Social Aspects of Food Systems and Climate Change II

March 3, 2015

Review… the commons

• Tragedy of the commons– Theoretically, what is a commons?

• What are the 3 commons we identified related to dairy farming in Wisconsin?

• The environment– A stable climate– Clean groundwater– Clean surface waters– Rich soils, protected from erosion and depletion– Pesticide-free food (and air, water, and land)

• Farm profitability– Farm input prices and output prices

• Community: Trust and reciprocity:– between large farmers and small farmers, confinement and

pasture, conventional and organic– between farmers and urbanites, so that each understands,

respects, and trusts the others’ motivations and constraints.

How is the climate a “commons”?

How is the climate a “commons”?

• Climate stability is a resource. • It is rival, but non-excludable.• If one factory emits GHG emissions into the

air, it does not pose a problem, but when 7 billion people are emitting GHG, our stable climate becomes unstable.

How is farm profitability a “commons”?

How is profitability a “commons”?

• How are output prices a “commons”? – Supply and demand. If all farmers produce as much milk as they

can, then prices drop. The farming community needs some type of governance to constrain supply by regulating how much individual farmers produce.

– Collective marketing: By working together (e.g. through a cooperative), farmers can be price makers rather than price takers.

– Collective action: By working together to share the burden, farmers can lobby for fair policies.

• How are input prices a “commons”? – Collective buying, e.g., through buyers cooperatives allows farmers

to be price makers.– Collective action: Political power to regulate seed and other input

companies.

How is community a commons?

How is community a commons?• Cooperation, trust, and reciprocity are important for governing the

other two commons, and maintaining social wellbeing overall. • Cooperation, trust, and reciprocity are social values. When an

individual acts selfishly, these social values are put at risk because selfish individualism could become the norm.

• Individuals can gain by discrediting others and creating divides, at the expense of the larger group.

• Example 1: enforcing laws is almost impossible without self-enforcement and some spirit of solidarity with others, even strangers.

• Example 2: a culture of corruption is nearly impossible to cure once it has become a social norm.

• Example 3: a culture of individualism (rather than cooperation) is also hard to roll back.

Organic Valley

• Today’s class: How does the Organic Valley cooperative try to address governance of these 3 types of commons?

• First:– What does Ostrom mean by “governance”?

Governance

• All processes of decision-making and rule enforcement in a group of people

• Whether undertaken by a government, firm, market, or network.

• Whether over a family, tribe, formal or informal organization, or territory.

• Whether through laws, norms, power, or language.

What is a cooperative?

• Definition?• History?• Examples?

Cooperatives are…

• In this class we are talking about cooperative corporations, a legal category of incorporation.

• A cooperative corporation is owned by its users.– Producer-owned (Organic Valley)– Consumer-owned (Willy St. Coop)

History

• Wisconsin is the historic U.S. leader in cooperatives.• 1870s-1950s: Huge coop movement.• Grain elevator and dairy creamery, cheese, and milk

marketing cooperatives together organized nearly 6,000 cooperatives by the end of the 1920s.

• Non-ag coops: Credit, banks, property insurance – 35% of Wisconsin property insurance was cooperative in

1920.

What are some current examples?

Current examples

• Ace Hardware and True Value Hardware• The Associated Press• Cabot Creamery and Land O’ Lakes• OceanSpray• REI (outdoor gear)• Isthmus Engineering and Manufacturing– http://www.isthmuseng.com/

• Union Cab

What are alternative business models?

Alternative I: Publicly-traded companies

• Ownership• Shareholder value• Example

Alternative I: Publicly-traded companies

• Ownership is dispersed among many shares of stock that are freely traded on a stock exchange

• Shareholder value: In publicly-traded firms, the ultimate measure of a company's success is the extent to which it enriches shareholders (owners) by paying dividends and/or causing the stock price to increase

• Example: Horizon Organic Milk– “Horizon wasn’t like us. They were slick guys with Rolexes... ~Jim

Kojola, Organic Valley’s operations manager– Organic Valley is in the bottom 5% of the industry in executive

compensation, but at the top in what it pays to its lowest paid workers – $12 in 2014 comparing to $7.25 minimum wage in Wisconsin.

Horizon organic milk is owned by Whitewave, which also owns Earthboand Farms, giving it 5.4% or total organic market.

What is the distinguishing factor between coops and publicly-traded

firms?

The coop difference

• The major difference between publicly-traded and coop is that ownership is not separated from production.– Coops can make decisions that are good for the

company, not just for short-term profits.– Coops can make decisions that are good for workers.– Coops can make decisions based on values other than

profits• As long as they are profitable enough to remain in business

Alternative II: Privately-owned firms

• But ownership isn’t separated from production in privately held firms either.

• What’s the difference?

Alternative II: Privately-owned firms

• All of these differences can be true for privately owned businesses too, such as Epic, the medical records software company.– When Epic expanded its servers, it spent a lot more money than was

necessary in order to build them in the ground and reduce its environmental footprint.

– This likely would not have been possible in a publicly-traded company.

• The difference here is democracy: in a cooperative, the workers make decisions about how the company is run.– More equitable profit-sharing.– Less out-sourcing and off-shoring.

Here are some more Coop Effects

• Coops eliminate independent shareholders and spread authority over user-owners instead of a majority owner.

• This alters the incentives among stakeholders within firms, creating new possibilities for investments.

• Examples of such investments:– Insurance industry in sprinklers.– Organic Valley invests in energy audits and renewable

site assessments, education, technical and veterinary support.

Case study: Organic Valley

What is “the paradox of social enterprise”

What is “the paradox of social enterprise”

• When a social movement develops a business that is self-sufficient financially :– its logic can become independent of the social

movement that supported and nurtured it in the first place

– profit-driven interests want to take it over• “conventionalization”• For profit interests have captured the organic

price premium without necessarily embodying the spirit of the organic mission

What is Conventionalization?

And Why does this happen?

What is Conventionalization?

• Using the cheapest and most profitable production and distribution practices that can still legally be considered organic (according to the USDA standards) even if only through loopholes in the law.

• Following the organizational model of the corporate controlled conventional agri-food industry

• Ideologically orienting toward profit rather than the ideals of the alternative food movement

• For profit interests have captured the organic price premium without necessarily embodying the spirit of the organic mission

Why does this happen?

• To be a market leader, a company must enter the mass agri-food market and work with concentrated grocery retailers who only deal with mass-suppliers, which requires:– Logistics– National-scale marketing and sales

• These capacities usually represent a barrier to entry into the mass market due to lack of:– Capital– Knowledge– Skills– Relationships

• Usually, organic food companies acquire these capacities through corporate takeovers, thus gaining an advantage over independent companies.

How did being farmer-owned allow Organic Valley to resist Horizon’s bid to buy it?

How did being farmer-owned allow Organic Valley to resist Horizon’s bid to buy it?

• When a company is owned by shareholders, it has a legal obligation to maximize shareholder profits, and companies overwhelmingly maximize short-term profits at the expense of long-term profits. A Horizon buyout would have generated much higher and more certain short term profits for Organic Valley.

• But because those profits would have to be distributed across many farmer-owners, rather than concentrated in the hands of a few, they are diluted and less compelling.

• And, farmers (unlike shareholders) compare the short-term profits with the long-run livelihoods offered by the cooperative.

• Typically, only when a firm is privately owned, in this case by its farmer-members, can it resist pressures to maximize short-term profits to enhance long-term financial sustainability.

What are two strategies Yifat mentioned that most agri-food companies use to

survive in the mass-market?

What strategies do most agri-food companies use to survive in the mass-market?

• Large-scale industrial farming– Buyers source from fewer, larger farms tha

exercise hierarchical control over hired labor• Contract farming (production contracts)– Buyers maintain full control over the production

process through detailed contractual specification, while farmers are deskilled and placed in a captive position.

How does Organic Valley survive in the mass market, given that it coordinates decentralized production?

That is, Why does anyone buy Organic Valley when Horizon is cheaper?

How does Organic Valley survive in the mass market, given that it coordinates decentralized production?

--[ That is, Why does anyone buy Organic Valley when Horizon is cheaper?]

• Differentiation on quality• Social, Environmental, Product quality

• Efforts to lobby for strict and high organic standards allow Organic Valley to raise production costs for its competition (and thus enhance its market competitiveness).– Differentiation by quality

• Control of supply. Farmers prefer to sell to Organic Valley because they pay better prices.

• High standards for its producers.• Builds producers’ skills and capabilities

– Support staff , veterinarians, agronomy experts– Cultivating knowledge and support-sharing networks among its farmers

• Cultivates a community of committed farmers and consumers• Relationships with suppliers and retailers.

• How does the Organic Valley cooperative try to address governance of our 3 types of commons – community, profitability, environment?– What are the threats?– How does Organic Valley handle them?

Community

• How does OV maintain a cooperative spirit and commitment to the social and environmental mission among its new member-farmers? – Explicit ideological indoctrination during member meetings– Pre-screening potential members for cooperative attitudes– Reinforcing company culture through constant communications and

employee seminars– Cultivating interpersonal networks among farmers in the same

region as sources of learning and support• Brought together the “old timer” farmers with the “back-to-

the-land” farmers (and the Amish). They joined together to respond to the 1980s farm crisis and the environmental movement.

Profitability

• Organic Valley is committed to pays a cost-based price to ensure the economic sustainability of its farmer-members

• They can resist intensification and consolidation.

• Organic Valley develops its marketing strategy to attain this price.

Environment• Energy:

– Renewable energy:• Goal – Energy neutrality by 2020. CROPP will produce enough renewable energy

to offset 100% of its energy (fuel and electricity) needs for owned facilities.• Wisconsin’s first community wind farm.

– Powers headquarters, warehouses, distribution center, and ten-story cold storage– 68% of total CROPP facility electricity

– Energy efficiency at all levels of value chain• Transportation (bio-fuels and distribution logistics)• Buildings• Processing• Farm energy use

– Employee engagement in pursuing energy efficiency– No-cost energy efficiency audits and renewable energy site assessments

for farmer-owners

Take home:

• What are the three legs of the sustainability stool?

• Sounds like our 3 commons?

Thanks!

• You all are wonderful students.