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. R eegainis G by FRUIT 23 VEGETABLE ASSOCIATIONS

| with PROCESSORS

BY G. ALVIN CARPENTER

MARKETING DIVISION FARMER COOPERATIVE SERVICE E U. S. DEPARTMENT OF AGRICULTURE, WASHINGTON, D. C.

SERVICE REPORT NO. 3 FEBRUARY 1954

UNIT#D

FE

STfTES DEPARTME MER COOPER/ TIVE

MENT OF

AGRICULTURE

SERVICE

WASHINGTON 25, D.C.

Joseph ae Knopp, Acting Administrator

Forewerd

Summary “and (Cone lwSilonmsiinie eerste a wie aie

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for

CONTENTS

HOW Price TS MDewermiMeGy ge teide ie <b a ettelnraie es Sees. 6

AL Theo

tern: tive

Lyon baEeaa:

The Bargeining Ee L ee OE Naty ae eivin cis ns +

Inf tue Some Theoretical #& peters and fee ee Coopereat Techniques of Barega

p

tive Vegetable

neing Prices Through B

Preparing for Negotiations... sessaocvsessete

Informetion Ne

SES Gi hse Walle Ss

Organizat: ns on of Meterial. see fetual Negotiations ocreCeea8

Me.

Developing lf

service activities relating to problems financing, processing, in connection with the coopers cooperative purchese of farm supplies

research studies, presents activities,

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ie i

to manegement in ell agencies en relating to coop

eting Objections

ffective Ba

e@e@enoae

The Fermer Cooperetive

rising roducts Areas ae

results of the course of service individuals perative principles

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and

5

end

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NPUTE MOH YP

MV ARN FOREWORD

This report grow out of wrk carried on jointly by the Utah Agricultural Experiment Station and, the Farmer Cooperative Service. It is being issued as a means of bringing information on th He guEsere to many agri- cultural groups who are intcrested in the, use of bargaining associations. The report is part of a study of G. Alvin Carpcnter on bargaining ccop- cratives undertaken in partial fulfillment of his lea for the Ph.D. degree in Economics granted by Cornell University. Other phases

of the study will be published by the Utah Agricultural "Eepepinent Station where Mr. Carpenter is Assistant Director of Extension.

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Bargaining céoperntives: arc woll“known. - Many , deiry cooperatives have been organized ‘to- bargain with “hi lk: distributors’ on prices for raw

milk, “Likewiso in the best sugar’ irdustry prices of beets are detor

mined largcly by bargaining between the growors' organiz:tion and re- finers. Inthe fruit and vegeta’ SL ‘field producers of canning’ crops

now have a considerable. amount ‘of interest in the organization of bar-= Tee GOs ATS which would represent thom in dealing with processor,

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In many atea: ‘tho processor contracts with growers to produce the vege- tables for processing. Sinee’ those contracts are initiated by the canner there may be the feeling on the part of producers that the terms favor the canncr. The indivicual srowcr may be, at a disadvantage since his production makes up such a small portion of the processor's needs. The canner also is he oe ‘than gnower on ene, supply and demand. Canning aes growers. have sought to Peet the processor-on equal terms through the devclopnent of eee cooperativés.: Some have had long and successful rel-tions with processors. %n the whole, however, producors except under very favorable conditions or location, have not been too successful to date in negotiating with processors through a cooperative organization even though there appears to be sound reasons for growers to engage in this activity.

This publication decals with some of the technigues of bargaining between the growers! organization and processors, points up some of the requirce ments for a successful cooperetive organization and also presents a theory of bargaining.

J. K. Samucls Acting Director Marxcoting Division

SUMUPY AUD CONCTUSIONS

rs

Collective bargaining is a method by which a group agreement is reached. It is usually thought of in such terms as prices, marketing facts, and business conditions,

In efforts to gain more influence over price, farmers in many areas have orgenized bargaining associations, Too often such associations hve started with great enthusiasm and promise only to end in discouragement and failure, principally beceuse they attempted too much without having enough factors under control, "xneriences in cooperative bergaining emphasize repeatedly, the necessity for adeauate control of supply and the importence of sound organization and management if success in influencing market price is to be achieved.

Most attempts at control of supply have failed principally because of: (1) inability to bring about the effective working together of a suffi- ciently large proportion of the producers; (2) inability to prevent the entrance of new producers into égricultural production or to control the output of those already producing; and (3) inebility to prevent substitu- tion of one product for another by the consumer.

If the farmers! bargaining association that controls the selling side has equivalent bargaining power with the processors who control the buying side, an actual price can be arrived at through the bargeining process comparable to a price attained’ under competitive conditions. The determination of price for contract crops under such conditions would enable both verties to have a fair chance and should strengthen the capacity of the industry for autonomous self~resulation and thereby lessen the amount of SC VONMBE EY control or edministrative pricing needed or sought,

Equal bergaining pover of both sides, however desirable, is rarely if

ever achieved, Bargeining power is the product of many forces which vary with circumstances and changing economic conditions, Becsuse of inability to control ail of these conditions equally well it is practically im- possible to have a market situation where both sides have cauer bargain— ing power.

The theory of bargaining as anelyzed in this report indicates that the price is not a fixed value. The final negotiated price depends in part upon the relative bargaining power of the two parties. Therefore, all factors which influence the bargeining power of either side become important in determining price, "very weakness of a farmers! cooperative has an adverse effect upon bargaining strength. Bvery weakness that can be overcome will have a favoreble effect upon’ bargaining strength.

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The theory of bargaining discussed in this report emphasizes several importent factors:

1.

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The function of a bargaining essociation is to facilitate the esteblishment of a price in the market which would: be the same as or which would approximate the price that would be arrived at under conditions of pure competition, - Other things being equal, the fewer the processors in the market the more likely the need for a bargaining associa= tion and the greater its chances for success, Ina competitive market it has less chance for success.

To increase bergaining strength to the point where it can be effective, it is important that the growers! association control a large enough portion of the volume to be sold that the buyers cannot obtain a sufficient quantity for their needs without dealing through the association,

Efforts to gain sufficient control of volume for effect—

ive bargaining often end in feilure. «As soon as returns

to farmers are increased by organization, additional supplies are usually produced which serve to undermine the bargaining strength of the association, It is very diffi- cult for farmers to gain monopoly control of supply in their efforts to influence price. There are so, many farmers pro- ducing each product and so many others who would produce it if the price were increased slightly that any permanent monopoly control is not achievable,

The portion of the total volume of a given commodity under control of a bargaining association necessary to enadie it to bergain effectively depends upon several important factors including: (1) the elasticity of demand for the product, (2) the number of processors existing in the market, and (3) the elasticity of supply of the product. Naturally, the higher the percentage of total supply controlled the

more effect the association will heve in price determination,

Under situations where there is only one or a few processors in a producing area, a well-organized, efficient bargaining association is able to increase the bargaining strength of producers end consequently increase prices for the raw product. Also competition is reduced among the seilers and they func- tion more nearly as a single seller, The association serves to protect the individual producer against monopoly on one hand as well as prevent disastrous competition among unor—- ganized sellers,

iv

6. If a bergeining association continues to press for a’ price beyond thet which the conditions of the market war- rant, the farmers will price themselves out of the market, the industry suffers and the association soon fslls apart.

7. For obvious reasons, use of the strike weapon to increase effectiveness of bargaining in agriculture has its limita- tions. Under certain situations, however, it can be used to gain bargaining advantages. The threat of strike is most effectively used prior to planting.

8, Price negotiations through committee action, arbitration, or prices determined administratively by government agency, are “otuer alternatives to determination of price by collective bargaining aione,

There are certain advantages and benefits in addition to.price that can come to farmers through well organized and efficiently operated bargain— ing associations, Some of these majer benefits may be listed briefly as followss:

1, Collective bargaining enables farmers to provide themselves With services essential to efficient production and market— ing which are not otherwise available,

2. Farmers as a group can make economical use of specialized ‘skill and equipment which they as individuals could not acquire at all or only at high cost,

3, ‘the farmer can concentrate mainly on his production job and feel that his market job is being handled effectively.

4. Coneentrating volume under one head reduces wastes of competition resulting from excessive duplication of services and facilities, thus benefiting society in general.

5. Processors can also reduce their overlapping services and realize savings in field work in contract sign-up.

6, Through collective bargaining farmers can become more familiar with needs and preferences of the market and the consumers as to the quantities, kinds and quality of pro- ducts wanted, The association cen serve as an educational vehicle to keep the farmers thus informed. Adequate information in the hends of farmers would facilitate closer adjustment of production to the needs of the market and would make for better integration of steps in the preduction -— marketing process,

7. The cooperative promotes privete enterprise and helps to- preserve democratic institutions, Using the cooperative , as a tool, farmers learn to do for themselves many things which they might otherwise insist that the Government do

for them at public expense,

8, Even processors, who may be opposed to the cooperative in its efforts. to negotiate prices, will recognize many benefits which orgenization among farmers brings to the industry as a whole, “Many problems in the industry can be more effectively solved through joint attack in an organized way, (disease end pest control, cultural practices, etc.).

9. Evidence indicates that grower-processor relations can be improved end maintained on a better basis where growers are strongly organized end can safeguard their interests.

“Where effective marketing control cen be secured and when effective bar—- geining techniques are utilized the association can have considerable influence in determining price and other contract provisions, Their power to force temporary price increases that are unwise is their great— est danger. “Wise, well informed leadership is vitally important to their continued success,

If collective bargaining is to succeed in the long run as a useful method of negotiating contrects both sides must learn to negotiate in good faith, They must each make forvhright efforts to reach a settlement. The negotiators must know the situation and look at the facts as they really are. If both sides conscientiously strive to meet these conditions collective bargaining cen be a feir and effective means of determining price and other contractual arrengements,

vi

BARGAINING BY FRUIT AND VEGETABLE ASSOCIATIONS WITH PROCESSORS by

G, Alvin Carpenter *

In many areas farmers producing vegetables for processing have joined together into cooperative bargaining associations. The success of these associations and others that may be organized depends upon the knowledge and application of the theory and techniques involved in bargaining.

This publication discusses why growers form bargaining associations and then goes into the theory and techniques of bargaining that these associ- ations may use to be effectives

NEED FOR BARGAINING ASSCCTATIONS

To start with, farmers growing vegetables for processing are faced :with

a different situation than those producing other agricuitural commodities. For example, they sell wheat and potatoes at the local market level under more competitive couditions than milk or canning cropse There are more buyers and outlets available. Also, wheat, being a commodity of small bulk or weight in relation to value, and not being perishable, can be transported long distance and stored for considerable periods of time.

The marketing season can thus be prolonged.

Products such as wheat, butter, corn, wool and cotton are sold on what might be termed national markets, and some of them through facilities

of the commodity exchanges are soid at or near a world=price level. When such products are sold in a local market, prices are largely based on the price as quoted in the central market less transportation and handling chargese

In the selling of such commodities there is usually sufficient competition to enable the farmer to obtain a price that fairly well reflects the cen-= tral market price. Considerable market information is available and buyers and sellers can be fairly equal in strength and in knowledge of the supply and demand factors.

In contrast to this situation, farmers sell other farm products such as canning peas, sugar beets, and milk in certain areas almost entirely on

a local market where there is no free play of competitive forces but

instead a very few or sometimes only one processor. The individual farmer having such products for sale is under a competitive disadvantage. Canning peas are bulky and perishable3 they cannot be transported long distances before being processed nor stored for any period of timee They must be processed before they are in the form suitable for consumer acceptance. This

% Assistant Director of Extension, Utah State Agricultural College.

processing usually takes place within or adjacent to the producing area. For efficient operation, a plant reouires sizable volume, adequate finan=

cing, technical skili and good management.

The individual farmer is generally not in a position to undertake such processing operations. Consequently, if he zrows such crops, his choices for their sale are limited to the one or the few processors that may be onerating in the area. 1/ In varying degrees, the same situation exists for the sugar beet producer and the dairyman. Because of location factors, the nature of the product, and the marketing pattern set up, the economic thing for the farmer to co is to. sell to one or the other of these outlets at the local market level.

In most areas throughout the United States where canning crops and sugar beets are vroduced, they are sold to processors under conditions where there are few buyers and many sellers. Unlike inany other agricultural industries, canners and sugar beet vrocessors have considerable control over the volume of their purchases (and hence their output) from yeer to year. This results from the common practice of such processors contracting, at a fixed price, in advance, for a rather specific acreage of production of the product. The processor (buyer) usually sets the price for the roduct in advance of the date for planting and offers the individual growers the opportunity to grow the product et that stipulated price and under the conditions as further stipulated in the contract.

How Price is Determined

Processors, being in the better bargaining position, will try to sct their contract prices at levels which will allow the greatest prorits, For example, one buyer who can control demand in the local market, will attempt to coffer only tnat price which he thinks wiil give him the volume necessary to make the largest profit. The lower the price the buyer sets, the smaller the quantity obtainable. At some price level, considering the quantity that can be purchased, the processing firm will make the largest profits. Over s long run period, however, the price which the processor sets must at least equal average cost of the producers, or the supply will disappear. 2/

The situation, pea aes: is often one of a few large processing firms and numerous small ones. The large firms usually assume price leadership ana to each new nositicn taken by these dominant firms the small .ones will tend to adjust on the basis of competitive behavior.

In analyzing such a. situation Nicholls says, NOur overall ana lysis would lead us. to expect. that prices

throughout the industry would tend to be established at such a level as to maximize. the profits of the most efficient of

1/ This situation which is characterized by few buyers and many sellers is technically described as being one of "oligovsony"; a situation having only one buyer anc many sellers is. called "monopsony".

2/ Adapted from Due, John f. Intermediate Economic Analysis, Richard D. Irwin Ince Chicage, 1947.6

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the dominant firms. This follows from the fact that while,

in their relationship to each other, a few dominant firms

must recognize the most efficient of their number as thei

leader, the dominant firms -~ regardless of efficiency --

assume a position of leadership relative to the remainder

of the industry by virtue of their sise alone." 3/ Even though a processing firm may not be large enough to occupy a dominant position as far as the national market is concerned, even a small firm may be dominant relative to the local market. The element of location cer= tainly affords any firm some protection from the competition of other buyers by the additional cost to the farmers of transyorting the supply of the farm oroduct in his local area to the markets of his competitors.

f, in a given market, both the number of processors and producers are few, with neither group having any particular monopoly. advantage, price determination becomes largely a bargaining process. The buyers will attempt to obtain the products at the lowest price consistent with the supply they desires; the sellers will attempt to obtain the price which will give them the most profits. The price will be indeterminate and the actual market price will denend to an important degree upon which of the bargaining parties has the better alternative sources or outlets for its particular product or use of its resources.

If the number of sellers in the market becomes more numerous and the number of buyers becomes fewer, the buyers are then able to exert more control over price to the disadvantage of the sellers.

Under market conditions of buyer advantage, as may be the case in the vegetable processing industry, the individual farmer, generally having small quantities of product to sell is in a weak bargeining position and consequently is not able to exert much influence in determining the price of his product.

"Individually the farmer is a notoriously weak bargainer because (1) he msy not know in what grade his product falls; (2) he may not know the relative value of the dif- ferent grades; (3) he may not know what his local price should be even when central market prices are known, and frequently he cannot even interpret wholesale market quotations; (4) he cannot follow market conditions closely enough to know at any given time whether market tendencies are up or down; (5) he finds it difficult to judge a pro} position put in a new way; and (6) his own supply is so small a part of the buyer's needs as scarcely to be missed if he refuses to sell." Lif,

"3/7 iicholls, Wm. H. Imperfect Competition Within Agricultural Industries. Iowa State College Press. 1941. ».143.

4/ lrdman, H. E. Possibilities and Limitations of Cooperative Marketing. Calif. Agrie EXpe Sule Circ. 298, 19 Ppe 1942, pe 11.

Alternative Actions of Producers

Under competitive conditions as described above, what alternative does

the farmer have? <Apvarently there are three main ones: (1) He can continue to produce and bargein individually as best he can for the sale of his products; (2) he can join with his neighboring farmers and pool his efforts with that of others to create an organization which will strengthen bare gaining power; and (3) he may call upon government to step into the picture to help regulate the markets with one buyer and many sellers and help establish a "fair" price (Administrative Pricing) at hearings where gov= ernment agents, processors and grower represensatives each have a voice.

£ fourth alternative would be for a farmer's coonerative to engage in processing the farmer's crops to carry the marketing operations on through to the wholesaler or the consumer, in other words, a vertical integration of production, processing, and marketing activities.

A fifth alternative might be to rely on Government regulation such as

the Shermen Anti-Trust Act to reduce the nower of the buyers in markets with one buyer and many sellers. However, the present market situation in the processing industry has develored since the Sherman Act was passed and it would apnear that in order to have efficient operations larger plants are desirable rather than addition of more small plantse

THEORY OF BARGAINING

The Bargaining Association The realizavion of their weak bargaining position has induced numerous groups of farmers to form cooperatives in an effort to improve their bar= gaining strength. The sole objective of some associations is bargaining for the sale of the products of their members. They do not handle products, process or store them, but only negotiate for the price, terms of sale, and other business arrangements involved in selling the products of their member Se

The primary aim of such an association is to increase the bargaining power of the producers by bringing together under contract a large number of producers who agree that their produce shall be sold through their association. The association in this manner obtains the power to bargain for the sale of a large quantity, if not the entire supply, or produce in a particular market.

From the standpoint of its structural organization, the bargaining asso= ciation may be either a local or regional, centralizea or federated associatione Farmers hold membership directly and sign contracts with their association and agree to accept the prices established by the association and the processorse

The history of American farmer movements has numerous exemples of efforts to control the market through cooperatives. Many farmers have believed that such control would allow freedom in setting price. However, in agriculture there are few products with no substitutes to which consumers - can move when price changes are unfavorable.

Even though the typical single firm monopoly ‘control of price is not feasible for most agricultural products, some semblance of monopoly might be beneficial in terms of helping to raise prices. For instance, the growers of canning peas in a given area might feel that through the forma» tion of a tight bargaining association, their industry by cooperating with other industries that produce relatively close substitutes would be in a position of gaining some monopoly advantage by control of supply and bargaining as a unit. If they can take additional steps and organize’ the tomato growers, snap bean growers, and all other farmers in the market area who vroduce similar crops which might be considered substi= tutes, then the group has placed itself in a much better bargaining position and may.be able to exert more influence over price.

When farmers group together in bargaining associations and negotiate prices as a unit they reduce competitive selling among themselves and tend to function as a single seller. The association serves to protect the indi-~ vidual producer against the condition of few buyers and many unorganized sellers-on the other hand. ;

The price=making power of such an organization is more limited than is commonly believed. For example, a local vegetable bargaining association cannot obtain prices substantially higher than those obtained in other States or regionse Canners are in such keen competition with other ree gions as to be forced out of business in a given section if prices are substantially above those with which they must directly compete.

Many associations come into existence because of prevailing practices toward one=buyer monoply in the market. The bargaining association can be looked upon then as a means of combating these practices through use of countervailing powere

Influencing Prices Through Bargaining

What then is the main theory involved and what are the possibilities

and limitations of influencing prices through bargaining? The theory

of collective bargaining for agricultural commodity prices holds that

on a given market with a given volume the price may be established some= where between the top and bottom of the bargaining range, depending upon the bargaining strength of buyers and sellerse

Buyers attempt to buy at as low a price as possible and sellers attempt

to sell at as high a price as possible. This necessitates a certain amount of bickering or haggling until for any one product in any particular market a price is established at which transactions take placee

How is. bargeining strength ettained? . Whet provortien of the volume

must an essocietion:control: to bergain effectively? These ere im= ny portant questions: which. immedistely: come to the. fore. when a coopere=- . tive has as:one of its: objectives the influencing of prices through bargeining.

It is desirable, from a seller's standpoint, that he control-a lerge enough portion:of the volume to: be’sold so: that the buyers cannot obtain a sufficient quentity, for their needs without dealing: with him. From-a buyer's standpoint, it is desirable that: he have access: to a - volume sufficient for his:needs’ ene Bermner: dependent on he so Eite connor) by. sany, one seller. aoe

The aH euaties: that associetions heve in trying to obtein MOB EP ONS control of supnly in. their:effort to influence price has long. be recognized... There are so many farmérs producing each product ena SO . many others who: would produce it if the price were increased slightly that any permanent. monopoly control is extremely difficult.

Most’ attempts at monopoly control of supply have feiled because:-of: (1) Inability to bring about the effective cohesion of © sufficiently large: proportion: of the producers; (2) inability to:prevent the entrance of new producers into agricultural production or to control output of those already vroducing; end (3) inability. to prevent sub- sti tution of one oe) product for snother by the consumer.

Meny writers in the eacsenatine field heve emphasiz ed thesimpaxtaree of trying to adjust volume of production to merket demands. However, for

the most pert’ cooneratives have been organized to take care of the selling function rather then production. The associztion nece ee leaves con, trol of production with the individual grower. In the case. of temporary over-supply of e@ non-psrisheble product a Lente association may render valuable service by adjusting time of sale.eccordingly. Nevertheless, it is the farmer's responsiblity rather tala the associetions's to adjust production. -The associetion cen help by supply informetion: on the future outlook, but this is effective only when the fermers trenslate this-infor- mation into ection on their individual farms,

4 bergeining association, to be effective, met Heve | control over a sizeble volume. The portion of the total volume of 8 given commodity needed denends upon a number of circumstances. ones important is the nature of the demend for the product. If demand is inelastic, that is, the product has few substitutes and is more a necessity than ce luxury, - a small volume is likely to sell for a higher price end.net the fermers a greater total return than if the demand for the product were elastic. Other things being equal, the. more elastic the demand for the product, the higher proportion of control over total supply an essociation must have to effectively influence prices. Obviously, much also devends upon the stetus and number of buyers in the merket.

The slasticity of supply of the product produced is also very important, The ‘supply of most ferm products is relatively inelastic, espocially within a season or oyer-a short period of time. This means thet a change in. the price of the product does not. result in a proportional chenge in production in the séme direction. This fact.is associated with the bio= logical end economic aa. of the industry. For example, in the milk incustry, it takes two years or more to raise a heifer to the time of first freshening. Ty cé ae crops, in most areas, only one planting per year cen be'grown, Production per acre cen be adjusted with chenging price conditions but only within relatively nerrow limits. Considering all these fectors, the more inelastic the supply of the product the more difficult it weuld be for the bargaining association to be effective in controlling production,

Stokdyk estimeted: thet the necessary portion of the total supply needed for effective berpaining renges from 25 per cent in'some livestock merkets to 90 per cent in the case of some svecialty crops. 5/ It is axiomatic that the highsr the percentage of total supply controlled, the more effect the essocistion will have in price determination.

Aside from control of volume, bergaining power is ettained through proper knowledge, interpretation end use of market information. More will be said about this in a subsequent section of this study.

ta

ome Theoretical “Uxamples

“Perhaps some of the discussion on the theory of bargaining can be brought into closer foeus by considering one or two examples pertain- ing to the vrocessed vegetseble industry.

Let us assume thet two rather lerge chain-canning companies, A and B, operste 5 and 6 canning plants respectively in © given srea adapted for ‘growing good cuclity canning tometoes, In addition to these 11 plants there sre severel other plants opersted in the same gencral area by smeller, indcpendent companics. The producing areca is charecterized

by 8 reletively large number oF small producers. None of them produce enough ‘tometoes to justify operating their own canning plant. Pro- cessors heve depended chiefly upon these semll producers for their total supply and eech year have offered them advance contracts for their tometoes,

5 / Stokdyk, H, A. Economic Objectives of Farmers Cooperetives. Farm Credit Administration, Washington, D. C., Misc. Report No. 90. 1945. io Zor

Each of the two large firms considers that a contrect price of $25 a ton for first grede tomatoes is to its benefit and should, there- fore, be the price offered growers. The farmers, on the other hand, desire to receive a contract price of ‘28 a ton for No. 1 tomatoes, Under this assumption firms could pay more and still make a reason— able profit snd not be forced to reise their wholesale price of the canned product,

The several smaller independent plants have been in the habit of accepting the price leadership of the two lerger ‘irms. Some of them would like to increase the contrect vrice to the growers in order to attract more volume, but they ere unable to beceuse they would then be paying a price above that of the larger firms, and this would place them at a competitive disadvantage in selling their product. Hence, the small firms accept the price leadership of company A and B.

In the face of such a market situation, the tomato growers as indi- viduals are quite helpless to set their prices raised, It may occur to a number of them that they could refuse to grow tomatoes and shift their land to something else. However, they are experienced at growing tomatoes end because of certain factors of immobility it is somewhat difficult for them to shift to a crop that would return them as much money per ecre. They are relatively far from consuming markets for fresh tomatoes so they are limited es to alternative outlets. Also, the farmers are not united and the few that did reduce acreage would have small effect on the totel production in the area.

Here then, is an example where an effective price bargeining associa— tion could be of significent aid to its members. “ith the majority of growers united under a strong organization, the association leaders could go to the canning companies early enough in the year and lay down their needs end demends for a better price for tomatoes, Since the companies could actually pey “28, the rise in the contract price for raw products would have no apyreciable effect on the whole- sele and retail vrice. The profits of the canning companies would

be reduced some, but not enough to force hardship on any of them,

The farmers could benefit materially by uniting their efforts in a bergeining association and negotiating with cenners for a better price for their product.

On the other hend, let us assume that in this particular area there are only two canning plents and that they have about the same costs, and that “25 a ton is all that the two companies can possibly pay under the existing market conditions. If, through its control of supply, the farmers! bargaining association brings pressure upon the companies end forces them to pay more they will fail. If the canners go broke and the plents close, the farmers cennot grow tomatoes for canning and consequently an industry with a local payroll is lost to

25a

the area, The result is inevitable when the association continues to press for a price beyond that the market conditions warrent, The farmers price themselves out of the market, the industry suffers and: the association soon falls Speke. =

The above two cases clearly show some of the streneths and weaknesses of price bargaining. Civen circumstences where canning companies are paying less than the equilibrium price — that is, less than the price which would preveil under perfect competitive conditions in the market -- the bargaining association has possibilities of successfully rais- ing prices up to that point. Given a price already equal to the equi-- librium price, a bargaining association is inviting feilure vigor it continues to demand higher prices.

Cn the other hand, if the processors have advantages in bargaining power and persist in offering a lower price then the equilibrium price, the agriculturs1]1 producer will suffer. He may continue to produce

at this disadventage until some time as he finds more profitable alternetive use for his resources.

A good enalysis of the theory of bargaining in the milk industry is given by Nicholls. 6/ He used the example of a cooperative which embraces all milk producers in the area and which has control of its members! production. This cooperative bargained with.the one distri- butor in the area, the entry to other distributors being closed, It became a clear cease of one buyer bargaining with one seller. Nicholls concludes his analysis by saying:

"Je may conclude by steting that while it is possible to fix definite limits within which price may be agreed upon under bilateral monopoly, the exect price level within these limits is indeterminate from a strictly economic point of view. The actual price will depend upon the relative bargaining power of the two agencies which depend in turn on certain non-economic (éssen= tially political) forces."

The conclusion reflects that price is not definitely established and ~ that the actual price will depend upon the relative bargaining power of the two agencies, Consequently all factors which tend to increase the bargaining power of either side become important in the Clog aM tion of price.

6/ i Nicholls, Wm. Imperfect Competition Within Agricultural. Industries, Iowa State College Press, 1941, p. 172.

Toy

riences in collective bargeining, lebor has often used the en effective weapon to increase its bargaining power. The neture of the agriculturel industry does not lend itself as.readily to a strike situation, The high percentage of fixed costs, biological nature of the industry, few alternative uses for land, and the like are all well known factors which affect the ability of agriculture to adjust to price changes or to make a strike effective. Under certain situa tions, however, this weapon can be.used by farmers tc gain bargaining advantages, There are examples of successful farmers strikes in the milk industry. In certain areas canning crop growers have also been successful in improving their bargaining position by shifting and threatening to shift their land to production-of other crops.

The effectiveness of such strike attempts devends upon how éffective

the association is and how much control it has over production, In the

case of canning tometoes, it is obvious that the threat to strike, or

more properly stated, the. threat not to grow tomatoes, must be made prior to the planting season. Once the crop is plented the farmer has incurred certain costs thet cannot be recovered unless he continues the production process and merkets his crop. The threat not to plant tomatoes can, of course; be more effective in influencing terms of the contract if the farmers have several alternative uses for their land, labor end other resources.

The fewer the alternatives the less effective the bargeining power.

By centering attention upon the key importence of the threatened strike it is easier to examine the bargeining process by which the final negotiated price is arrived at.

When a cooneretive demands an increese or resists a reduction in the price by threatening to withnold the desired acreage, the processor buyer must either pay a higher price than he would have paid of his own initiative or must be prepared to endure the direct loss resulting from a stoppage or a severe reduction in his supply. If resistance aprears less costly than concession he will resist; if concession seems cheaper, he will meet the cooneretive!s demands. These are the two over-all alternatives. What

are the circumstances that determine which one will be accepted?

Nicholls analyzes the Bee a ing process in the miik industry in which producer cooneratives use strike threats to force milk distributors

to raise prices above those a in the absence of. a bargaining agency.

As the expected leneth of the strike increases the price which distributors are willing to pay rises, and at the seme time the price which producers are willing to accent decreases. When the length of time the two parties are

willing to strike are Sarai at a single price then they will come to agreement,

With some modificetions due to the differences in production and marketing methods, Nicholls! analysis of milk bargeining may be applied to the canning crop industries, One difference to keep in mind is thet milk producers can shut off the supply of their product on a day to day basis, whereas the canning cron producers have to decide whether to produce or not to produce for an entire season. However, the element of time can be used quantitatively

in the canning crop bargaining association just as in milk bargaining,

plenting seers ay t is during this period which the bargaining usually akes plece. The longer the cooper ntive can hold to the threat of with=

holding all or a mejor part of the supply of raw products, the more likely

the canners are to agree to higher prices, In effect, both sides bring

into play their bergsining power from the time one canning, season ends until

a contract is signed for another. The desdlina is the planting period.

Canners cnd growers like to complete contreects well in advance of the € i S +

Assume in a particular area all the processors form a committee to bargain with the raw product producers and all the raw product producers have joined together in a bargaining cooperetive, and now these two parties, the proc essor and the producer representatives face each other across the bargaining table.

he processor is interested in obtaining the right to contract with the individual members of the cooperative for an acreage which will yield

a season's pack in line with his enticipated market demand, and at the lowest price possible considering guelity of raw product desired. He will elso have e price above which he will not go because to do so would leave

=)

him no mergin to cover the costs incurred in canning the season's pack,

Facing the processor is the bargaining cooperetive and it is interested in having the processor agree to take the needed acreaze at the highest possible price. The cooperative will also have in minda price pollen which it will not go hecause its members will have more »vrofitable alternatives,

In this type of bargaining each party threatens to withhold their product or services from the other. The processor says he will not contract any corn et ths nrice offered by the cooperative, and in turn the cooperative refuses to allow its members to contract with the processor unless its rice is met. In effect each vavty judges the other's bargaining position and

the prices: each would be willing to accept at any given time during the bargaining process. Customarily the opening price in the bargaining process is based partially upon the last season's price with the processor's offer perhaps under the past year's price and the cooperetive!s offer some above last year's pace. Within this renze bargaining takes place and agreement

is reached at a-price unsatisfactory to both, eee ie at the best price

each side ids woseto le aig Maleate, xk | alts ke neg nective bargaining power. »

For example, if the cooperative demands a price Bes the price determined

at the bergainine equilibran, the processor w will refuse it if he correctly concludes that the cooperative is unwilling to withhold acreage in order

to obtain this price. If the processor demends a price below this equilibrum price the cooperative will refuse it if it correctly judges the unwillingness of the processor to carry out his threat. The two bargainers will get to- gether at a orice whsre each judces the other woyld be unwilling to make any further concessions. ft whetever point price negotiations begin, assuming correct Eeaipeonee ‘on the part of each concerning the others positions,

they must end at a price which correctly reflects. the relative bargaining strength end skill of each, f+ this point each concludes that the other would be willine to carry ovt his threat rather than make any further price concessions. fs Nicholls seys, "This price will be reached by a special form of higsling ~ by threats, not by competition," 7/

ui, Nicholls, Wm. H. Imperfect Competition Within Agricultural Industries, Iowa State College Press. 1941 p. 174

Lleida fis |e eres

Although price is emphasized in this Hpotheticet case there are many other benefits which are bargained for in the process. These heve been indicated in other places in this publication and are not repeated heres

The psychological effect of the threat by tho cooperative to induce its.,

members to shift their land to other uses coupled with a sound knowledge

of market facts, profitable alternatives, and the ability to use and.inter—

pret those facts are the important factors in the negotiations processe

Of course, at any given time the cooperative must balance the costs of. con— cegsion against the edvantages of their other alternatives, At its maximum

asking orice the cooperative would have no reason to withhold acreage at

all; it may want to increase it,

The processor will also employ the paycholegical effect of a threat to let

his plant lie idle for the scason or to graw the crop himself, unless his

price is met. He will also use his knowledge of market eee iors partic- ularly with respect to the profitableness of the relative alternstives open

to the producers However, if only a small acreage is available, the processor may not find it profitable to run his plant because of high unit costs involved, The processor is also aware of the loss he would probably incur if he did not operate at all, and he will consider the costs of eeu the crop himself,

These factors are uppermost in the minds of the bargainers as they sit across the table from each other. It is extremely difficult for one bargaining party to know the other party's willingness to strike or resist. The judgment may eastly be incorrect since there are many subjective things in the picture involving not only money costs of striking but also such "costs"-as unplesant— ness of conflict, loss of public goodwill and the like.

In an exceptional case, a strike may even be considered an asset by one or

the other party, On this point Hicks says, "Weapons grow rusty if unused

and a union which never strikes may lose the ability to organize a formidable .

fea! so that its threats become less effective." 8/ Thus the cooperative may have to try out its weapon occasionally to demonstrate its effectivenesss

Also, if the processor feels fairly certain that the cooperative is unable

to hold its membership in line, he may welcome. a strike as a’ chance to reveal

the actual weaknoss of the cooperatives

If as a result of effective bluffing and counter-bluffing, each overestimates the salon s willingness to carry out its threat, it would be fairly casy

for the parties to agree upon a price range considerably narrower, each thinking he has. obtained an wnusally good bargaine Within this narrow range, aniable negotiations are possible and the probability of an agreeable price being reach is high.

8 Wises, J» Re Theory of Wages. MacMillan, London-1932, p. 146.

ae eke

If, on the other hand, each varty discounts the other's bluffing too much, thereby underestimating the extent of the other's willingness to earry out its threats a conflict must result unless, as is likely during the course of the negotiations, each is able to correct his estimates.

Since each party would, in general, prefer a peaceful settlement, the actual msaterialization of a situation where the crop is not planted will result only from faulty negotiations, arising from errors in the estimates of each concerning the other's actual position. Errors in estimates concerning the other's actual position should be lessened as a result of negotiations.

Under actual conditions the bargaining by the buyers may be done through a "milk dealers association" or a "canners association". In such cases, one of the dominant firms usually assumes the role of leadership in

‘the negotiations with the cooperatives, or they do it through a repre= sentative committee system. Usually the dominant firms show more inter= est and cooperation in the bargaining process by virtue of their superior reseorch fecilities, larger financial resources, and their general opposition to "cutthroat competition’. On the other hand no cooperative is in the position of a complete monopolist, since its control over its membership and total production is rather imperfect and its financial resources may be inferior.

In some cases it may be exceedingly difficult for the two nerties to com promise their differences because each is afraid thet the other will interpret any concession as a sign of weakness and might insist more firmly than ever on its original price. In such situetions a mediator who commands the con= fidence of the two sides may be exceedingly useful in helping them arrive

at a compromise, Or, the deadlock may be broken, as it frequently is in bargéining over wages or the price of milk, by referring the dispute to an arbitration committee. Such a committee impartially reviews the facts on each Side and decides where the prices should be. Each party is then re- quested to abide by this decision.

Bargaining and Administrative Pricing

The third major alternative for determining price under 2 buyer-dominated situetion is that of utilizing a Government agency to help regulate the industry and establish a "fair price at hearings called for thet pur-= pose. This practice has not been followed to any great extent in the processed vegetable industry, although during the World War II State Agricultural War Boards were given certain authority to help regulate contract prices for canning crops which would encourage growers to meet production goals as set by the U. S. Department of Agriculture. In

order for processors to qualify to sell canned goods to the Government,

- 13 =

and the War Devartment, t-ey had te agree to pay producer schedule of prices according to grades. This price schedul veloped by government officials in consultation with re

the industry. Following the war the procedure was abandone

In the ase of milk marketing, prices for fluid milk are determined in IMany of the larger city milk markets through mnerseting agreements and rders administered by government authority. When a price-determining negment of this sort is established, no particular change takes place structure }

he market, but the machinery for price determination

cl (q0) 16) i a z sah)

8

is changed. Pee e set, not by the unregulated forces of suvply and demand operating through the interplay of many buyers and sellers all over the market, nor by the bargaining of a cooperative with a few proc-= essors, Dut” administra tively by a government agency.

So-called administrative pricing of farm products is not a new develop-= ment. Its history extends over many years and many countries. In the depression years of the 1930's it was used to alleviate the plight of the producers. In this case the government acted to increase farm prices and incomes. At other’times, as during World War It, the situa- tion was reversed, and the government acted to hold down prices in an effort to pravent the cost of living from rising. Because government represents the entire population, it should consider the interests of all groups and endeavor always to reach a balance that is fair. The coilective argaining association, if there were such in that particular market area, would likely act as the repressrtative of a large number of producers in hearings held tc develop the basis for administrative pricing and would have an important voice in final vrice determination. Its bargaining would thus be more with the government agency than with the processors.

the real problen in Stun Sn ative pricing Se Sat to the level at which the prices are fixed. Minor deviations from the levels that would pre= vail under He Satie stitive market conditicns might not have a signifieant effect. Disitocations would beome serious, however, when prices are set out of line with competitive prices for any conse aie length of time. Under conditions of relative stability in the general price level a

fairly close approximation may be achieved. But under conditions of widely fluctuating prices, this task is very difficult.

The history of

examples of the dislocations which a pricing when too little consideration to fundamental cconomic principles is given. 9/ Further emphasis.on this point is made in the conclusions of the New York Milkshed Price Comnittes which states:

governme out price fixing efforts provides a wealth of encountered in.administrative

"In any program of administrative pricing by government,

it is important tc keep clearly in mind: (1) that the long- run interests of producers and consumers should be considersd as more important than their short-run interests and (2) that many objectives which are desirable from the standpoint of

9/ For examples see Bleckman, Jules, Government Price Fixing, Pitman, N. Y. eo ee cae some of the cases of Price fixing by Office of

aves

improving the welfare of oreducers and consumers cannot be attained by the simple expedient of fixing the price of this or that product at some arbitrary devel." 10/

Cooperntive Veget- Bille Processing

ce: 1 er RTS

PR TR Re ot CTA ERI we

Growers moy also acquire on operate their own processing plrnts. However, vegetable processing is a hazardous industry involving many risks and

failures. Organizations thet are, able to distribute their risks over a number of plants or among a number of commodities are. better fortified against losses arising from local crop failures or other adverse de= velopments than those primarily or solely dependent upon one or two

crops grown in a restricted area. This circumstance may account in part for the concentrated character of the vogetable canning industry, which includes large nation-wide corporations that pack many different products in plants located in most of the large producing areas.

Vegetable processing cooveratives in contrast to l»srge private processing localized, ana usually confine their operations to fewer ice, most of these cooperatives have less opportunity for spreading risks geographically or in terms of products.

@) 453 =] n fa) 33 (@) ei O La) 1)

When conditions aren't favorable for a cooperative processing operation, producers may improve their marketing situation by perfecting and supporting sound bargaining associations.

TECHNIQUES OF BARGAINING

Important as it is for a bargaining association te have adequate velume Sane and a sound organization Sees bes it is also important for

tC to develop Laiobins techniques for the conduct of collective bar- coe negotiations. Whether certain techniqucs work effectively or not depends upon their nature and how they are initiated and carricd ae the negotiation process. Collective bargaining is essentially rocess whereby two groups. reach an agreement on various points. It is a Vee ans process involving human emotions and psychological attitudes. The attitudes developed by both sides at the bargaining table go far in establishing the atmosphere, and the working relations between members of the two groups.

Prepering for Negoti ean

ab.

Before bargaining can take place it is apparent that the processors or buyers must recognize the association as the bargaining ‘agent for the producers. Obteining this recognition is usually the first step for an association. Such recognition comes ratner easily if’ the associa= tion has a large percentage of total supply under its control and the buyers perceive that the spokesman eat iy represents the rank and file of the producers.

10/ Report of the New York Milxshed Price Committes, Febraury IVES). Sols) date’ ~ 156

a ance preparatio CESS salesman, not eve endenvors to vresent his nropositicn until he quently encountored objections to his procauct ti ome Unexpected’ objeetions work Weak points and objections eae pated and reviewed so that a AC, the negotiators for each s ints of the other’ side and be reg adequate knowleds int 4 :

irrcunding the

Nex ex “~ » 40, 1D

oy °

oC WL

wide Shoulda repared 08 me sot them. erpretation of all importa industry.

i]

. : | ' |

4A most important requisite for efficient and sound handling of negotia~- tions is economic inform:tion of a type which allows a thorough ‘analysis of current problems in the industry and in the market. The more complete and accurate such information, the closer the negotiations can be guide Dy intelligent decisions rather than blind guesses» If gach side has the facts and a sincere desire to bargain in good faith, it is much mor likely that negotiations will move smoothiy and that equitable results will be achieved, The determination of an equilibrium price by collectiv bargaining, of course, assumes that exch side has full kncowledse of the market end relatively equal bargaining ebility und techniques in negoti- ations. To the extent that one. side has more and better information than the other ana uses it inteliigscntly, the ter will be its bare aining power. Bargaining power is denencdent not onl upon strength which comes from com.rol of adequate volume, but also’ upon ability to bargain effectively» Ability is attained through a knowledge of market facts, proficiency in evaluating them, and skill fulness in convincing others to make teansactionen It is gained through study and experience, It is an ability highly ree gorded in a competitive economy.

h general, to be g, cach side needs te know: The economic aohaiieien nll times, what the results of existing prices anc likely to be, what forces com= bined ‘to’ bring ahe s, and how their organization may anticipate and these forccse

2ceurat

the A ib LN

+3,-

Ae Fa a the

3. Trends in general economic and b Tr

weaknesses and

facts a pile the S, pre

industry i scessors, an

U md the pub

‘© 16-

rS

a ttitudes of

producte- procucte

usiness comitions. the. othor

ncluding attitudes of NISC

Ra JW os

It is important that such information be compiled in a form that be most useful for negotiation purposes. This will require me accurate records based on reliable sources. The particular type of records needed and the detailed nature of. them will depend anon ae product. In most:cases, farmer's bargaining associstions are guilty

of keeping too few records rathcor than too many. Naturally, as the scope and operations of the association brbadens the greater will be the need for more records and information. Very often ass sociations may have need for certain tvpes of information for which they have not kept re= cordse In such cases they must rely on less reliable information from other sources. As a matter of insuring the association the specific ine formation it necds for effective bargaining, it would appear to be sound policy to compile regularly all the pertinent statistics and other facts rather than depend on getting such information elsewhere on short notice.

Organization of Material

Before actual contract nogowi alec ene ee nego= tiator or spokesman be sure the } Lshcs to present is cloan in his own’ mind. This ‘is a awe aaa, epee tant when it zo eee

- m

that he renresents a larga body of growers. To be sure that he truly represents the best thinking oi the Sey it is perhaps well to hold meetings of growor revresentatives in advance of the negotiation meetings ton set a cr scetion. of their thinking and erystallize opionions con- cerning the es issucse. To be most effective, the spokosman needs the assurance that he has the full backing of the members of his associa= tion regarding the important issucs for negotiation.

s beg ma

(2)

Se Ss

‘Aftor the basic issues ave determined, allowing for participation of members in such determiniotion, the presentation of points should be or- ganized in the most logical orde:, iceping in mind also the possible reaction of the othr negotiating party. Well planned presentations, backed by sound data, illustrated with graphs and charts along with sound

easoning will very likely yield better results than verbal.-orgument alone. If the other side sees that the arguments are supported with reliable data, ond if the controversial points can be clearly illustrated, ncogotiations are likely to progress more sroothly.

Actual Negotiations

The leaders or spokesmen on cach side must ncecssarily be of high calibre and ability. The type of leadership should not be that which would dom= inate or try to exercise unwarranted power over people. Rather, it should be the type of leadership that is effective in working with people and encouraging them to reach agreement. To effectively work with people

a leader should have tolerance instead.of. zealotry, self=-dise 2ipline instead of self~assortion, ane restraint instead of belligerence.

Experiences from collective bargaining in the labor ficld indicate:

"Many carncst mcn in the ranks of both management and unionism have ilsarned that in negotiation they have had to disregard preconceptions of 'what ought to be' in favor of ‘what is’; ‘namely, a new set of human relationships that need constant, conercte guidance, Thev have learned too, that resort to ‘principles! is less practical than to resort to the opera= tional approach of taking a long hard look at what actually makes the wheets go round." 11/

Negotiations are usvally conducted through committeos representing both des. For best results, however, only one man should be authorized to

speak for each side. Other committee members should, of course, be

free to ask questions or give supplementary information. Only the

spokesman, however, should be allowed to maxe statements that: may be con=

sidered to commit the association. The committee should agree in advance

about methods of prescnting proposals and mecting counter=proposals, but

actual commitments should be left to the spokesman. Too many talkers

add cconfusion to negotiations.

No fixed rules can be laid down for conducting collective-bargaining negotiations, although good common scnse approach is paramount. The represcntatives on both sides should be atle to judge the situation and conduct negotiations accordingly. At the first meeting, it would seem that the main objective should be to establish an atmesphere of fricndli- ness and confidence so that negotiations can develop smoothly. The meeting should be as informal as possible. The discussion of current events or non-controversial matters might be a good way to break the ice. Better progress may be made if a rather definite agenda is agrecd upon as well as how long the meeting is to last. Other specific points concerning arrangments can usually be agreed upon as the mecting progressese

be =)

Negotiations are often re aplet with objeetives from the opposing party. To win his points, the spokesman must mect such objcctions. Suggestions for meeting objections arc given by Hill and Hook as foilows: 127,

fy o q ir) O ur) (a) He ct bee wv)

1. Anticipate them - An objection answeret actually stated) Josos) iis power

Qe Agrec, then rofute = This method may be termed the "yes, but" answer. The negotiator agrees with the objector and then explains the difference by starting with "but".

3. Postpone the answer = Sey "I am coming to thet " and thon

answer the guestion later when it may seem more onportune.

agTY Williamson, S. T. and Harris H. Trends in Collective Bargainin Twentieth Centru Fund, N. Y. 1945, p. 201.

12/7 HAIG. Leet. and Hook, C. Re Managomont at the Bargaining Table. McGraw-Hill Co. N.Y. 1945. poe. 243=245.

tiny do you ask the cuestion"? in avoics making a hasty revly»s Oub additional information tha:

It may igs bring would not otherwise be heard and that might be very _ valuable to the ee MA TLONS »

eee cdvan bare ~ ae to Osean a

De Offset advantages.

6. Capitalige the objection = Sometimes the opposition may give en objection thet can be turned inte a good reason for accepting the proposal.

7. Ignore the objection -— The only objection that can safely be ignored is one obviously made as a joke and not intended to a taken seriously.

8. Deny the objection = This is the "head on" situation. Care should be eee to avoid appearing argumenta tive or impatient.

9. Analyze the situation - This is sim we to method 4. The negotiator may be somewhat baffled so he counters with WWell, let's cee the Senet He then begins to ask questions about his opposition's points, From her on both sides may contribute something which eventually leads to new and perhaps smoother negotiations.

The negotintor must alweys remember that something once offered cannot be withdrawn without great difficulty. Just as with the commercial salesman, once he mentions that he will scli at a certain price it practically impossible for him to raise the price,

Developing Effective Bargaining Machinery

Bffective ma selma ae Os Cee does not develop all at once. Since bargaining is a dynamic process involving human emotions the pattern

that works best evolves oe Ag more experience is gained alterations will be made in procedures to mcet the concitions that arise. Marketing conditions are so varicd in different sections of the country that plans and procedures which bring results in some sections may prove almost worthless in others.

The machinery for negotiating contracts between cooperatives and proce essors can be fairly simple. It can consist primarily of formal con— ferences on a local or regional basis between representatives of both sides. Provisions should be mace for arbitration of issues when the two sides cannot agrees. This is largely the type of pe used in

negotiating labor-management wage contracts. Such Du eae does not of course, always suarcntce prompt and peaceful settlement of all ee

involved.

R +} By AqQiaa ad eist i] Sia Gy antatiwves 5] st ha aware or the Both processors and associations representatives must be aware of the danger of making unreasonable demands. If price offers made by the

7

processors are unreasonably low, animosities will be built in the minds of vroducers.. Likewise, if the cooperative asks for prices or other contract provisions beyond that justificd by market conditions, the

f the parties are unable to egrec

negotistions will likely bog down, I certain issue, it is desirable to drop that issue for the time

and proces wen tae next. If tempers appears to be getting on edge

i she meeting until Igter. Hach side

can then See ‘and ee more facts and goers on further een

It may hapoen that negotiations are

of such meetingse If possibiliti

dispute can be referred to an impart

and decision.

Ly ttle ee seem too distant, itration committee ee rev

= 710)

Rye ea eS abe: os