University of Wisconsin Center for Wisconsin
Rural Cooperatives, September/October 1997, pp. 6-10.
Published by the Rural Business and Cooperative Development Service
The Transnational Challenge: Cooperatives and the Global Food System
Michael F. Seipel and
Editor's Note: Seipel recently earned his Ph.D. in rural sociology at the University of Missouri; Heffernan is a professor of rural sociology at the University of Missouri. The following article is excerpted from their new report, "Cooperative in a Changing Global food System," RBS Research Report 157, available from USDA (see page 43 for >ordering information). The work was conducted under a cooperative research agreement with USDA Rural Business-Cooperative Service.
A sea of change is washing over the U.S. and world food industries. Enhanced transportation and telecommunications technologies are resulting in closer links between U.S. food producers and consumers and producers with consumers in other countries, suggesting the emergence of a global food system. This new global food system involves important alterations in historical consumption patterns and in the relationships among producers and consumers of food in local areas across the globe. It also involves changing relationships for producers and consumers with the various organizations that play a role in assembling, processing and marketing food products: agricultural investor-oriented firms (IOFs) and cooperatives. In particular, the competitive strategies being utilized by a particular type of IOF, the transnational corporation (TNC), are redefining their relationship with U.S. farmers and presenting important challenges for U.S.-based farmer-owned cooperatives.
Important precursors of the challenges presented by globalization for cooperatives can be found in earlier times, when farmers faced market failure at the local, regional or national level and attempted to rectify the situation through participation in cooperatives. However, the strategies being utilized by TNCs in the global food system present unique challenges for cooperatives that must be understood in their own right. In addition, trends toward globalization will present opportunities that cooperatives, by nature of their organizational structure and history will be uniquely qualified to fill.
The Challenge of Globalization
Since the late nineteenth century, U.S. farmers have dealt with issues of unequal power in the marketplace, often facing input supply and agricultural commodity markets controlled by only one or two firms at the local level. Farmers sometimes responded to this lack of competition or "market failure" via political channels, linking their efforts to broader social issues, such as in the Populist movement of the late nineteenth century. Farmers also responded to market failure by forming cooperative associations to purchase inputs and provide services to members on a local basis.
In 1922, the Capper-Volstead Act provided legitimacy to these attempts by farmers to establish a "level playing field" in commodity markets. These early cooperatives soon found that in order to ensure continued service to their members, they had to ensure their own survival through growth and profitability. As IOFs consolidated control of agricultural markets at the regional and national levels, local cooperatives responded by forming regional federations to provide a "competitive yardstick" which could be used to measure the performance of these IOFs and to "keep them honest."
In the intervening years, cooperatives, IOFs and the markets in which they compete have continued to grow in size and complexity. Like their counterparts of 100 years ago, farmers in the late 20th century continue to seek ways to work together, often through cooperative associations, to collectively counter the economic efficiency and power of large IOFs. However, the ability of cooperatives to continue to provide their traditional "competitive yardstick" function in this new "global food system" is being challenged not only by the sheer size of their competitors, but by the flexibility offered by their multiple-nation locations.
Concerns about the unequal distribution of economic power in agriculture voiced by farmers over a century ago still ring true today. Most of the major farm commodities produced in the Midwest today move into an oligopolistic market system at the national level. In every major commodity sector except turkey production and processing, four firms at the national level control 40 percent or more of processing. Four firms control over 70 percent of the market in such major commodity sectors as beef processing, wheat flour milling, soybean crushing, and wet corn milling. Many food processing firms achieve greater than a 20-percent return on investment, while farm management data from many Midwestern states suggests that most farmers receive only a 2to- 4 percent return on investment.
Another important aspect of the current system is that many of the same firms are involved in the processing of more than one commodity. ConAgra, Cargill, Archer Daniels Midland (ADM) and others rank among the top four firms in several commodities. The movement of IOFs into the processing of several commodities represents a qualitative difference from the concentration within a single sector that has been relatively common throughout this century. One reason is that it allows such firms to cross-subsidize. Firms operating in more than one commodity can survive a major loss in one commodity area if they are making significant profits in other areas.
A third notable characteristic of the current situation is the vertical integration that has occurred in the food system. Although vertical integration began receiving considerable attention by farmers 30 to 40 years ago in the poultry industry, the complete integration from "seed to shelf' has occurred quite recently. IOFs are increasingly attempting to consolidate profits from different stages of production and processing through multiple coordination strategies, ranging from outright ownership to a variety of contracting arrangements.
Such arrangements often involve a single firm controlling all aspects in the production and processing of a given product, from control of the genetic stock through ownership of the brand name the product bears when it reaches the grocery store shelf. Such vertical integration played a key role in changes in the poultry sector over the last 30 years and is a major factor hastening the current transformation of the hog sector. While these issues would be significant in the context of the United States alone, the most meaningful changes in the concentration of agricultural markets in the last decade have occurred not at the national, but at the global level.
Concentration of control in some sectors of the global food system is not new. At the turn of the century, seven closely held family firms controlled the global grain trade. But it was not until the 1970s that the global grain market became so critical to the economic well being of grain and oil crop farmers in the United States.
As these farmers became more dependent on the global market to establish the price of their commodities, they again realized the unequal nature of the power relationship between themselves and the large IOFs. Although farmer-owned cooperatives control much of the origination of grain from the farm level, this grain must generally pass through the facilities of their competitors in order to enter the export market. Moreover, TNCs such as Cargill, Continental and ADM are involved in more than just delivering U.S.-produced commodities to other countries. They also own grain handling and processing facilities in many countries, facilitating commodity flows between multiple locations across the globe. Often profits generated in the food sector of the United States will be reinvested in other countries,leading to direct competition with food products produced in this country.
The diverse strategies employed by TNCs are making national boundaries increasingly irrelevant to commodity flows in the global food system. Many of the technologies employed in agricultural production and processing activities are decreasingly dependent on local conditions and therefore capable of being transferred to locations throughout the world. TNCs are able to combine these technologies with investment capital, which is also highly mobile, in whatever location offers the best (cheapest) combination of other, more "fixed" inputs, such as labor, raw materials and government regulations pertaining to labor and the environment. This process, known as "global sourcing," presents a major challenge to cooperatives which have ties to producers within a particular national setting and may not have the same freedom to shift production and processing around the globe.
Co-op Responses to the Challenge
Three cooperatives that have responded to this challenge through direct engagement in the global food system are Land O'Lakes, Harvest States Cooperatives and Farmland Industries. A few examples of the international activities of these organizations will highlight some of the ways that cooperatives are reacting to globalization of the food system.
Land O'Lakes is a regional supply and marketing cooperative with operations organized into four core businesses: Feed, Seed, Agronomy and Dairy Foods. This cooperative's involvement in the international arena has a dual focus: international marketing and international development. International marketing seeks to expand overseas markets for dairy foods and feed through direct sales, licensing of cooperative products for foreign manufacture and the establishment of foreign-based processing plants through ownership or joint venture.
International development serves a dual function, promoting rural development in under-developed nations, but also serving the function of long-term market development in these countries by establishing ties for the cooperative with local producers, distributors and processors. Land O'Lakes international activities include feed manufacturing in Poland and a range of technical assistance and training activities being carried out in Central and Eastern Europe and the former Soviet Union, which are seen as rapid-growth markets for Land O'Lakes' core businesses.
Harvest States is a regional grain marketing and farm supply cooperative active in exporting a wide range of agricultural commodities. Export sales are made both directly to end-users and through U.S. or foreign-based sales agents. The cooperative also participates with a transnational grain corporation in a joint venture established to export feed grains and shares a Mexico sales office with another large U.S.-based grain processing firm. Due to increased privatization of commodity purchasing in many importing nations, Harvest States has attempted to establish ties with end-users in these countries whenever possible.
The regional cooperative is also a member of a consortium of U.S., Dutch, Swedish, French and German cooperatives that together own nearly 48-percent interest in an international grain trading firm. The balance of this international firm is owned and controlled by a large, U.S.-based grain processing firm. Contacts initially fostered through this group have evolved into commodity trading relationships with the Dutch, Swedish and French members of this international consortium. Harvest States, like other cooperatives, seeks to maintain a balance between expansion of domestic processing activities and potentially rewarding, but often higher risk international investment.
Farmland Industries is a federated, regional cooperative active in producing, processing and distributing agricultural input and output products. Farmland, perhaps more than any other U.S. agricultural cooperative, has moved aggressively in recent years to expand its international involvement. Farmland currently exports grain and oilseeds, pet food, feedstuffs, fresh and processed beef and pork, lubricants and fertilizer. The cooperative's pork processing operations tend to be more geared to pork export markets than those of its competitors.
Farmland also imports crude oil and fertilizer inputs for further processing in the United States. In 1993, Farmland made an aggressive move to increase its presence in the international grain market by purchasing a Swiss-based grain-trading firm. The grain trading group—with offices in Geneva; London; Paris; Bremen, Germany; Buenos Aires, Argentina; and Memphis, Tenn.—is a truly transnational entity, with a worldwide network of buyer and seller contacts. This network provides the cooperative with the opportunity to more closely emulate the strategies of the grain-trading TNCs through the global sourcing of agricultural commodities. More recently, Farmland has taken steps that position it to copy other TNC's strategies, such as beginning export-focused pork processing operations in Mexico.
Lessons From the Responses
The international activities of these three cooperatives provide some examples of how U.S. agricultural cooperatives are interfacing with the global food system. Because these three are all large, regional, multi-commodity organizations, their activities cannot be said to be typical of international engagement by cooperatives, nor do they represent the full range of international activities by U.S. agricultural cooperatives. However, they do provide some insights that may be useful to other cooperatives confronting the global food system in various ways. The experiences of these cooperatives suggest both limitations that cooperatives may face as they compete in this system and advantages that they may possess relative to IOFs.
Limitations to International Involvement by Regional Cooperatives
The diverse interests of the membership in a regional, multi-commodity cooperative may present a structural constraint to international involvement. Investment in overseas assets or the importation of commodities for domestic processing or marketing tends to provide commodity specific benefits, and is likely to be perceived to provide greater benefit to some producers than others.
A related structural issue is that cooperatives often have ties to a domestic resource base that may limit their international activity relative to IOFs. These ties include both the "physical plant" owned by the cooperative in its country of origin and the assets owned by its farmer-members, the value of which the cooperative has been charged with protecting.
International investments tend to be higher in both actual and perceived risk than investments in domestic assets. Cooperative boards of directors, which must give final approval to such investments, are generally composed partially or entirely of farmers. These farmers, who must manage significant risk in operating their farms, may seek to avoid the additional financial risk presented by overseas investments.
Many of the international projects currently being undertaken by agribusiness firms entail long-term investments. Such long-term commitments of capital may indeed help ensure survival of the cooperative as a going concern, but may offer little short term benefit to cooperative members' primary business—farming—and may therefore be viewed with skepticism.
The fact that the term "cooperative" connotes different things in different countries may provide a symbolic barrier to international involvement by cooperatives. In countries where cooperatives were employed by the state in efforts to collectivize food production, farmers may initially be less willing to deal with an operation that is cooperatively organized. In this situation, cooperatives may lose an important edge—the knowledge of how to organize producers for collective action—that has traditionally offered them a comparative advantage over IOFs in competing for farmers' lousiness.
End-users in other countries often feel that by forming alliances with cooperatives they are aligning themselves with producers and thus assuring themselves of a consistent, high-quality supply of agricultural and food products. Furthermore, the organizational structure of regional cooperatives can provide for the identity-preservation of agricultural commodities from the farm gate through processing and export or through export in their unprocessed form to foreign-based processors.
Cooperatives are often seen as highly ethical, trustworthy business partners by agricultural entities in other countries. This may make them attractive to investors for developing nations seeking to avoid exploitation at the hands of TNCs.
As the macro-level trend toward globalization proceeds, it is constantly creating local and regional niches in the food system that cooperatives may be uniquely qualified to fill. For example, in some consumer markets, the reaction to globalization has been manifested in increased concerns about food safety and quality and in increased interest in alternative food channels.
Cooperatives can play an important role in this alternative food distribution system by using their marketing infrastructure to re-establish direct links between food producers and consumers, thereby alleviating concerns over food safety and quality. However, doing so will necessitate moving beyond traditional commodity channels to encourage their members to experiment with new products and production methods and seeking out new alliances with consumer groups.
As improved communication technologies facilitate the reorganization of highly centralized, corporate bureaucracies into more flexible, diffuse organizations, the federated cooperative system could be well -positioned to compete in a "post-industrial" food system. The federated cooperative system has the potential to offer such flexibility through encouraging autonomy and innovation at the local level.
The main objective of this article is to provide a broad conceptualization of the major issues faced by cooperatives during the ongoing globalization of agricultural and food markets. In addition to the potential advantages and limitations suggested by the experiences of three large regional cooperatives and described above, there are other more general considerations for cooperatives to keep in mind as they engage the global food system. In particular, cooperatives may be able to draw on features of their organizational structure and history in developing creative responses to globalization. Here are some examples:
In the final analysis, there is no one, single role for cooperatives in the global food system, but potential many varied roles. This is in part because the globalization of agriculture and food does not imply one monolithic global market, but many intricately intertwined local, regional and international food production, distribution and consumption networks. Some large, regional cooperatives, such as those analyzed here, can and will persist for a number of years in head-to-head competition with the transnational IOFs on a global scale, much as they have done for years on a regional and national scale. These organizations may continue to provide the "competitive yardstick" function in the global marketplace that Nourseenvisioned them providing in the national economy. However, these cooperatives may be able to improve their competitive position vis-a-vis IOFs by seeking out innovative new working relationships with their local associations and farmer members that involve developing customized products for different groups of consumers. Other cooperatives will operate entirely in these niches created by globalization, helping to shape and create alternative food systems.
If U.S. farmers are to maintain a direct presence in the international marketplace, cooperatives must explore the ways in which their organizational structure is enabling in an international context, and must take account of social and cultural, as well as economic, benefits to international cooperation.