Agribusiness Management and Marketing Case Study of a Commodity Bargaining Association


by R.J. Folwell, A.C. Jaqua, C.T. Worley, and J.C. Foltz

KEYWORDS: asparagus, cooperative, marketing channels

 

Introduction to the Case Study

The Washington Oregon Asparagus Growers Association (WOAGA) is a bargaining cooperative for asparagus growers in Washington and Oregon. Prior to the mid 1980's the Washington asparagus industry produced its product primarily for the processed (canned) asparagus market. WOAGA was organized in 1957 as a bargaining cooperative to negotiate prices and nonprice terms of trade for processed asparagus with large processing firms. WOAGA also had active promotion and research programs.

WOAGA was very successful for many years. It attracted roughly 90 percent of the producers in the industry as members. In the mid 1980's, however, the asparagus industry was faced with a changing economic situation. The Washington/Oregon acreage increased almost 50 percent and the processing demand was not able to absorb all the new production. This caused producers to send much of their increased production to the fresh asparagus market.

The fresh market for asparagus is related to the processing market. Surpluses of fresh market asparagus during peak harvest times are diverted to the processing market. WOAGA has always worked with handlers in the fresh market to sign contracts agreeing to honor the price negotiated in the processed market. This guaranteed that the price bargained for with processors would be maintained and that surplus asparagus from the fresh market would not be resold to processors at a price below the contracted price. However, during the mid 1980s when surplus fresh asparagus production occurred, a single broker with a well developed network of buyers nearly monopolized the control and sale of surplus fresh market asparagus to the processing market. Once this broker captured the market, WOAGA could not control the flow or price of surplus asparagus from the fresh market to the processed market. This broker was able to control the market for diverted fresh market asparagus because he alone possessed the quantity and type of shipping containers required by the processors for receipt of raw product. WOAGA lost much of its prior market power during this period.

As WOAGA market power declined, a surge of growers left the cooperative. WOAGA attempted to implement innovative management/marketing practices to resolve their problems. These decisions turned out to be catastrophic for WOAGA and it went from a financially solvent, sound organization to one that was insolvent and faced with many lawsuits.

The following section details the historical development of WOAGA. It establishes the foundation upon which WOAGA was built and the forces leading to its marketing and management problems. This background provides the basis for users of this case to:

  1. identify the problem(s);
  2. consider relevant factors;
  3. identify alternative strategies; and
  4. select and justify the choice of strategy.


The Period of Establishment and Growth

The Washington Oregon Asparagus Growers Association (WOAGA) was established in 1957. The primary purpose of WOAGA was to bargain for price and nonprice terms of trade for processing asparagus. At the time WOAGA was formed, there were numerous asparagus growers and few buyers (processors). WOAGA was a form of countervailing market power for the growers.

The first person hired to manage WOAGA was asked by the organization, to work with asparagus growers in building membership. This involved going from farm to farm to talk to growers about the benefits of joining a marketing association, selling the idea of bargaining to growers and having them sign on as members of WOAGA.

When WOAGA was formed in 1957 the industry consisted of many small growers. Acreage per farm generally ranged between 1 to 7 acres, with 7 acres considered a large asparagus operation.

The WOAGA office was initially established in Yakima. In 1958, the directors decided to move the office to Sunnyside, Washington, which was 40 miles to the southeast of Yakima. This move offered a more centralized location for the office which benefited the members, management, and board of directors.

The asparagus industry has always shared the reputation of the overall fresh produce business for being aggressive in their competitive behavior including a lack of loyalty in honoring contracts. Prior to the formation of WOAGA, it was not uncommon for a grower to contract the same crop to several different buyers. When time came for the grower to sell the crop there was no guarantee which buyer's contract would be honored. Therefore, the concept of group cooperation was crucial for the growers to comprehend because it provided organizational strength for the bargaining process.

Bargaining cooperatives are used to influence the market forces that buyers and sellers typically face. They do not generally become involved with handling or take title to the product represented. Instead, their role is to act as a single negotiator for many producers and provide countervailing power for many small sellers in the market place.

The first mission of WOAGA was to improve and stabilize prices and incomes for the grower-members. A secondary mission was to offer security to the buyers/processors in terms of a stable and adequate supply of quality asparagus. In setting the objectives of WOAGA as a bargaining cooperative, it was important to identify management objectives to strengthen the organization. The manager identified six objectives: (1) build confidence in growers, board members, and staff; (2) provide long-term direction; (3) provide information about the asparagus industry for members and prospective members; (4) provide one-on-one communication with the growers and board members about WOAGA activities and actions taken or intended; (5) manage the cooperative in a way that would maintain its economic viability and long-term success; and (6) be involved in all aspects of the industry, ranging from improving prices to asparagus promotion.

In order for WOAGA to function properly it was important for the manager, in conjunction with legal services, to develop the necessary contracts that would legally bind the growers, fresh handlers, and processors to the association. The grower membership marketing contract (Appendix A) was to be renewed every five years. The processor contract was for three years (Appendix B), however the processor price was bargained for every year, prior to the start of each season. Finally, the fresh handler contract (Appendix C), like the processor contract, was to be renewed every three years. These contracts were staggered to the growers, fresh handlers, and processors so that there would be a relatively constant level of signed buyers and members. Thus about one-fifth of the grower contracts and one-third of the processor and fresh handler contracts were to be renewed each year. The total number of growers, processors, and handlers changed very little over time. This prevented a large portion of growers, signed fresh handlers, and signed processors from coming up for renewal in any given year. The goal was for the number of members and contracted buyers to fluctuate little from year to year and thus keep WOAGA's ability to bargain strong.

Another very important responsibility of the WOAGA's manager was budget-based planning. This involved creating a budget for the forthcoming year based on a forecast of revenues, costs, and capital needs. The revenue WOAGA generated was to be used solely to cover the costs of running the organization and providing benefits to grower members through bargaining, promotion, and research. The revenue required to do this came from three primary sources: (1) grower assessments; (2) matching funds; and (3) promotion assessments. Grower assessments were generated from the member grower who agreed, as specified in the grower contract, to pay WOAGA a sum equal to 1 percent of all asparagus sales marketed by the grower. This generated roughly 45 percent of total revenues for the association.

The matching funds came from both the fresh handlers and the processors. The fresh handlers agreed, as outlined in their contract, to pay the association 1.5 percent of their total gross sales proceeds which came from each member grower. The processors agreed, as outlined in their contracts, to pay WOAGA 1 percent of their total net returns from the sale of asparagus. The matching fund accounted for roughly 37 percent of WOAGA's total revenues.

In addition to the grower assessment, the grower also agreed to pay the WOAGA 0.5 percent of the proceeds of all asparagus sold by him/her for market promotion each crop year. This accounted for roughly 16 percent of the total WOAGA revenues. Additional revenues included bank advances and miscellaneous sources accounting for the remaining 3 percent of the revenues.

A third area that helped to make WOAGA an operational bargaining cooperative was communications. A newsletter was developed and written by the manager and sent once a month to the members. This newsletter was offered to nonmembers as well in order to persuade them to join the Association. To distinguish the nonmembers and members, nonmembers received a red newsletter while members of the WOAGA received a green newsletter.

Field representatives or fieldmen employed by WOAGA were an additional way of communicating with the grower members. These field representatives visited farmers periodically throughout the year to discuss the production of asparagus and provided information on issues of concern to the growers at any point in time.

WOAGA's initial organizational structure had two major groups involved in performing activities: (1) the board of directors; and (2) management/fieldmen/office staff (Figure 1). The board of directors oversaw the management of WOAGA and was composed of elected member growers.

Figure 1. Organizational Chart of Washington Oregon Asparagus Growers Association

The Manager was in charge of the office operations and reported to the board of directors. The manager's duties included price negotiations, budgeting, and working with growers and the office staff to maintain an efficient business.

The original manager stayed with the Association until 1983, when he retired. Up until 1983, the membership base had gradually increased to include 85 to 90 percent of all asparagus growers in Washington and Oregon.


Marketing Channels

WOAGA members ship their asparagus to the processors and fresh handlers who have signed contracts with the WOAGA (Figure 2). Once the Association asparagus reaches the buyers it is graded, normally by spear length and diameter. It is then trimmed to the desired length, and processed or packed according to the buyers' needs. All growers harvest their asparagus according to buyers' specifications. These specifications include spear length, diameter, and the amount of green and white color. After the asparagus has been canned or frozen by processors or packed by fresh handlers, it makes its way to brokers, supermarket chain sales/marketing divisions, export markets, or other food manufacturers. After this it goes to retail supermarket outlets or hotel, restaurant or institution outlets.

Figure 2. Marketing Channels for the Washington Asparagus Industry.

 

By controlling a large portion of the supply through membership contracts, WOAGA has the ability to negotiate a price for its product. Such supply control gave WOAGA the ability to influence price and nonprice terms of trade. WOAGA's mission to market asparagus in an orderly fashion and maximize returns to its growers are the very conditions that persuade growers to join the group in the first place.

To maintain WOAGA's monopolistic position in the market there are two contracts with buyers, one to the processors and one to the fresh handlers. WOAGA bargains with the processors over the price of the asparagus prior to the start of the season. The processing market for asparagus in Washington currently accounts for 70 percent of total utilization. However, when WOAGA was started and until the early 1980's about 90 percent was processed. The contract provides assurance that the members' asparagus can be sold in the processed market at a fixed price.

Every year WOAGA and processors enter into a bargaining process where an opening price is offered by WOAGA to the processors (Figure 3). If this offer is accepted, this is the price that processors pay for WOAGA asparagus for the specified season. If rejected, a second price is offered by the WOAGA. This price may be the same or different. The second offered price is again either accepted or rejected by the processors. If not accepted, an arbitration board is appointed by the Director of the Washington State Department of Agriculture. It is then up to the arbitration board to decide a "reasonable price" for asparagus for the upcoming season.

Figure 3. Determination of Price for Processor Asparagus through Bargaining.

The third contract used by WOAGA is the fresh handlers' contract. The fresh handlers' contract offers many advantages to WOAGA and its members. The fresh handler contract requires selling diversion (surplus) fresh market asparagus to fresh handlers at the same price bargained for by WOAGA with the processors. It also keeps the fresh handler from price discriminating between members and nonmembers of WOAGA and states that the fresh handler shall not accept nonassociation asparagus in preference to association asparagus.


The Period of Management Changes

At the end of 1983, a new manager took over operations of WOAGA and will be referred to as Manager 2. Manager 2 did not believe having the fresh handlers work with WOAGA through the contractual agreement was of any great concern. Manager 2 believed that the fresh handlers were trustworthy people and holding them together with legal contracts was unnecessary. Several fresh handlers did not renew their contracts with WOAGA. Manager 2 also allowed a portion of the processor contracts to lapse.

At this time minicomputers were starting to be used in businesses throughout the country and were becoming a popular management tool. Manager 2, with the board's approval, decided to purchase a National Cash Register (NCR) computer for roughly $55,000.00. The computer was to be used for the improvement of the WOAGA operations and grower-member farm management pricing. After briefly using the computer, the staff discovered that the programs were not user friendly and it was difficult for the growers to adapt to these new types of management tools and techniques. The computer was then reconfigured to be used for internal record keeping. The computer was unable to perform as originally intended and as a result became a financial burden to the Association rather than a tool to increase efficiency.

Manager 2 was asked to resign in November 1984, for numerous reasons including the fact that a number of contracts had not been renewed. A new manager was hired and will be referred to as Manager 3. During his first year, Manager 3 was faced with a most difficult situation. In 1985, the fresh handlers and processors from the previous year, whose contracts had lapsed, had not renewed their contracts and, in addition, a portion of the growers whose contracts came up for renewal in 1985 decided not to renew their contracts. Not having signed the contracts, the fresh handlers could buy asparagus from growers and resell it to processors without having to adhere to the price that WOAGA had bargained for with the processors. Thus, they could sell diversion or surplus asparagus to processors at prices below the negotiated prices.

During this collapse of contracting for WOAGA, one broker in particular, saw an opportunity to make money which caused much turmoil for WOAGA. The broker's first objective was to inform the fresh handlers and processors that they were paying too much for asparagus when they bought from WOAGA growers. This got the attention of some fresh handlers and subsequently they did not renew their contracts. His next objective was to establish a price for asparagus that was lower than the price WOAGA had bargained for in the processed market. The broker offered his services of moving the product from fresh handlers to processors. He was the only broker with a sufficient number of boxes to move the surplus asparagus from the fresh handlers to the processors. As such, he was able to benefit from any price difference between the two markets.

At the start of the 1985 season, WOAGA still had not signed any fresh handlers but asparagus was being delivered to them nonetheless. Signed processors were complaining of their inability to compete with the unsigned processor in the region as well as in other regions who were purchasing asparagus at a price which was lower than the bargained price. WOAGA then approached fresh handlers to renew their contracts. With there being numerous unsigned fresh handlers and processors in the market, the processors decided not to renew their contracts unless the price was rolled back 3 cents per pound. With the highly volatile nature of the fresh market, WOAGA felt that a price in the diversion market was better than no price. WOAGA thus decided to accept the processors' offer and roll the price back 3 cents. A one-year contract was then signed by the fresh handlers and the processors. The difference in price for asparagus that had already been sold to fresh handlers, at the bargained price and the new negotiated price had to be refunded by WOAGA. The reimbursements were garnished from the growers' checks for the rest of the season. This made the growers very angry and confidence in WOAGA was further eroded.

As a result of these problems, Manager 3 was replaced. The new manager (called Manager 4) was the former assistant manager and main fieldman for WOAGA. The new management and board of directors believed a new approach to the marketing program was needed.

A new type of marketing program was introduced by WOAGA called "the Exchange." The board of directors and WOAGA staff felt that this might be a way to increase membership and raise growers' income. Implemented in 1987, the Exchange was based on the concept that WOAGA would have a central sales desk for a large majority of Washington fresh asparagus production. A location had to be set up and the packing services of a fresh handler were contracted. An additional crew was hired to grade, sort, trim, and pack the asparagus for bulk delivery. There was an individual hired specifically to manage the Exchange and work to find buyers so a network could be formed for the sale of fresh asparagus.

The structure of WOAGA allowed for the Exchange to be considered a subsidiary of WOAGA. Funds from WOAGA and the Exchange were kept separate. Accounting was divided so that each was considered a separate organization. The reason for this being that if problems arose with the Exchange, WOAGA would not be held responsible.

The Exchange was to take fresh market asparagus from WOAGA members who had agreed to deliver to the Exchange. Fresh handlers would sign a contract with the Exchange to accept the product. They would then pack and sell it to brokers or buyers on a given day during the production period. The Exchange would fix a minimum price for each day's production and then deal with brokers or buyers willing to arrange sales at this minimum fixed price. The significant features of the legal structure and functions of the Asparagus Exchange are presented in Appendix D.

The marketing logic behind the Exchange was based upon the fact that it had worked well in California. The perceived advantages were market expansion, an alternative market for asparagus during peak periods of production, and a reduction in the volatility of fresh market prices on a given day.

When the Exchange started in 1987, growers were delivering fresh asparagus to the signed fresh handlers who had agreed to do the packing. However, problems soon developed due to the inexperience of management in running this type of marketing system. The first strategic error was that the Exchange did not have a diversion market for the excess fresh asparagus that came into the Exchange on any given day. Normally, fresh handlers buy fresh asparagus and then divert the excess asparagus into the processed market which acts as a pressure valve to keep them from being forced to sell all the fresh asparagus into the fresh market. Management hypothesized with a single sales desk and a large volume of asparagus, they would be able to regulate the volume sold per day.

The computer purchased two years previously was to be used for internal record keeping for the Exchange and WOAGA. The existing software was not capable of performing the functions that the Exchange required. The Exchange manager decided to contract with an outside programmer to develop software. The new software never performed as intended. Consequently, an accounting firm was hired to properly handle the daily records of the Exchange. The board was very disappointed and blamed the manager for this problem. Additional expenses were incurred when the board decided to stop payments to NCR. NCR sued WOAGA for payment and won the case.

Management also mistakenly allowed the Exchange and the Association to co-mingle funds&emdash;contrary to the original intent of the two organizations. With the two entities co-mingling funds, the success or failure of the Exchange became the responsibility of both the Exchange and WOAGA. The protection offered by the corporate umbrella was lost, leaving WOAGA unprotected and liable for financial burdens incurred by the Exchange.

The Exchange subsequently failed. Growers involved with the Exchange were very disturbed by its performance and several lawsuits were brought against WOAGA. Growers who lost large sums of money had to be reimbursed by WOAGA. To pay the growers back, a large amount of money had to be borrowed. This left WOAGA with a debt of about $100,000.00 and facing 15 lawsuits filed by the fresh handlers and growers, the computer manufacturer, and software designer.

WOAGA had gone from an economically viable and sound organization in 1983, to one that was on the verge of bankruptcy and facing many lawsuits in 1988. Table 1 displays the profit and loss statement for WOAGA starting with 1983 and going through 1988. The financial effects of Manager 1 allowing the fresh handler and processor contracts to lapse became evident in 1984. Revenue totaling $89,000.00 was lost from the fresh handler and processor matching funds in 1984 because their contracts had not been renewed. Also in 1984, total expenses rose rather substantially with the purchase of the expensive computer, which was financed by monthly installment payments by WOAGA. Computer supplies and expense increased by $8,000.00 in 1984 raising the total expense for the computer and other supplies to $13,000.00 for that year.

 

TABLE 1. Income Statement for the Washington Oregon Asparagus Growers Association.

Item

1983

1984

1985

1986

1987

1988

REVENUE

476,000.00

469,000.00

380,000.00

380,000.00

380,000.00

395,000.00

OPERATING EXPENSES

Salaries

124,938.00

127,398.01

137,797.13

109,749.51

110,997.00

100,051.00

Advertising & Promotion

682.56

725.00

756.00

800.00

825.00

851.00

Research Trust Contributions

52,950.00

52,950.00

30,000.00

30,000.00

30,000.00

30,000.00

Market Development Trust

88,090.56

88,090.56

50,000.00

50,000.00

50,000.00

50,000.00

Taxes

36,577.56

36,801.50

37,649.65

37,948.57

40,001.99

40,443.50

Meeting Expense

15,000.00

14,411.95

14,119.29

12,441.37

10,651.49

10,100.00

Annual Meeting Expense

12,924.00

13,115.60

13,226.68

12,091.50

11,401.60

10,501.49

Legal & Accounting

13,000.00

13,500.00

13,300.00

14,500.00

31,300.00

28,500.00

Telephone

8,688.00

8,449.51

8,891.80

8,948.50

9,071.84

9,115.90

Insurance

18,522.00

18,902.51

18,957.40

19,112.18

19,227,80

19,677.40

Dues & Periodicals

7,234.56

7,340.50

7,690.50

7,709.35

7,941.80

8,115.40

Repairs & Maintenance

3,486.00

3,556.40

3,775.50

3,980.41

4,056.40

4,150.60

Office Supplies & Expense

6,075.00

6,213.50

6,350.78

6,498.31

6,219.50

6,201.40

Leases

8,203.56

8,203.56

8,203.56

8,203.56

8,203.56

8,203.56

Computer Supplies & Expense

5,000.00

13,150.41

9,175.28

7,165.60

7,253.48

13,241.87

Depreciation

36,214.56

36,214.56

36,214.56

36,214.56

36,214.56

36,214.56

Miscellaneous

2,088.00

2,094.80

1,989.73

2,146.50

2,049.13

2,050.69

Car Radio Repeater

540.00

540.00

540.00

540.00

540.00

540.00

Employee Benefits

5,737.56

5,850.40

6,250.40

5,153.41

5,184.09

5,005.06

Utilities

6,537.00

6,610.15

6,795.40

6,981.71

6,975.40

7,010.03

Vehicle Expense

1,462.56

1,498.50

1,502.05

1,591.89

1,490.89

1,398.50

Exchange Debt Paid by the Assoc.

0.00

0.00

0.00

0.00

60,000.00

0.00

Office Lease

TOTAL OPERATING EXPENSES

453,951.48

465,617.42

413,185.71

381,781.88

459,605.48

391,411.96

NET REVENUE

22,048.52

3,382.58

(33,185.71)

(1,781.88)

(79,605.48)

3,588.04

 

Revenues did not rebound in 1986 and WOAGA was now operating in the red. The Exchange was developed in 1986 and implemented in 1987. Losses were incurred in 1986-1987, totaling $92,940.92 for the previous 2 years. Legal and accounting expenses increased by $17,000.00 Of this increase, $15,000.00 was for accounting fees.

In 1988, losses for the WOAGA were still substantial. Membership was down and legal expenses continued to mount. Another interesting item was the research trust contributions and the market development trust. These two trust funds were developed by WOAGA to stimulate asparagus research and the development of alternative markets. Asparagus research covered a wide area of possible topics including harvest mechanization, asparagus hybrids, and asparagus production practices. The market development trust area involved trying to open new markets for asparagus including the international market. It also involved different promotional approaches in response to changing tastes and preferences and demographics of consumers. These two trust funds were very important to the asparagus industry. Many different segments of the industry benefited from the money collected and used by WOAGA. During the financial crunch in 1987 and 1988, it became difficult to cover these expenses which totaled roughly $141,040.56 or 29 percent of WOAGA's total revenues. This was an expense that benefited all growers and not just those that were members of WOAGA.

WOAGA also had expenses for an office building (Table 2). The major expenses associated with the building came from the building insurance, repairs and maintenance, utilities, and depreciation. Owning a building was an asset to WOAGA. It gave the WOAGA a strong and more permanent presence in the asparagus industry. The total area of the building was approximately 4200 square feet. The building offered four offices, a reception area, and a large conference room for board meetings.

 

Alternatives

The alternatives for the association at this juncture basically came in two forms, one was to file bankruptcy and the second was to work their way out of the situation. With fifteen lawsuits pending, heavy losses and lack of grower confidence, it seemed that WOAGA had nowhere to go except into bankruptcy. Its reputation as a sound economic entity was gone. The director of the Washington State Department of Agriculture, after numerous complaints from growers, fresh handlers, and processors, had threatened to close WOAGA. However, the board of Directors and many people in the asparagus industry felt that there was a definite need for the bargaining association. WOAGA asked for another chance to make the organization successful once again. The director of the Washington State Department of Agriculture gave WOAGA another chance prior to dissolution under the condition that they appoint a public member to the Board of Directors. WOAGA, with the State's approval, appointed a public member. The public member shared the views of the Board and felt that this was indeed a needed organization, although continuing WOAGA was going to be an uphill battle.

TABLE 2. Annual Operating Expenses Associated with Owning and Operating
the WOAGA Office During the Mid 1980s.

Expense Category

$/Year

Comprehensive Building Insurance

15,552.00

Repairs & Maintenance

3,486.00

Utilities

6,537.00

Office Supplies and Expense

6,075.00

Property Taxes

15,000.00

TOTAL

45,764.00

 

Listed below are a series of study guide questions about the case. They should be viewed in the context of a newly hired manager who has been assigned the task of resolving the issues outlined in the case with the assistance of a public member on the board of directors.


Study Guide
  1. Based on what you know, define the problem(s) for your own use as if you were the newly assigned WOAGA Manager.
  2. What factors within WOAGA and within the asparagus industry are relevant to the objectives of WOAGA and impact your strategic alternatives as a decision maker?
  3. Identify and make a list of alternative strategies for WOAGA.
  4. After devising a list of the strategic alternatives, evaluate each one by listing the strengths and weaknesses of each. Upon completion of this evaluation, select and justify the choice of strategy that best fits.
  5. Describe the implementation process that will successfully incorporate the strategic alternative that you as the WOAGA manager will use.
  6. Describe how you will measure the success of the strategic alternative you selected and what sort of feedback you will utilize as to insure successful implementation of this strategic alternative.
  7. If, for whatever reason, this strategic alternative did not work, describe a possible contingency plan that could be used as an alternative.


Appendices are not included. But you can request copies of the appendices by e-mail through
Tom Worley (worley@wsu.edu).

R.J. Folwell, A.C. Jaqua, C.T. Worley, and J.C. Foltz are with the Department of Agricultural Economics, College of Agriculture and Home Economics, Washington State University, Pullman, WA 99164-6210.

 


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