Cooperatives and Payment Schemes

Transcription

1 Cooperatves and Payment Schemes

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3 Peter Bogetoft & Henrk B. Olesen Cooperatves and Payment Schemes Lessons from theory and examples from Dansh agrculture Copenhagen Busness School Press 2007

4 Cooperatves and Payment Schemes Lessons from theory and examples from Dansh agrculture Copenhagen Busness School Press, 2007 Prnted n Denmark by Narayana Press, Gyllng Cover desgn by Morten Højmark 1. edton 2007 e-isbn Dstrbuton: Scandnava DBK, Mmersvej 4 DK-4600 Køge, Denmark Tel , fax North Amerca Internatonal Specalzed Book Servces 920 NE 58th Ave., Sute 300 Portland, OR 97213, USA Tel: Fax: Emal: [email protected] Rest of the World Marston Book Servces, P.O. Box 269 Abngdon, Oxfordshre, OX14 4YN, UK Tel +44 (0) , fax +44 (0) E-mal: [email protected] All rghts reserved. No part of ths publcaton may be reproduced or used n any form or by any means - graphc, electronc or mechancal ncludng photocopyng, recordng, tapng or nformaton storage or retreval systems - wthout permsson n wrtng from Copenhagen Busness School Press at

5 Content PREFACE 7 GUIDANCE FOR READERS 9 1 SUMMARY The Dansh pg ndustry as an example The theoretcal challenge The practcal challenge The crtera Payment schemes Multple-crtera evaluaton Concluson 25 2 COOPERATIVES What s a cooperatve Tradtonal cooperatves New Generaton Cooperatves (NGCs) General problems of cooperatve ownershp Coordnaton and motvaton The lterature on cooperatves Case: The Dansh pg ndustry Conclusons 56 3 ECONOMIC OBJECTIVES AND CONDITIONS Effcency Equalty and the ntegrated proft Techncal applcablty Balanced budget Indvdual ncentves Group ncentves Robustness and dynamcs Holstc evaluatons Conclusons 105

6 6 PETER BOGETOFT AND HENRIK B. OLESEN 4 SINGLE PRODUCT PAYMENT SCHEMES Technologes and markets The tradtonal payment scheme The wse charman s soluton Producton of specal pgs an example Optmal, under- or over-producton The problem of over-producton and some possble solutons Balanced budget and the allocaton of profts and losses Far and natural proft allocatons Informaton needs Summary MULTI PRODUCT PAYMENT SCHEMES A general example Natonal prcng system: Equal gross margns Payment scheme for pglets: Equal returns on captal The premum-pg system: Quota and premum products The ACA (Alternate Cost Avodance) method Nucleolus Shapley Summary 222 REFERENCES 229 GLOSSARY 237 INDEX 243

7 Preface Approach Ths book descrbes a set of economc methods and results that can gude the choce of payment (proft and cost sharng) schemes n cooperatves. We establsh an economc framework n whch the choce of a payment scheme s looked at as a multple crtera decson problem wth multple decson makers. Crtera Ths allows us to dentfy a number of crtera and desrable characterstcs for a payment scheme. The crtera are arranged n a goal herarchy. Ths gves a structure to the problem. We deal wth the crtera under the headngs of coordnaton, motvaton and dynamc adjustment. Coordnaton s to ensure that the rght members are dong the rght thngs at the rght tme. Motvaton s to gve the members selfnterest n the coordnated actons that beneft the cooperatve the most. Dynamc adjustment s to promote reasonable nvestments and adjustment of payments when market and producton condtons change. Cooperatves Cooperatves are frms that are owned and controlled by ts users (as opposed to ts nvestors). Cooperatves and cooperatve payment schemes are found n all sectors of socety. Moreover, many frms have more n common wth cooperatves than wth nvestor owned frms, regardless of ther legal form. Ths s for example the case wth: a group of consultants or lawyers sharng offces, secretaral assstance and clents, a group of ctzens settng up a jont water-supply, or households n a regon ownng and operatng a common electrcty grd. We wll usually take examples from agrcultural marketng cooperatves, but the analyss can be used drectly n other sectors, and t can easly be modfed to cover consumer cooperatves. Payment schemes The analytcal framework s used to assess a number of actual payment schemes. We analyze exstng payment schemes used n the Dansh pg ndustry and a number of other payment schemes, both practcal and theoretcal. Compromse It s not possble to fnd one partcular scheme that s superor n relaton to all crtera and n all stuatons. Rather, a compromse s necessary between the dfferent crtera takng nto account ther relatve mportance n the specfc context. Ths book helps to clarfy and structure the compromse, and to dentfy the context specfcs that are partcularly mportant.

8 8 PETER BOGETOFT AND HENRIK B. OLESEN Thanks We are grateful for the support of Norma and Frode Jacobsen (NFJ) Foundaton to ths and related project over the years. In partcular, we apprecate the patence the Foundaton has shown n the (numerous) perods where we have been nvolved n too many other projects. The am of the NFJ Foundaton s to support agrcultural research n order to promote the compettveness of the Dansh pg ndustry. Part of the book s based on Henrk B. Olesen's submsson for a competton promoted by the NFJ Foundaton. Parts of the text have been used as teachng materal for courses n The Economcs of Cooperatves at the Royal Veternary and Agrcultural Unversty (KVL) and elsewhere. We are grateful for many helpful comments from the partcpants. Several people have made helpful suggestons to earler drafts of the manuscrpt. We would especally lke to thank Frode Slpsager and Bent Claud Lassen, both members of the Board of Trustees of Norma and Frode Jacobsen Foundaton, Søren Büchmann Petersen, the Federaton of Dansh Cooperatves, Karsten Flemn, The Federaton of Dansh Pg Producers and Slaughterhouses, Hans Frmor of The Unversty of Southern Denmark n Odense, as well as Jens-Martn Bramsen, Kostas Karantnns, and Msja Mkkers, KVL. We would also lke to thank Pa Skogø for her help wth the edtng of the orgnal Dansh book, and Lsbeth Balle and Helle Gjedng Jørgensen for several rounds of fnal edtng of ths edton. Fnally, Peter Bogetoft would lke to thank hs famly, Vctora, Rasmus, Stna and Nete for ther support. Henrk B. Olesen would lke to thank Pa for her help and encouragement throughout ths work. Frederksberg, October 1, 2006 Peter Bogetoft Henrk B. Olesen

9 Gudance for readers Readershp The book s amed at three reader segments. A decsonmakng tool Cooperatve economcs New deas 1. Busness people Busness people and decson makers can use the analytcal framework of the book to evaluate changes to a cooperatve's payment scheme. Our analytcal approach can be used n any branch of ndustry. The book uses examples from the Dansh pg ndustry to llustrate the concepts dscussed, but t has proved to be of nterest to busness people from many other sectors as well, ncludng law and consultancy, utltes and health. The summary n Chapter 1 gves a rapd overvew of the man conclusons of the book. 2. Students Students can use the book as an ntroducton to the economc theory of cooperatves. They can also use the book to see how modern economc theory can be used n practcal problem solvng. 3. Researchers We beleve that the book can prompt researchers to make new use of and formulate new contrbutons to analytcal busness economcs. We have, ourselves, gathered many deas for research through our work on ths book, and we would welcome further research on the specal problems of cooperatves and cooperatve payment schemes. The book can be read wthout mathematcs The arrangement of the text The book has been wrtten for t to be understood by those who are not accustomed to readng mathematcally based economc lterature. The general text does not use mathematcal expressons n ts arguments. The way the text s lad out, makes t possble to skp the mathematcal representatons. Glossary The book has a short glossary explanng central terms. Ths should help readers wth lttle pror knowledge of the termnology of modern mcro economcs or busness economcs. Of course, we also explan relevant terms n the text as they are ntroduced.

10 10 PETER BOGETOFT AND HENRIK B. OLESEN Example boxes We present examples n text boxes, to show how the theoretcal concepts apply to actual cases. Most of these examples are taken from the Dansh pg ndustry. Sometmes the example boxes contan smple calculatons whch llustrate the theoretcal prncples. Example: Perspectves from ndustry or a smple numercal llustraton Mathematcal sectons Those who are used to readng mathematcal expressons can beneft from the more detaled presentaton n the mathematcal sectons. One of the advantages of usng mathematcal models s that t enforces dscplne on our argumentaton, and thus ensures that our arguments are consstent. In the text we use the symbol M to ndcate where we gve a more detaled analyss n the followng mathematcal secton M. The mathematcal secton s always placed at the end of the relevant secton and s presented wth a shaded background. Mathematcal representaton: The mathematcal model whch gves detals of the argumentaton n the precedng secton. We explan the mathematcal notaton used as t s ntroduced. At the end of ths gudance for readers, we gve a short overvew of the most mportant notaton. The contents of the book The man conclusons of the book are summarzed n Chapter 1. Cooperatves In Chapter 2, we gve a general ntroducton to cooperatves and the scentfc lterature hereon. We also dscuss the basc strengths and weaknesses of cooperatves from an economc perspectve. Lastly, we gve a bref descrpton of the man characterstcs of the Dansh pg ndustry. The man goals In Chapter 3, we present the fundamental economc crtera whch a payment scheme should satsfy. The chapter starts wth a dscusson of the goals of a cooperatve. Ths dscusson deals wth the ssues of effcency and equalty. Ths s followed by consderng a number of requrements whch lmt the scope of the desgn of a payment scheme. Among other thngs these requrements are techncal feasblty, a balanced budget, ncentve compatblty and voluntary partcpaton. The prncple of voluntary partcpaton not only sets restrctons on

11 GUIDANCE 11 Economc models of cooperatves Analyss of payment schemes payments to ndvdual producers, but also on payments to dfferent coaltons of producers who can threaten to collectvely wthdraw from the cooperaton. We also consder the requrement for the payment scheme to be adaptable n a dynamc envronment, and we close wth a summary of the most mportant crtera structured as a goal herarchy. In Chapter 4, we use the crtera from Chapter 3 to analyze n a seres of more specfc economc envronments. We focus on cooperatves wth a sngle product lne and defne the envronments by makng more specfc assumptons on the producton, processng and marketng condtons. We also dscuss how, n actual cases, a cooperatve can estmate the producton costs and the revenue potental of the processng stage, e.g. the slaughterhouse. We llustrate the classc over-producton problem n stuatons where the cooperatve s operatng n a thn market, and we dscuss varous ways of lmtng over-producton a number of the usual proposals for lmtng producton results n a resdual surplus whch s typcally ether not dealt wth n the lterature or not dealt wth satsfactorly. We revew a number of dfferent allocatons generatng a balanced budget, whle elmnatng over-producton. Fnally, we dscuss the nformaton needs of payment schemes and the possblty of reducng these needs. In Chapter 5, the crtera compled n Chapter 3 are used to evaluate some specfc payment schemes n the context of a mult-product cooperatve. We analyze the prncples of two payments schemes used n practce n the Dansh pg ndustry, the Natonal Payment System and the payment scheme for pglets. We also propose a payment scheme based on margnal prcng n whch the surplus s allocated accordng to the ownershp of specal premum rghts. Fnally, we analyze three payment schemes whch have a more theoretcal bass. The chapter concludes wth a summary of the strong and weak ponts of the dfferent payment schemes. Glossary The book also contans a glossary and an ndex Notaton Mathematcal representaton: In general we use the followng notaton n the mathematcal sectons: A varable y wth a superscrpt j refers to the value of the varable for member j, and a varable y wthout a superscrpt refers to a vector wth the ndvdual member's y values. We also use the superscrpt -j to ndcate vectors wth all members except j. We use the subscrpt to refer to the product type.

12 12 PETER BOGETOFT AND HENRIK B. OLESEN The most mportant varables are: j q j q q q R q s producer j s producton of product, j=1, n and =1, m, where n s the total number of members of the cooperatve and m s the total number of product types (e.g. organc pgs and UK pgs). s producer j s producton. s the producers' total producton of product I;.e. q n q q q. s a vector of the members' total producton;.e. q q,... 1 qm s the cooperatve's revenue j s producer j s proft j x s producer j s payment j c s producer j s producton costs N s the set of prmary producers;.e. N {,.., 1 n} S s a coalton or subset of prmary producers;.e. S N S s the producer group whch produces product (e.g. j organc producers);.e. S j N q 0.

13 1 Summary Cooperatves In broad terms, a cooperatve (also co-operatve or co-op) s a group of persons who jon together or cooperate, to carry on an economc actvty of mutual beneft. More specfcally, cooperatves are frms that are owned and controlled by ts users (as opposed to ts nvestors). Cooperatves and cooperatve payment schemes are found n all sectors of socety. Moreover, many frms have more n common wth cooperatves than wth nvestor owned frms, regardless of ther legal form. Ths s for example the case wth: a group of consultants or lawyers sharng offces, secretaral assstants and clents, a group of ctzens settng up a jont water-supply, or households n a regon ownng and operatng a common electrcty grd. We wll usually take examples from agrcultural marketng cooperatves, but the analyss can be used drectly n other sectors, and can easly be modfed to cover consumer cooperatves. Payment scheme s the key A number of consderatons The payment scheme plays a key role n a cooperatve. It defnes how costs and profts are shared among the members. The payment scheme therefore regulates the wllngness of the members to partcpate, the effort they supply and the producton they brng to the cooperatve. Ths n turn determnes the cooperatve's opportuntes n processng and marketng. It s not easy to desgn a sutable payment scheme. A payment scheme must take nto account a number of consderatons. 1 It must reflect the exstng condtons n producton, processng and sales, and t must be flexble enough to accommodate changes n the busness envronment. It must be smple to understand and t must help n provdng a steady ncome for ndvdual members, wthout deprvng them of the ncentve to develop new deas and to adjust to changes n the market. The payment scheme must be a compromse between dfferent producer groups wth dfferent nterests and dfferent expectatons, whle allowng ndvdual producers to change producton, acqure captal and even to wthdraw from the cooperatve. However, the complexty of the problem s no excuse for conservatsm. A cooperatve ought regularly to evaluate not only the specfc clauses of ts exstng payment scheme, but also the overall structure of the scheme. The cooperatve cannot be sure that a scheme desgned for one set of market and producton condtons, s stll optmal for current condtons.