The Role of Cooperatives
M. E. Bohman and J. A. Janmaat
This chapter studies the impact of supply management on dairy processors, particularly producer cooperatives. The regulations analyzed are output restrictions, minimum producer prices and rules to govern the allocation of milk to processors. The model developed in this chapter shows that supply management regulations increase the incentive for farmers to form cooperatives if they enable producers to capture rents through vertical integration. Milk allocation regulations that allow the first receiver of milk to retain financial ownership, even if the milk is processed by another firm, also increase the incentive for farmers to join cooperatives. In a case where cooperatives cannot transfer rents to farmers, supply management may decrease the incentive for farmers if regulations replace the benefit of having a cooperative with which to bargain with processors.
Cooperatives play an important role in the dairy processing industry. They account for approximately 50% of the milk output for all of Canada. The market shares of cooperatives vary across provinces. In Ontario, cooperatives have only an approximate 7% market share, but cooperative members produce 80-85% of the milk in British Columbia and approximately 80% of the milk in Alberta. In both provinces the cooperatives' share of the output market is lower. Exact market shares for dairy cooperatives are not available, but interviews with industry participants suggest an estimate of about 50% for British Columbia.
This chapter develops a model of the milk market that shows why