Risk Management in the Cooperative Contract

12 Pages Posted: 3 Mar 2011

See all articles by Ethan A. Ligon

Ethan A. Ligon

University of California, Berkeley; Giannini Foundation

Date Written: November 26, 2008

Abstract

Agricultural cooperatives have long played an important role in helping their members manage risk. Yet the typical cooperative does a much better job of helping their members manage some sorts of risk than it does others. In particular, co-ops are good at helping members manage marketing risk, or idiosyncratic variation in prices observed within the course of a single season. However, agricultural cooperatives seem not to be particularly good at helping their members to manage production risk, which involves variation in yield over the course of several years. This paper argues that by taking advantage of the multi-year nature of most members' relationship with the cooperative, the cooperative can also provide a useful (though limited) form of insurance against crop shortfalls.

Agricultural producers face various sorts of risk; some of these are difficult to manage using standard institutions. Agricultural cooperatives can play an important role in helping their members to manage these sources of risk. For example, marketing co-ops traditionally help to reduce price risk by pooling sales across time and space, and could reduce production risk by making some payments to members on the basis of predetermined shares, rather than on actual delivery or patronage".

However, just because a cooperative can help its members manage risk doesn't mean that membership in a cooperative will serve as a useful means for dealing with risk. The details of a cooperative's by-laws, management of equity, mechanisms governing the transfer of delivery rights, methods of capitalization, pooling rules, and expansion options can all have a big impact on the usefulness of the cooperative structure as a risk-management tool for users.

Here, we provide an enumeration of some different sorts of shocks which may be important to agricultural producers, and then describe the manner in which a typical cooperative market pooling mechanism can reduce the risk associated with these shocks. However, market pools don't help producers manage yield risk at all|the cooperative must deploy a different mechanism if it is to help members manage shocks to output.

Accordingly, we describe a simple way of structuring an agricultural marketing cooperative's operations so as to best help members manage yield risk, in addition to the other sources of risk they face. Marketing cooperatives o er the greatest scope for mutual insurance among members, and so will serve as the principal focus of the proposed paper, but some approaches to risk management will apply to other forms of cooperatives.

Suggested Citation

Ligon, Ethan A., Risk Management in the Cooperative Contract (November 26, 2008). Available at SSRN: https://ssrn.com/abstract=1774021 or http://dx.doi.org/10.2139/ssrn.1774021

Ethan A. Ligon (Contact Author)

University of California, Berkeley ( email )

207 Giannini Hall #3310
Berkeley, CA 94720-3310
United States

Giannini Foundation

UC Davis
Davis, CA 95616
United States

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