Farmer trust in producer- and investor-owned firms: Evidence from Missouri corn and soybean producers

Farmer Trust in Producer- and Investor-OwnedFirms: Evidence from Missouri Corn andSoybean Producers

Harvey S. James Jr.Department of Agricultural Economics, University of Missouri-Columbia,146 Mumford Hall, Columbia, MO 65211

Michael E. SykutaDepartment of Agricultural Economics, University of Missouri-Columbia,135B Mumford Hall, Columbia, MO 65211

ABSTRACT

The authors examine whether cooperatives are characterized by greater trust than investor-ownedfirms+ They surveyed 2,000 Missouri corn and soybean farmers and found that trust and farmerperceptions of honesty and competence are higher in cooperatives than in investor-owned firms andthat trust is a significant factor explaining the choice of farmers to market to cooperatives ratherthan investor-owned firms+ Interestingly, they found that trust is more significant in producers’decisions for marketing soybeans than for corn+ @JEL classifications: Q130, Z130#+ © 2006 WileyPeriodicals, Inc+

1. INTRODUCTION

Agricultural producer-owned firms ~POFs!, or cooperatives, occupy a special place in theAmerican economic landscape+Agriculture is one of few sectors of the U+S+ economy inwhich cooperative firms directly compete on a large scale with investor-owned agribusi-ness firms ~IOFs!+ The U+S+ Department of Agriculture ~USDA; 2003! reports there were3,229 agricultural cooperatives in the United States in 2001, with membership totalingmore than 3 million and producing a net income of over $1+35 billion+ As of 1999, agri-cultural cooperatives accounted for 27% percent of total farm marketing ~e+g+, crops, live-stock, and poultry! and 27% of all farm inputs ~e+g+, feed, seed, fertilizer, crop protectants,and petroleum! ~Kraenzle, 2001!+

Producer-owned firms are owned by and operated for the benefit of their agriculturalproducer members; therefore, POFs have a distinctly different objective and focus thantraditional IOFs+While POFs provide financial benefits to the producers with whom theydo business, either in the form of cost-based pricing, reduced-price services, or patronagerefunds, IOFs focus on financial returns to ~nonproducer! investors+ Sykuta and Cook~2001! suggest this difference in organizational objectives may create greater trust in therelation between producers and producer-owned agribusinesses than between producersand IOFs+ Shapira ~1999! argues that capitalist firms are “low-trust and coercive,” while

Agribusiness, Vol. 22 (1) 135–153 (2006) © 2006 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/agr.20069

135

kibbutzim are “high-trust and democratic+” In related work, Shaffer ~1987! asserts thattrust makes or breaks a cooperative, in part because the contract between producers andthe organization is more relational in cooperatives than in IOFs and because cooperativesare generally more reluctant than IOFs to impose sanctions on their members+ Similarly,Fulton and Giannakas ~2001! show how member commitment within a cooperative—which could be a manifestation of organizational trust—is affected by cooperative char-acteristics and affects cooperative performance+

Notwithstanding the theoretical arguments, there has been little empirical research onthe relationship between cooperative forms of organizations and trust, although work thathas been done has been supportive+ Balbach ~1998! examined differences in contractsbetween U+S+ sugar beet producers and producer-owned and investor-owned refining com-panies, arguing that the more efficient contracts with cooperatives is attributed to thehigher trust producers have with the cooperative than with the IOF+ Shapira ~1999! attrib-uted the decline in cooperative effectiveness to the transition from a high-trust to low-trust culture+ In these studies, trust is implied but not directly measured+A 2003 survey of2,031 U+S+ adults conducted by Opinion Research Corporation ~Princeton, New Jersey!measured the relative degree of trust in cooperatives and IOFs+ The survey revealed “two-thirds of consumers believe businesses that are owned and governed by their customersand have consumers on their boards of directors are more trustworthy than those that donot” ~National Cooperative Business Association @NCBA# , 2003, p+ 1!+ However, thissurvey examined consumer attitudes only+ In related research, Chloupkova, Svendsen,and Svendsen ~2003! showed how the institutional environment helps create and destroytrust within cooperatives, but they did not compare how trust in cooperatives compares toIOFs+ Ole Borgen ~2001! showed why trust is important in cooperatives and how coop-eratives can generate trust, but he did not compare trust in cooperatives with that of IOFs+James and Sykuta ~2003! found that agricultural POFs with governance structures moreresembling those of IOFs exhibit lower levels of organizational trust than cooperativeswith more traditional governance structures+

The theoretical and empirical literature cited above suggests that cooperatives ought tohave higher trust than investor-owned firms and that trust ought to play a relatively impor-tant role in the producers’ choice of doing business with either a POF or an IOF+However,these issues have not been examined empirically from the perspective of agricultural pro-ducers interacting with POFs and IOFs+The purpose of our study is to fill the gap in the empir-ical literature linking trust to cooperative ~producer-owned! and investor-ownedorganizations+We used data from a survey of 2,000 Missouri farmers of corn and soybeanto examine the relationship between trust and the choice of agricultural organization to whichfarmers marketed their 2002 crop-year harvest+We asked farmers whether they marketedtheir 2002 crops to cooperatives or investor-owned agribusinesses+We also asked about thedegree to which they trusted the organizations to which they marketed their crops, the termsof the marketing agreement, and other questions about their farming practices and experi-ences+We find that producers have a higher trust in POFs than in IOFs when marketing theirsoybean crops, but not when marketing their corn harvests+

2. BACKGROUND

Trust is an expectation that one would not be exploited by another ~James, 2002a!+ Thisexpectation is based in part on perceptions of the trustworthiness and competence of theentities in whom trust is placed+ Both trustworthiness and competence are necessary for

136 JAMES AND SYKUTA

Agribusiness DOI 10.1002/agr

trust+ For instance, Baier ~1986,! says, “we trust @others# to use their discretionary powerscompetently and nonmaliciously” ~p+ 240!+ Hardin ~2004! says that “trust depends on twoquite different dimensions: the motivation of the potentially trusted person to attend tothe truster’s interests and his or her competence to do so” ~p+ 8!+Ullmann-Margalit ~2004!notes that trust “is based in principle on reasons that include both intention and compe-tence” ~p+ 63!+ The idea is that if either perceived trustworthiness or competence is low,then trust might not exist+ As an illustration, consider the case of public support for bio-technology+ Hunt and Frewer ~2001! and James ~2003! state that if biotechnology insti-tutions are perceived to have a vested interest to misrepresent the safety and efficacy ofbiotechnology ~i+e+, are not trustworthy! or to have insufficient knowledge to conductbiotechnology-based research and development ~i+e+, are not competent!, then the publicmay not be willing to trust and hence, support biotechnology institutions+ In addition toexpectations of trustworthiness and competence, James ~2002b!, showed that trust is alsoa reflection of the anticipated gains that can result from correctly trusting and the lossesthat can arise when trust is misplaced+ Generally, the more there is to gain from correctlytrusting, the greater is the likelihood of trust+ However, increases in perceived vulnera-bility have a negative effect on trust; as the expected losses to misplaced trust increase,the lower is the likelihood of trust+

Research in the marketing literature suggests trust plays an important function in mar-keting relationships+ For example,Morgan and Hunt ~1994! “theorize that successful rela-tionship marketing requires relationship commitment and trust” ~p+ 20!, and they findthat trust is an important factor affecting cooperation in marketing relationships and thewillingness of marketing partners to continue the relationship+ In their review of the empir-ical literature, Geyskens, Steenkamp, and Kumar ~1998! conclude that trust is a strongand robust factor contributing to the emergence and success of marketing relationships+Importantly, not all empirical studies find that trust is important in marketing decisions+For instance, Doney and Cannon ~1997! find that while trust is an important factor affect-ing a buying firm’s choice of supplier, the effect of trust disappears “when controlling forpast purchase experience, supplier delivery performance, relative price0cost, and product0service performance” ~p+ 44!+ The reason is that, after all things are said, price and reli-able delivery are what “make the sale+”

In addition to the marketing literature on trust, there is also an emerging literature onthe relationship between trust and organizations+ Some researchers link institutions, orga-nizations, and other formal structures to the formation and destruction of trust ~e+g+, Sha-piro, 1987; Zucker, 1986!+ For example,Moorman, Deshpande, and Zaltman ~1993! findthat the degree of organizational bureaucratization is negatively correlated with trust inmarket research relationships+ Kwon and Suh ~2004! link trust to specific asset invest-ments in supply chain relationships and found that specific investments by a respondent’sfirm lowers perceived trust, but specific investments by a partner increases trust ~becausesuch actions are an indicator of commitment!+ In their study of cross-border marketingrelationships, Aulakh, Kotabe, and Sahay ~1996! find that output-monitoring mecha-nisms reduce trust while social and cultural control characteristics increase trust+

Other researchers show that trust is a factor affecting organizational form+ For instance,La Porta, Lopez-de-Silanes, Shleifer, and Vishny ~1997! provide evidence that trust ispositively correlated with the size of firms in an economy+ Simply, trust explains, at leastin part, the existence of large firms ~see also Fukuyama, 1995!+

At a more fundamental level, trust is equated with cooperation, such as in economicmodels of trust ~James, 2002a!+ For instance, La Porta et al+ ~1997! state that

FARMER TRUST IN PRODUCER- AND INVESTOR-OWNED FIRMS 137


Economists have developed two views of trust as a tendency to cooperate+ One view, rooted inrepeated game theory, holds that trust is a prior that an opponent is cooperative rather than fullyrational ~e+g+, plays only tit-for-tat in a repeated prisoner’s dilemma!+ + + + Another view, rooted ineconomic experiments, holds that people cooperate even in one-shot encounters, such as the dic-tator game or the ultimatum game + + + + ~p+ 333!

If trust is rooted in cooperation, then we might expect that agricultural “co-operatives”—by definition—ought to be characterized by trust+ However, are coopera-tives or producer-owned firms ~POFs! characterized by greater trust than investor-ownedfirms ~IOFs!? Some researchers have suggested that POFs have higher levels of trust thanIOFs ~e+g+, Shaffer, 1987; Shapira, 1999; Sykuta & Cook, 2001!+ Although cooperativesare not immune to problems that can erode public trust, the fact that cooperatives aregoverned by the members who patronize them might provide important advantages withrespect to trust formation, at least compared to investor-owned firms+ In other words,trust might be more important in the farmer-POF relationship than in the farmer-IOFrelationship+1 Therefore, we hypothesize that agricultural producers will have higher trustin POFs than in IOFs+

In addition, we explore the question of whether trust affects the marketing decision offarmers to a POF rather than IOF organization+ Specifically, we examine whether trust isa factor explaining the decision of producers to market their crops to POFs or IOFs, hold-ing constant other factors expected to affect that decision, such as price received by theorganization and the organization’s location+ Because we expect cooperatives to be char-acterized by higher trust than IOFs, we hypothesize that trust will be positively correlatedwith a farmer’s decision to market his output to a POF rather than an IOF after controllingfor other relevant factors+

3. DATA AND METHODS

We worked with the Missouri Agricultural Statistics Service ~MASS! to survey a sampleof 2,000 farmers from the population of Missouri corn and soybean farmers with farmslarger than 50 acres in the USDA farm census+ The sample was stratified by size and byUSDA reporting district in the state to ensure a statistically representative sample+ Wemailed surveys in late February 2003, with a second mailing to nonrespondents com-pleted in March 2003+2 We received 369 responses ~142 from the first wave, 227 from thesecond!, resulting in an overall response rate of 18+5%+3 This response rate is not unusualfor surveys mailed to farmers early in the calendar year ~see Pennings, Irwin, & Good,2002!+ We asked farmers how they marketed their 2002 corn and soybean harvests+ Wealso asked farmers about the extent to which they trusted the organizations to which theymarketed their harvests, how long they had dealt with the organization to which they soldtheir 2002 crop, whether they earned any off-farm income, and information about their

1This language was suggested by an anonymous referee, which we gratefully acknowledge+2The surveys were mailed by MASS in University of Missouri envelops, with postage-paid return envelops

addressed to MASS+ MASS checked off respondents against the original mailing list and forwarded the anon-ymous responses to us+

3The only significant difference between first- and second-wave respondents was that second wave respon-dents were, on average, 6 years older than first wave respondents and had 6 more years of farming experiencecompared to first-wave respondents+ In all other respects, the characteristics of first- and second-wave respon-dents were statistically identical+



personal and farming backgrounds+ In our sample, 258 farmers planted soybeans and 160farmers planted corn+

The average farmer in our sample was 58 years old, farmed approximately 750 acres,and had 34 years of farming experience+ Seventy-six percent of respondents had a soy-bean harvest in 2002, 59% had a corn harvest, and 55% harvested both corn and soy-beans+ Sixty percent did not participate in any off-farm business activities, while 41%utilized only family members’ labor ~instead of hired labor! during harvest+ Our respon-dent sample was 94% male, 87% married, and 97% Caucasian+ The average yield forsoybean farmers in our sample was 33 bushels per acre, while the average yield for cornproducers was 104 bushels per acre+ Soybean farmers in our sample received an aver-age price of $5+38 per bushel for their 2002 crop, while corn producers received anaverage price of $2+35 per bushel+ These yield and price averages are consistent withstatewide averages for Missouri farmers reported by the Missouri Department of Agri-culture ~MODA! and the U+S+ Department of Agriculture for the 2002 crop year,4 sug-gesting that our sample was a good representation of Missouri corn and soybean farmers+See Table 1 for a complete listing of variables and their definitions+

We measured trust by asking farmers to indicate the degree to which they trusted thatthe cooperative or agribusiness to which they marketed their 2002 corn or soybean har-vests “would stay within the terms of the agreement+” Respondents answered by check-ing “Definitely Agree,” “Tend to Agree,” “Tend to Disagree,” or “Definitely Disagree+”Additionally, we asked farmers about their perceptions of the honesty and competence ofthe POF or IOF to which they marketed their crops, because perceptions of honesty andcompetence are known to affect trust in organizations+5 We measured perceptions of hon-esty by the question: “Think about the honesty and integrity of the people in the @coop-erative or agribusiness# who explained the terms of the contract to you and who paid youand took delivery of your grain+ Overall, how would you rate the honesty and integrity ofthese people?” Respondents answered by checking “Very High,” “High,” “Average,” “Low,”or “Very Low+” Similarly,we measured perceptions of competence by the question: “Thinkabout the competence of the people in the @cooperative or agribusiness# who explainedthe terms of the contract to you and who paid you and took delivery of your grain—theirknowledge of the industry and your business, their interpersonal skills, their ability toanswer your questions, etc+ Overall, how would you rate the competence of these peo-ple?” Respondents answered by checking “Very High,” “High,” “Average,” “Low,” or“Very Low+”

Trust, honesty, and competence are ordinal qualitative variables rather than cardinalvariables; therefore, we employ the transformation procedure outlined by Terza ~1987!to replace each discrete category value ~e+g+, low, average, high! with a number+6 If dj

~where j � 1, + + + , J and J is the number of discrete categories! is the discrete categoryvalue for variable D, then dj is replaced with Zdj � @nj�1~dj�1!� nj~dj !#0pj , where n is the

4According to the 2003 Missouri Farm Facts, the average soybean yield in Missouri in 2002 was 34 bushelsper acres, with an average price received by farmers of $5+40 per bushel+ For corn producers, the average yieldstatewide in 2002 was 105 bushels per acre, with an average price received of $2+45 per bushel ~MODA0USDA, 2003, pp+ 5, 64!+

5For example, Nooteboom ~2002, pp+ 56, 57! says that organizational trust is reflected, in part, by indicatorsof “honesty trust” and “competence trust” in the organization+

6Alternatively, we could assign numbers to these categories linearly ~e+g+, for trust we would assign 4 �Definitely Agree, 3 � Tend to Agree, 2 � Tend to Disagree, and 1� Definitely Disagree!+We reject this approachbecause it assigns an arbitrary mean to the variable+ See Terza ~1987! for a discussion+



TABLE 1+ Variable Names and Definitions

Variable Definition

POF Dummy variable equal to one if respondentmarketed his 2002 crops to a producer-owned firm~cooperative!; equal to zero if 2002 crops marketedto an agribusiness+

Trust Qualitative response variable based on respondent’sagreement with the statement that the cooperativeor agribusiness would stay within the terms of theagreement, where response options are “DefinitelyAgree,” “Tend to Agree,” “Tend to Disagree,” or“Definitely Disagree+”

Honesty Qualitative response variable based on respondent’sassessment of the honesty and integrity of thepeople within the cooperative or agribusiness whoexplained contract terms, took delivery of the crop,and paid the farmer, where response options are“Very High,” “High,” “Average,” “Low,” and “VeryLow+”

Competence Qualitative response variable based on respondent’sassessment of the competence ~such as knowledgeof industry and interpersonal skills! of the peoplewithin the cooperative or agribusiness whoexplained contract terms, took delivery of the crop,and paid the farmer, where response options are“Very High,” “High,” “Average,” “Low,” and “VeryLow+”

Price of Crop Price received by respondent for 2002 crop at timeof delivery+

Distance to Establishment Distance, in miles, from respondent’s farm tocooperative or agribusiness establishment wheredelivery of the 2002 crop occurred+

Size of Farm Number of acres farmed by respondent+

Had Above-Average Farming Experience Dummy variable equal to one if the respondent hadabove-average number of years farming experience+

Did Not Participate in Off-Farm Business Dummy variable equal to one of respondent wasnot involved in any off-farm business ventures oroccupations in 2002+

Utilized Only Family Help at Harvest Dummy variable equal to one if family membersonly ~rather than or in addition to hired employees!helped the respondent with the 2002 crop harvest+

Was Married Dummy variable equal to one if the respondent wasmarried+

Age Respondent’s age+

Soybean Farmers Planted Corn Dummy variable equal to one if soybean producersalso planted corn in 2002+

Corn Farmer Planted Soybeans Dummy variable equal to one if corn farmers alsoplanted soybeans in 2002+



probability density function of the standard normal distribution evaluated at dj , pj is thepercentage of the sample observed in category j, and dj is calculated as follows: First, let

N~d1! � p1

N~d2 ! � p1 � p2 + + +

N~dj�1! � p1 � p2 � + + + � pj�1

Then,

dj � N�1�(i�1

j

pi�, ~ j � 1, + + + , J � 1!,

where N�1 is the inverse of the standard normal cumulative distribution function, andd0 � �` and dJ � �`+

Because we surveyed farmers after they had made their marketing decisions, trust, aswe measured it,may not be exogenous+ The reason is that respondents’ perception of trustin the organization to which they marketed their crops would likely be affected by theiractual experiences with those organizations for the crop year in question+ To control forthe expected endogeneity,we used perceptions of honesty and competence in two ways—first, as independent variables to explain producers’ choice of marketing organization,and second, as instruments of trust in a two-stage specification+7

While trust in the organization might be important, we expect other factors to affect thedecision of farmers to market to either POFs or IOFs+ For example, Doney and Cannon~1997! argue that when price and delivery service are controlled for, the importance oftrust disappears+ Therefore, we control for the price, in dollars per bushel, offered for thecrop at the time of delivery, and the distance, in miles, to the establishment receivingdelivery of the harvest+ We also control for farm and farmer heterogeneity by includingthe following additional variables in our analysis: ~a! the total number of acres of theresponders’ farms; ~b! whether the farmer had above-average farming experience; ~c!whether the respondent was not involved in any off-farm business activities; ~d! whetherthe respondent had exclusively family members ~such as spouse, children, siblings, par-ents, cousins, etc+! help with their 2002 crop harvest, ~e! either as paid or unpaid workers;~f ! whether the respondent had some college education; and ~g! the respondent’s maritalstatus and age+

4. RESULTS

Tables 2 and 3 list summary statistics for our sample of Missouri farmers, separated byproduction of soybeans and corn+ As shown in Table 2, approximately 40% of soybeanfarmers marketed their 2002 soybean harvests to producer-owned firms ~POFs!, and 72+1%of soybean farmers also planted corn in 2002+ In contrast, Table 3 shows that while roughly

7Using instruments to correct for the endogeneity of trust follows the pattern of La Porta et al+ ~1997!, who,in addition to linking trust to organization, analyzed an instrument of trust ~in their case, “hierarchical religion”!as a factor affecting organization+ Similarly, James ~2003! used instruments of trust in a two-stage model inwhich trust is hypothesized to affect public support for biotechnology+



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2+S

umm

ary

Sta

tist

ics

for

Soy

bean

Pro

duce

rs

All

Soy

bean

Gro

wer

sS

oybe

anG

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ers

Mar

keti

ngto

PO

Fs

Soy

bean

Gro

wer

sM

arke

ting

toIO

Fs

Var

iabl

eM

ean

SDM

inM

axM

ean

SDM

inM

axM

ean

SDM

inM

ax

PO

F0+

395

0+49

00

11

0T

rust

0+00

00+

814

�2+

856

0+65

90+

147

0+73

8�

0+90

10+

659

�0+

089

0+84

6�

2+85

60+

659

Hon

esty

0+00

00+

911

�2+

839

1+03

00+

148

0+86

4�

1+26

71+

030

�0+

101

0+93

3�

2+83

91+

030

Com

pete

nce

0+00

00+

918

�2+

615

1+17

90+

078

0+87

9�

1+15

61+

179

�0+

049

0+94

3�

2+61

51+

179

Pri

ceof

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380+

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506+

185+

230+

512+

506+

185+

470+

354+

506+

12D

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nce

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men

t23+5

27+8

121

212+8

16+8

112

030+3

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121

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850+

492

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5058

0064

0+6

709+

650

5500

987+

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0+69

70+

461

01

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pat

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0+43

40+

497

01

0+35

30+

480

01

0+48

70+

501

01

Was

Mar

ried

0+86

80+

339

01

0+84

30+

366

01

0+88

50+

321

01

Age

57+9

12+9

2686

59+4

13+2

3186

56+9

12+6

2686

Soy

bean

Far

mer

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nted

Cor

n0+

721

0+44

90

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726

0+44

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718

0+45

10

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and

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0+24

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01

0+52

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502

01

0+07

10+

257

01

N25

810

215

6



TAB

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3+S

umm

ary

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ics

for

Cor

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cers A

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orn

Gro

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Var

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ean

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axM

ean

SDM

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PO

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425

0+49

60

11

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rust

0+00

00+

800

�2+

493

0+56

2�

0+04

80+

879

�2+

493

0+56

20+

034

0+74

3�

0+99

80+

562

Hon

esty

0+00

00+

915

�2+

757

1+08

60+

087

0+94

0�

2+17

91+

086

�0+

072

0+89

9�

2+75

71+

086

Com

pete

nce

0+00

00+

919

�2+

740

1+18

50+

126

0+90

3�

1+07

61+

185

�0+

096

0+92

7�

2+74

01+

185

Pri

ceof

Cro

p2+

350+

251+

453+

152+

290+

261+

603+

152+

400+

241+

452+

90D

ista

nce

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stab

lish

men

t21+6

22+1

110

814+4

15+4

280

27+0

24+7

110

8S

ize

ofF

arm

941+

510

19+1

5058

0069

2+4

829+

550

5500

1125+7

1107+9

5058

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Far

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0+50

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544

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20

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435

0+49

80

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Off

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mB

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0+63

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502

01

0+70

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461

01

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Hel

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0+42

50+

496

01

0+41

20+

496

01

0+43

50+

498

01

Was

Mar

ried

0+90

00+

301

01

0+86

80+

341

01

0+92

40+

267

01

Age

57+5

13+2

2686

59+0

14+1

3286

56+5

12+4

2686

Cor

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arm

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lant

edS

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ans

0+95

60+

205

01

0+95

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207

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205

01

Cor

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and

Del

iver

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0+35

00+

479

01

0+77

90+

418

01

0+03

30+

179

01

N16

068

92



the same percentage of corn farmers ~as soybean farmers! marketed cooperatives ~about43%!, nearly all corn farmers ~95+6%! also farmed soybeans+

With respect to the question of trust, Table 2 shows that for soybean farmers themean of trust in producer-owned firms is significantly greater ~ p � 0+06 in a differenceof means test! than the mean of trust for investor-owned firms+ Similarly, the meanvalues for honesty is greater for POFs than for IOFs ~ p � 0+08!+ However, the meanvalues for competence is not significantly greater for POFs than for IOFs+ Thus, soy-bean farmers attribute greater trust to POFs than IOFs, and they perceive POFs to becharacterized by greater honesty than IOFs+ This suggests that trust is more importantfor a soybean producer’s relationship with POFs than with IOFs+ It also suggests trust isprimarily based on perceptions of trustworthiness rather than on competence+Moreover,in comparison to farmers who marketed their soybean crops to agribusinesses, soybeanfarmers marketing to cooperatives received a lower price for their crop, traveled a shorterdistance to deliver their harvest, had smaller farms, were more likely to participate inoff-farm businesses, and were less likely to rely exclusively on family members to helpwith harvest+8

Interestingly, Table 3 provides a different picture of trust in POFs and IOFs when con-sidered from the perspective of corn growers+ In particular, there is no statistically sig-nificant difference between trust in POFs and trust in IOFs+ Additionally, there is nodifference in average perceptions of honesty and competence between POFs and IOFs+However, there are significant differences in the characteristics of corn farmers who mar-ket to POFs rather than IOFs+ Specifically, farmers selling their corn to cooperatives insteadof agribusinesses on average received a lower price for their crop, traveled a shorter dis-tance for delivery, had smaller farms, and were more likely to participate in off-farmbusinesses+9

The relationship between farmer trust and choice of marketing outlet can also beobserved from an examination of the biserial correlations between measures of trust andchoice of POF, as well as correlations between trust, honesty, and competence vari-ables+10 As shown in Table 4, for soybean producers, the correlation coefficients betweenthe variable POF ~the decision of farmers to market their grain to a cooperative! andboth trust and honesty are positive and significant at the 10% level+ However, in thecase of corn growers, neither trust nor perceptions of honesty and competence are sig-nificantly correlated with the POF variable+ Importantly, honesty and competence arehighly correlated with trust for both corn and soybean producers, providing prima facieevidence that perceptions of honesty and competence are linked to trust+

Tables 5 and 6 present results from a Probit analysis of the effects of trust and othervariables on the marketing decisions of farmers+11 Because we are interested in examin-ing whether and how trust correlates with the decision of farmers to market their 2002crop to POFs or IOFs, after controlling for other factors we expect to influence the mar-keting decision, we removed from our sample respondents who marketed their crop to

8In a Difference of Means test, the differences noted here are significant at the 10% level or better+9In a Difference of Means test, the differences noted here are significant at the 10% level or better+

10A biserial correlation measures the correlation between a dichotomous variable ~e+g+, POF! and a contin-uous variable ~e+g+, trust!+

11Although the coefficient in a Probit model is not directly interpretable in terms of the magnitude of theeffect in the probability a farmer marketing to a POF, it is possible to calculate the change in probability, givena unit change in the respective variable, by looking at the estimated coefficient times the average density func-tion of the standard normal distribution ~see Greene, 2000, chapt+ 19!+



both a POF and an IOF+ Thus, the sample for our Probit analysis consisted of 248 soybeanproducers and 149 corn farmers+

Table 5 presents results of our analysis of soybean farmers+We find that trust, as wellas honesty and competence, were highly correlated with POFs, even after controlling forother factors expected to affect the marketing decision of soybean producers+ Specifi-cally, a one standard deviation ~SD! increase in perceived trust increases the probabilitythat a soybean farmer would market his crop to a POF by nearly 9%+12 Controlling for theexpected endogeneity of trust by examining perceptions of honesty and competence asexplanatory variables, we find that increases in these variables also improved the likeli-hood of a farmer marketing to a POF+ Finally, we use honesty and competence, as well asthe number of years the respondent marketed his crop to the establishment, as instru-ments in a two-stage model in which predicted values of trust ~labeled “trust_hat”! fromthe first-stage regression are used in a second-stage Probit model+13 We find that the impactof trust not only remains significant but also increases in importance; a 1 SD in trustincreases the likelihood that farmers would market their soybeans to POFs by 25%+

Although trust in the organization to which a farmer markets his crop is an importantfactor in marketing decisions, other factors are also important, according to our analysis+

12As shown in Table 3, 1 SD of the trust variable is 0+813+ Thus, 0+813 � 10+7% ~� 8+7%! gives the per-centage change in the probability of a farmer marketing his soybeans to a POF resulting from a 1 SD increasein trust+

13We included “number of years” as an additional control variable in the first-stage regression because someresearchers ~e+g+, Doney & Cannon, 1997! have found that frequency of business contacts is an important factoraffecting trust+

TABLE 4+ Correlation Coefficients Between Measures of Trust andFarmer’s Decision to Market Crops to a Producer-Owned Firm ~POF!Rather Than to an Investor-Owned Firm ~IOF!

Correlation Coefficient~Probability!

Variable POF Trust Honesty Competence

Soybean GrowersPOF 1+000 0+141b 0+135b 0+067

~0+061! ~0+080! ~0+382!Trust 1+000 0+532a 0+447a

~0+000! ~0+000!Honesty 1+000 0+799a

~0+000!Competence 1+000

Corn GrowersPOF 1+000 �0+057 0+086 0+120

~0+579! ~0+327! ~0+183!Trust 1+000 0+603a 0+519a

~0+000! ~0+000!Honesty 1+000 0+824a

~0+000!Competence 1+000

aSignificant at 1%+ bSignificant at 10%+



TABLE 5+ Probit Analysis of Farmer Decision to Market 2002 Soybean Harvest toProducer-Owned Firms ~POFs! Rather Than Investor-Owned Firms ~IOFs!,Where theDependent Variable is POF � 1

Variables Trust Honesty Competence TRUST_HAT

Trust 0+429a 1+490a

~0+172! ~0+453!@0+107# @0+317#

Honesty 0+379b

~0+159!@0+0940#

Competence 0+339b

~0+161!@0+082#

Price of crop �1+257a �1+274a �1+261a �1+494a

~0+387! ~0+371! ~0+371! ~0+432!@�0+313# @�0+316# @�0+306# @�0+318#

ln~Distance to Establishment! �0+528a �0+461a �0+524a �0+609a

~0+141! ~0+145! ~0+144! ~0+190!@�0+131# @�0+114# @�0+127# @�0+130#

ln~Size of Farm! 0+063 �0+068 �0+038 �0+081~0+140! ~0+147! ~0+145! ~0+170!@0+016# @�0+017# @�0+009# @�0+017#

Had Above-Average Farming 0+583c 0+832b 0+777b 0+997a

Experience ~0+319! ~0+343! ~0+340! ~0+393!@0+145# @0+206# @0+189# @0+212#

Did Not Participate in Off-Farm �0+719a �0+614b �0+658b �0+518Business ~0+280! ~0+304! ~0+294! ~0+349!

@�0+179# @�0+152# @�0+160# @�0+110#

Utilized Only Family Help at �0+514c �0+847a �0+884a �1+142a

Harvest ~0+271! ~0+295! ~0+296! ~0+357!@�0+128# @�0+210# @�0+215# @�0+243#

Was Married �0+497 �0+662c �0+677c �1+171b

~0+350! ~0+379! ~0+387! ~0+486!@�0+124# @�0+164# @�0+165# @�0+249#

ln~Age! �0+545 �1+323 �1+315 �1+902c

~0+779! ~0+841! ~0+829! ~1+021!@�0+136# @�0+328# @�0+320# @�0+405#

Constant 10+224a 14+219a 14+124a 18+490a

~3+892! ~4+423! ~4+332! ~5+481!@2+546# @3+526# @3+432# @3+938#

Pseudo R2 +466 +469 +481 +571% Correctly Predicted 86+6 85+3 86+6 89+3Likelihood Ratio ~df � 9! 60+311a 57+443a 60+448a 62+907a

Average Density 0+249 0+248 0+243 0+213

Note+ Standard errors in parentheses+ Estimated slope in brackets, calculated by multiplying coefficient withaverage density+aSignificant at 1%+ bSignificant at 5%+ cSignificant at 10%+



TABLE 6+ Probit Analysis of Farmer Decision to Market 2002 Corn Harvest toProducer-Owned Firms ~POFs! Rather Than Investor-Owned Firms ~IOFs!,Where DependentVariable is POF � 1

Variables Trust Honesty Competence TRUST_HAT

Trust �0+009 0+236~0+197! ~0+340!@�0+003# @0+071#

Honesty 0+159~0+182!@0+046#

Competence 0+216~0+187!@0+062#

Price of Crop �1+918a �1+323b �1+332b �1+094c

~0+762! ~0+649! ~0+642! ~0+656!@�0+537# @�0+385# @�0+382# @�0+329#

ln~Distance to Establishment! �0+472a �0+395b �0+365b �0+343b

~0+169! ~0+167! ~0+171! ~0+173!@�0+132# @�0+115# @�0+105# @�0+103#

ln~Size of Farm! �0+032 �0+114 �0+143 �0+190~0+154! ~0+155! ~0+154! ~0+160!@�0+009# @�0+033# @�0+041# @�0+057#

Had Above-Average Farming 0+572 0+601 0+712c 0+620Experience ~0+417! ~0+404! ~0+413! ~0+409!

@0+160# @0+175# @0+204# @0+187#

Did Not Participate in Off-Farm �0+468 �0+668b �0+658b �0+701b

Business ~0+361! ~0+340! ~0+371! ~0+339!@�0+131# @�0+194# @�0+189# @�0+211#

Utilized Only Family Help at �0+099 �0+157 �0+265 �0+311Harvest ~0+308! ~0+308! ~0+317! ~0+322!

@�0+028# @�0+046# @�0+076# @�0+094#

Was Married �0+532 �0+303 �0+279 �0+261~0+469! ~0+460! ~0+471! ~0+463!@�0+149# @�0+088# @�0+080# @�0+079#

ln~Age! �0+031 0+024 �0+313 �0+344~0+859! ~0+856! ~0+873! ~0+870!@�0+009# @0+007# @�0+090# @�0+104#

Constant 5+919 4+881 6+306 6+240~4+085! ~4+016! ~4+117! ~4+099!@1+657# @1+420# @1+810# @1+878#

Pseudo-R2 +373 +357 +364 +328% Correctly Predicted 81+2 80+3 80+8 79+4Likelihood Ratio ~df � 9! 32+111a 31+815a 31+766a 26+353a

Average Density 0+280 0+291 0+287 0+301

Note+ Standard errors in parentheses+ Estimated slope in brackets, calculated by multiplying coefficient withaverage density+aSignificant at 1%+ bSignificant at 5%+ cSignificant at 10%+



For example, each $0+10 increase in soybean price decreases the probability that a farmerwould market his soybeans to a POF by approximately 3%+ Because IOFs offered, onaverage, a $0+27 per bushel premium for soybeans ~see Table 2!, the probability that pro-ducers marketed their crop to a POF decreased by approximately 8%+ One reason theprice variable is negative and significant is that producer-owned firms often return rev-enue to producers in the form of a patronage refund+ Therefore, some farmers might bewilling to accept a lower price for their crop from a POF in anticipation of receiving apatronage refund from the POF+ However, the fact that the price and distance variablesare significant might indicate that the expected patronage refund is not sufficient to inducesome farmers to market to a POF in and of itself+ If the expected patronage refund weresufficient to make up the difference between the POF and IOF price, then price would notbe expected to be significant+ That is, at the margin, farmers would be indifferent betweenmarketing to a POF and IOF, if the patronage refund paid by the POF was expected onlyto “make up the difference” between the IOF and POF prices+ We believe the effects ofthe patronage refund, price paid, and other factors on the marketing decision of farmersdeserve further research+

Moreover, we find distance is a significant factor affecting the marketing decision ofsoybean farmers+ The greater the distance to the organization, the less likely the farmerwill market to a POF, other things being equal+ In other words, soybean farmers appear tobe willing to travel a greater distance to an IOF than to a POF, most likely to take advan-tage of the higher price offered by the IOF despite the fact that soybean producers seemto place greater trust in POFs than in IOFs+ This pattern of behavior would seem to beindicative of a tradeoff farmers face between trust and higher returns for marketing soy-beans, with different farmers weighing the tradeoffs to different degrees+As price rises atthe IOF compared to the POF, some farmers are enticed away from the cooperative eventhough they have more trust in the POF+ That a tradeoff exists between prices ~received orpaid! and attributes of a cooperative ~e+g+, trust, commitment! has been recognized in theliterature ~see Fulton & Giannakas, 2001!+14

We also found that soybean farmers with above-average farming experience werebetween 15 and 21% more likely to market their soybeans to POFs than to IOFs+ Farmerswho had only a farming business ~i+e+, did not participate in off-farm businesses! werebetween 15 and 18% less likely to market to cooperatives+ Soybean farmers who utilizedonly family help for their harvest were between 12 and 24% less likely to market to POFs+Finally, married farmers were less likely to market to POFs than to IOFs, other thingsbeing equal+

Table 6 presents a different picture of the effect of trust on the decision of corn pro-ducers to market their crop to POFs+We find that trust is not significantly correlated withthe POF or IOF decision of corn farmers, even when controlling for expected endo-geneity by using perceptions of honesty and competence as instruments of trust+ Rather,as in the case of soybean farmers, price, distance, and other control factors dominate themarketing decision+ For example, we found that the $0+14 per bushel premium offered byIOFs for corn over the average price offered by POFs ~see Table 3! resulted in an approx-imately 8% reduction in the probability that corn farmers would market to a POF, otherthings being equal+ Distance was also negatively correlated with the decision to market toa cooperative+ These findings suggest that trust plays less of a role in the case of cornmarketing than in the case of soybean marketing, so that corn farmers are not overtly

14We appreciate the insight of an anonymous referee who identified this implication of our analysis+



concerned about a tradeoff between trust and returns+We explain this finding in the nextsection+

5. DISCUSSION

We find that farmers marketing soybeans place higher trust in POFs than IOFs and thattrust is correlated with the decision to market soybeans to a POF, other things being equal+However, while trust matters for soybean marketing decisions, the relationship betweentrust and agricultural organization does not appear to be the same for corn marketingdecisions+ We find no significant difference in the trust corn farmers place in POFs andIOFs+Why is trust important for marketing soybeans but not corn, especially if nearly allcorn producers also grow soybeans? We offer two possible explanations for this finding+

First, the soybean marketing decision might drive the corn marketing decision for farm-ers producing both crops, thus masking any independent effects trust might have on thecorn marketing decision+ That is, farmers producing both soybeans and corn might firstmake a decision regarding the marketing of soybeans and then market their corn based onwhere they choose to market their soybeans+ Most corn farmers market soybeans; there-fore, we may not be able to detect a separate trust effect for the corn marketing decisionbecause it is affected by the soybean marketing decision+ The reason soybeans mightdrive the corn marketing decision is that, while corn and soybeans may be substitutes inproduction ~farmers will typically rotate between growing one or the other! and may bemarketed through the same distribution channels, the economics ~or returns to produc-tion! of the two crops are different+According to USDA reports, between 1997 and 2002total net returns per acre of production averaged �$31+34 for soybeans and �$71+80 forcorn in the production region that includes most of Missouri ~see Table 7!+ Operatingreturns per acre for the same period and region averaged $146+40 for soybeans and $133+37for corn+ These figures suggest that farmers might perceive soybeans to be more impor-tant than corn in terms of overall returns to production+ Simply, some farmers might expect

TABLE 7+ Estimated Net and Operating Returns per Acre for Soybean and Corn Production inUSDA Heartland Regiona Between 1997 and 2002, as Reported in USDA’s AgriculturalResource Management Survey

Year

Total NetReturns:Soybean

Total NetReturns:

Corn

Differencein Net

Returns

OperatingReturns:Soybeans

OperatingReturns:

Corn

Differencein Operating

Returns

1997 41+53 �23+66 65+19 214+38 183+26 31+121998 �15+28 �89+58 74+3 160+06 121+54 38+521999 �66+21 �130+42 64+21 111+84 83+02 28+822000 �58+67 �121+5 62+83 125+26 98+29 26+972001 �77+1 �66+94 �10+16 111+51 121+17 �9+662002 �12+33 1+28 �13+61 155+33 192+96 �37+63Mean �31+34 �71+80 40+46 146+40 133+37 13+02SD 44+69 52+73 �8+04 39+36 44+93 �5+57

Note+ Retrieved November 1, 2004, from USDA Economic Research Service Website “Commodity Costs andReturns” http:00www+ers+usda+gov0data0CostsandReturns0testpick+htm, accessed+aThe Heartland region includes most of the crop production land in Missouri as well as other major producingStates in the north-central region+



that they have more to gain ~or less to lose! by producing soybeans rather than corn—which could explain why more farmers in our sample had a soybean harvest than a cornharvest+15 Additionally, we note that for farmers marketing both soybeans and corn, thereis a high correlation between the choice of marketing outlet for each crop ~see Tables 2and 3!+ Farmers marketing one crop to a cooperative were also likely to market the othercrop to a cooperative, while farmers marketing one crop to an IOF were very unlikely tomarket their other crop to a cooperative+ Thus, for many farmers in our sample, the mar-keting choice for soybeans might have driven the corn marketing decision+

Second, in addition to having different mean returns, the two crops have differing pro-duction and market value uncertainties that may affect farmers’ perceptions of vulnera-bility and hence the role of trust+ As shown in Table 7, the financial returns to plantingcorn are relatively more volatile than the financial returns to producing soybeans, as mea-sured by the standard deviation of total net returns and operating returns+ Combined withthe higher average returns to soybeans noted above, this suggests a higher mean-adjusteduncertainty for returns to corn+ The higher uncertainty in corn returns is a generalizeduncertainty resulting from production factors and market prices of inputs and corn and isnot closely related to the marketing agent to which the farmer sells the crop, whether aPOF or an IOF+Most corn in Missouri is marketed for animal feed, the value of which islikely not subject to large differences among buyers of corn+ The greater financial uncer-tainties associated with planting corn may create a greater sense of vulnerability for farm-ers when compared to soybean production, thus impacting the willingness of corn farmersto trust their marketing partners, independent of who their marketing partners are+ Thisperception of greater vulnerability with corn is also consistent with the observation thatalmost all farmers that produced corn also produced soybeans, perhaps as a diversifica-tion strategy+Moreover, the uncertainty in corn value is independent of the identity of thebuyer; thus, one would expect less of a role for trust in the marketing decision+

Soybeans, on the other hand, may be subject to lower overall financial uncertainty, butsoybeans in Missouri are purchased for a much wider variety of uses with differing val-ues+ Because there are more marketing opportunities and potential uses for soybeans thanfor corn, there is potentially more information asymmetry in the value of the soybeans+This asymmetry could be viewed as a source of vulnerability for farmers marketing soy-beans; however, in this case the source of the vulnerability is the buyer of the crop, wholikely has better information about the ultimate consumer of the soybeans and the valueof the beans to that particular user+As discussed earlier, Sykuta and Cook ~2001! argue itis exactly this type of situation—higher information asymmetry about the value ofproduction—in which producers may place greater trust in a POF, because the POF’sobjective function is to provide value to its producer–owners+ Thus, one would expect agreater role for trust in the marketing decision for soybeans+

6. CONCLUDING COMMENTS

The literature on collective organizations and trust suggests that agricultural producersmight have higher trust in producer-owned marketing organizations than in investor-owned firms+ Our results suggest that while such a trust relationship appears to existin soybean marketing relationships, there is little evidence it exists in corn marketing

15Recall from Tables 2 and 3 that 248 farmers had a soybean harvest while 149 harvested corn+ Moreover,71+8% of soybean farmers also grew corn, but 95+3% of corn farmers planted soybeans+



relationships+ These findings are an interesting puzzle concerning the nature of produc-ers’ relationships with the organizations to which they market their crops+ The puzzle iswhy such a difference would exist between soybean and corn products+ As noted above,one possibility is that the soybean decision drives the marketing decision for farmersplanting both soybeans and corn, thus making it difficult for us to observe an effect oftrust in the context of corn marketing decisions+Another possible explanation is that uncer-tainty in the value of the two products likely created different perceptions of vulnerabil-ity; corn farmers perceive greater vulnerability because of the nature of the crop itself,whereas soybean farmers perceive greater vulnerability to asymmetric information in thevalue of the crop+A higher sense of general vulnerability for corn producers may decreasetrust across the board, while the buyer-specific vulnerability for soybean producers andthe nature of the relationship between producers and POFs gives rise to greater trust inPOF trading partners+

While these are important issues in their own right, they highlight the fact that ourunderstanding of the relationship between trust and organizations is quite limited+ Ourstudy paints a broad picture of how trust relates to producer marketing decisions andparticipation in agricultural organizations in that we distinguish between producer-owned firms and investor-owned firms+ However, there are wide variations of organiza-tional structures within these broad categories, which we expect to affect perceptions oftrust, honesty, and competence+ For example, James and Sykuta ~2003! show that differ-ent organizational characteristics of producer-owned firms affect trust differentially andthat trust in new-generation cooperatives is lower than trust in traditional cooperatives+This suggests that more work is needed examining the effects of specific organizationalcharacteristics rather than broad categories of firm structure in relation to trust+

Another issue involves the question of whether the value of trust in organizations canbe estimated+ If farmers do, in fact, place greater trust in producer-cooperatives than ininvestor-owned firms, but receive lower prices for their crops from cooperatives as wefound in our study, then is this evidence of the economic value of trust, once patronagerefunds and other economic considerations are accounted for? We encourage continuedresearch on these and other questions involving the relationship between cooperative andother organizational structures and trust, and their impact on producer marketing decisions+

ACKNOWLEDGMENTS

We appreciate insights and comments offered by Michael Cook and two anonymous ref-erees, as well as the research assistance of Athanasios Chymis+An earlier version of thispaper was presented at the 2004 Meeting of the American Agricultural Economics Asso-ciation+We gratefully acknowledge financial support provided through a grant from theCoase Foundation+

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Harvey S. James, Jr. is Assistant Professor of agribusiness at the University of Missouri, Colum-bia. He received a BA degree (1989) in economics and a MS degree (1990) in sociology from BrighamYoung University, and MA (1991) and PhD (1995) degrees in economics from Washington Univer-sity in St. Louis. Dr. James’s research interests are organizational economics, the economic foun-dations of trust, and the interplay between ethics and economics. E-mail: [email protected].

Michael E. Sykuta is Associate Professor at the University of Missouri, Columbia, and director ofthe Contracting and Organizations Research Institute. He received a bachelor degree in economicsfrom University of Missouri-St. Louis in 1989. He then attended Washington University in St. Louis,where he earned master (1990) and doctoral (1994) degrees in economics. Dr. Sykuta’s researchfocuses on institutional contracting, corporate governance, and firm and industry organization andperformance. E-mail: [email protected].



Documents

Farmer trust in producer- and investor-owned firms: Evidence from Missouri corn and soybean producers