Forward Contracting Specification through Collective Bargaining

Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. Game-based bargaining theory is presented to evaluate the potential of and stability of cooperative coalition among producers for enhancing producer returns and managing market price and income risk. Results clarify that collective bargaining can increase and stabiliz e producer profits when they face a single processor. 3 Long summary (as on COS) Problem Statement Agricultural producers have long been concerned with low and unstable farm prices and income. These conditions have been interpreted as threatening to the feasibility of sustainable agricultural systems. Two approaches are pursued. One approach is central control or management through various forms of government intervention, such as government payments to farmers and price supports for farm products. Over the past decade, this approach has been found to be financially unsustainable for the private sector (Levins, 2001). The other approach is that the government grants farmers the right to form cooperatives to collectively bargain with the handlers and processors of their products. The general objective of cooperatives is to offer their members a number of services such as production and marketing advice to enable them to do collectively what they cannot do individually. Many practical issues with respect to cooperative bargaining and decision making, their objectives and benefits, the actual process of negotiation, and the major problems they face, have been addressed in previous studies, Marcould (2002ab), and numerous USDA reports. However, agricultural economists have paid surprisingly little attention to the economic and market implications of such bargaining (Young and Hobbs, 2002). The purpose of this paper i s to fill this gap. Two objectives are pursued: 1) Clarification of the role cooperatives might play in providing collective bargaining for farmers to manage price risk and income level and risk. 2). Evaluation of the implications of associated changes in level and stability of producer returns that result from collective bargaining. Specifically, a) evaluate how the extent of collective bargaining may affect price, quantity and profit, and b) compare price level, quantity, and profit under collective barga ining versus the cases where farmers remain independent and face a single buyer (monopsony). Approach We consider a market for a homogeneous agricultural good such as milk or fruit. We suppose there are two kinds of traders: a processor and some homogenous individual farmers. We also suppose …