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Motives for the vertical integration and diversification of the Western Canadian prairie pools

University of British Columbia

In recent years the three Prairie Pools have actively expanded their primary operations to include a number of investments both within and outside of the agricultural sector. The Pools' investment strategies are economically interesting because they are being pursued within the context of a co-operative organizational structure which requires that the users of the cooperative business also own, control, and benefit from its operations. This thesis examines the possible economic incentives agricultural co-operatives may have to invest in vertically integrated and diversified activities using the case of the Western Canadian co-operative elevator companies as an example. The analysis undertaken in this thesis is structured in two ways. First, the economic literature regarding co-operative formation and conventional firm expansion is surveyed. This analysis suggests that an important difference between vertically integrated investments and diversified investments is that they are motivated by the realization of distincly different sets of economic benefits for the co-operative firm and its members. It is argued that co-operative vertical integration can convey benefits to members indirectly through the market, in the form of increased producer margins and improved market access. However, these benefits may not impact the "bottom line" of the co-operative firm. Diversification can, on the other hand, provide a co-operative with direct monetary benefits in the form of improved financial performance and increased profits, which can translate into increased patronage refunds available to members. The second component of this analysis involves the development of a simulation model to examine the implications of an additional hypothesis proposed to explain co-operative expansion. The proposed hypothesis is based on the notion that perhaps the indirect market benefits from cooperation and co-operative expansion are being undervalued. This undervaluation can result in a preoccupation with the monetary benefits from co-operative business, and may therefore cause a bias towards diversified investments. The model developed in this thesis illustrates that, although such a bias may improve a co-operative's rate of return, it may also result in significant opportunity costs for agricultural producers due to a decrease in a co-operative's pro-competitive effect on primary markets.

Thesis/Dissertation

application/pdf

2009-01-16

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http://hdl.handle.net/2429/3702

Agricultural Economics

University of British Columbia

UBCV

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