Unstable farm markets prompt more growers to look to bargaining co-ops

Rural Cooperatives, July-August, 2002 by Dan Campbell

Bargaining co-ops and production contracts have long played a role in helping farmers and ranchers secure a fair price for their products, but the wilder-than-normal swings in commodity prices in recent years may prompt even greater use in the future. Representatives from the beef, poultry and processing tomato industries, who participated on a panel discussion at USDA's 2002 Agricultural Outlook Conference each described various ways these tools can help producers meet the challenges ahead.

Dan Looker, business editor of "Successful Farming" magazine and the moderator of the panel discussion, said he began noticing a sharp increase in interest in bargaining co-ops about four years ago, when a group of "progressive farmers from Iowa, Illinois and other Midwestern states gathered to discuss something that has been around for decades: bargaining co-ops. They began making trips to California, Maine and other states where these types of coops have been operating. Because of that, our magazine also rediscovered bargaining co-ops and began writing about some of the more successful co-ops," Looker said. "Successful Farming" also sponsored a "Marketing Clout" conference last winter featuring presentations by bargaining co-op leaders.

Tomato growers struggle to find market balance

"An old pot still cooks good soup," John Welty said, quoting an old French proverb. Welty, executive vice president for the California Tomato Growers Association (CTGA), was referring to the Capper Volstead Act, which allows producers to jointly discuss price and trade information, and has helped to foster thousands of cooperatives and bargaining associations. Welty is well practiced in the art of bargaining for a crop price, having long led CTGA in its efforts to bargain for fair prices for California tomato growers. California farmers produce about 95 percent of the nation's supply (and 40 percent of the world supply) of processing tomatoes.

The role of bargaining cooperatives, such as his, is still not well understood, but they play a vital role in promoting the interests of farmers--particularly producers of specialty crops who rarely qualify for subsidies or other support programs, Welty said.

For the canning tomato industry, reports given at the start of the conference that the agriculture economy is "reasonably stable" are far from accurate, Welty said. The market may have stabilized for producers of subsidized crops, but specialty crop producers have suffered a 20-percent decline in prices during the past five years. "That's a huge drop in net income," he said.

Production costs are high for specialty crops--averaging $1,800 per acre--and margins are "razor-thin," usually 5 percent or less, Welty said.

California, which produces 350 crops--including the lion's share of many of the nation's specialty crops--long felt it was insulated from the supply-price roller coaster that farmers in most other states live with. Growers in the Golden State have long used crop diversification as a primary risk management tool. But that has profoundly changed in recent years, with markets for California specialty crops "one by one succumbing to over-planting, over-supply and eroding prices," Welty said.

CTGA has long argued that commodity program "flex acres" not be allowed to be switched over to vegetables, because this kind of shift would distort vegetable markets that had previously been free from subsidy influence. Welty noted that even small shifts in program crop land into vegetable crops could "ruin the markets with near-instantaneous over-supply.

"And low and behold, that prophecy became reality," Welty said. "While we were able to keep the wolf away from the door for seven years, as program crops lost their subsidies (and other major producing parts of the world did not remove theirs) world prices plummeted." U.S. program crops began moving "freed-up acres into high-margin crops," Welty continued. "This trend has completely undermined the cornerstone of the risk-management strategy of specialty crop growers."

Contracts can spread risk for specialty crop farmers

Almost one-third of U.S. crops and livestock and 40 percent of U.S. fruit and vegetables were grown under production contracts in 1997, according to USDA data he cited. That's more than double the amount grown under contract a decade before, Welty said.

With contracts, the handler shares the risk with the grower, he noted. Quality incentive contracts reward better quality crops, which also benefit the processor.

"The ability to transfer fide of vast quantifies of fresh, red-ripe, perishable tomatoes in a manner that shares risk in a rational fashion is a major asset, and should not be trifled with," Welty stressed.

Growers used to worry about large food companies vertically integrating, buying land, buildings and production capability, Welty noted. "But why own farms if you can own the farmers?" Welty said, quoting ag law expert Neil Hamilton, stressing the vulnerability of farmers in the marketplace.