Farm Supply Cooperatives: Specialized Inputs, Exchange Arrangements, and Economic Coordination

Some critics of the cooperative farm supply system point to an erosion of member loyalty and suggest that it indicates that farm supply cooperatives are not currently meeting the needs of their farmer-members. This paper discusses the commitment problem within a transaction-cost-economics framework that analyzes the effects of agricultural specialization on the farm input industry. The analysis shows that: (1) despite complaints by many cooperative managers, farmers are behaving rationally and efficiently in their purchasing practices of specialized inputs, and (2) the cooperative system has responded well by instituting a unique exchange mechanism at the upstream end of the input system.