Thus, processors have an incentive to procure production near their processing facilities. Timing of production is also critical. Tomatoes must be harvested immediately upon ripening and then processed quickly to avoid spoilage. The efficient operation of processing facilities and the effective processing of the harvest require that a processor’s deliveries be spread uniformly over an extended harvest period of 20 or more weeks. Similarly, processors specialize in producing different types of tomato products. Some plants produce only bulk tomato paste, which is then remanufactured at other locations into various processed tomato products, while others produce whole tomato products. The preferred type of tomato to grow depends upon the intended finished product. Delivery dates and product characteristics cannot be communicated effectively through spot markets. Nor will a central market work when processors are interested in procuring product only in the vicinity of their plants.Thus, the California processing tomato industry transacts essentially its entire production through grower-processor contracts. These contracts specify the specific acreage the product is to be grown on, variety of tomato to be grown, delivery dates, and premiums and discounts for various quality characteristics. Price terms in these contracts are set with the intervention of a producer bargaining cooperative.Cooperatives are firms that are owned by the producers who patronize them,blueberry grow pot although many cooperatives also do business with nonmembers. California is home to many large and important food-marketing cooperatives.

Producers who are members of a marketing cooperative essentially have vertically integrated their operation downstream into the processing and marketing of their production. A number of incentives can account for producer cooperative integration, including avoidance of processor market power, margin reduction, and risk reduction . Cooperatives are the leading marketing firm in several California agricultural industries including almonds , walnuts , prunes , citrus and raisins . However, the recent years have represented difficult times for some California marketing cooperatives. Tri Valley Growers , a fruit and tomato processing cooperative, formerly the second largest cooperative in California, declared bankruptcy in the summer of 2000. Around this same time the Rice Growers Association, a large and long-lived rice milling operation closed its doors, as did Blue Anchor, a diversified fresh fruit marketer. Reverberations from the failure of these prominent California cooperatives were felt nationally and caused some to wonder whether the model of cooperative marketing was well suited for 21st century agriculture. Indeed cooperatives do face some important challenges competing in the market environment we have described here. As noted, retailers prefer suppliers who can both provide products across an entire category and provide them year around. Cooperatives are traditionally organized around a single or limited number of commodities and member production is likely to be seasonal. Cooperatives can attempt to surmount these difficulties by undertaking marketing joint ventures with, for example, other cooperatives, and sourcing product from nonmembers, including internationally. However, cooperatives may face impediments relative to investor-owned competitors in pursuing such strategies. For example, various laws affecting cooperatives specify that at least 50 percent of business volume must be conducted with members.

Joint ventures with firms that are not cooperatives are not afforded legal protection under the Capper-Volstead Act.2 Doing business with nonmembers may also adversely affect a cooperative’s membership, if it is perceived that most of the benefits of the cooperative can be obtained without incurring the financial commitment associated with membership. This issue was important for TVG when it appeared that tomato producers selling to TVG under nonmember contracts received a better deal than member growers. Cooperatives may also face challenges in procuring the consistent high-quality production that the market place now demands. Cooperatives usually employ some form of pooling mechanism to determine payments to members. In essence, revenues from product sales and costs of processing and marketing flow into one or more “pools.” A producer’s payment is then determined by his/her share of the total production marketed through each pool. The problem with some pools is that high quality and low-quality products are commingled and producers receive a payment based upon the average quality of the pool. Such an arrangement represents a classic adverse selection problem, and its consequence is to drive producers of high-quality products out of a cooperative to the cooperative’s ultimate detriment. Cooperatives can obviate this pooling problem through operating multiple pools and/or by designing a system of premiums and discounts based upon quality, but the key point is that investor-owned competitors face no similar hurdles in paying directly for the qualities of products they desire. Offsetting these limitations on cooperative marketing in the 21st Century at least to an extent is the recognition that the marketing clout producers can attain from joint action may be as important now as ever. As we have documented in this chapter, the food retailing and processing sectors have consolidated. Although producers, too, have generally gotten larger in absolute scale, the typical producer’s power in the market place pales in comparison to that of the firms with whom he/she conducts business. Also worthy of mention is that some cooperatives have evolved the structure of their organization to “keep up with the times.”

Such cooperatives are usually known as“new generation cooperatives” or NGCs. Typical features of an NGC include grower contracts that include both delivery rights and delivery obligations. Delivery rights, however, are transferable and can function somewhat analogously to capital stock, i.e., if a cooperative is successful, its delivery rights will increase in value. These rules are intended to give the cooperative assurance of a stable supply but also to regulate the amount of product it must process and sell in line with market conditions. To date, the NGC structure is most common among cooperatives in the mid western U.S. and has made few inroads in California. Interestingly, TVG underwent a re-organization to an NGC structure in 1995-96. Although it is doubtful that this re-organization had much impact on TVG’s ultimate demise, its failure may have made Californians skeptical of the NGC structure. Two types of cooperative organizations are relatively unique to California. They are information-sharing cooperatives and bargaining cooperatives. Information sharing cooperatives perform no handling or other traditional marketing activities for their members. Rather, they serve as devices for their members to communicate, share information on production plans and market conditions, and formulate pricing strategies. Industries where these cooperatives have emerged include iceberg lettuce, melons, kiwifruit, table grapes, fresh stone fruits, mushrooms,hydroponic bucket and fresh tomatoes. The activities undertaken by these cooperatives would ordinarily be illegal under the U.S. antitrust laws but are rendered lawful due to the Capper-Volstead Act, which grants an exemption from the antitrust laws to farmers acting collectively through a cooperative. The major examples of this form of cooperative are industries where the product is highly perishable and production is concentrated in the hands of relatively few grower-shippers. Successful coordination of production and marketing in these industries can be a major advantage in terms of managing the flow of product to the market to avoid the periods of over supply and low prices that have been common in these industries. Membership in these organizations tends to fluctuate, however, and there is little evidence to date that they have been successful in either raising or stabilizing grower prices.3 Bargaining cooperatives also engage in little or no actual handling of product. Rather, they function to enable growers to bargain collectively the terms of trade with processors. Iskow and Sexton identified 10 active bargaining cooperatives in California and 29 nationwide. Prominent California bargaining cooperatives are the California Tomato Growers, California Canning Peach Association, California Pear Growers, Prune Bargaining Association, and Raisin Bargaining Association. These cooperatives are a response to the asymmetry in power that might otherwise characterize dealings between farmers and processors. Bargaining associations are especially common in processed fruit and vegetable industries, where products are generally grown on a contract basis and there is no active spot market. In addition to increasing growers’ relative bargaining power, these associations play a valuable role in facilitating exchange and minimizing transaction costs. Rather than having to negotiate terms of trade with each individual grower, a processor need strike only a single agreement with the bargaining association. Generally the bargaining association will negotiate first with a single leading processor, with similar contract terms then applying to other processors. In no case is a cooperative the sole marketer or bargainer in California. Farmers always retain the option not to participate in a cooperative. In fact, many of the benefits that a cooperative provides are available to a grower whether or not he/she is a member of the cooperative. For example, Blue Diamond was a leader in opening new export markets for almonds. However, once these markets were established, other handlers were easily able to sell into them.In industries with cooperative bargaining, a farmer who is not a member of the bargaining association generally receives the same terms of trade as growers who are members. Thus, farmers have an incentive to free ride on the activities of the cooperative.In addition to undertaking joint action in marketing through cooperatives, U.S. legislation at both the national and state levels allows producers and marketers of many agricultural products to act collectively through a legal structure to control various aspects of the marketing of their products.

Enabling legislation for federal marketing orders is provided by the Agricultural Marketing Agreement Act of 1937 , while state orders and agreements are governed by the California Marketing Act of 1937, with amendments. California also has more than 20 individual laws for the formation of commodity commissions and councils. There are differences between the use of federal and state marketing programs. Federal marketing orders can cover a production region in more than one state, while state orders are effective only within the state boundaries. Federal marketing orders tend to focus on quality regulations and sometimes volume controls, while California state marketing programs tend to focus on research programs and promotion. Several California commodities utilize different programs for different activities. For example, California-grown kiwifruit has a federal marketing order program that administers grades and standards and a state commission that conducts advertising and promotion; California walnuts have a federal marketing order with provisions for grades and standards and quantity control and a state commission used only for export advertising and promotion. California agricultural producers were at the forefront in adopting both federal and state marketing order programs when they first became available in the 1930s. The mandatory nature of the programs overcame the free-rider problems that had earlier led to a breakdown of cooperative-organized quality and supply control marketing efforts. The popularity of government-mandated commodity programs is clearly reflected by their continued use by a large number of commodity producers. California had 17 federal marketing orders and 48 state marketing programs effective in 1993 . Those programs covered commodities that accounted for 54 percent of California’s 1990 agricultural output, based on value. There are 12 federal orders and 51 California commodity marketing programs effective in 2003. As shown in Table 4, these commodities accounted for 55 percent of California’s total agricultural output in 2002. The largest proportional drop in marketing program coverage between 1990 and 2002 was for vegetables .Among the 17 federal marketing orders operating in California in 1993, four were eliminated and coverage of California production was dropped by two. The terminated federal programs included the marketing order for Tokay grapes and the long-standing marketing orders for California-Arizona Navel oranges, Valencia oranges, and lemons. The marketing orders for Northwest winter pears and spearmint oil, while still in effect, no longer apply to California production. There is one new federal order, the Hass Avocado Promotion, Research and Information Order, and another has been proposed for pistachios. Thus, there was a net loss of 5 federal marketing orders for California commodities between 1993 and 2003. There have also been changes in the coverage of California marketing programs. The marketing orders for apricots and fresh tomatoes have been dropped and there is a new state order for garlic and onion dehydrators and a “Buy California” marketing agreement. The California Egg Commission is no longer operating but there are new California Commissions for dates, rice, tomatoes, and sheep. The total number of California marketing programs went from 48 in 1993 to 51 in 2003 for a net gain of three.