Cooperatives and Contracting in Agriculture: The Case of West Liberty Foods

Roger G. Ginder, Brent Hueth, Philippe Marcoul
October 2005  [05-WP 408]

The West Liberty Foods turkey cooperative was formed in 1996 to purchase the assets and assume operations of Louis Rich Foods (an investor-owned processing firm), which, at the time, announced the imminent shutdown of its West Liberty, Iowa, processing facility. We study the creation and performance of this "new generation" cooperative using field interviews with grower members and company management. We describe changes, before and after the buyout, in the contractual apparatus used for procuring live turkeys, and in the communication requirements, work expectations, and financial positions of growers. During the private ownership period, most of the inputs (except labor and facilities) were provided by the firm; there was substantial supervision of the growers' actions; growers faced little price and production risk; and growers' equity was due largely to ownership of land and other farm assets. Our interviews reveal that, after cooperative formation, growers were exposed to considerable additional risk; monitoring of growers by the firm was less intensive; grower time and effort commitments to turkey production increased substantially; and a significant fraction of firm (cooperative) equity came from growers' willingness to leverage their farm and personal assets (and hence indirectly their existing relationships with local lenders). We argue that some of these changes are consistent with a financial contract where asset pledging and its corollary risk generate higher work effort by growers and a reduction in agency rents. These economies likely compensate for an organizational deadweight loss traditionally associated with cooperative governance.

Keywords: Cooperatives, procurement, financial contracting, agriculture.

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