Cooperatives/associations/voluntary chains

2.61 A cooperative enterprise, association, or voluntary chain of stores is formed by a group of economic entities who agree to act collectively in order to further their joint and own private interests. Such enterprises or associations can be formed by farmers, processors, wholesalers, retailers, or exporters, in order to undertake joint investments, common practices, or collective self-regulation of competition. The members essentially enter into a series of explicit and implicit contracts with one another, agreeing to certain membership terms and agreeing to certain standard operating procedures (Staatz (1984); Zusman (1989)).

2.62 Voluntary cooperation can support commodity system investment and coordination in at least the following ways: a) it can counter the problem of 'lumpy' investments in marketing infrastructure and services since the fixed costs of such investments can be spread among the group members. b) it can serve to internalize certain externalities and allow for private provision of certain public goods. One area for this is in product promotion which may not be worthwhile for an individual producer or trader, but profitable for a group since costs could be spread and benefits internalized. A group or association can also serve to promote and protect an industry's reputation for quality, reliability, etc. by monitoring its members and punishing (perhaps through loss of membership) those parties which provide substandard service to buyers/consumers. c) it can reduce or pool member risks by guaranteeing commodity purchases and sales on behalf of members, and by providing insurance and/or credit to members. When performing the sales function, the cooperative will pool the market price and access risks of members. Cooperatives or associations may be better placed to provide insurance and credit to members because of having more detailed and reliable information about their risks and creditworthiness. d) it can lower transaction costs for members and for non-members trading with members by settling disputes and by obtaining, interpreting, and disseminating information about production, markets, and farmer/trader competence and creditworthiness. A trade association can be an important 'first stop' for a prospective buyer of an industry's output and can provide a channel for consumer/buyer complaints. A farmers' cooperative can synthesize information about its members' production and be used as a low-cost channel for information from processors or traders. e) it can serve to exercise or counter market power for its members through collective negotiations with suppliers or buyers, by controlling/withholding member supply into the market, and by informing members about prevailing terms of trade.