A Duality Approach to Testing the Economic Behaviour of Dairy-Marketing Co-operatives: The Case of Ireland

A DUALITY APPROACH TO TESTING THE ECONOMIC BEHAVIOUR OF DAIRY-
MARKETING COOPERATIVES: THE CASE OF IRELAND

1. Introduction

Since the introduction of production quotas in 1984 there has been a substantial amount of
analysis of the impact on the choices of primary milk producers in European economies. This trend
has accelerated in the wake of the 1992 "MacSharry CAP Reforms". In contrast with the
voluminous amount of material dealing with primary producers there appears to have been
relatively little analysis of decision-making by the processors of farm output. Yet there are several
important reasons to analyse the behavior of these firms.

For one the processors of milk output are predominantly organised as cooperatives. This raises
interesting issues about the appropriate behavioural framework for the empirical modelling of such
firms. A particular concern in this paper is to explore, in the case of Ireland, whether cooperatives
are fundamentally different in their economic behaviour to profit-maximising firms. Specifically, if
cooperatives are found to be no different in their behaviour to profit-maximising firms it calls into
question the generally favourable fiscal treatment of such entities in most jurisdictions. In Ireland,
for instance, up to April 1992 dairy-processing cooperatives were exempt from corporation tax.

A second major issue of interest arises out of the 1994 reforms themselves. The imposition of the
quota system had a major impact on the dairy-processing sector as Chart 1 demonstrates. Up to
1985¹ milk production in Ireland was growing at a rate of about 5% per year and the intake of
milk for processing would have grown at about the same rate. From this date raw material
available for processing has been more or less fixed. Such an imposition can be expected to have
led to significant adjustment in the output supply and input demands of dairy processors.

¹ Ireland was exempted from the quota regime in 1984.

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