Republic of the Philippines Document Code: AAO-TMP-009

UNIVERSITY OF ANTIQUE Revision No.: 00

Sibalom, Antique
Effectivity Date: January 2016
Telefax No. (036) 543-8161
E-mail: ua@antiquespride.edu.ph Page: 1 of 27

DR. SUSAN
F.
COOP 5 COOP STRATEGIC MARKETING MGT.
ATIENZA

Professor
susanatienza
12@yahoo.c
om
#097556348 MODULE/HANDOUT FOR COOP 5
27 FIRST SEMESTER: SY 2022-2023

COLLEGE OF BUSINESS AND ACCOUNTANCY

cbm.secretary@antiquespride.edu.ph

Dear Esteemed COOP 5 Students,

Greetings!

Your welfare and safety is our greatest concern amidst this unexpected NCOVID19 Pandemic. But,
it doesn’t mean that everything has to stop. We are practicing now the “New Normal” class.

My dear COOP 5 students, while you are staying at home, and, probably helping your parents meet
both ends, let us do something to also enhance your learnings. Thus, this module is prepared for
you.

Each Chapter is composed of three Parts:

 Presentation of the subject matter and its supporting discussions
 Chapter Activity/activities
 Questions or exercises for you to do which would include:
Objective Quizzes, or
Simple essay questions
 Midterm and Final Exams are to be based on this Module

Those of you with internet connection, you may send the answers to me through this email:
susanatienza12@yahoo.com, or to my messenger.

Those without internet access, please coordinate with your class adviser for the schedule of
collecting the hardcopy of your answers to the Chapter quizzes/midterm/final exams, exercises,
among other simple requirements.

Enjoy, and please keep safe always!

God bless!

DR. SUSAN F. ATIENZA

1
 Welcome my dear students!!!
How is your “stay at home” for quite a
time?
I am sure that you are already accustomed
to the “New Normal” lifestyle caused by
our “unseen” enemy – the New corona
virus ‘version’ 2019.
Let us not be afraid of ‘IT’, rather, let us
eat more of natural food and plenty of
fruits found in your backyard or in your
farm. This is the best way of boosting our
immune system against this ‘unseen
enemy’.

Welcome!!!

Ma’am Susan

How can we sell our produce?

2
 List of Abbreviations
NGO Non-Governmental Organization

Glossary
Chain operator - A cooperative providing services to enhance the efficiency, effectiveness and quality of
the activities and products of its members (and possibly non-members), buying their
products and adding value to them before selling.
Chain supporter - A cooperative providing services to enhance the efficiency, effectiveness and quality
of the activities and products of its members (and possibly non-members) without
buying or owning the product.
Consumer - The consumer consumes the product. His/her satisfaction is the objective of all other
customers.
Cooperative marketing - Regrouping various marketing services a cooperative can provide, i.e. collective
marketing as well as marketing services that support the individual marketing of its
members.
Customer - The cooperative’s customer is the individual or organization that actually pays for and takes
delivery of the goods from the cooperative. This can be, but is often not, the final
consumer, whose satisfaction is the objective of all other customers.
Fair Trade - A trading partnership, based on dialogue, transparency and respect, that seeks greater
equity in international trade. It contributes to sustainable development by offering
better trading conditions for, and securing the rights of, marginalized producers and
workers – especially in developing countries. Source: Fair Trade Glossary,
http://www.fairtrade.net/fileadmin/user_
upload/content/2009/about_fairtrade/Fair_Trade_Glossary.pdf (accessed 19 Oct.
2011).
Marketing - is everything related to selling the product: assessing needs, defining markets, storing,
certifying, promotion, and so on.

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Marketing mix - A marketing mix is composed of 5 elements: product, price, promotion, packaging and
place. These elements are also referred to as “the 5 Ps”.
Market development - Market development is the expansion of the total market for a product or
company. This can be achieved by (1) entering new segments of the market, (2)
converting non-users into users, and/ or (3) increasing usage per user.
Market information - Any information used or required to support marketing decisions
Market opportunities - Newly identified trend in terms of needs, wants, or demands a firm can exploit
because it is not being addressed by competitors.
Source: http://www.businessdictionary.com/definition/market-opportunity. html
(accessed 19 Oct. 2011).
Market penetration - Market penetration occurs when a company enters/penetrates a market with
current products.
Source: http://www.encyclo.co.uk/define/Market-penetration (accessed 19 Oct. 2011).
Market segmentation - Market segmentation is about understanding the needs of customers and how
they decide between one offer and another.
Market share - A percentage of total sales volume in a market captured by a brand, product, or
company. Source: http://www.businessdictionary.com/definition/market-share.html
(accessed 19 Oct. 2011).
Marketing strategy - A strategy that integrates an organization’s marketing goals into a cohesive whole.
Source: http://www.businessdictionary.com/definition/marketing-strategy. html
(accessed 19 Oct. 2011).
Market transparency - A market in which current trade and quote information is readily available to the
public.
Source: http://financial-dictionary.thefreedictionary.com/Transparent+Market
(accessed 19 Oct. 2011).
Organic agriculture - An ecological production management system that promotes and enhances
`biodiversity, biological cycles, and soil biological activity.
Source: http://www.nal.usda.gov/afsic/pubs/ofp/ofp.shtml (accessed 19 Oct. 2011).
Production standard - The quality levels relating to production.
Specialized markets - Specialized markets refer to those markets which require that the cooperative
products meet certain quality standards before they can be sold.

4
Transaction cost - Mainly, costs of the preparation and execution of business transactions, costs of
collecting and processing relevant information (in order to indentify the best offer,
business opportunities and risks). Costs of drawing up agreements and controlling their
implementation.
Source: H.H. Münkner and J. Txapartegi Zendoia: Annotiertes Genossenschaftsglossar,
Annotated Co-operative Glossary, Glosario cooperativo anotado (Geneva, International
Labour Organization, 2011).
Upgrading - The concept of upgrading highlights options available to farmers and cooperatives for
obtaining better returns from their activities.
Source: http://www.kit.nl/net/KIT_Publicaties_output/ShowFile2. aspx?e=1687
(accessed 19 Oct. 2011).
Value chain - A value chain refers to the entire system of production, processing and marketing of a
particular product, from inception to the finished product.
Since we don’t have a definite textbook for this Subject, with due respect and acknowledgement,
let me introduce and discuss to you Cooperative Strategic Marketing based on the two references, but,
with parallel concepts from the Articles published and written by the following 1. Professors from
Oregon State University(Nov.09,2014), 2. by Phil Kenkel and Bill Fitzwater of Oklahoma State
University (August 21,2019), 3. The Cooperative Marketing Manual of the Federation of Southern
Cooperatives/Land Assistance Fund (2006), 4. the MODULE 4 Cooperative Marketing of the
Managing your Agricultural Cooperative, My.COOP, is licensed under a Creative Commons
Attribution-NonCommercial-ShareAlike 3.0 Unported License, Design and production:
International Training Centre of the ILO, Turin Printed in Italy (The legal conditions of this copyright
procedure are expressed here: http://creativecommons.org/licenses/by-nc-sa/3.0/). 5.
http://www.utzcertified.org(accessed 19 Oct.2011), and 6.
http://mpra.ub.uni-muenchen.de/41840/MPRA Paper No.41840,posted 09 Oct 2012 20:07 UTC,
“Strat.Mktg.. A Literature.

To start with, let us know what this Module is all about.

This module is about cooperative marketing. The members of cooperatives are farmers and and
mostly are the small business sectors of an industry or a community, who primarily concerned with
production and the provision of the basic needs of their respective members. This requires a variety of
support services. A cooperative can play an important role in meeting the needs of its members by
providing them with services that help them optimize their production and sales.

5
 When farmers for example do not produce for their own use but aim to sell their produce on the
market, they might need additional services: for example, transporting, and sometimes sorting and
grading and adding value through processing. Another important group of services in which many
cooperatives are engaged is related to the marketing of produce. Compared to customers for their
products, farmers and community-based business sectors are small-scale and have corresponding low
negotiating and bargaining power. At the same time, the transaction costs for collection and marketing of
agricultural products and goods for the individual members are very high. To address these challenges,
cooperatives can support them in marketing by collective marketing or by providing marketing services,
for example, the provision of market information or the establishment of contacts between farmers and
potential buyers or between the small-scale business owners and their potential buyers. Marketing is
everything related to selling a product/good: assessing needs, defining markets, certifying products,
promotion, and so on. Marketing is based on thinking about the business from the point of view of the
customer, and considering customer needs and satisfaction. 5 Marketing services focus on smooth
marketing of the product. For example, marketing services could involve transport or storage of the
products or, for example, sending information from the production area to the market (e.g. on products
available, volumes) and from the market back to the production areas (e.g. on prices and supply levels,
consumer preferences and changes in taste). If marketing services are improved, this will contribute to
better performance by the farmers/members.
With the concept of the value of strategic marketing for cooperatives, this Subject – Cooperative
Strategic Marketing Management, is Composed of Three (3) Modules. These are:
Module 1 – Introduction to Cooperative Marketing
Module 2 – Cooperative Marketing and Marketing Services
Module 3 – Strategic Marketing and the Issuance of Certification as a Certified Coop Marketer
Learning Objectives:
After studying this subject, the students will be able to:
a. Understand the concept and importance of marketing to cooperatives;
b. Explain how a cooperative can get to know its customers;
c. Explain the 5 Ps of a marketing mix;
d. Identify ways in which a cooperative and its members can improve their marketing
performance;
e. Identify target markets more efficiently;
f. Propose how a cooperative can adequately respond to changes in tastes and preferences; in
the fast –advancing technology and the like; and,

6
g. Distinguish different methods of “upgrading”, and propose relevant certification schemes and
explain the advantages and disadvantages of being a certified cooperative marketer.

ARE YOU READY NOW??????????

Fasten your “seatbelts”!!!!!!
Let us START NOW WITH OUR ------MODULE 1

“Tara na mga kasUbAy….”

MODULE 1
INTRODUCTION TO COOPERATIVE MARKETING
7
This Module is about Introduction to Cooperative
Marketing.

Marketing is everything related to selling a product: assessing needs, defining markets, storing,
promotion, and so on. Marketing is based on thinking about the business from the point
of view of the customer, and considering customer needs and satisfaction.

How can I sell these?

The cooperative’s customer is the individual or organization that actually pays for and takes delivery of
the goods from the cooperative. This can be, but is often not, the final consumer, whose
satisfaction is the objective of all other customers. The needs of your customer, however,
depend on the demands of his or her customers, etc.

Before we attempt to sell that beautifully-smiling caterpillar, and the well-

rested bunny, let us learn some concepts about cooperative and

8
 how is strategic marketing becomes very useful or important to
each and every COOPERATOR-MEMBER
What is cooperative marketing?
According to an Article on “Cooperative Marketing” (Marketing-Schools.org, 2012), and I quote:
‘Cooperative marketing is any agreement to combine marketing efforts, and thus it can
appear in many forms. Complementary companies, as well as direct competitors, can create
effective and mutually beneficial cooperative marketing campaigns. ‘
In combining the efforts of an entire industry or the entire small-scale business sectors into one
(1) marketing campaign, everyone will benefit even if they are competing for the same peso – income.
Resource-sharing is a significant reason to cooperatively market goods and services. A “buy-
and-sell” industry can purchase the produce of a sweet-potato (kamote) farmer-cooperative. They may
sell these “kamote” produce to a nearby “kamote” – chips and candy cottage factory- and this cottage
factory, may sell their products to the surrounding small-sclae retail-cooperatives.
Cooperative marketers often use their cooperative power in collective bargaining as well. How
is this “power” erned?
EASY ----- one “kamote” farmer may have difficulty getting a “good” price for his
produce. 50 “kamote” farmers joining forces as a cooperative can successfully control a significant
portion of the supply, THUS, increasing their bargaining power for a “good” price.

Originally, the term “marketing” referred to going to the marketplace to buy or sell goods. The
producer would sell his or her goods directly to the consumer. Today, the producer and consumer do not
usually meet face-to-face. Farmers do not deliver products directly to consumers, but they still need to get
their goods to the consumer in some way. Farmers sell products to a trader or processor. Cooperatives can
assist in this, by providing marketing services, and linking farmers to these customers. Marketing services
encompass a range of activities. Examples of marketing services are: informing the market about products
available, and the other way round, informing members about customer preferences, price information
services and branding. We also consider collective marketing to be a service that a cooperative can
provide to its members(My.Coop Managing your agricultural cooperative Managing your Agriculture
Cooperative).

On the other hand……….

Why Are Cooperatives Formed?

In one sense, the cooperative form of business needs no more justification than do
proprietorships, partnerships or investor owned corporations. Businesses are formed when the owners
perceive a positive return on investment from providing some combination of products and services to
customers. A cooperative is simply an alternative structure for organizing economic activity. The major

9
rationale for forming a cooperative is to improve the economic well-being of the potential members. In
almost any situation where there is a potential to form a feasible business there is the potential to form
that business as a cooperative and, in fact, cooperatives are successfully operating in almost every
business sector. There are however situations where the cooperative form of business is particularly
effective. This is particularly true in the case of agricultural cooperatives.

NOW… successful and “long-standing cooperatives formulate and or develop important

sustainable strategies in order to survive and, hence, continuously serve the members. One of these
important sustainable strategies is--- MARKETING STRATEGY.”

WHAT IS ‘MARKETING STRATEGY’?

Strategic marketing management is the process of implementing your business’

mission through specifically focused in the maximization of sales.

WHILE…

Strategic Management is defined as: “The art and science of formulating,

implementing,and evaluating cross-functional decisions that enable an organization to achieve its
objectives. This definition implies that strategic management focuses on integrating
management, marketing, finance/accounting, production/operations, research and development,
and information systems to achieve organizational success. --- this term, Strategic Management
is synonymous with the term – Strategic Planning (David 2011).

Now, how is strategic marketing related with

cooperative management?

History of Strategic Marketing Management

Strategic marketing management is part of an organization’s strategic plan as a whole.

10
 Initially, strategic marketing management and otherwise was simply concerned with
sales, costs, and profits a sale of a certain product could earn.

Strategic planning are plans that involve more than one (1) year. Thus, this needs
forecasting. Forecasting is described as “intelligent guess”. And, it involves several techniques
that produce: trends at the time, predictions concerning sales, costs, and profits.

In the 70s and 80s, strategic planning placed focus on overall direction and control over
planning. A bit of forecasting was involved then, but, the main focus was on the business side of
things(how to sell at a profit).

At present, we find ourselves in the period of strategic management. Strategic marketing

management uses all of its previous strategies and techniques s and combine each of them into
one. The idea is to use all of these techniques and strategies to be able to arrive at the best
combination or method in order to better manage the plan at hand.

Examples of strategic marketing management

Take note, strategic marketing management involves making strategic decisions within
your current marketing plan in order to maximize the implementation of your plan which
involves maximum sales and hence, maximum profit for a satisfied customer or group of
customers.

A good example of this would be Apple and how they market themselves.

Before the NCOVID 19, there was smartphone craze. It seems that everybody wants to
own a smartphone. There weren’t many options for phones on the market.

Here comes Apple amidst this pandemic caused by NCOVID 19. With their strategic marketing
management, they saw a need for a product on the market and made the necessary decisions and
implemented a strategy. Now, almost everyone has an iPhone in their pocket, especially
University students, teachers and faculty (not to mention those who are “work from home -
WFH”.)

In fact, in its early years, Apple made all of their decisions based on forecasting and
strategy. For instance, the Apple logo is very simple in its design because they wanted it to be
easy to remember. Hence the name “Apple” as well.

It was a combination of all of these decisions and the implementation of their strategic
marketing management that made their world-wide fame possible.

The benefits or advantages of strategic marketing management

The idea behind strategic marketing management is to adapt to your market as things
change around you like from an urban market to rural market; from the nirmal situation before

11
 the NCOVID 19 pandemic, and, during this “new normal” situation. The goal remains the same,
but the path that leads you towards your goal can change.

The benefits of implementing strategic marketing management are fairly recognizable in

the business world. Here are a few of the advantages in implementing a strategic marketing
strategy:

 A better understanding of the market

The research involved in properly implementing strategic marketing management will

inevitably end in a better understanding of your given market. Research regarding domestic and
international markets, competition, and market trends will need to be conducted.

 Helps identify the strategic direction

Strategic marketing management involves making better decisions that align your plan
with the business’s or company’s goals.

 Can have a big pay off

If implemented correctly, strategic marketing management can earn some impressive

results for a business. The result could be a better handle on budget, and an overall increase in
the sustainability of a business.

All in all, there are many advantages to this style of management. By implementing
strategic marketing management, you’re making strategic decisions to better your business and
your understanding of the market as a whole.

Disadvantages of strategic marketing management

As helpful as strategic marketing management can be for a business, there are some
drawbacks. Here are some disadvantages you should consider before implementing strategic
marketing management:

 Budget vs cost

As we’ve stated a few times before, strategic marketing management often involves
making quick and game-changing decisions. Marketing campaigns are expensive, advertising is
expensive, simple analysis and research can end up costing money. At the end of the day, you
could make a decision that can greatly affect the end cost of the campaign. If affected too much,
the budget will be blown.

 It’s very time consuming

12
 Strategic marketing management can take quite a long time to research and plan. The
process should be very precise, which means that the initial planning should be, too.

 It may not pay off

Making these strategic decisions may not end up working out in the end. They are often
risky, which means that you could end up with nothing to show for your efforts at the end of the
period. As you may already know, marketing plans, strategic or not, can often take months to
reach their end. That means you may end up wasting not only a lot of your own time, but
everyone else on the marketing team may end up doing the same.

Ok.

Please put your pens and modules aside.

Let us do some exercises.

Can you sing with action our most fave song: “My toes, my knees;
My shoulders, my head
My toes, my knees
My shoulders, my head…… continue singing
PLEEEEASE!!!!!!!!!!
Shall we have another style of exercise? Okay.
Please get your Module and pens and answer the following:
Explain in your own understanding the following terms: (5 points each)
Instructions:
- Explain the terms in your own understanding in 2 sentences only
- Deadline is one (1) week upon receipt of this Module (October 16, 2020 – anytime of
the day)
1. Production Standard
2. Cooperative Marketing
3. Value Chain
4. Fair Trade
5. Marketing Strategy
6. Cooperative Management
7. Consumer
8. Specialized Markets
9. Marketing Mix
10. Customer

13
 These are just some of the major issues that arise when practicing strategic marketing
management. Just like any other methodology, marketing strategy, or business plan in general,
there are things that can and will go wrong.

Is strategic marketing management right for your team?

Now the impending question comes up: is strategic marketing management right for your team?
The answer to that question is a simple one. If you and your team are willing to combat the
negatives in pursuit of the positives, then yes, it could work.

But, like we explained above, there will be drawbacks no matter how you look at it. If you’re
running a massive corporation with lots of money to spend in the budget, a wrong decision may

14
not affect you so badly. However, for a small startup with just a few employees, a simple mistake
could lead to a massive blow to the entire company.

The key is research. Precise decisions and calculated risks are all going to be based on market
trends, competition, and the customer.

Hello!!!
How are you today?
Shall we have an activity first before we go to the next part of our exercise? Okaaaay.

Spot the Symbol

Hone your visual searching skills with this table featuring many different
symbols. Count how many times the three at the top appear in the entire
table, spending 30 seconds on each.

15
How did you find the game above?

I have here a very nice mind-exercise for you to do too.

This is just a simple recall of our past lessons.

Please answer this and pass thru your LMS link.

1. What is referred to as going to the marketplace to buy or sell goods?

2. What is the process of implementing business mission focused in the
maximization of sales?
3. What are the plans that involve more than one year?
4. A bit _______ was involved in strategic planning.
5. _______ regarding domestic and international markets, competition,
and market trends will need to be conducted.
6. What are the disadvantages of strategic marketing management?

16
17
General FAQ
What is the role of strategic management in marketing?
If implemented correctly, strategic marketing management can yield some impressive results for a business. Having
a strategic approach to your marketing management can mean better budgeting, better allocation of resources and
overall better marketing results.
What are the fundamentals of strategic marketing management?
The fundamentals for strategic marketing management include differentiation, positioning, and segmentation, as
well as tools like SWOT analysis and The BGC matrix.
What is an error analysis in strategic marketing management?
Error analysis in strategic marketing management involves the compilation, study, and analysis of any errors made
during the strategic marketing management process.

(https://airfocus.com/glossary/what-is-strategic-marketing-management/#:~:text=Strategic%20marketing
%20management%20is%20the,order%20to%20better%20that%20plan.)

Economies of Scale

When the per-unit cost of an operation decline as the number of units increases there
are positive economies of scale. Economies of scale are a classic rationale for starting
and operating a cooperative. The per bushel cost of a 1M bushel grain storage
structure is typically half that of a 10,000 bushel facility. It is easy to see why producers
might want to join together to form a grain storage or fertilizer warehousing cooperative
since the cost of jointly owning and operating those functions would be lower than
investing in on-farm grain and fertilizer storage. Scale economies also often extend to
purchasing and marketing. Sourcing inputs or marketing commodities requires
someone to constantly monitor the markets and buy or sell at the appropriate time. The
per-unit cost of monitoring and making those transactions declines as the volume being
handled increases. Economies of scale is one of the rationales for almost every
cooperative although it is more obvious in some situations than in others.

Missing Services

Entrepreneurs are always searching to identify a product or service that customers are
willing to purchase at a price that will cover the cost of production and provide a
reasonable return on the invested capital. The perception of a missing service can be a
rationale for establishing a new business. Many cooperatives are formed to provide a

18
missing service. In many cases that service is somewhat specialized or focused on a
particular group of users and has not caught the attention of the broader investment
community. Rural electric cooperatives began forming in the late 1930’s to bring
electricity to rural America. Investor owned utilities were not interested in investing in
electrical infrastructure in rural areas because the customer density was much lower
relative to urban areas. Today’s rural electric cooperative system which controls 44% of
the lines in the U.S. was clearly created to fill a missing service. Another example of
filling a missing service would be the establishment of organic food stores in the early
days of the organic movement. The customer base for organic foods was too small to
interest the general business community, That led organic food consumers to form
cooperatives to provide the missing service of retail organic outlets. As the demand for
organic foods has grown those cooperatives continue to prosper but face competition
from traditional retail outlets that have now expanded into organic product lines.

Risk Reduction

Every consumer and every business faces risk and it is particularly prevalent in
agriculture. Some risks can be eliminated but in many cases the only solution is to
share the risk with a pool of other individuals or businesses. Risk pooling is the sole
purpose of insurance cooperatives. Like all insurance companies, cooperative
insurance companies allow policy holders to pool risk and pay a share (the premium) of
the risk each year while avoiding a catastrophic risk. Because the policy holders in an
insurance cooperative are owners and receive the residual profits, they have a built in
incentive in controlling risk. For that reason, many cooperative insurance companies
have active and effective programs to help their owner-members reduce and control
loses.

Many other types of cooperatives have risk pooling as part of their functions. Many
agricultural marketing cooperatives have marketing pools. That allows the pool
participants to receive the average annual price for the grade and quality of commodity
they placed in the pool. They eliminate the risk of selling at a below average price at
the cost of missing the opportunity to sell at an above average price. Many cooperative
members conclude that they cannot beat or time the market and choose to eliminate
their market price risk through the marketing pool. Other cooperatives reduce risk
through their everyday operation. If a farm supply and marketing cooperatives chooses
to operate with a single patronage (profit distribution) pool the risks of losses in
agronomy or grain handling are shared. The basic structure of shared services also
pools risks. If a producer operates his/her own sprayer or fertilizer applicator they stand
the entire risk of any breakdowns. When those services are provided by the
cooperative the cost of repairs are implicitly shared across all user through the
application fee. The cooperative member using the service does not bear the cost of
the applicator breaking down on his/her job.
19
Unique Role of Agricultural Cooperatives

As mentioned, there are some rationales for a cooperative that are somewhat unique to
or at least particularly prevalent in the agricultural industry. Agricultural cooperatives
often function as an extension of the farm firm. The cooperative extends the farmer’s
business backward into the input supply chain or forward into the marketing and
processing value chain. This extension of the farm business is referred to as backward
integration into the input supply chain or forward integration into the marketing chain.
As we will see later, this concept of the agricultural cooperative serving as an extension
of the farm business is the basis of cooperative taxation and the rationale for allowing
cooperatives to pass the taxation on distributed profits on to the farmer members. This
unique role of the agricultural cooperative also creates challenges for the manager and
board. Patrons are affected by both the price paid or received and from the share of the
cooperatives profits. Increasing profitability by purchasing the member’s commodities
at a lower price does not benefit the member because the increased profits came from
reduced commodity payments. The cooperative board and manager have to focus on
increasing the profitability of the combined farm and cooperative system.

If producers faced the perfect markets that you studied in your introductory economic
class they might not be interested in backward or forward integration. Instead they
could simply reinvest to grow their farm business (grow horizontally). For example, if
markets were perfect, a cotton farmer to invest in expanding his or her cotton farm
rather than investing in a cotton gin (either individually owned or collectively by forming
a cooperative). As you might guess, markets are not perfect and there are advantages
for producers to form cooperatives to supply inputs (backward integration) or market
and process commodities (forward integration). In a very general sense, market failure
or at least market imperfections is behind some of the classic rationales for the
formation of agricultural cooperatives. Market Failure

In the case of perfect markets (which only exist in textbooks) all products are identical,
there are large numbers of buyers and sellers, all market participants have perfect
information and producers can enter or exit markets or reallocate to different products at
no cost. In those conditions of perfect competition there would be economic rationale
favoring the cooperative business form. The U.S. agribusiness sector, like most
industry sectors in the U.S. does not have all of those characteristics of the perfectly
competitive market. Those deviations from the “perfect market” are termed “market
failures” although perhaps “market imperfection” would be a better term. Regardless of
the term, it is easy to see how these deviations from the perfect market create
incentives for producers to form cooperatives.

Offsetting Monopoly Market Power

20
A primary characteristic of a competitive market is the existence of a large number of
buyers and sellers. In that situation, no market participant has the ability to influence
the market price. Fertilizer manufacturing, petroleum refining, food processing and
many other agribusinesses are all characterized by a relatively small number of firms on
one side of the market. Much of this is due to economies of scale. A large flour mill or
a large fertilizer manufacturing plant has a lower cost per unit relative to a small one.
When scale economies exists, larger firms grow and smaller firms go out of business or
merge. That leads to an industry structure with a limited number of firms. When there
are a limited number of firms in an industry, those firms can have market power, i.e.
they have the ability to influence the market price. The most extreme case is that of
monopoly (one supplier) or monopsony (one buyer). The need to offset the market
power in markets with a small number of buyers or sellers is a classic rationale for the
formation of a cooperative.

Most of our legacy agricultural cooperatives in the U.S. were established in the 1920s
and 1930 during a period of time when large banks and railroads had high levels of
market power in rural America. The Capper Volstead Act which provides the legal
foundation for U.S. agricultural cooperatives was a direct result of anti-competitive
environment during that period of time. For that reason, the importance of offsetting
market power as a rationale for cooperative formation cannot be overemphasized.

Spatial Dimensions of Markets

In agricultural markets there are also often “spatial” dimensions to the market or “spatial
economic forces”. When the cost of transportation is high, relative to the value of the
commodity, or the product is perishable or difficult to transport, there can be limited
competition in a geographic area. For example, a dairy farmer might have only one
logical choice to market their milk even when there are multiple milk processing plants
in the U.S. This is a common situation in many rural areas particularly in the Great
Plains states. In this case the buyer or seller is characterized as a spatial monopolist
and has market power within a geographic area.

There is often a second dilemma in markets with limited competition within a

geographical area.. Adding more buyers or sellers might address the market power but
the least cost structure in terms of manufacturing and transport costs might involve a
single buyer or seller. For example, if multiple milk processing plants operate within a
county they likely have overlapping routes picking up the producers milk. The plants will
also be smaller than the most efficient scale and therefore have higher cost. The most
economic structure for transport and processing might involve a single firm. However,
the existence of a single milk processor, organized as an investor owned firm raises the
danger of market power. The milk processor would have a spatial monopoly and could

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use their market power to offer the producers an unfairly low price. A cooperative milk
processing plant provides the ideal solution. It allows the producers to gain the
transportation and scale economies of a single large processing plant without concerns
over market power. Because the cooperative returns all of its profits to the members
supplying the milk, it has no incentive to offer unfair prices. Cooperatives have a very
large market share in dairy processing, reflecting the fact that producers understand the
economic rationale that a cooperative can provide the scale economies of a single plant
without concern over unfair pricing.

Transaction Costs

You might recall that in our perfect market, every participant had perfect information and
transactions are costless. The reality of many agricultural markets is that information is
imperfect and transaction costs can be significant. A producer may not have access to
the prices at all possible outlets and getting current bids may involve both a monetary
and time cost. The lack of complete price information can be a particular problem for
fruit and vegetable producers and other farmers with perishable products. The producer
has a limited time to market their commodities and may sell at an unfavorable price due
to limited information. Providing price information and facilitating transactions is a key
rationale for many specialty crop marketing cooperatives. There is a successful apple
marketing cooperative in New York that only supplies market price information. Their
members make the actual transaction and package and transport the product. The
cooperative still increases member profits by over 10% simply by giving the producers
complete access to prices at all possible outlets.

Bulk commodity marketing cooperatives still play a role in reducing transaction costs.
Individual grain producers would find it expensive and time consuming to meet the
contract specifications of a flour mill or to export their grain. The grain marketing
cooperative reduces those transaction costs by marketing for the combined
membership.

Information can also be a part of the value of a commodity and cooperatives can create
value by helping to certify and communicate that information. For example, the grade
for a product may not represent all of the quality characteristics. A carton of eggs might
be graded “Grade A Large” but they might also come from chickens raised in free range
conditions, A steak graded “choice” might originate from grass fed beef. Cooperatives
such as “Organic Valley” have created value by conveying information to consumers.
The “Organic Valley” brand conveys information about how the milk was produced
which is important to some consumers.

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Coordination

Most agricultural products are processed or at least handled and packaged, before they
reach the final consumer. Processing operations have high fixed costs and are most
efficient when operated at a constant volume which is at or near their maximum
capacity. That creates the challenge of coordinating production with processing. As an
example, consider a cull cow processing plant that supplies ground beef to hamburger
chains. Ideally, the plant would operate at full capacity year around. Unfortunately,
most beef producers cull cattle seasonally. That creates a challenge for the plant to
procure a constant year around supply.

Theoretically, a processor can solve the problems of coordination through contracts and
date based premiums and discounts. Contract coordination is common in some
aspects of agricultural such as broilers and hogs. Contracts can also be risky and
expensive. Also, since there is often a single processor dealing with many producers,
the producers may fear an imbalance of market power. Having the producers forward
integrate into the processing operation has the potential to achieve gains from
coordination. Because they share in the resulting profits, the producers are often much
more willing to match the timing of delivery with the processing plant’s needs. There
can also be further potential gains from producing the crop or livestock varieties and
sizes that lowers processing costs and/or creates the highest value in the final product.

Access to the Market

Another rationale for the formation of agricultural cooperatives is simply to have access
to the market. The least cost shipping bulk commodities to many markets involve
transportation by train or barge. Induvial producers do not have rail or river access and
do not have the necessary volume for a full train or barge shipment. Food processors,
such as flour mills have strict quality standards and require sellers to have large liability
insurance policies. A typical flour mill will purchase over 1 million bushels a week.
Flour mill buyers are therefore not interested in dealing with suppliers that cannot
provide that level of volume on a weekly basis. Similarly, a grocery chain may purchase
millions of eggs per year. They will only purchase from suppliers that can meet
extensive food safety standards and who can supply their needed volumes. In all of
those situations, marketing cooperatives provide producers with the ability to access the
market. The cooperative has the scale of operation, food safety expertise, infrastructure
and expertise to access markets that are inaccessible by the individual producer.

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Concept of Competitive Yardstick and Invisible Benefit

A famous cooperative scholar, Edwin G. Nourse developed what is known as

the “competitive yardstick” school of thought on role of cooperatives. Under this
concept, the role of a cooperative is to that “the cooperative operating at cost (including
a normal return for capital invested) provides a measure of reasonable prices. The
competitive yardstick model implies that a major role for cooperatives is to maintain
competitive and efficient markets. This leads to a related concept that one benefit of a
cooperative is its “invisible benefit” in keeping the market competitive. Unfortunately,
that benefit is often not recognized until the cooperative disappears and the remaining
firms are free to exercise market power through unfavorable prices.

An interesting example of the competitive yardstick comes from rural electric

cooperatives. In most states, electric utilities are regulated by the state Corporation
Commission or similar entity. The assumption is that, in the absence of regulation, the
utility would use its monopoly power to charge unfairly high rates and generate
excessive profits. Rural electric cooperatives are generally exempt from regulation.
The reason for the exemption is that because of their cooperative business model, if a
rural electric cooperative were to charge excessive rates they would simply refund the
excess to the very same customers through patronage refunds. For that reason
regulators consider rural electric cooperatives to be self-regulating. One could also say,
that if we wanted a measure of the fair and reasonable price for electricity we could look
to rural electric cooperatives for a competitive yardstick.

Summary

Cooperatives are an alternative form for organizing a business. There basic rationale is
that they are providing a good or service that is demanded at a price which creates an
acceptable return to the member-owners. There are however some classic situations
where cooperatives are particularly effective. In terms of the general cooperative

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business model, typical rationales include: economies of scale, providing a missing
service and reducing or pooling risk. Those rationales also apply to agricultural
cooperatives. Agricultural cooperatives operate as an extension of the farm firm and
also often operate in imperfect markets. Some of the classic rationales for the formation
of agricultural cooperatives include: offsetting market power, addressing the spatial
dimension of many agricultural markets, providing market information and reducing
transaction costs, and coordinating production and processing. Most U.S. agricultural
cooperatives were formed to offset market power and cooperatives continue to have a
role in providing “a competitive yardstick” as to fair and reasonable prices and generate
an “invisible benefit” in keeping markets competitive.

MODULE 2

COOPERATIVE MANAGEMENT AND MARKETING

SERVICES

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Objectives of Cooperative Marketing
 Economic efficiency
 Shared resources
 Broader visibility
 Access to target market
 Consumer convenience

What is Cooperative Marketing?

Marketing is everything related to selling a product. Like:

Assessing needs; Defining markets; Certifying products; Promotion; Pricing, and
so on.
Copperatives support members by providing what we call:
Collective Marketing services. For example, the provision of market information or the
establishment of contacts between farmers and potential buyers.
Marketing is based on thinking about the business from the point of view of the customer,
and considering customer needs and satisfaction.
Marketing services focus on smooth marketing of the product. For example, marketing
services could involve transport or storage of the products or, for example, sending information
from the production area to the market (e.g. on products available, volumes) and from the market
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back to the production areas (e.g. on prices and supply levels, consumer preferences and changes
in taste). If marketing services are improved, this will contribute to better performance by the
member-producers.

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