How Low Should We Go: Competing for Larger Farmer Customers
Phil Kenkel
Bill Fitzwater Cooperative Chair
In a previous newsletter I discussed the example of a large farmer who had little interest in
supporting his local cooperative. The situation touches on almost every aspect of cooperative
structure, management, governance and communications. One issue that is sure to arise in any
discussion of large customers is that of differential pricing. While once controversial, almost all
cooperatives now realize the fact that equal pricing is not necessarily equitable pricing. Volume
discounts for truckload lots and other factors that impact the cost of providing the service are
almost universal. A more difficult question is how far a cooperative should go to attract the
business of a current non-customer. One theoretical answer is that the cooperative should
provide incentives for additional business as long as the volume drives down the average total
costs for the cooperative. That assumes that the discounts will not impact pricing for existing
customers.
This concept was illustrated years ago for an orange juice processing cooperative. Analysis
clearly indicated that all members benefited when the cooperative offered a distance related
premium to attract volume from producers who had the longest hauling distance. In the absence
of a premium distant producers could not afford to deliver to the cooperative. The additional
volume drove the average cost of processing down and benefited the existing members. The
remotely located members were less profitable to the cooperative but they generated profits that
the cooperative could not obtain without the price premiums. In the case of the orange juice
cooperative the differential was not controversial because it was not perceived as unfair and
existing customers didn’t argue for the same price.
Aside from the issue of member reaction, discounting to capture large customer business raises
issues relative to the cooperative principle of “equity supplied by member users”. The newly
attracted large customer member is generating some additional profit but profit per unit is lower
than existing members. Since equity is generated from retained profit the discounted large
producer will not be financing their share of the infrastructure. Keeping equity proportional to
use is desirable. On the other hand, other practices such as age of patron equity management
systems, also violate this concept.
As a new feature, we have added a blog on the “Cooperative Comments” section of the OACC
website. I would invite your comments on the large producer issue and how far you think a
cooperative should and shouldn’t go in attracting large customers.
10-10-2012