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Cooperative Formation and Financial Contracting in Agricultural Markets

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  • Brent Hueth
  • Philippe Marcoul
  • Roger G. Ginder

Abstract

Cooperative formation in agriculture sometimes occurs in response to the exit of a private firm and typically requires substantial equity investment by participating farmers. What economic rationale can explain why farmers are willing to contribute capital to an activity that fails to attract non-farm, "private" investment? We hypothesize that doing so is a costly mechanism for increasing the maximum penalty farmers face in the case of business failure. For a given market environment, exposing farmers to this risk increases the amount of surplus that can be used to repay lenders, thus expanding the set of market environments in which financing is available. We show how equity investment of this sort can be an efficient organizational response to a reduction in expected market returns and interpret the resulting financial contract as a "cooperative."

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Bibliographic Info

Paper provided by Center for Agricultural and Rural Development (CARD) at Iowa State University in its series Center for Agricultural and Rural Development (CARD) Publications with number 03-wp349.

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Date of creation: Oct 2004
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Handle: RePEc:ias:cpaper:03-wp349

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Related research

Keywords: cooperative; corporate finance; moral hazard; vertical integration.;

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  1. Chan, Yuk-Shee & Kanatas, George, 1985. "Asymmetric Valuations and the Role of Collateral in Loan Agreements," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 17(1), pages 84-95, February.
  2. Parliament, Claudia & Lerman, Zvi & Fulton, Joan R., 1990. "Performance of Cooperatives and Investor-Owned Firms in the Dairy Industry," Journal of Agricultural Cooperation, National Council of Farmer Cooperatives, National Council of Farmer Cooperatives, vol. 5.
  3. Gregory K. Dow, 2000. "Allocating Control Over Firms: Stock Markets Versus Membership Markets," Discussion Papers dp00-03, Department of Economics, Simon Fraser University, revised Feb 2000.
  4. Stafford, Thomas H. & Roof, James B., 1984. "Marketing Operations of Dairy Cooperatives," Research Reports, United States Department of Agriculture, Rural Development Business and Cooperative Programs 52025, United States Department of Agriculture, Rural Development Business and Cooperative Programs.
  5. Harris, Andrea & Stefanson, Brenda & Fulton, Murray E., 1996. "New Generation Cooperatives and Cooperative Theory," Journal of Cooperatives, NCERA-210, NCERA-210, vol. 11.
  6. Brent Hueth & Ethan Ligon, 1999. "Producer Price Risk and Quality Measurement," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 81(3), pages 512-524.
  7. Peter Bogetoft & Henrik Ballebye Olesen, 2003. "Incentives, Information Systems, and Competition," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 85(1), pages 234-247.
  8. Martinez, Stephen W., 1999. "Vertical Coordination in the Pork and Broiler Industries: Implications for Pork and Chicken Products," Agricultural Economics Reports, United States Department of Agriculture, Economic Research Service 34031, United States Department of Agriculture, Economic Research Service.
  9. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(3), pages 663-91, August.
  10. David A. Hennessy, 1996. "Information Asymmetry as a Reason for Food Industry Vertical Integration," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 78(4), pages 1034-1043.
  11. Ben-Ner, Avner & Jun, Byoung, 1996. "Employee Buyout in a Bargaining Game with Asymmetric Information," American Economic Review, American Economic Association, American Economic Association, vol. 86(3), pages 502-23, June.
  12. Melkonian, Tigran A., 2004. "Quality Measurement and Contract Design: Evidence from the North American Sugar Beet Industry," Staff General Research Papers, Iowa State University, Department of Economics 12350, Iowa State University, Department of Economics.
  13. Bonin, John P & Jones, Derek C & Putterman, Louis, 1993. "Theoretical and Empirical Studies of Producer Cooperatives: Will Ever the Twain Meet?," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 31(3), pages 1290-320, September.
  14. Dow, Gregory K. & Putterman, Louis, 2000. "Why capital suppliers (usually) hire workers: what we know and what we need to know," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 43(3), pages 319-336, November.
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