Modelling contracts and incentives in agricultural cooperatives with an emphasis on quality and financial decisions

Abstract

An agricultural cooperative (co-op) is an organisation that is owned, financed, and controlled by a group of farmers who collaborate by pooling resources for their own mutual benefit. The success of a co-op requires a highly coordinated supply chain and a well-managed capital structure. However, the principles of user-owner, user-control, and user-benefits result in several problems inherent to co-ops that create disadvantages for co-op members. This thesis focuses on two specific issues in this class: the quality coordination problem and the financing problem. To investigate the relevant trade-offs, this thesis builds models and employs the approaches of game theory, dynamic programming, case study, and numerical experiments. This thesis first considers the quality coordination problem, or more specifically, contractual coordination for a co-op that proposes quality provisions in its contracts with farmers. Included in the research is the practice of multi-period payment schemes and farmers' time preferences. The thesis derives the optimal decisions for a quality standard, together with optimal payment schemes. This work provides guidelines for the implementation of quality provisions and incentive mechanisms for current co-ops. In addition, because, in co-ops, equity investment is linked to members' economic participation, the thesis next considers financing problems. In particular, it considers the interaction of operational and financial decisions. The results provide insight into a co-op's decision making, cash position, and risk management. To further investigate cooperative finance, this thesis conducts a case study of co-op capital structure optimisation in the New Zealand Dairy Industry using Fonterra Co-op Group Limited. A Markov decision process (MDP) model captures the relationships among the various financial instruments, and a numerical analysis by an Approximate Dynamic Programming (ADP) algorithm derives results and evaluates the financial performance under different scenarios. These results show the trade-offs between the equity holders' returns and financial risks. Overall, this thesis provides implications for agricultural co-ops in achieving coordination on quality standards and alleviating financial challenges.