Farmer Cooperatives and Competition: Who Wins, Who Loses and Why?

Farmer-owned processing cooperatives are common in agricultural industries, but they differ from standard profit maximizing firms. The farmers who supply a cooperative are also the shareholders and a cooperative aims to maximize the overall return to its suppliers. So the presence of a cooperative can alter both market pricing and structure.In this paper, we develop a simple model to analyze the market impact of a farmer cooperative. We show how a cooperative can intensify the competition between processors for farmers' produce and benefit all farmers, including those who do not supply the cooperative. If, however, the presence of a cooperative changes industry structure, then the effect of a cooperative on farmers is ambiguous -- some farmers gain while others lose. The potential for farmers to free ride on a cooperative raises the possibility of market instability, where a cooperative is desirable overall to farmers, but the cooperative's shareholders may find it in their own interest to 'sell out' to a for-profit processor. We show that the market has two stable outcomes, one where there are only profit maximizing processors, and a second where a cooperative coexists with profit maximizing processors.