Small scale farmers in the market and the role of processing and marketing cooperatives: A case study of Italian dairy farmers

Agricultural markets are often characterised by imperfect competition between buyers of farm produce. Cooperatives are often regarded as one possible way to enhance welfare for small producers, while others view them as an inefficient historical relic. My thesis investigates empirically the coexistence of cooperative and capitalistic processing and marketing firms in the market for raw milk in three Italian provinces, using a dataset I collected via a survey of dairy farmers. First, I analyse what accounts for variation in market structure within each province and what drives coop membership when choice is available. Geography is found to influence both number and nature of processing firms operating at a given location. Where farms are more isolated and scale of production is smaller, cooperatives have – historically – tended to prevail, and often remain the only buyer today. Where both coops and capitalistic processors are available, parental membership status is more important for the decision of a farmer to join the cooperative, suggesting some degree of inertia. Second, I investigate whether there is any evidence that selling through a cooperative makes a difference for farmers, with respect to both price and non-price characteristics of the relationship. With respect to non-price characteristics, results show that cooperatives draw less complex contracts with members compared to capitalistic processors with their suppliers, are less likely to pay a lower price than agreed, and more likely to offer technical assistance. Members and non-members do not appear to differ in their perceived net benefits from the exchange relationship, but benefits from membership appear to be larger for smaller than larger farmers. As regards whether cooperative membership, per se, has any effect on price paid to farmers, the theoretical literature suggests that asymmetric price competition between two firms with different objective functions, in a spatial market, under different spatial pricing policies, can lead to price differences between the two. This prediction is tested by estimating the effect of coop membership on prices paid using four different nonexperimental evaluation methods. The results show a positive and significant effect of membership, driven by more remote farmers with smaller scale of production, located in areas of cooperative monopsony.