives do you belong to?"  "What 
            functions do the cooperatives perform?" and "What advantages and 
            disadvantages do you experience as members of cooperatives?"
            This information can be used as the basis of future class 
            discussions.
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