Abstract
Production contracts between processors and growers are commonly used in the U.S. potato industry. The ability of a grower bargaining association to negotiate a production contract with a payout price that covers increased production costs will indicate whether collective bargaining power can countervail the oligopsony market power of potato processors. This issue is examined by analyzing empirical data from Idaho from 2003 to 2008. Contract payout prices were provided by the Southern Idaho Potato Cooperative – the process growers bargaining association, while changes in cost of production were based on University of Idaho potato costs and returns estimates. Both nominal and percentage change comparisons were made for incremental (year-to-year) and cumulative changes. Percentage changes in contract payout prices were also compared to percentage changes in production costs measured by USDA’s Prices Paid Index. In only two of the 5 years, 2005 and 2007, did the increase in the contract payout price cover increased production costs. While the cumulative increase in the contract payout price was $29.10 per metric ton, or +30% from 2003 to 2008, the cumulative change in cost of production was $53.79 per metric ton, or +54% based on University of Idaho cost studies, and +50% based on USDA data. Production contract payout prices that failed to consistently cover growers’ increased production costs indicates that collective bargaining did not countervail the oligopsony market power of potato processors in Idaho.
Resumen
Los contratos de producción entre procesadores y productores son de uso común en la industria de la papa en Estados Unidos. La habilidad de una asociación negociadora de productores para negociar un contrato de producción a un precio que cubra los aumentos en los costos de producción indicará si el poder colectivo de negociación puede compensar el poder oligopólico del mercado de los procesadores de papa. Este tema se examina mediante el análisis de datos empíricos de Idaho de 2003 al 2008. Los precios de contrato fueron proporcionados por la Cooperativa de Papa del Sur de Idaho, la asociación negociadora de productores para proceso, mientras que los cambios en los costos de producción se basaron en estimaciones de costos e ingresos de papa de la Universidad de Idaho. Ambas comparaciones de cambios, nominales y en porcentaje, se hicieron para cambios por incrementos (año con año) y acumulativos. También se compararon los porcentajes de cambios en los precios de contratos al porcentaje de cambios en los costos de producción medidos por un índice del USDA de precios pagados. Solamente en dos de los cinco años, 2005 y 2007, el aumento en el precio del contrato cubrió el aumento en los costos de producción. Mientras que el aumento acumulativo en el precio de pago del contrato fue de $ 29.10 por tonelada métrica, o +30% de 2003 al 2008, el cambio acumulativo en los costos de producción fue de $ 53.79 por tonelada métrica, o +54% con base a los estudios de costo de la Universidad de Idaho, y +50% con base en datos del USDA. Los precios de pago por contrato de producción que fallaron en cubrir consistentemente los costos aumentados de producción indican que la negociación colectiva no compensó el poder oligopólico de mercado de los procesadores de papa de Idaho.
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Notes
“Food manufacturing” refers to both processing and packing industries.
The degree of market power on the seller side of the market is typically measured by Lerner Index (L), which characterizes the ability of the industry to raise the output price (P) above marginal cost (MC): L = (P-MC)/P. This index is also referred as a mark-up. The degree of market power on the buyer side of the market is measured by a mark-down (MD), which indicates the buyer’s ability to suppress the input price (W) relative to the perfectly competitive price level: MD = (P-W)/W. Under perfect competition, P = MC = W and both mark-up and mark-down are equal to zero.
NAICS stands for the North American Industry Classification System.
Richards et al. (2001) report the 80% estimate by referring to the US International Trade Commission Report.
These studies use the New Empirical Industrial Organization (NEIO) framework and advance econometric techniques to estimate conjectural elasticity, a market power parameter used to evaluate the degree of market power and to derive the mark-ups and mark-downs. For a detailed overview of this framework see Sexton and Lavoie (2001).
7 U.S.C. §291–292 (2009).
Treasure Valley Potato Bargaining Association v. Ore-Ida Foods, Inc. and J.R. Simplot Company 497 F.2d 203 (1974).
Northern California Supermarkets v. Central California Lettuce Producers Cooperative 413 F.Supp. 984 (1976).
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Acknowledgements
The authors would like to thank the Idaho Potato Commission and USDA-CSREES for their financial support of this project, and two anonymous reviewers for their comments on an earlier draft.
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Patterson, P.E., Bolotova, Y. Have Processing Potato Contract Prices Kept Pace with Cost of Production? An Empirical Analysis from Idaho. Am. J. Pot Res 88, 135–142 (2011). https://doi.org/10.1007/s12230-010-9170-3
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DOI: https://doi.org/10.1007/s12230-010-9170-3