Furtan & Karantininis, Reverse franchising: Reversing the road to mega farms.

Farm Policy Journal, Vol 9, No 2, Winter Quarter, 2012; pp. 39-49

Reverse Franchising: Reversing the Road to Mega Farms

Professor Hartley Furtan, University of Saskatchewan, Canada Professor Kostas Karantininis, Department of Economics, SLU, Sweden and FI, KU, Denmark1 Reverse franchising is the business format where a number of small firms (or farms) through collective action create an entity (a firm, a cooperative, a marketing order, a joint venture, a strategic alliance, etc) which undertakes certain activities on behalf of the members franchisees. We use two illustrative examples of reverse franchising in the farm sector, the Danish agricultural system and the Canadian Wheat Board. Through these reverse franchise structures farmers have been able to enjoy economies of size and market power, and thus maintain the family farm. The creation of superstructures by farmers has helped them maintain a smaller scale at the primary level. These two examples illustrate that in order for the family farm to survive and become a mega farm, it will have to integrate backward and forward into mega structures, such as large cooperatives, federated structures or marketing orders. The family farm needs to achieve economies of size wherever this is necessary through external organisations. These organisations, besides production costs are loaded with transaction and agency costs. The ability of the stakeholders to minimise these costs is path dependent and depends very much on the macro-culture and the overall institutional framework within which the farms and their organisations operate.

Introduction
A unique feature of world agriculture is that production takes place on a large variety of farm organisation types, often for the same agricultural product. We define organisation to include farm structure, farm size, farm ownership, over a broad scope of activities. Countries or regions have their own culture and set of institutions,2 as well as factors such climate conditions and soil typology, which create a type of path dependency in shaping the type of organisation. In the Middle East, farms have moved from being feudal to small family farms or share cropping. Parts of Africa have tribal rights over agricultural land use, while in North America farms which were initially organised as family operations are now a mixture of corporate farms (much of the hog, poultry and parts of the dairy sector) and large family operations (grain and oilseed sector),3 In many countries agricultural production is dependent upon industrially produced inputs, such as fertiliser, chemicals,
Names appear in alphabetical order, and no senior authorship is assigned. NOTE: The "Single desk" monopoly of the Canadian Wheat Board was dismantled and farmer-elected board dismissed, enabling an open market for Prairie wheat and barley effective 2012 crop year.The corresponding Bill, the Bill C-18, has been challenged in court, but the changes were to be applied for the campaign 2012-2013. The Federal court of Canada declared the Federal Governments decision illegal, since according to the statutes it required a farmers pebicite which the Federal Government refused. An appleal by the Federal Government was discussed at the Federal Court of Appeals on May 23, 2012. The Court reserved its decision. See more here: http://www.parl.gc.ca/HousePublications/Publication.aspx?Language=E&Mode=1&DocId=5339113 . This article was completed before the completion of this decision. 2 We use the terms institutions and organisations in the following contexts: Institutions are the rules of the game in a society, or more formally, are the humanly devised constraints that shape human interaction (North 1990, p. 3). Organisations are groups of individuals bound by some common purpose to achieve objectives (ibid, p. 5). 3 In some countries the structure of agriculture is determined by government fiat (for example Cuba, and North Korea).
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Furtan & Karantininis, Reverse franchising: Reversing the road to mega farms. Farm Policy Journal, Vol 9, No 2, Winter Quarter, 2012; pp. 39-49

and farm machinery, which is where the term industrialised farming originated. Closed loop agriculture production is increasing, which occurs when the same farm provides the inputs, purchases the output, and often sets management benchmarks that must be achieved. By way of comparison the manufacturing sectors around the world have a spectrum of the small family operations up to corporate farms and contract farming by large multinational enterprises (MNEs). Institutions such as trusts are seen as playing a large role in the structure of manufacturing (Fukuyama 1995). In this paper we are interested in explaining the role economics plays in determining the evolution of the farm organisation. There are at least three important global phenomena that are influencing the changing structure of agricultural production. First, is the growing importance of MNEs in the agriculture sector. The spread of technology is increasingly a result of MNEs, international research agencies, and freer trade. MNEs play a large role in new seed technology, crop and animal protection technologies, and in many cases farm equipment. For example, the use of genetically modified organisms (GMOs) plants is largely the result of research commercialised and marketed by MNEs. University researchers developed some of the basic research for GMOs, but the transnational marketing of these seeds is the purview of MNEs. MNEs are increasingly the mechanism used to trade agricultural products, both agricultural commodities and food products. They play a large role in the supply chain management of the food sector in everything from food inspection to labelling. There has been a corresponding decline in the role of state trading enterprises and farmer owned cooperatives in agriculture and food trade. As a result of the growth in MNEs, farmers in many developed and developing countries have access to the same production technology. This suggests that agriculture production is becoming more homogeneous over time and across countries.

A second global phenomenon is the standardisation of institutions, such as property rights, use of science to arbitrate food safety issues.4 Globalisation through free trade agreements has reduced the set of institutions a country can use to affect the structure of primary agriculture. The World Trade Organizations (WTO) drive to reduce agriculture protection and trade distortions for example, by allowing more market access make many institutional incentives a form of unfair trade practice. An example is the pressure by the WTO and others to remove the monopoly powers of farm marketing organisations. A third global phenomenon is the changing consumer product demand, consumption of food outside the home, and the demand for increased food safety. Consumers want more variety in the products they consume. This implies countries must import more of the average food basket. Consumers are eating more food away from home as incomes rise. Finally, consumers are increasingly concerned with food security and how their food is produced. The rise of the organic industry is in part the result of the consumer concern over food production.

Property rights, for example on patents, use of chemicals, food additives, animal rights, etc are becoming increasingly standardised globally. For example, the Registration, Evaluation, and Authorization of Chemical Substances (REACH), an EU regulation (EC1907/2006) on chemicals, has been adopted recently by China and India, but not by the United States.

Furtan & Karantininis, Reverse franchising: Reversing the road to mega farms. Farm Policy Journal, Vol 9, No 2, Winter Quarter, 2012; pp. 39-49

The objective of this paper is to demonstrate that the structure of farms is determined in part by how the large external economies to the farm are managed. External economies5 are those market forces that a farm must interact with as part of the management of its human and physical resources. We draw on the notions suggested by Stigler (1951) and show that the size of farms is not solely a function of the degree of specialisation within the farm or how the farm deals with informational problems. How farms arrange their business such as production within the firm, or buying from another firm determines the structure and the boundaries of the farm. We argue that super farms are the result of the efficiencies gaining from making business decisions inside the farm, whereas family farms gain the greatest efficiency through outsourcing a wide spectrum of their activities externally. The farm can achieve outsourcing by contracting, or by reverse franchising. Franchising is a well known business format where a large firm, the franchisor, provides a license along with a very detailed operating framework in addition to ongoing advice to the franchisee. Franchising has become a standard model in the restaurant and business services sectors, but is found also in food production in various forms. For example, the production of broiler chickens by corporations such as Tyson Foods operates very much like the franchise model. Reverse franchising is the opposite process where a number of small firms (or farms) through collective action create an entity (a firm, a cooperative, a marketing order, a joint venture, a strategic alliance, etc) which undertakes certain activities on behalf of the members franchisees. These activities may be marketing, input procurement, up-stream or down-stream bargaining, research and development, advisory service, or simply the creation of brand name capital through advertising and promotion. Which system is most efficient depends on the characteristics of the particular business activity, and upon the institutional structure of the country.

Literature
We are by no means the first economists to have an interest in explaining the structure of primary agriculture production using economic theory. In his classic 1962 paper Breimyer, divides agriculture into three economies: primary production from soil; secondary, or conversion of feedstuffs into livestock products; and the marketing of products from farm to retail (Breimyer 1962, p. 679). What distinguishes the three economies is their dependence on fixed inputs. The primary economy is highly dependent on land, whereas the marketing economy is highly dependent on social capital which is not fixed in the long run. The livestock economy depends on feedstuffs, an output of the primary sector, and capital. He also identified the industrialisation of agriculture as the transition from an agriculture based on fixed land resources to an agriculture based on variable (manufactured) inputs. He characterised the first economy as the least industrialised, the marketing and agribusiness as the most industrialised and the animal production as intermediate. In a nutshell, an industrialised economy is totally self-contained and self-sustained in which no factors are fixed, but all are variable (Breimyer 1962, p. 681). He added later [A]ll factors are perfectly mobile and divisible (Breimyer 1978, p. 39). This definition and consequent analysis is therefore based on the presence of increasing returns and economies of size. Breimyer even predicted that the primary economy is catching up in the industrialisation process: Production on US farms has been shifting at fast pace to an industrial, capital using character (Breimyer 1962, p. 685).

External economies are usually refered to as the impact that a firms actions have on the economic and physical environment, however in a broader sense this could include the interaction a firm has with input suppliers, buyers of their product, government, international organisations, etc.

Furtan & Karantininis, Reverse franchising: Reversing the road to mega farms. Farm Policy Journal, Vol 9, No 2, Winter Quarter, 2012; pp. 39-49

Naturally, more recent approaches to the problem of the farm have been influenced by evolutions in economic theory, especially in new institutional economics. Two are the most permanent views here. One looks at the internal economies of the firm, whereas the other emphasises the external institutional environment within which a firm operates. The first view follows the path breaking contribution of Coase (1937) on the nature of the firm where he examined the fundamental question of why a firm exists. In turn, the answer to this question determines the boundaries (ie the scope) of the firm. In this view, a firm has to make the choice of what to produce internally and what to procure from the market. A farmer, for example may decide to plant with his own tractor and seeder, but may hire some specialised professional to do the harvesting with their own machinery. The choice of make or buy depends on the sum of two types of costs: production and transaction costs. The latter are the costs of doing business, similar to friction in physics. The costs of negotiating, drafting a contract, haggling, and monitoring, are some examples of the transaction costs involved. The characteristics of each transaction, be it seeding, spraying, harvesting, marketing, etc give rise to different production and transaction costs. Depending on these costs, the farmer may decide to drive the tractor himself, or hire a driver, or contract with some specialist professional. Extend this to all the activities related to the farm and you have the boundaries of the farm, ie the scope of activities of the farm. In the extreme case, a farmer may be someone sitting in a remote office who rents a piece of land and contracts all the activities to specialists. This format is probably not observed very often, if at all, because the risks of the contractors not performing the jobs properly and on time, and the costs of monitoring, for example by hiring a local manager, are too high. This farm would have been very different from the traditional family farm, where the farm manager owns most of his land, maybe rents some extra parcel from his retired neighbour, also owns most of his machinery and operates it himself with the assistance of other family members, or maybe of some seasonal hired labour. On the other end of the spectrum of farm types, is the franchise, such as for instance the broiler chicken operation where the franchisor is a large corporation who owns several slaughterhouses, hatcheries and feed mills. This corporation contracts with franchisee broiler growers to raise the chicks which the franchisor delivers from the corporate hatcheries, and provides the feed and continuous veterinary and other technical advice to the grower. When the chicks are grown to slaughter weight, the corporation brings in teams of harvesters who catch the broilers, and transports them to the corporations slaughterhouse for slaughter and further processing. In this game of chicken (Knoeber 1989), the grower is paid a fee for every kilogram of live weight he delivers, less the feed and other costs. No set price for chicken exists in this system only a precontracted fee for raising a chicken on behalf of the corporation.6 This business format is dominant in the broiler and egg industries in the US, and to a lesser extend in turkey, pork and even less in the beef industries. The benefits of such organisation of economic activity are summarised nicely by Rhodes: The approximate model may be the fast food franchise in which a franchisor such as McDonalds saves on capital while obtaining highly-motivated local managers and greatly increasing its sales
6

The payment (or settlement) fee is based on a rather complicated system of tournament contracts, where each farmers fee per kilogram depends on relative performance compared to the performance of a pool of other growers. A large part of the remarkable technological developments in the broiler industry is attributed to this particular form of contracting (Knoeber 1989). On the other hand, one could argue that this system has crowded out the traditional family farm, which in the case of broiler production is almost entirely extinct.

Furtan & Karantininis, Reverse franchising: Reversing the road to mega farms. Farm Policy Journal, Vol 9, No 2, Winter Quarter, 2012; pp. 39-49

by contracting with individual franchisees. Likewise, the hog contractor can employ all, or most, of his capital on hogs and feed, rather than on land and facilities while the grower avoids certain market risks and obtains a key role in a hog operation that he could not capitalize on his own. (Rhodes 1995, p. 113) This system of production is not, however, without costs. One consequence is that profits to the farmer are gradually disappearing, mainly due to the well-known treadmill effect. The treadmill theory as first introduced by Cochrane in 1958 argues that farmers constantly strive to improve their incomes by adopting new technologies. Early adopters make profits for a short while, however, these profits tend to decrease since more farmers adopt the technology and prices go down. In order to survive, farmers are forced by lower prices to adopt the technology and lower their production costs. Those farmers who do not adapt new technologies called the laggard farmers are lost in this price squeeze and leave farming. One of the successes of the chicken broiler industry has been its phenomenal technological advances which have doubled productivity in a matter of three decades (Knoeber 1989). In its drive for quick adaptation of technology the franchise system of production has also increased the pace of the treadmill process. Employing modern economic theories of the firm, it has been argued repeatedly by analysts, that the family farm is a very successful and long-lasting form of business organisation because it has some advantages over corporate and other forms. Roumasset (1995) for examples argues that the family farm is the dominant form because it allows specialisation of labour and management within the farm. Similarly, Allen and Lueck (1998) explain the predominance of the family farm as a result of the trade-off between external risk, which occurs because of the biological nature of agricultural production and the gains from specialisation. They apply their argument on farming systems in North America but do not explain why many farms, for instance with intensive livestock production, such as large feedlots for example, or the chicken broiler production mentioned earlier, have a corporate structure at least where it is not disallowed by legislation. Another strand of literature looks at the farming system in its relation to the external economic, social, institutional and physical environment. The main question of this research is the causes and consequences of the industrialisation of agriculture, which re-appeared in the literature in the 1990s (Barkema 1994, Rhodes 1993 and 1995). Two main arguments can be identified here: demand driven and supply driven industrialisation. Barkema (1994) and others that followed, are the main proponents of the demand-driven industrialisation hypothesis. The argument here is that consumers are becoming more specialised in their demand for food, mainly due to increased incomes, and changes in demographics and lifestyles. The food demand now consists of niche markets compared to the mass markets of the past. The traditional food market structure, which traditionally had been designed to handle undifferentiated food commodities is becoming redundant. It is being replaced by a system that channels precisely engineered food products to a multitude of new consumer niches (Barkema et al. 1993). We focus here on the supply driven industrialisation processes, because there is as yet no good empirical support for the demand driven process, but most importantly because our approach fits within the latter. The supply driven forces mainly stem from technological advancements in biotechnology and information technologies (Barkema et al. 1993). Focusing on the pork sector (the second economy in Breimyers classification), Rhodes (1993) argues that the motivation for the drive towards industrialisation is efficiency, innovation and economies of size. However, the treadmill process may lead to the deterioration of any benefits from this process and can lead to the

Furtan & Karantininis, Reverse franchising: Reversing the road to mega farms. Farm Policy Journal, Vol 9, No 2, Winter Quarter, 2012; pp. 39-49

demise of the family farm. It is proposed in this paper that reverse franchising may actually reverse, or at least impede, the process of the demise of the family farm.

Reverse Franchising and the Farm

If the franchising process (Rhodes 1995) contributes to what some may call the demise of the family farm, could reverse franchising be one solution? As defined in the introduction, under reverse franchising, a number of small farms collectively agree to be part of an entity, become member franchisees. The created entity (a firm, a cooperative, a marketing order, a joint venture, a strategic alliance, etc) undertakes certain activities on their behalf. These activities may be marketing, input procurement, upstream or downstream bargaining, research and development, advisory service, or simply the creation of brand name capital through advertising and promotion. This process, of course, is not unique to primary agriculture. Cox, Mowatt and Prevezer (2003) show that some UK retailers subcontract management of their distribution centres. Similarly, doctors in Australia are involved in reverse franchising which involve doctors creating a franchise from existing solo practices and then benefiting from a consolidated brand and shared services and administration costs.7 This is what a farmer cooperative does as well. Perhaps the difference between the Australian doctors franchise practice, or Sainsburys warehouse management network on one hand, and a farmers cooperative on the other, are the particular bylaws governing the decision-making (one-member, one-vote) process, or the share of surplus (patronage dividend). But this is not what we are concerned with here. What these organisational initiatives have in common is that they allow their primary owners/patrons to outsource certain activities. In doing so, they are able to specialise on their core activities (farming) while they can attain services or inputs at a lower cost via the franchise. Some examples will help illustrate the argument. The sources of efficiency through this reverse-franchising process are the following: 1. Better realisation of economies of size through rationalisation.8

2. Market power: through collective action, farms may attain better bargaining position, and they can extract rents from upstream and downstream industries. At least, through collective action they may prevent other firms from taking advantage of them (countervailing power, Galbraith 1958). 3. Network externalities: although related to market power above, this is not pure rent-seeking. Instead, these are externalities created through large numbers in the network. These include, information sharing and trust development. Below, we illustrate our arguments with the help of some examples: the Danish cooperative network and the Canadian Wheat Board9. These are two very different examples of reverse

See the Australian Doctor website, www.australiandoctor.com.au, viewed on 5 April 2012. This argument follows Adam Smith (1776) and later Stigler (1951), and has been explained further by Williamson (1975). An example for Canadian agriculture is proposed by Karantininis, McNinch and Brown (1997). 9 The "Single desk" monopoly of Canadian Wheat Board was dismantled and farmer-elected board dismissed, enabling an open market for Prairie wheat and barley effective 2012 crop year.The corresponding Bill, the Bill C-18, has been challenged in court, but the changes were to be applied for the campaign 2012-2013. See more here:
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Furtan & Karantininis, Reverse franchising: Reversing the road to mega farms. Farm Policy Journal, Vol 9, No 2, Winter Quarter, 2012; pp. 39-49

franchising, having in common however, that they both internalise external economies. In other words, instead of a large share of the profits of framing being captured by the franchisor they are captured by the franchisees. In addition, a large part of the costs is saved through large external economies of scale. These two examples are illustrative of these two effects.

Empirical Examples
Example I: The Danish cooperative network

Many social scientists (historians, economists, anthropologists, political scientists, sociologists) have been fascinated with the significance of the Danish cooperatives.10 They all agree that the Danish cooperatives have contributed significantly to the development, success and survival of Danish farms.11 Below, we briefly illustrate the significance of the network (franchise) by examining the structure and the benefits of the organisation of the Danish pork industry. Following Karantininis (2006), we identify three tiers of organisations beyond the farm level: the cooperative, the federated structure and the policy network. Firstly, it is important to understand the key features of Danish agriculture, and specifically the traditional practices and policies repeated over time. These are called path dependency and macroculture.

Path dependency and macroculture

After the severe decline of world wheat prices after 1870, Denmark turned from an exporter to an importer of wheat (Kindleberger 1951). Unlike Germany, France and Italy who pursued protectionist policy through export subsidies and tariffs, Denmark changed from an exporter of wheat into an importer. This happened at the same time that Danish agriculture turned from grains production to animal husbandry. It is in this time that the cooperative slaughterhouses and creameries emerged in Denmark. Around the same time, in 1844, the folk high school movement originated in Denmark, by NFS Grundtvig (Borish 1991). The schools provided liberal education mainly to the rural population not in scientific agriculture per se, but instead in language, history and economic life. The schools created a national awareness and strong social cohesion which contributed to the development of organisational knowledge and the development of a macroculture. These assisted to the organisation of the strong cooperative movement (Kindleberger 1951; Borish 1991).

The cooperative
On 14 July 1887, 500 farmers formed the first cooperative slaughterhouse in Horsens, Denmark. Today, 90% of all the pigs (a total of 22 million heads) in Denmark are slaughtered, processed and distributed by two cooperative slaughterhouses: Danish Crown (85%) and Tican (5%) reducing the market into a farmer owned duopsony with one dominant and one smaller firm. Danish Crown operates six state-of-the-art slaughter facilities and is vertically integrated into a number of subsidiaries, many of whom are multinational entities. While hog producers remain autonomous in their primary production, the cooperatives coordinate the production, logistics,
http://www.parl.gc.ca/HousePublications/Publication.aspx?Language=E&Mode=1&DocId=5339113 . This article was completed before the completion of this decision. 10 To mention just a few: Kindlemberger (1958) and Borish (1991). 11 Some researchers underline also the role of the Danish folke hoj skole, initiated and nourished by Grundvig during the end of the last century (Kindlemberger 1958; Borish 1991).

Furtan & Karantininis, Reverse franchising: Reversing the road to mega farms. Farm Policy Journal, Vol 9, No 2, Winter Quarter, 2012; pp. 39-49

distribution and quality of the activities via relational contracts. They have established, for example, a code of practice, where farmers who comply with certain quality and animal welfare standards receive a premium (Karantininis & Vestergaard Nielsen 2004). Similar contracts are in place for farmers who produce specialty pigs.

The federated cooperative structure

The Danish Bacon and Meat Council (Danske Slagterier or DS) is a federative organisation. Since 2006, it has been part of the Danish Meat Association (DMA). It differs from most traditional federated cooperative organisations, where the member organisations are usually cooperatives from the same level of production. The members of the DS are not only the two slaughterhouses, several other firms related to the pork chain participate. DS has three main tasks: Research and development (R&D), covering all areas from primary production to slaughtering and processing, including breeding, feeding, housing systems, animal welfare, the environment, food safety, meat quality, and automation. Sales promotion and information. Service, disease prevention and control: health management, combating diseases, meat inspection, legal advice and market support.

To facilitate these tasks, DS operates several committees and organisations. Furthermore, it is vertically integrated into breeding. DS and its members constitute a solid inter-organisational network. In this, DS has a pivotal role in the coordination of the pork industry (Hobbs 2001). DS has taken many initiatives. These initiatives are credible and develop customer trust, because they were undertaken by a recognised and representative industry-wide body. Also, these actions reduce agency costs as buyers of Danish pork do not need to undertake their own monitoring activities (Hobbs 2001). By undertaking these activities, directly or indirectly (through its subsidiaries), DS removes a large burden of transaction and agency costs from its member organisations. Many of these activities would otherwise have to be undertaken either by the slaughterhouses (for example R&D in processing, generic marketing and promotion, etc), or by the farmers themselves.

Policy networks and board interlocks

The policy network (Pappi & Henning 1998, 1999). A policy network consists of farmers as members of various industry organisations, such as the cooperatives, the federated structures, and other associations. Their role is mainly to influence policy at local, national, and international levels. However, sometimes they may provide services, such as advisory services, to their members. The Danish Agricultural and Food Council (Landbrug og Fdevarer) is such an organisation. Board interlocks are a striking phenomenon in the Danish pork industry. There are at least two levels of interlocks, at the pork industry level and at the agricultural sector level. The interlocked board members cooperate to transfer information and monitor the actions and performance of other firms in the chain. In their representational role these board members represent the knowledge, and the values of the entire industry, and guarantee the continuity, legitimacy and homogeneity of values and ideas. The capabilities and social capital developed by these directors are valuable, non-

Furtan & Karantininis, Reverse franchising: Reversing the road to mega farms. Farm Policy Journal, Vol 9, No 2, Winter Quarter, 2012; pp. 39-49

tangible, non-copyable resources, and constitute a major source of the competitive advantage of this industry. The organisation of the Danish industry in these three tiers is a form of multi-layer reverse franchising. The primary stakeholders are farmers. Their farms are organised as family farms. Farmers have reversed franchised into cooperative slaughterhouses, which have in turn, reverse franchised into the federated DS and DMA. All farm organisations are members of the Danish Agriculture & Food Council (DAFC). These multi-layer organisations provide services to farmers, processing, marketing, exports, advisory services, and lobbying. This helps maintain the family farm since it does not have to grow very large in order to reach the economies of size required for the downstream operations such as slaughter, marketing and lobbying. Hence, through this organisation farmers have been able to both attain market power and reduce external costs.

Example II: The Canadian Wheat Board12

While the Danish cooperative network is a voluntary, purely privately owned initiative consisting of a nexus of privately owned organisations, the Canadian Wheat Board (CWB) is in essence a government backed compulsory monopoly which operates under specific statutes. Its main purpose is to capture market power benefits and to operate efficiently the grain handling and transportation system with as little duplications in handling as possible. The Canadian Wheat Board (CWB) started in the 1930s as a result of war in Europe. Canadian farmers were called upon to produce grain to support Great Britain who was facing a number of financial constraints. In order to orderly manage the sale of wheat the Canadian Government became directly involved in the sale, pricing, and marketing of wheat. Following World War II the CWB went through a period where its usefulness was questioned by the grain trade. However in 1945 the Canadian Wheat Board Act was passed that gave it permanent status. Initially the CWB focused on marketing wheat, but over the years barley and oats were added to the mandate. The CWB had a monopoly on the export of wheat, barley, and oats by 1950. By 2006, the CWB marketed wheat, durum, and barley to the export market and for domestic human consumption (feed barley and feed wheat is marketed through a open market).13 The CWB is the largest wheat exporter in the world. The initial purposes of the CWB were to get higher prices for farmers, protect farmers against large international trading houses, and provide equity in delivery opportunities (Schmitz & Furtan 1997). All of these activities are external to the farm and as such are a form of bargaining or outsourcing for services. At the local level farmers developed a series of grain handling cooperatives which built elevators, inland terminals and port terminals.14 The CWB had no physical assets, except the building in which it was housed. All CWB assets are in the form of human assets and the international networks which they developed.
The "Single desk" monopoly of Canadian Wheat Board was dismantled and farmer-elected board dismissed, enabling an open market for Prairie wheat and barley effective 2012 crop year.The corresponding Bill, the Bill C-18, has been challenged in court, but the changes were to be applied for the campaign 2012-2013. The Federal court of Canada declared the Federal Governments decision illegal, since according to the statutes it required a farmers pebicite which the Federal Government refused. An appleal by the Federal Government was discussed at the Federal Court of Appeals on May 23, 2012. The Court reserved its decision. See more here: http://www.parl.gc.ca/HousePublications/Publication.aspx?Language=E&Mode=1&DocId=5339113 . This article was completed before the completion of this decision. 13 For a complete review of the history of the CWB see Schmitz and Furtan (2000). 14 The prairie grain pools do not exist today, at least not in their orinial form of farmer-owned grain handling cooperatives. (Fulton and Larson, 2009)
12

Furtan & Karantininis, Reverse franchising: Reversing the road to mega farms. Farm Policy Journal, Vol 9, No 2, Winter Quarter, 2012; pp. 39-49

Primary farmers deliver their grains to grain elevators. The CWB acts as a single desk seller of wheat and barley on behalf of the farmers and offers an initial payment for the delivered grain. This initial payment represents a percentage of the expected return from the CWBs pool account. After the end of the crop year, an interim payment and a final payment are paid to farmers. The initial payment is guaranteed by the Government of Canada and is paid even if there is a deficit in the pool account. The governance structure of the CWB was initially a board of government appointed commissioners. The commissioners were accountable to the Minister responsible for the CWB, which has been the Minister of Finance, Minister of trade, and Minister of Agriculture. In 2006 it is the Minister of Agriculture who speaks for the CWB in the Canadian Parliament. In 1996 the Commissioner model was replaced with a 15 member board of directors, 10 farmer elected and five (including the CEO) government appointed. There are a few unique features of the CWB legislation. Firstly, the legislation made the CWB a state trading corporation with a monopoly on the exports and human consumption use of wheat, durum and barley. Secondly, the CWB was never audited by the Auditor General of Canada, unlike other state owned corporations until 2002. The CWB had some very favourable financing advantages provided by the Federal Government. These features were just part of the initial package and never really lobbied for in any manner by farmers. The CWB is a type of reverse franchise. It is controlled by a group of farmers, all of whom produce wheat, durum and barley for export. The CWB does the bargaining for transportation services, port services and export price. In 1996, Kraft et al. showed that the CWB earned farmers an extra CAD$1315 to CAD$20 per tonne premium for wheat, while Schmitz et al. (1997) estimated the malt barley premium to be CAD$70 per tonne. The CWB is purely a marketing board and passes all profits back to farmers. Gray has estimated that the cost of rail freight would increase by about CAD$10 per tonne in the absence of the CWB bargaining power. In the absence of the CWB wheat farmers would have to use a futures market contract to price their grain and have no bargaining agency to protect them from monopoly pricing on the part of railways. Farmers would either have to purchase (outsource) such services from one of many providers or get larger and make such services in-house.

Conclusions
In this paper we have used two illustrative examples of reverse franchising in the farm sector, the Danish agricultural system and the Canadian Wheat Board. Both examples are bottoms up organisations with farmers as main stakeholders. We argue that through these reverse franchise structures, farmers have been able to enjoy economies of size and market power, and thus maintain the family farm. We have used theories, such as transaction cost economics, to explain the emergence and choice of the organisational structures. These theories help us explain the choice of governance structure between, for instance, family farm and mega farm, or between a cooperative and an investor owned firm.

15

CAD$: Canadian Dollars.

10

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Our main point in this analysis and examples is that in some agricultural systems the creation of superstructures by farmers has helped them maintain a smaller scale at the primary level. Hence, our examples illustrate that in order for the family farm to survive and become a mega-farm, it will have to integrate forward into mega structures, such as large cooperatives, federated structures or marketing orders. In other words, the family farm needs to achieve economies of size wherever this is necessary through external organisations. These organisations, however, besides production costs are also loaded with transaction and agency costs. The ability of the stakeholders to minimise these costs is path-dependent and depends very much on the macro-culture and the overall institutional framework within which the farms and their organisations operate.

References
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