Murray Fulton
Director, Centre for the Study of Co-operatives
July 1997
During the past few years the faculty of the Centre for the Study of Co-operatives have been identifying areas where insights from co-operatives can be applied to good effect. This pattern has certainly been true of my work, particularly in the area of the Canadian Wheat Board (CWB). The rest of this note outlines four research papers I have written on the CWB and identifies the linkages with co-operative theory that they contain.
Dual Marketing and the Decisions Facing Western Canadian Farmers for Wheat and Barley Marketing: A Brief to the Western Grain Marketing Panel (with James Vercammen) -available in PDF format
The main argument presented in this paper is that a dual market in Western Canada for wheat and barley would not be sustainable. The evidence to support this argument is both theoretical and empirical. On the theoretical side, farmers have an incentive to deliver to the spot market whenever the price is rising over the year; when the price is falling, the incentive is to deliver to the pool. The result of these different incentives is that deliveries to a voluntary pool would be highly variable. As well, the pool obtains deliveries under the very conditions that would result in a pool deficit. Thus, from a theoretical perspective the conclusion is that a dual market is not sustainable.
The empirical evidence strongly supports this same conclusion. Examples of viable and sustainable voluntary dual markets do exist. The examples of dual markets involve co-ops, with the co-ops purchasing product from their members at a pooled price. For instance, in California, the co-operatives involved in pooling include Sunkist (citrus), Sun-Maid Growers (raisins), Tri-Valley Growers (peaches), Blue Diamond (almonds), Calcot Ltd (cotton), and Farmers' Rice (rice) (Smith and Wallace).
The evidence is very clear that successful pools all share a common feature: "Any cooperatives or other body initiating a market pool must be certain it can provide a special service or expertise that is truly beyond the reach of individual growers, if sustained success is to be assured. Evidence is conclusive that merely combining the crop volume of a number of growers for marketing purposes is not enough. The successful operations studied capitalized on one or more special advantage(s) they developed to differentiate their role in the marketing of the agricultural commodities with which they are identified" (Hammonds, p. v). The special advantages identified by Hammonds include specialized grading services and quality control programs offered by the co-operative, brand-name products at the consumer level, and substantial vertical integration. The California co-operatives listed above all share these characteristics, as do the co-ops identified in the recent Alberta government report on voluntary pooling organizations (Government of Alberta). Since the CWB merely combines the crop volume of farmers in Western Canada and does not have brand name products or is not vertical integrated, the CWB is unlikely to operate successfully in a dual market.
This paper was the basis for the testimony I gave in November 1996 at the CWB Charter Challenge Case. The viability of a dual market was cited by the federal judges as a key issue in whether the CWB violates people's rights and freedoms under the Charter.
Producer Coalition Stability Within Price Discriminating Central Selling Agencies: Implications for the Canadian Wheat Board (with James Vercammen and Richard Gray)
The basis of this paper is two observations: (1) agricultural markets are often differentiated, with different prices existing in different markets; and (2) different groups of producers are located different distances from these markets. The paper shows that an "open market" system of selling the commodity (ie., producers deliver to the market with the highest price net of transportations costs) is generally inefficient. Instead, some sort of marketing coordination is required to eliminate the inefficiencies. The inefficiences arise because too much product is sold to the high value markets, thus depressing the price, and because transportation costs are increased as producers try to access the high valued markets.
While coordination is clearly beneficial, a problem emerges as to how producers should be paid for the product they deliver under a coordinated system. For all farmers to agree to coordination, the price each receives under the coordinated system must be greater than the prie received under the "open market." Such a condition may not always be satisfied. For instance, paying producers an average pooled price (adjusted for transportation costs) may not provide certain groups of producers with sufficient income to ensure that they prefer the coordinated system to the open market system. Unless an appropriate payment mechanism can be derived that makes the producer coalition stable &endash; that is, ensures that the benefits are distributed in such a way that all producers prefer the coordinated system &endash; attempts at coordination will fail and the "open market" system will prevail. The paper suggests that one reason for the dissatisfaction with the CWB is that the payment mechanism does not ensure that the benefits are appropriately distributed.
The paper also shows that the task of finding a payment mechanism that ensures stability is made more difficult the higher are producers' transportation costs. This observation is important given the recent removal of the WGTA. The WGTA minimized the differences among producers in various parts of the Prairies, thus making it easier for a simple pooled price to generate coalition stability. The removal of the WGTA meant that the differences among producers were accentuated, thereby making it more likely that the pooled price would not produce a stable coalition. The paper thus indicates that the removal of the WGTA is likely a factor in the increased producer dissatisfaction with the CWB.
The link between the material in this paper and co-operatives is that the paper relies on a theoretical concept called co-operative game theory. Co-operative game theory examines the conditions under which a group of people will find it advantageous to carry out an activity jointly rather than separately. A key element of co-operative game theory is the stability of coalitions.
Caring For Markets: Compliance, Adjustment and the Law (with Don Buckingham)
The purpose of this paper is to examine why people in society comply with the rules and regulations they face, particularly when these rules and regulations deal with common property. The common property used as an example in the paper is the CWB. Interestingly, the notion of common property is not well understood in the law. People working in co-operatives, however, understand this term; the ability to bring a concrete example of common property was a major contribution to this paper.
The CWB has within it a number of instances of common property. All of these instances deal with how the CWB provides access to resources that are limited or constrained. The resources that are most limiting for grain marketing in Western Canada are: (1) high-valued markets; (2) West Coast terminal elevator capacity; and (3) rail transportation. The limited size of these resources means that access needs to be rationed in some way; otherwise the benefits provided by these resources will be bid away by competition (the argument here is quite similar to the one presented in the coalition stability paper). The rationing of these resources effectively creates common property.
The legislation governing the CWB is being strongly challenged at the current time. Some of these challenges take the form of non-compliance with the legislation surrounding the CWB &endash; for instance, farmers illegally shipping grain to the US. By definition, laws which are enacted are meant to be followed. But why do people breach, or not comply, with laws?
H.L.A. Hart, an English legal philosopher, reverses this question and asks why people comply with laws. He argues people change or modify their behaviour to have it generally conform to the law because they are essentially either internalists or externalists. Internalists modify their behaviour to conform with the law because they see these rules as the rules of their government and simply the "way they should live their lives." They pay taxes, they do not kill, and they do not pollute streams because they recognize implicitly the collective values which underlie the law they obey. They have, in a sense, "bought into" the underlying collective values or the simple virtue of obeying the law.
Externalists usually obey the law, but not because they accept it and its underlying collective values. If they obey the law, it is because it is THE LAW or because they fear the sanction of law if their behaviour falls outside of prescribed norms. When externalists do not obey the law, they may do so in protest of a law with the full expectation of being brought to justice to face the consequences of their breach. Or they may do not comply intending to escape justice entirely or if caught, suffer consequences less severe than the benefits to be gained from breaching the law. The first type of externalist breach is based on "questioning of paramountcy of the collectivity" while the second type of breach is based on the "costs/benefits of compliance".
Both types of externalist breach appear to be at work in the case of the CWB. Some farmers breach the law as a matter of principle (they do not like the restriction of freedom implied by the Board), while others do it as a matter of a cost/benefit analysis. The former group questions the notion of common property captured in the CWB and views private property and freedom as being the value on which laws should be based. For the latter group, the question might be: "If I can sell 10,000 bushels of wheat at a $1.00 Cdn premium into the United States, and the maximum fine under Canadian legislation is $5,000 then I will sell to the United States. If the fine is $15,000 I will not."
Both of these reasons for breach have to be well understood. If breach occurs because of a questioning of the paramountcy of the collectivity, then efforts to convince farmers that there are benefits to be derived from the CWB will likely be unsuccesful. Instead, actions that strengthen the position of the collective &endash; e.g., through activities that indicate that the majority of farmers support the CWB &endash; are likely required to offset the pressure brought by this group of externalists. If breach occurs because of a cost/benefit analysis, then efforts to provide a price that would ensure coalition stability (see the above paper on producer coalition stability) will be successful, and indeed be necessary for continual CWB survival.
A Discussion Paper on Canadian Wheat Board Governance
In this paper I argue that a substantial change in the governance of the CWB is urgently required to provide farmers with both voice and control, and that without these two vital elements, farmers are unlikely to continue to support the organization.
The wheat board is unique as a grain trader, operating with single-desk selling authority on behalf of farmers to maximize returns from the sale of wheat and barley in the CWB area. Its ability to act effectively in this capacity is critically dependent upon the support of the farmers within its jurisdiction. To maintain this support requires two things: farmers must be able to express their views on the board with some chance that these views will be heard; and their representatives must have effective control over the board's policies and operations.
The wheat board is currently governed by five commissioners appointed by and accountable to the federal government. Although CWB permit-book holders elect members to a committee that advises the board on policy matters, this committee has no real authority or control over policies. Under recently proposed legislation (Bill C-72), the commissioners would be replaced with a board of directors and a chief executive officer, both appointed by the government on the recommendation of the minister responsible, although the legislation does allow for some of the directors to be elected by CWB permit holders.
While the proposed legislation is a welcome change, the CWB requires a much more democratic structure if it is to operate effectively in the future. Allowing the government to retain the right to appoint the directors and the CEO, and failing to specify that farmer-elected members should make up a majority of the board reflect a lack of confidence in the democratic process and should be changed.
The board should have the power to appoint (or remove) the CEO; farmer-elected members should have a majority on the board; the CEO should not be a board member; and the board chair should be elected by the board. The legislation should also outline in more detail how the farmer board members should be elected, with the preferred choice being a delegate structure.
The general governance structure proposed in Bill C-72 is common to that used by most corporations and co-operatives, which rely for effectiveness on an appropriate division of specialized tasks between board and management. This traditional model would be useful for wheat board governance as well, with the addition of three elements common to co-operatives: representative democracy, participatory democracy, and education.
Representative Democracy: Farmers would ideally elect their directors through a delegate system, which offers the advantage of greater access to elected officials and greater decentralization. The delegates' primary role is to facilitate the flow of information between farmers and the board, thus providing farmers with a voice in the operations of the CWB.
Participatory Democracy: The CWB must encourage both farmer and employee participation in its affairs, perhaps through working groups on particular issues or an annual strategic planning process. Its organizational structure must be innovative and responsive, and foster a strong identification of farmers with CWB management, staff, and activities.
Education: An effectively run wheat board requires the education of farmers, delegates, board, and management regarding such things as tasks and responsibilities, the grain trade generally, and the wheat board's unique role in grain marketing. Education is critical in ensuring that farmers can make informed decisions on CWB matters and participate meaningfully in strategic planning processes.
Although the Canadian Wheat Board is not a co-operative, the development of an effective governance structure could benefit greatly from the application of co-operative values and principles, which would guarantee farmers both voice and control, and ensure their continued support of the organization.
References
Government of Alberta. 1997. Voluntary Pooling Works in Open
Markets. News Release, March 19, Calgary, Alberta.
URL: http://www.gov.ab.ca/~pab/4669.html.
Hammonds, T.M. 1976. Cooperative Marketing Pooling. Circular of Information 657, Agricultural Experiment Station, Oregon State University (November).
Hart, H.L.A., 1964. A Concept of Law. Oxford, Clarendon Press.
Smith, D.K. and Wallace, H.N. 1990. Cooperatives in California Agriculture. United States Department of Agriculture, Agricultural Cooperative Service, ACS Research Report Number 87, Washington, D.C.