An analysis of the efficiency of local supply and grain marketing cooperatives in the upper Midwes

The purpose of this study is to develop a better understanding of the economic efficiency of local farm supply and grain marketing cooperatives. This study provides information on (1) the types of inefficiency that limit the performance of cooperatives, (2) the potential for efficiency gains by capturing unrealized economies of scale or diversification, and (3) the firm level and geographic factors that are associated with the efficiency of cooperatives.;In this study, efficiency is measured relative to the standard of cost minimization. Cost frontiers are estimated using nonparametric efficiency measurement techniques (data envelopment analysis). These methods involve the use of linear programming models rather than statistical methods to estimate the frontier of a production technology. A measure of overall cost efficiency is obtained for each firm and is then decomposed into components of allocative efficiency, technical efficiency, and scale efficiency. The frontier methods are also used to examine the existence or nonexistence of product mix economies. This is based on a comparison of the costs of diversified and specialized production arrangements. The data reflect information on 513 cooperatives located in seven upper Midwestern states between 1989 and 1996.;Results suggest that of the three components of efficiency, cooperatives had the most difficulty achieving technical efficiency. The results include the estimated relationship between technical efficiency and differences in the financial structure of cooperatives, differences in product mix, and differences in regional agricultural conditions and practices. The results also indicate that further efficiency gains though returns to scale are limited for most farm supply and grain marketing cooperatives. One exception is a modest number of the specialized grain marketing cooperatives. Estimated returns to diversification measures suggest that diversification has not been an effective means of lowering production costs for most cooperatives. However, this study focused only on production costs, and there may be other considerations that motivate diversification or expansion strategies among cooperatives.