CWT: The Case for Negotiating Power
By Richard A. Levins

    The Cooperatives Working Together program has shown that dairy supply management pays. Money invested in retiring herds and expanding exports has returned handsome dividends to dairy farmers in the form of enhanced prices.
     Still, I wonder if what farmers received from their investment in CWT was all it could have been. Was there something “left on the table”? The reason I ask this is that there are two ways prices are determined in a modern agricultural economy. One is supply and demand; the other is negotiating power.
     CWT in its present form works only in the world of supply and demand. Retiring herds shortens supply; enhancing exports strengthens demand. Together, these two actions both point toward higher prices than we would have had without those actions. But, in my opinion, this is not the whole story.
     An example I sometimes use is that of buying a car. When cars are in oversupply compared to demand, as we see now with many models of larger vehicles, prices tend to fall. On the other hand, when the supply of certain cars is tight in relation to demand, such as with some fuel efficient, smaller cars on today’s markets, prices are strong. This we all know.
     But we also know this. Whatever the level of supply and demand, a large volume buyer for a rental car fleet can get a better price than an individual walking onto a dealer’s lot. A larger volume purchaser has more negotiating power. No matter what the level of supply and demand, they can move prices in their favor. Maybe those prices won’t be good, but they will be better than they would have been without negotiating power.
     It seems to me that CWT has not developed much negotiating power among cooperatives. Several cooperatives are not enrolled in the program at all, and others still act in ways that are more consistent with competition than with cooperation. As my economics text says, competition is the antidote to pricing power. Only the strong have pricing power, and that strength comes from working together, not from trying to get the best of each other.
     A classic example of what I am talking about is Wal-Mart. Wal-Mart has such a large share of the retail segment that it can, to use its own words, “squeeze the supplier” and demand concessions that would not otherwise be available. Those firms that are forced to compete for the business of larger firms have less (or no) market power and therefore operate at a disadvantage.
     Dairy cooperatives face very large buyers at the point their products leave the farmer-owned cooperative system. Whether selling raw milk to Dean’s for bottling or cheese to Wal-Mart for retailing, the buyers have in many cases become so large that the market power advantage has shifted toward them and away from dairy cooperatives.
     Dairy farmers need a system in which the buyers are prevented from playing cooperatives against each other. Instead, we need a system in which cooperatives play buyers against each other. The only way that can happen is if the cooperatives control substantially larger volumes than do the buyers.
     How can this be made to happen? In principle, the idea is simple enough. An effective marketing agency in common (MAC) must be formed that controls a very large share of the nation’s dairy products. A representative of that organization must bargain prices on behalf of all participating sellers with all buyers. Simple in theory, not so simple in practice.
     In conclusion, I recommend that CWT’s next step be one of developing stronger cooperation among dairy cooperatives in pricing milk. Believe me, I know that this is easier said than done, but it is in my opinion something that must be done. The nature of building market power is that no one can predict how successful use of that market power will translate into pricing power in any given situation. I can say this, however. Those who do not have market power will always be at a disadvantage in pricing their products. For this reason, if no other, I think this proposal is worthy of your consideration.

This paper was presented at the National Farmer’s Organization’s national convention in Milwaukee, Wisconsin, on January 16, 2008.
Dr. Richard A. Levins is Professor Emeritus of Applied Economics at the University of Minnesota. He can be contacted at .