An empirical analysis of producer prices in the milk sector in Argentina: what can we expect from milk processing cooperatives?

Topic 04-Stage4-Macro. In the main milk-producer countries of the world, cooperatives have an important role in the commercialization and industrialization of dairy products. In countries that account for approximately 50% of... [ view full abstract ]

Topic 04-Stage4-Macro.
In the main milk-producer countries of the world, cooperatives have an important role in the commercialization and industrialization of dairy products. In countries that account for approximately 50% of dairy products exports worldwide, cooperatives’ participation in the industrialization process is between 55 and 95% in terms of volume. After economic liberalization processes in the 1990’s, in the main milk producer countries in Latin America, Brazil and Argentina, the market share of milk processing cooperatives decreased, from 60% to 40% approximately, in the first case; and from 40-50% to 20% in the second. The main reasons were the increase in competition from imports in Brazil, and the restructuration of enterprises due to foreign investment which determined many cooperatives had negative profits in Argentina.
This process was not homogenous and nowadays, cooperatives’ performance differs in the 5 milk basins that represent 80% of milk production and industrialization in Argentina. In the basins Oeste Bonaerense, Abasto Buenos Aires y Villa María, they account for less than 15% of industrialized milk, whereas in the Central Santa Fe basin cooperatives process 22% of the milk and 39% in the Noreste Córdoba basin. The competitive yardstick argument states that cooperatives can increase market efficiency in oligopolistic markets by driving investor oriented firms to pay higher prices. On the other hand, the transaction cost theory suggests that cooperatives may lower transaction costs for their members and that is a reason why they would accept lower prices. Our paper analyzes cooperatives pricing using both strands of thought.
We analyze 13,276 producer prices from 1440 producers for 5 different productive cycles in the period of 2001 to 2013. We perform a pooled regression model and we find no economically significant relationship between the market share of cooperatives and the producer prices of farmers in the different basins. We find that cooperatives pay 5% lower prices than investor oriented firms. Besides explaining the reasons for price differentials, our paper analyzes the challenges for the milk cooperative sector which is in highly need of transformation in order to increase its value added and participation in international markets.