Food Processing Business and Agriculture

Asian Economic Journal 2008, Vol. 22 No.
1, 83–107 83
Food Processing Business and Agriculture

Cooperatives in Japan: Market Power and
Asymmetric Information*
Kazuhiko Mikami and Satoru Tanaka

Received 19 April 2007; accepted 8 November 2007
Food processing businesses run by agriculture cooperatives (in this paper

referred to as food processing cooperatives) are basically firms that are owned by
the suppliers of raw materials. Typically, in this type of firm, corporate decision-
making is the responsibility of member farmers through the one member one–
vote rule, and the surplus of the business is divided among them according to the
amount of raw agricultural products they have supplied to the firm. This is in
contrast to a conventional capitalistic firm, in which corporate decision-making
is ultimately made by the stockholders through the one share–one vote rule, and
the profit is divided among them according to the amount of financial capital
they have supplied to the firm. Based upon statistical data and case studies, the
present paper considers some economic factors that might influence the estab-
lishment of food processing cooperatives.
Keywords: food processing business, agriculture cooperative, market power,

asymmetric information.
JEL classification codes: P13, Q13.
doi: 10.1111/j.1467-8381.2008.00270.x
I. Introduction
There are various types of firms in the market economy. Capitalistic firms, such
as stock companies, are firms owned by the suppliers of capital. They are
clearly the dominant form of enterprise in most industrial areas.1 Worker-owned
firms are firms that are owned by the suppliers of labor. They are much less
common than capitalistic firms, but are seen in such industrial areas as profes-
sional services (e.g. law, accounting, management consulting, architecture and
* Mikami (corresponding author): Department of Applied Economics, University of Hyogo, Nishi

Ward, Kobe, Hyogo 651-2197, Japan. Email: mikami@econ.u-hyogo.ac.jp. Tanaka: Kobe City University
of Foreign Studies, Nishi Ward, Kobe, Hyogo 651-2187, Japan. Email: tanaka@inst.kobe-cufs.ac.jp.
The authors thank Yasuhide Teramoto and the participants of the seminar at Kobe City University
of Foreign Studies for helpful comments. They are also grateful to an anonymous referee for a
constructive critique. An interview with Ichiro Ozaki and Osamu Kotera at the Hyogo Prefectural
Central Union of Agriculture Cooperatives was very helpful and is gratefully acknowledged.
1. Ownership of the firm consists of the rights to control the firm and to claim the residual earnings
of the firm. This concept must be distinguished from ownership of the physical assets of the firm,
which plays the central role in Hart and Moore (1990).
© 2008 The Authors

Journal compilation © 2008 East Asian Economic Association and Blackwell Publishing Ltd.
ASIAN ECONOMIC JOURNAL 84
Figure 1 Transactions of goods and services under a food processing cooperative. Raw
agricultural products are supplied to the firm through ownership (self-procurement).
Labor, capital and the products are traded in the market
medicine), road transport (e.g. taxicabs and truck transportation) and plywood
manufacturing (Bonin et al., 1993; Hansmann, 1996). Consumer cooperatives,
which are firms owned by their customers, are most common in food retailing.
They are also seen in finance, insurance, medical care and housing. Most cor-
porations in the private sector of our economy can be classified as one of these
three types of firm, or as a mixture of these. Other types of firms are not very
common.
Food manufacturing firms run by agriculture cooperatives (henceforth referred
to as food processing cooperatives) are classified as a fourth type of firm, which
are formally owned by the suppliers of raw materials.2 That is, food processing
cooperatives are owned by farmers, the suppliers of raw agricultural products
(Figure 1). Typically, in this type of firm, corporate decision-making is made by
2. Agriculture cooperatives form the largest cooperative organizations in Japan. There are 886
agriculture cooperatives with a membership of 5 million nationwide. Local agriculture cooperatives
are hierarchically organized under a prefectural central union, and prefectural central unions are
further hierarchically organized under the national central union. Therefore, the whole agriculture
cooperative is a three-tier organization. Business activities of agriculture cooperatives include
credit, insurance, collective purchasing of production materials and livelihood necessities, collec-
tive marketing of agricultural products, agricultural warehousing, processing of agricultural prod-
ucts, and supplying of housing lots. Total business surplus from these activities amounts to 2 trillion
yen. Data based on Ministry of Agriculture, Forestry and Fisheries (2005).
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FOOD PROCESSING AND AGRICULTURE COOPERATIVE IN JAPAN 85
member farmers through the one member–one vote rule, and the surplus of the
business is divided among them according to the amount of raw agricultural
products that they have supplied to the firm. This is in contrast to capitalistic
firms, in which corporate decision-making is ultimately made by the stockhold-
ers through the one share–one vote rule, and the profits are divided among them
according to the amount of financial capital that they have supplied to the firm.
Therefore, food processing cooperatives may well have advantages and disad-
vantages that are different from food manufacturing companies.3
In reality, the comparative efficiency of food processing cooperatives is
considered to be determined by both institutional and economic factors.
Clearly, the institutional framework is influential in the formation of food
processing cooperatives. Because agriculture cooperatives are not allowed to
issue bonds under present laws, their external financing methods are restricted
to borrowing from financial institutions. In addition, agriculture cooperatives
are legally prohibited from borrowing a large sum of money for investment.
These restrictions make it difficult for farmers to start a food processing
business that requires large, capital-intensive production facilities. Also, the
scope of undertakings and the area of business are restricted for agriculture
cooperatives. These restrictions keep their businesses from growing in variety
and geographically. However, corporate income tax rates are set lower for agri-
culture cooperatives than for companies. Furthermore, under certain conditions,
agriculture cooperatives are exempted from the application of the anti-trust law.
These favorable treatments for agriculture cooperatives can promote the estab-
lishment of food processing cooperatives.
In this paper, based on statistical data and case studies, we examine the
implications of certain economic factors for the comparative efficiency of food
processing cooperatives. We mainly focus on monopsony power that is exercised
by major food manufacturing companies in the market for raw agricultural
products, as well as asymmetric information on the quality of farm products.
Through the inquiry, we reach a conclusion that both of these factors are influ-
ential in the formation of food processing cooperatives.
The next section describes the analytical framework. Section III takes five
industry groups that have been important for Japanese agriculture cooperatives,
and examines the comparative efficiency of food processing cooperatives in
these industrial areas from the viewpoint of market power and asymmetric
3. Manufacturing industries operate under quite weak governmental regulations compared with
other industries. According to the Economic Planning Agency (1994), the share of regulated
industries in manufacturing is 14.1 percent. The share of regulated industries in other sectors is
87.1 percent for agriculture, forestry and fisheries, 100 percent for mining, 100 percent for construc-
tion, 100 percent for electricity, gas, heat supply and water, 97.3 percent for transport and communica-
tions, 100 percent for finance and insurance, 7.5 percent for real estate, 55.6 percent for services,
and 0 percent for government. (The share for wholesale and retail trade, eating and drinking places
is not available in the report.) The low level of regulation in manufacturing industries implies that the
observed distribution of firm types is the result of spontaneous choice of the enterprise form by firms.
© 2008 The Authors

information. Section IV considers the implications of other economic factors for

the formation of food processing cooperatives. Section V concludes the paper.
II. Analytical Framework

Under farmers’ ownership of a food manufacturing firm, raw agricultural
products are provided to the firm in a self-sufficient manner, whereas physical
capital, labor and the processed food as the product are traded in the market
(Figure 1). This contrasts with food manufacturing companies, in which physi-
cal capital is provided to the firm in a self-sufficient manner. Raw agricultural
products, labor and the processed food are traded in the market. Therefore, food
processing cooperatives will have a comparative advantage over food manufac-
turing companies when the market for raw agricultural products fails to work
efficiently.
In this paper, among the major causes for market failure, we focus on market
power and asymmetric information in the market for raw agricultural products.
We then examine their implications for the formation of food processing co-
operatives in the real economy.
II.1 Market power

Farms are numerous and mostly small in Japan. In contrast, food manufacturing
companies are much fewer in number and larger. Under these circumstances,
monopsony is a natural consequence if agricultural products are traded in the
market between farmers and food manufacturing companies. Under monop-
sony, prices for agricultural products are distorted downward, and the market
fails to achieve an efficient allocation of resources. Such inefficiency can be
prevented if farmers who supply raw agricultural products own and manage the
food manufacturing firm themselves.4
II.2 Asymmetric information

In general, the quality of raw agricultural products is better known to the farm-
ers who grow them in the field than those who buy them in the market. For
example, the safety of vegetables depends upon how they were grown in the
field: either by organic farming or by standard farming with chemical fertiliz-
ers, pesticides and herbicides. Such information is known to the farmers for
obvious reasons but not to the third parties, because the method of farming
cannot be determined simply by looking at the final product. If safety informa-
tion of this kind is distributed asymmetrically between the farmers and the
buyers, the market for agricultural products may fail to achieve an efficient
4. See Mikami (2003) for a formal argument on the implications of market power for the enter-
prise form.
© 2008 The Authors

resource allocation because of moral hazard or adverse selection. These infor-

mational problems can be avoided if farmers as the suppliers of raw agricultural
products own and manage the food manufacturing firm themselves.5
III. Empirical Observations

In this paper, the food manufacturing industry is defined to include 12 small
(three-digit) industry groups in the Standard Industrial Classification for Japan
(SIC), which include: (1) livestock products, (2) seafood products, (3) canned
and preserved fruit and vegetable products, (4) seasonings, (5) sugar process-
ing, (6) flour and grain mill products, (7) bakery and confectionery products,
(8) animal and vegetable oils and fats, (9) miscellaneous foods and related
products, (10) soft drinks and carbonated water, (11) alcoholic beverages and
(12) tea and coffee (see the industry classification in Table 4). In these food
categories, we take five detailed (four-digit) industry groups of the SIC that
have been important for agriculture cooperatives, which are: (1) meat products,
(2) dairy products, (3) fruit and vegetable products except pickles, (4) starch
and (5) tea (Table 1).6 In this section, we examine the implications of market
power and asymmetric information for the formation of food processing coop-
eratives in these industrial areas.
III.1 Meat products and dairy products7

The sales of meat products and milk products by agriculture cooperatives
amount to 18.5 yen and 13.6b yen, respectively, which constitute 16.6 and
12.1 percent, respectively, of the total revenue from their food processing busi-
nesses (2005, Table 1). Forty-three (3.6 percent) agriculture cooperatives and
63 (16.1 percent) stock companies run by agriculture cooperatives are engaged in
manufacturing of meat products, whereas 35 (2.9 percent) agriculture cooperatives
and 65 (16.9 percent) stock companies run by agriculture cooperatives are engaged
in the production of milk (Table 2).8 The employee ratio of cooperatives and
5. See Mikami (2007) for a formal discussion of the implications of asymmetric information for
the enterprise form.
6. Production and distribution of rice and wheat have been under strict governmental regulations,
and they are considered to be influenced more by legislation than by economic factors. For this rea-
son, we exclude rice and barley polishing from the subjects of study in this paper.
7. The business categories of meat processing and milk processing in the Ministry of Agriculture,
Forestry and Fisheries (2005) correspond to the divisions of meat products [0911] and dairy prod-
ucts [0912], respectively, in the SIC.
8. Firms in stock company form that are capitalized and run by agriculture cooperatives are called
cooperative companies. Legally speaking, these firms are companies. Practically speaking, however,
they are identified with cooperative firms in most cases for the following reasons. In many cooper-
ative companies: (i) a substantial equity share is owned by the parent agriculture cooperative, and
the stock is not traded in an open market; (ii) there are no dividends for the shareholders; and (iii)
managers often come from the parent agriculture cooperative.
© 2008 The Authors

© 2008 The Authors
ASIAN ECONOMIC JOURNAL

Table 1 Sales (thousand yen) and the ratio (%) in parenthesis of processed foods produced by agriculture cooperatives
Food category 1980 1985 1990 1995 2000 2005
Rice and barley polishing 561 947 1 607 962 3 787 538 7 730 998 13 271 113 16 393 333
(0.95) (1.33) (2.93) (5.30) (8.99) (14.64)
Milling 55 947 571 304 116 142 3 793 150 3 515 707 326 122
(0.09) (0.47) (0.09) (2.60) (2.38) (0.29)
Starch and potato processing 14 775 463 22 815 079 27 160 637 37 990 171 34 543 867 29 075 996
(24.86) (18.84) (21.00) (26.06) (23.40) (25.97)
Pickles 3 621 234 5 443 134 8 567 068 12 498 083 13 121 068 8 293 190
(6.09) (4.49) (6.62) (8.57) (8.89) (7.41)
Soy bean paste and sauce 1 265 988 1 327 760 1 692 062 2 229 093 1 666 000 1 696 535
(2.13) (1.10) (1.31) (1.53) (1.13) (1.52)
Bottling and canning 16 581 141 50 571 990 37 872 860 29 936 240 11 535 444 6 425 202
of fruit and vegetables (27.89) (41.75) (29.28) (20.54) (7.81) (5.74)
Meat processing 3 678 874 10 543 627 16 947 699 21 611 305 29 055 070 18 537 252
(6.19) (8.70) (13.10) (14.83) (19.68) (16.56)
Milk processing 7 716 849 6 680 039 8 680 642 8 312 048 20 664 031 13 591 175
(12.98) (5.51) (6.71) (5.70) (14.00) (12.14)
Tea refining 11 188 116 21 570 164 24 531 023 21 658 950 20 242 762 17 634 615
(18.82) (17.81) (18.96) (14.86) (13.71) (15.75)
Total 59 445 559 121 131 059 129 355 671 145 760 038 147 615 062 111 973 420
(100.00) (100.00) (100.00) (100.00) (100.00) (100.00)
Ministry of Agriculture, Forestry and Fisheries, Statistics on Agricultural Cooperatives, 1980, 1985, 1990, 1995, 2000, 2005.
88
Table 2 The number of food processing businesses run by agriculture cooperatives
Food category Agriculture Joint stock Women’s Voluntary

cooperative company section group
Number % Number % Number % Number %
Starch 67 5.6 22 5.6 5 0.7 19 1.4

Pickled vegetables 395 32.8 128 32.7 341 49.1 550 39.9
Soft drinks 151 12.6 49 12.5 57 8.2 108 7.8
Jam 69 5.7 28 7.1 118 17 188 13.6
Noodles 52 4.3 72 18.4 22 3.2 177 12.8
Rice products 125 10.4 35 8.9 63 9.1 135 9.8
Confectioneries 26 2.2 74 18.9 50 7.2 204 14.8
Canned and preserved food 140 11.6 72 18.4 74 10.6 172 12.5
Alcoholic beverages 31 2.6 99 25.3 2 0.3 103 7.5
Soy bean paste 484 40.2 86 21.9 435 62.6 508 36.9
Soy bean sauce 76 6.3 74 18.9 25 3.6 117 8.5
Seasonings except soy 35 2.9 14 3.6 21 3 43 3.1
bean paste and sauce
Bean curd 89 7.4 126 32.1 84 12.1 490 35.6
Meat products 43 3.6 63 16.1 8 1.2 90 6.5
Milk 35 2.9 65 16.6 5 0.7 70 5.1
Dairy products except milk 11 0.9 32 8.2 9 1.3 21 1.5
Green tea (crude) 159 13.2 39 9.9 1 0.1 186 13.5
Green tea (refined) 134 11.1 26 6.6 1 0.1 174 12.6
Tea except green tea 67 5.6 18 4.6 5 0.7 107 7.8
Food boiled down 39 3.2 37 9.4 48 6.9 98 7.1
in soy sauce
Others 279 23.2 49 12.5 57 8.2 166 12
Total 1203 392 695 1378
Source: National Central Union of Agricultural Cooperatives, National Survey on Activities of

Agriculture Cooperatives (1991).
other types of noncapitalistic firms is approximately 4.4 to 6.6 percent in live-

stock products in general (2001, Table 3; 2003, Table 4). The ratio is 4.9 percent
in meat products, and 6.8 percent in dairy products (2003, Table 4).
Substantial monopsonistic power seems to exist in the market for raw meat.
There are 6 meat product companies that list their stocks on the first section of
the Tokyo Stock Exchange Market.9 The CR3 (sum of the market shares of the
top three firms) is 48.8 percent for ham, 60.6 percent for sausages, and 97.1
percent for corned beef (2004, Table 5). It is also reported in case studies that
agriculture cooperatives started meat processing businesses in order to contend
9. The 6 meat product manufacturers are Itoham Foods, Nippon Meat Packers, Prima Meat Pack-
ers, Marudai Food, Hayashikane Sangyo, and Yonekyu.
© 2008 The Authors

Table 3 The ratio of non-company corporations and unincorporated associations in the

number of employees (%)
Code Industry 1981 1986 1991 1996 2001
091 Livestock products 6.68 6.88 6.20 6.10 4.42

092 Seafood products 3.08 3.23 2.71 2.52 2.43
093 Canned and preserved fruit 7.24 7.10 7.26 6.88 6.17
and vegetable products
094 Seasonings 1.79 2.32 3.45 2.46 2.55
095 Sugar processing 5.46 5.77 4.90 4.24 3.27
096 Flour and grain mill products 7.47 8.41 8.52 6.95 4.86
097 Bakery and confectionery products 0.77 0.64 0.61 0.64 0.72
098 Animal and vegetable oils and fats 0.86 1.47 1.07 1.12 1.49
099 Miscellaneous foods and related products 4.22 1.76 2.23 1.81 1.53
101 Soft drinks and carbonated water 7.55 9.61 9.36 7.86 6.54
102 Alcoholic beverages 0.22 0.75 0.76 1.01 0.98
103 Tea and coffee NA 23.59 27.37 19.88 17.61
Food manufacturing industry average NA 3.56 3.60 3.11 2.67
Manufaturing industry average 0.82 0.81 0.79 0.76 0.70
Note: NA, not applicable.

Source: Ministry of Internal Affairs and Communications, Establisment and Enterprise Census of
Japan, 1981, 1986, 1991, 1996, 2001.
with the domination of the market by downstream firms such as manufacturers,

wholesalers and retailers (Shiraishi, 1985a).
Potential monopsonistic power also appears quite intensive in the market for
raw milk. Three giant dairy product manufacturers list their stocks in the first
section of the Tokyo Stock Exchange Market.10 The CR3 is 45.6 percent for
milk, 78.6 percent for powdered milk, 73.2 percent for butter, and 45.0 percent
for cheese (2004, Table 5). Raw milk is perishable and must be processed soon
after extraction. It is difficult to store it for future shipment. For this reason,
supply of raw milk is necessarily inelastic, and dairy farmers are quite vulner-
able to the monopsonistic behavior of dairy product manufacturers.11 Indeed,
dairy farmers have struggled with low and unstable milk prices offered by dairy
product manufacturers. For instance, it is reported that dairy farmers’ dissatis-
faction with low milk prices was the principal motive for the establishment of
Yotsuba Milk Products, a major milk processing firm in joint stock company
form run by several agriculture cooperatives in the prefecture of Hokkaido
(Higurashi, 1985a).
10. The three dairy product manufacturers are Meiji Dairies, Morinaga Milk Industry, and Nippon
Milk Community.
11. In Suzuki (2002), the price elasticity of supply of raw milk is estimated to be 0.22– 0.31.
© 2008 The Authors

Table 4 The ratio of cooperatives and other types of noncapitalistic firms

in the number of employees (%)
Code Industry 1980 1985 1990 1995 2000 2003
091 Livestock products 7.31 7.40 7.58 7.14 6.76 6.60

0911 Meat products 4.00 5.16 5.95 4.28 5.28 4.93
0912 Dairy products 8.94 9.68 9.47 9.49 7.49 6.84
0919 Miscellaneous livestock products 9.26 7.57 7.71 8.89 8.56 9.20
092 Seafood products 3.36 3.42 2.82 2.80 2.67 2.41
0921 Canned seafood and seaweed 1.92 1.41 2.72 2.46 2.73 0.64
0922 Seaweed products, except canned 1.67 2.41 2.25 2.06 1.62 1.64
0923 Fish paste products 2.11 1.66 1.18 1.03 1.03 0.82
0924 Salted-dried and salted products NA NA NA NA NA 2.57
0925 Frozen seafood products 12.67 10.90 7.22 9.23 5.69 4.75
(unprocessed and packaged)
0926 Frozen seafood products NA 6.78 5.33 3.66 4.84 4.92
(processed and packaged)
0929 Miscellaneous seafood products NA 2.35 NA NA NA 1.92
093 Canned and preserved fruit and 8.33 7.92 7.25 6.41 5.91 5.12
vegetable products
0931 Canned and preserved fruit and 14.47 13.24 15.06 10.25 9.07 7.31
vegetable products, except
vegetables pickled or in brine
0932 Vegetables pickled or in brine, 3.25 3.97 3.68 3.78 3.88 3.74
not in air-tight containers
094 Seasonings 2.19 2.39 2.64 2.58 2.65 2.83
0941 ‘Miso’ (fermented soybean paste) 1.77 2.78 4.79 4.18 8.28 7.39
0942 ‘Shoyu’ (soy sauce), and edible 4.27 4.93 5.89 6.19 6.69 6.80
amino acids
0943 ‘Umami’ seasoning NA NA NA NA NA 0.00
0944 Sauces NA NA NA 0.67 0.50 0.71
0945 Vinegar NA 2.23 1.62 2.28 3.07 3.40
0949 Miscellaneous seasonings NA NA NA 0.44 0.76 0.56
095 Sugar processing 7.91 7.80 6.55 NA NA 5.63
0951 Sugar, except refined sugar 15.33 16.96 NA NA NA 15.89
0952 Refined sugar products 0.00 0.00 NA NA NA 0.00
0953 Glucose, starch syrup and 0.00 0.00 NA NA NA 0.00
high-fructose corn syrup
096 Flour and grain mill products 10.98 11.41 10.79 10.16 6.03 5.22
0961 Rice cleaning and polishing 41.04 36.55 NA NA NA 12.12
0962 Wheat and barley cleaning NA 0.00 0.00 0.00 0.00 0.00
and polishing
0963 Wheat flour milling 0.00 0.00 0.00 0.00 0.00 0.00
0969 Miscellaneous flour and NA 2.19 NA NA NA 0.76
grain mill products
097 Bakery and confectionery products 0.87 0.72 0.81 0.88 0.79 0.97
0971 Bread 1.56 1.02 1.51 1.20 0.96 1.36
0972 Pastries and cakes 0.27 0.26 0.23 0.34 0.35 0.48
0973 Biscuits, crackers and other 0.70 0.86 0.93 1.22 1.18 1.00
dry bakery products
0974 Baked rice confections 0.19 NA NA NA 0.16 0.10
© 2008 The Authors

Table 4 (continued)
Code Industry 1980 1985 1990 1995 2000 2003
0979 Miscellaneous bakery and 0.91 NA NA NA 1.43 1.42

confectionery products
098 Animal and vegetable NA NA 1.83 1.85 2.61 2.70
oils and fats
0981 Vegetable oils and fats 0.00 0.00 NA 0.46 0.39 0.10
0982 Animal oils and fats NA NA NA 9.24 11.21 13.94
0983 Edible oils and fats 0.00 0.00 0.00 0.00 0.00 0.00
099 Miscellaneous foods 3.87 2.16 1.96 1.70 1.88 1.56
and related products
0991 Starch 25.42 24.61 28.23 24.37 18.86 17.67
0992 Noodles, macaroni 1.56 1.21 0.89 0.70 0.82 0.91
and spaghetti
0993 ‘Tofu’ (bean curd) and 5.98 5.36 3.58 3.12 3.64 2.02
‘aburage’ (fried bean curd)
0994 ‘Anko’ (sweet bean paste) 2.74 2.59 2.79 3.07 2.52 2.27
and other related products
0995 Precooked frozen packed foods 0.62 1.76 2.55 3.21 2.48 2.45
0996 ‘Sozai’ (side-dish) foods NA 0.27 1.08 0.82 1.80 1.25
0999 Food and related products, n.e.c. NA 1.28 1.54 1.25 NA 1.44
101 Soft drinks and carbonated water 11.76 15.09 13.00 12.32 12.77 4.96
102 Alcoholic beverages NA 0.76 0.87 1.01 1.02 1.25
1021 Wine, except ‘sake’ 9.04 13.64 12.23 9.10 6.06 6.60
(Japanese rice wine)
1022 Malt liquors 0.00 0.00 0.00 0.00 NA 0.34
1023 ‘Sake’ (Japanese rice wine) 0.34 0.33 0.28 0.31 NA 0.29
1024 Distilled, rectified and 1.24 1.84 2.40 3.32 NA 2.91
blended liquors
103 Tea and coffee NA 13.12 10.06 11.46 NA 11.01
1031 Tea 19.74 16.71 13.50 14.77 NA 13.82
1032 Coffee 0.00 0.00 0.00 0.00 0.00 0.00
Food manufacturing industry average NA NA 3.26 NA NA 2.65
Manufacuring industry average 0.90 0.85 0.78 0.78 0.80 0.76
Note: NA, not applicable; n.e.c., not elsewhere classified.

Source: Ministry of Economy, Trade and Industry, Census of Manufacturers, 1980, 1985, 1990,
1995, 2000, 2003.
Naturally, meat producers and dairy farmers have detailed information about
the quality of their livestock products that is difficult to observe from the outside.
Knowledge of the quality of raw meat and milk might help meat producers and
dairy farmers to develop differentiated products. That is, private information on
the quality might make it possible for them to set up production lines that are
suitable for their raw livestock products. Conversely, they might produce raw
meat and milk that match their processing technologies. Informational advantages
© 2008 The Authors
Table 5 The CR3 for processed foods (%)
Food category 1980 1985 1990 1995 2000 2004
Meat products
Ham 44.2 45.2 42.3 46.0 45.9 48.8
Sausages 67.8 59.7 58.9 58.9 59.8 60.6
Corned beef 70.0 67.4 75.8 80.0 85.9 97.1
Dairy products
Milk 44.9 44.8 45.7 48.3 41.8 45.6
Powdered milk 73.3 67.1 67.8 69.7 70.6 78.6
Butter 69.1 60.7 68.2 68.8 78.6 73.2
Cheese 65.5 58.4 51.6 49.4 39.7 45.0
Fruit and vegetable products
Canned fruit 37.3 32.7 28.7 25.6 29.6 27.4
Canned vegetables 29.9 35.9 39.7 34.2 43.2 40.9
Tea
All green tea NA NA NA 13.2 13.8 16.0
Packed green tea 5.5 6.2 6.9 32.8 33.8 NA
Nikkan Keizai Tsushinsha, Production and Sales Shares in Alcoholic Beverage and Food Industries,
1983, 1985, 1987, 1991, 1997, 2005.
can thus give meat producers and dairy farmers an incentive to start processing
businesses.12
In fact, meat processing cooperatives often use a strategy to vertically dif-
ferentiate their products from those produced by large meat processing com-
panies. For instance, the Tohaku-cho Agriculture Cooperative in the prefecture
of Tottori has a policy of using raw meat that they produce in their farms
for processing, and of adding as little as possible salt and food additives to
their products. By doing so, they intend to have their products gain prestige
value as being healthy and of high quality (Shiraishi, 1985b). This is in sharp
contrast to the production method adopted by large meat processing companies.
Typically, they use imported meat to produce standardized products in large,
highly automated plants. This helps them reduce production costs.13 They also prefer
to use food additives, such as preservatives and colorants, to reduce distribu-
tion costs and to enhance acceptability and attractiveness of their products.
12. If consumers can observe the quality of the products ex ante (search goods) or ex post (experi-
ence goods), the firm with private information has an incentive to produce high-quality products,
regardless of the enterprise form. If consumers cannot observe the quality of the products even after
purchasing and consuming the goods (credence goods), the firm may be motivated to produce low-
quality products on purpose. However, if consumers can infer the quality of the products by some
means, the firm may want to produce high-quality products and try to let the consumers know the
true quality of the products by sending them a signal through advertising or the price. In this case,
the enterprise form may affect the firm’s ability to send an effective signal. See Tirole (1988) and
Mikami (2007) for the details of this argument.
13. In Japan, approximately 70 percent of all raw meat that is used for processing is imported
from overseas. See Japan Food Journal (2003).
© 2008 The Authors

Such differences in the style of production between meat processing co-

operatives and companies can also be seen in the manufacturing of dairy
products. Typically, major dairy food companies collect raw milk from many
different areas and mix them to produce standardized milk. On the contrary,
agriculture cooperatives use raw milk that they extract in their farms to produce
their own brand of milk in small quantities. Examples include the Hiruzen Ranchers’
Cooperative in the prefecture of Okayama, which produces pure Jersey milk by
using only the raw milk extracted from their Jersey cows (Takenaka, 1985a).
A series of polluted milk cases that were caused by major dairy food com-
panies may have boosted the competitiveness of milk made by agriculture co-
operatives in the market.14 It seems convincing to consumers that by using raw
milk that they produce on their farms and being equipped with small production
facilities, agriculture cooperatives can secure the safety of their dairy products
better than large dairy food companies.
III.2 Fruit and vegetable products except pickles15

Fruit and vegetable products have been a primary processed food item for Japanese
agriculture cooperatives. The employee ratio of cooperatives and other types of
noncapitalistic firms has declined over the past two decades, but still remains at
a nonnegligible level of 7.3 percent (2003, Table 1).
Generally speaking, potential monopsonistic power does not appear to be
very strong in the market for raw fruit and vegetables. Over the past few decades,
the CR3 has been around 25–35 percent for canned fruit and 30–40 percent
for canned vegetables (Table 5). We also do not find many reports of fruit
and vegetable farmers suffering from low market prices offered by large food
manufacturers. Presumably, with a variety of substitutes, a single company or a
small group of companies cannot exercise a strong influence upon the market
for raw fruit and vegetables. Therefore, monopsony power is not considered a
principal incentive for agriculture cooperatives to engage in fruit and vegetable
processing businesses.
Rather, informational advantages seem more important for the formation of
fruit and vegetable processing cooperatives. As a matter of course, fruit and
vegetable farmers are better informed of the characteristics of their farm products
than outside traders. By processing their fruit and vegetables in a small, labor-
intensive factory, an agriculture cooperative can produce a wide variety of fruit
14. The most serious case in the history of polluted milk is the Morinaga Arsenic-contaminated
Milk Case, which occurred in 1955. Sodium secondary phosphate for industrial use was used by
mistake as a food additive in the production of powdered milk for babies in a factory of Morinaga
Milk Industry. The powdered milk was contaminated with arsenic acid that was contained in the
sodium secondary phosphate. As a result, 130 babies were killed and more than 12 000 babies were
seriously injured. See Kawana (1989) for the details of this case.
15. The business category of bottling and canning of fruit and vegetables in the Ministry of Agri-
culture, Forestry and Fisheries (2004) roughly corresponds to the division of canned and preserved
fruit and vegetable products except pickled vegetables or those in brine [0931] in the SIC.
© 2008 The Authors

and vegetable products in small quantities that are vertically differentiated from
standardized products made by major food manufacturing companies.
For instance, the Oita Oyama-machi Agriculture Cooperative in the prefec-
ture of Oita has a policy of using their own fruit and vegetables as the raw
materials, of refraining from making a large investment in production facilities,
and of relying mostly on human hands to produce homemade-like products.
Despite its small membership of 690 farmers, the cooperative produces over 40
kinds of fruit and vegetable products, such as strawberry jam, plum jam, plum
jelly and marmalade. To maintain their brand name recognition for high-quality
products, the cooperative has a sales strategy of not supplying their products to
supermarkets and discount stores but shipping them only to department stores
and prestigious consumer cooperatives (Masui, 1985). The better the producers
are informed of the characteristics of their raw agricultural products, the more
effectively strategies of this kind seem to work in the market for food.
III.3 Starch [1292]16

Potato processing is one of the most important food processing businesses for
Japanese agriculture cooperatives. Sales of starch and other potato products
have constituted approximately 20–25 percent of the total revenue from their
food processing businesses (Table 1). Sixty-seven (5.6 percent) agriculture
cooperatives and 22 (5.6 percent) stock companies run by agriculture coopera-
tives are engaged in the production of starch (Table 2). Over 90 percent of all
starch and other potato products made by agriculture cooperatives is produced
by those in the prefecture of Hokkaido. Agriculture cooperatives have a sub-
stantial market share in potato starch. The employee ratio of cooperatives and
other types of non-capitalistic firms in this industry group has been around 20–
25 percent over the past few decades (Table 4).
Historically, market power seems to have been a major reason why agricul-
ture cooperatives undertake starch production. One instance is the potato
processing business run by the Shihoro Agriculture Cooperative in the prefec-
ture of Hokkaido. Before the Second World War, potato farmers in the village
of Shihoro had long struggled with low prices and unfair terms of trade for
potatoes that were offered by starch manufacturers in the region.17
After the war, the agriculture cooperative bought out a factory from a starch
manufacturer in the village and began processing their potatoes. The principal
16. The business category of starch and potato processing in the Ministry of Agriculture, Forestry
and Fisheries (2004) roughly corresponds to the division of starch [0991] in the SIC. There are
some exceptions, however. For example, potato products, such as French fries and potato chips, are
included in the category of starch and potato processing by Ministry of Agriculture, Forestry and
Fisheries (2004), but not in starch [0991] by the SIC.
17. Traditionally, the Fair Trade Commission (FTC) of Japan has adopted a mild stance against
monopolistic behavior of firms and has reserved the right to apply antitrust laws. Such an inclina-
tion of the FTC may have allowed market power to persist in local markets.
© 2008 The Authors

objective of the factory buyout was to establish a stable and fair transactional
relationship between potato farmers and the starch factory. The potato process-
ing business of the agriculture cooperative has attracted wide popularity among
potato farmers in the village, and the scope of their products has expanded to
cover such items as French fries and potato chips (Higurashi, 1985b).
Therefore, monopsonistic power seems to have played an important role in
the establishment of potato processing cooperatives in Hokkaido.
Potatoes are a relatively homogeneous farm product. Starch is also quite a
homogeneous product that is manufactured in a simple production line. In addi-
tion, most starch produced is shipped not for final consumption but for input
into the production of other foods. For these reasons, asymmetric information
on the quality of potatoes does not seem to cause serious problems in the
market for potatoes and, therefore, is not considered a principal reason for the
establishment of potato processing cooperatives.
III.4 Tea [1331]18

Manufacturing of tea leaves consists of two stages: processing raw tea leaves
into crude tea leaves, and refining crude tea leaves into final tea leaves. The
product in this food category that agriculture cooperatives primarily deal with
is green tea leaves. Agriculture cooperatives’ revenue from the tea refining
business amounts to 17.6 billion yen, which constitutes 15.8 percent of the
total sales of their processed foods (2005, Table 1). One hundred and fifty-nine
(13.2 percent) agriculture cooperatives and 39 (9.9 percent) stock companies
funded by agriculture cooperatives are engaged in the production of crude tea
leaves, whereas 134 (11.1 percent) agriculture cooperatives and 26 (6.6 percent)
stock companies funded by agriculture cooperatives are engaged in the production
of final tea leaves (Table 2). The employee ratio of cooperatives and other types
of noncapitalistic firms in this industry group is 25.8 percent (2003, Table 4).
Agriculture cooperatives have a substantial market share in the production of crude
tea leaves, but they have only a limited share in the production of final tea leaves.
There are a great number of tea leaf manufacturers in Japan. Indeed, the con-
centration ratio of the industry is quite low, with the CR3 being 16.0 percent
(2004, Table 5). However, this does not necessarily mean that serious market
power is absent in the market for raw tea leaves. Manufacturing of green tea
leaves is a traditional business, and its distribution system is said to be
extremely conservative and closed. Major local tea leaf refiners and wholesalers
often dominate the market for raw tea leaves and exercise strong monopsony
power over tea leaf farmers (Takenaka, 1984). There are several reasons why
such an industry structure prevails over a long period of time.
First, green tea is a highly differentiated product. There is wide regional
diversity in preference for green tea. For instance, green tea with a strong taste
18. The business category of tea refining, both crude and final, in Ministry of Agriculture, Forestry
and Fisheries (2004) corresponds to the division of tea [1031] of the SIC.
© 2008 The Authors

is preferred in the prefecture of Shizuoka, tea with a somewhat raw taste is pre-
ferred in the prefecture of Kyoto, and tea with a steamed taste is preferred in
the prefecture of Osaka. Green tea that is favored in a particular region is fur-
ther classified into even narrower varieties (Ohishi, 1983; Teramoto, 1999).
Second, green tea is not only regionally (or horizontally) differentiated, but
also vertically differentiated to a large extent. Grades for green tea leaves are
determined mainly by the time the raw tea leaves are picked. For instance, in
the prefecture of Shizuoka, Japan’s largest raw tea leaf planting and final tea
leaf producing area, raw tea leaves that are picked at the earliest time (the high-
est grade), the second earliest time (the second highest grade), the third earliest
time (the third highest grade) and the fourth earliest time (the fourth highest
grade) are priced at 484 yen, 111 yen, 79 yen, and 38 yen, respectively, per
kilogram (Fuchinoue and Fuchinoue, 1999). Each grade is further divided into
several narrower classes.19
Because of such fine horizontal and vertical differentiation, the market for
tea leaves is partitioned into smaller and closed local markets, and in each dif-
ferentiated market, refiners and wholesalers exercise monopsony power over the
tea leaf farmers. In economics terms, the market for raw tea leaves is under
strong monopolistic competition.
In addition, because raw tea leaves decay quickly, they must be processed
immediately after they are picked. Therefore, the price elasticity of supply for
raw tea leaves is necessarily low, and monopsonistic power tends to leave a
heavy deadweight loss in the market.20,21
19. According to different data for the prefecture of Shizuoka, between 1970 and 1972, green tea
leaves that were picked in the beginning period, the middle period, and the final period within the
earliest time (the highest grade) were priced, on average, at 350 yen, 192 yen and 166 yen, respec-
tively, per kilogram. Similarly, green tea leaves that were picked in the beginning period, the middle
period, and the final period within the second earliest time (the second highest grade) were priced
at 117 yen, 90 yen and 76 yen, respectively, per kilogram. See Fuchinoue and Fuchinoue (1999).
20. Presumably because of such unstable quality of raw tea leaves, a commercial custom has been
created whereby raw tea leaves that are picked by the farmers are immediately handed over to the
manufacturers without a definite agreement on price. The price is later determined when the man-
ufacturers recognize the quality of the tea leaves. Because manufacturers have dominant bargaining
power in such ex post negotiations of the price, there is no option for the farmers but to accept the
price the manufacturers offer. In the year of a good harvest, manufacturers assign a quota of raw
tea leaves they buy from the farmers, and they refuse to buy any additional quantity. In this way, tea
leaf farmers have been in a weak position in negotiations with the manufacturers about the terms of
trade for their raw tea leaves. See Fuchinoue and Fuchinoue (1999).
21. In contrast to raw tea leaves, crude tea leaves can be preserved for an extended period of time.
Crude tea leaf producers can therefore keep their intermediate products in cold storage and ship
them to the market when the price is favorable to them. In addition, because raw tea leaves reduce
to about one-fifth in size when they are processed into crude tea leaves, transportation costs are
lower for crude tea leaves than raw tea leaves. This makes it easy for crude tea leaf producers to sell
their products even to distant refiners outside the region. (See Fuchinoue and Fuchinoue, 1999.) For
these reasons, monopsonistic power is less easily exercised in the market for crude tea leaves than
in the market for raw tea leaves. This explains in part why agriculture cooperatives are actively
engaged in processing raw tea leaves rather than crude tea leaves.
© 2008 The Authors

For these reasons, the market for raw tea leaves would work quite ineffi-
ciently under investor-owned firms. One solution to avoid such inefficiencies is
to establish tea leaf processing cooperatives.
Private information on the quality of raw tea leaves can also give tea leaf
farmers an incentive to start tea leaf processing businesses. Quality control of
tea leaves is much easier if they are processed in a vertically integrated produc-
tion line, from growing raw tea leaves in the field to manufacturing final tea
leaves in the factory. Concerning this point, it has been a custom of the industry
that information on the place of production and processing is not labeled on the
packages of final products. Tea leaves made by the Kanagawa Prefectural Eco-
nomic Federation of Agriculture Cooperatives have attracted wide popularity
among consumers through such information being revealed on their packages
(Ohshima, 1985). One reason behind this phenomenon is that consumers want
safety-related information about the tea leaves they consume every day, such as
the type, amount, and frequency of agricultural chemicals that the producers
used in growing the raw tea leaves. Such information is easily obtained if the
final tea leaves are produced by the raw tea leaf growers.
IV. Other Economic Factors

In the previous section, we examined how market power and asymmetric infor-
mation affect the establishment of food processing cooperatives. In this section,
we consider other possible economic factors that might influence the compara-
tive efficiency of this type of firm in the food manufacturing business.
IV.1 Hold-up problems

Food processing factories are often built near the place of production of the
raw agricultural products for on-the-spot production. This reflects the fact that
many raw agricultural products easily lose their freshness after harvest, and are
costly to keep in stock in good condition (Takenaka, 1985b; Hiraiwa, 2005).
The on-the-spot production method might cause hold-ups at the time of con-
structing the food processing facilities (Williamson, 1979). That is, food
processing plants built in remote farming areas will be of little use once the
supply of the raw agricultural products is terminated. Therefore, investors
hesitate to invest in those plants for fear of sudden termination of trade with
farmers. 22 This kind of inefficiency can be prevented if farmers rent the
22. The hold-up problem is commonly discussed in a context such as when farmers threaten
manufacturers with a sudden termination of trade of their agricultural products. In practice,
however, the problem occurs even in the absence of farmers’ strategic termination of trade with
factories. For instance, farmers might change the crops they grow in their fields according to the
market prices for farm products. Otherwise, they might quit farming because of the absence of
successors. In these cases, food processing factories built in the rural farm area become worthless,
which hinders investment in the area.
© 2008 The Authors

factories long term or own the factories themselves by mortgaging their

land.23,24
In reality, factories that process fruit and vegetables are often located in
inland areas near the place of production. For instance, canned tangerines are
produced in the prefecture of Nagasaki, a major tangerine-growing area; canned
peaches in the prefecture of Yamagata, a major peach-growing area; and canned
pineapples in the prefecture of Okinawa, a major pineapple-growing area.25 The
average value of physical assets per establishment amounts to 152 million yen
for fruit and vegetable products (2004, Table 6). This is not a small amount,
and investors may well reserve investment in fruit and vegetable processing
factories that are built in rural farm areas. Farmers’ ownership of processing
factories is a solution for overcoming the underinvestment problem in these
circumstances.
A similar argument seems to hold true for potato processing plants. Produc-
tion of both potatoes and potato starch is concentrated in the prefecture of
Hokkaido. Seventy-seven percent (or 2278 thousand tons) of all domestic pro-
duction of potatoes (which is 2959 thousand tons) occurs in Hokkaido. Potato
starch is almost exclusively produced in Hokkaido. Ninety-two percent (or
215 209 tons) of potato starch produced in the prefecture (which is 233 559 tons)
is produced by agriculture cooperatives.26 The value of physical assets per
establishment is 332 million yen for starch production, a considerable large
amount (2004, Table 6). These facts imply that potato farming villages in the
region had difficulty in inviting new investment in the region from outside and,
therefore, potato farmers in the villages built factories themselves that use their
potatoes to produce potato starch.
IV.2 Monitoring costs

In theory, on-the-spot production as discussed in the previous subsection might
provide another advantage to food processing cooperatives over food manufac-
turing companies with respect to monitoring costs. Because farmers have good
access to the factory of their food processing cooperative that is located in their
farm area, they can easily monitor daily operations of the factory. In contrast,
stockholders of a food manufacturing company are not physically present at the
production site. Therefore, they need to incur monitoring costs to alleviate
moral hazard in their factory.
23. Putterman (1984) and Hansmann (1988) consider a noncapitalistic firm that procures physical
capital entirely by borrowing.
24. Another way of avoiding the hold-up problem in this case is to let stockholders of the company
farm themselves, which seems unrealistic. In particular, ownership of farms by stock companies is
legally restricted in Japan.
25. Japan Food Journal (2003).
26. Data for 2001 are from the Ministry of Agriculture, Forestry and Fisheries, and are available
at http://www.tdb.maff.go.jp/toukei.
© 2008 The Authors

© 2008 The Authors

Table 6 The value of tangible assets per establishment (million yen)
Code Industry 1980 1985 1990 1995 2000 2004
091 Livestock products 202.13 231.78 306.40 396.34 418.71 431.79

0911 Meat products 248.18 246.27 269.83 322.37 340.11 306.87
0912 Dairy products 277.31 364.61 523.49 747.47 851.16 954.98
0919 Miscellaneous livestock products 75.56 87.52 147.63 158.80 138.60 141.45
092 Seafood products 32.20 44.70 66.67 90.91 96.67 72.10
0921 Canned seafood and seaweed 135.74 126.30 126.77 197.44 194.76 192.83
0922 Seaweed products, except canned 27.40 32.91 48.60 71.15 72.67 52.60
0923 Fish paste products 36.30 57.92 85.44 121.12 145.03 121.65
0924 Salted-dried and salted products NA NA NA NA NA 43.59
(unprocessed and packaged)
(processed and packaged)
0929 Miscellaneous seafood products 19.30 28.92 45.63 60.88 70.87 51.21
093 Canned and preserved fruit 44.18 55.00 72.91 111.18 118.14 94.11
and vegetable products
0931 Canned and preserve fruit and vegetable products, 80.08 98.77 108.25 172.94 171.34 152.18
except vegetables pickled or in brine
0932 Vegetables pickled or in brine, 30.40 38.13 58.20 83.38 94.41 68.28
not in air-tight containe
094 Seasonings 104.49 134.70 235.06 307.96 340.81 296.72
0941 ‘Miso’ (fermented soybean paste) 50.82 58.18 78.96 115.86 118.89 99.14
0942 ‘Shoyu’ (soy sauce), 51.83 66.48 106.50 166.76 193.92 160.50
and edible amino acids
0943 ‘Umami’ seasoning NA NA NA NA 2326.45 2524.00
0944 Sauces 234.44 292.75 434.45 612.73 638.20 533.04
0945 Vinegar 41.33 81.76 199.55 159.23 151.27 104.89
100
0949 Miscellaneous seasonings 267.98 410.70 658.86 685.07 666.35 571.18
FOOD PROCESSING AND AGRICULTURE COOPERATIVE IN JAPAN
095 Sugar processing 807.70 848.12 983.93 1434.50 1457.39 1428.48
0951 Sugar, except refined sugar 662.86 714.73 697.39 837.35 739.37 679.07
0952 Refined sugar products 903.16 805.54 932.33 1822.32 1971.56 2233.64
0953 Glucose, starch syrup and 743.63 1116.40 1475.23 1908.53 1891.94 1652.07
high-fructose corn syrup
096 Flour and grain mill products 137.09 203.21 255.85 360.75 361.30 252.72
0961 Rice cleaning and polising 77.78 125.13 175.10 310.66 260.97 143.46
0962 Wheat and barley cleaning 70.17 159.37 168.91 501.75 724.00 266.87
and polishing
0963 Wheat flour milling 631.33 955.22 1131.64 1292.25 1376.50 1400.21
0969 Miscellaneous flour and 25.27 24.83 46.55 75.00 108.46 29.98
grain mill products
097 Bakery and confectionery products 55.79 86.57 125.77 167.39 179.31 176.94
0971 Bread 91.53 145.67 204.18 263.12 277.14 308.60
0972 Pastries and cakes 32.81 54.10 75.59 101.98 113.81 94.43
0973 Biscuits, crackers and other 47.64 72.79 98.72 135.67 147.24 110.67
dry bakery products
0974 Baked rice confections 42.21 68.37 102.63 131.31 158.92 139.45
0979 Miscellaneous bakery and 77.54 112.35 190.40 272.44 276.65 306.33
confectionery products
098 Animal and vegetable oils and fats 512.11 568.92 781.43 1012.91 1077.96 1156.84
0981 Vegetable oils and fats 646.23 828.25 1215.38 1331.35 1373.53 1714.86
0982 Animal oils and fats 55.74 74.18 121.60 158.91 176.84 144.26
0983 Edible oils and fats 1536.74 1570.52 1573.79 3003.19 3102.52 3169.79
099 Miscellaneous foods 28.86 40.70 67.29 103.38 126.57 125.00
and related products
© 2008 The Authors
0991 Starch 152.02 284.94 197.05 341.27 417.82 332.48

0992 Noodles, macaroni 20.27 28.68 41.20 68.92 81.16 71.14
and spaghetti
0993 ‘Tofu’ (bean curd) and 11.27 16.59 25.48 42.30 51.67 41.39
‘aburage’ (fried bean curd)
101
© 2008 The Authors

Table 6 (continued)
Code Industry 1980 1985 1990 1995 2000 2004
0994 ‘Anko’ (sweet bean paste) 15.75 22.70 31.88 45.22 47.09 34.91
and other related products
0995 Precooked frozen packed foods 117.94 167.19 305.00 315.68 363.20 317.91
0996 ‘Sozai’ (sidedish) foods NA 44.65 82.78 118.36 151.05 185.93
0999 Food and related products, n.e.c. 32.64 55.95 90.40 140.84 161.68 168.21
102 Alcoholic beverages NA 258.72 441.61 626.96 701.14 683.82
1021 Wine, except ‘sake’ 144.92 225.15 214.01 198.76 249.97 174.45
(Japanese rice wine)
1022 Malt liquors 8563.35 9848.00 18 831.51 22 891.16 13 325.90 14 083.75
1023 ‘Sake’ (Japanese rice wine) 56.20 76.90 115.28 181.15 204.46 140.60
1024 Distilled, rectified 232.84 440.34 521.41 560.27 760.79 802.29
and blended liquors
103 Tea and coffee NA 51.98 73.11 80.86 75.80 60.92
1031 Tea 13.89 20.35 30.20 38.64 48.91 25.82
1032 Coffee NA 441.76 472.01 545.89 360.21 396.69
Food manufacturing NA 90.74 135.10 185.39 205.57 197.21
industry average
Manufacturing industry average 91.80 125.98 167.82 227.50 256.73 256.50
Note: NA, note applicable; n.e.c., not elsewhere classified.

Source: Ministry of Economy, Trade and Industry, Census of Manufacturers, 1980, 1985, 1990, 1995, 2000, 2004.
102
In practice, however, we do not find any evidence in case studies that moni-
toring costs of this kind have promoted the establishment of food processing
cooperatives.
IV.3 Risk bearing

An agriculture cooperative consists of family-managed farms. Their livelihood
depends heavily upon the activities of the agriculture cooperative to which they
belong. Therefore, farmers are not in a good position to diversify the risks of
their cooperative businesses compared with investors of a stock company.27
Consequently, costs of risk bearing will be great for a food processing cooper-
ative when the undertaking requires a large amount of initial investment and is
accompanied with substantial business risks.
The value of tangible assets is not very low for meat, dairy, fruit and vegeta-
ble products and starch. The only exception is manufacturing of tea, which
requires only a very small amount of physical assets (Table 6). In contrast,
except for starch, variations in profit as a proxy of business risks are moderate
for all food groups we studied in this paper (Table 7). Taking these facts into
account, tea leaf processing seems most consistent with the theoretical predic-
tion based upon risk bearing. Generally speaking, however, we cannot find
strong statistical evidence that supports the hypothesis of risk bearing. We can-
not find such evidence in case studies either.
V. Conclusion
In this paper, we examined the comparative efficiency of food processing busi-
nesses run by agriculture cooperatives. We mainly considered the implications
of market power and asymmetric information for the formation of this type of
cooperative firms.
Market power seems to play the primary role in the formation of food
processing cooperatives. We came across various cases in the literature of food
processing cooperatives being formed when the market for raw agricultural
products was under the strong monopsony power of large food manufacturing
companies. Statistical data seem to support this tendency.
Asymmetric information is thought to be another important factor for the
establishment of food processing cooperatives in Japan. In several case studies
we reviewed, private information on the quality, particularly the safety, of raw
agricultural products seemed to have given farmers some advantages in starting
food processing businesses.
Presumably, there are two reasons why private information on the safety of
food can be influential in the formation of food processing cooperatives. First,
27. Also, managers of agriculture cooperatives assume unlimited liability for the results of the
cooperative’s undertakings.
© 2008 The Authors

Table 7 Variance of percentage rates of change in the gross added value for 1980 –2003
Code Industries Variance
091 Livestock products 21.8

0911 Meat products 40.0
0912 Dairy products 29.4
0919 Miscellaneous livestock products 58.1
092 Seafood products 19.1
0921 Canned seafood and seaweed 161.7
0922 Seaweed products, except canned 38.5
0923 Fish paste products 33.0
0924 Salted-dried and salted products NA
0925 Frozen seafood products (unprocessed and packaged) 117.5
0926 Frozen seafood products (processed and packaged) 360.8
0929 Miscellaneous seafood products 35.5
093 Canned and preserved fruit and vegetable products 20.8
0931 Canned and preserve fruit and vegetable products, 48.1
except vegetables pickled or in brine
0932 Vegetables pickled or in brine, 24.5
not in air-tight containers
094 Seasonings 19.3
0941 ‘Miso’ (fermented soybean paste) 30.9
0942 ‘Shoyu’ (soy sauce), and edible amino acids 17.2
0943 ‘Umami’ seasoning NA
0944 Sauces 90.1
0945 Vinegar 117.6
0949 Miscellaneous seasonings 112.5
095 Sugar processing 174.5
0951 Sugar, except refined sugar 671.9
0952 Refined sugar products 249.4
0953 Glucose, starch syrup and high-fructose corn syrup NA
096 Flour and grain mill products 42.8
0961 Rice cleaning and polising 152.3
0962 Wheat and barley cleaning and polishing 598.1
0963 Wheat flour milling 96.4
0969 Miscellaneous flour and grain mill products 196.3
097 Bakery and confectionery products 9.9
0971 Bread 10.4
0972 Pastries and cakes 25.2
0973 Biscuits, crackers and other dry bakery products 47.0
0974 Baked rice confections 26.8
0979 Miscellaneous bakery and confectionery products 25.9
098 Animal and vegetable oils and fats 73.8
0981 Vegetable oils and fats 145.6
0982 Animal oils and fats 203.5
0983 Edible oils and fats 318.3
099 Miscellaneous foods and related products 26.0
0991 Starch 147.6
0992 Noodles, macaroni and spaghetti 23.2
0993 ‘Tofu’ (bean curd) and ‘aburage’ (fried bean curd) 25.3
0994 ‘Anko’ (sweet bean paste) and other related products 45.9
© 2008 The Authors

Table 7 (continued)
Code Industries Variance
0995 Precooked frozen packed foods 68.2

0996 ‘Sozai’ (side-dish) foods NA
0999 Food and related products, n.e.c. NA
101 Soft drinks and carbonated water 93.9
1011 Soft drinks and carbonated water 93.9
102 Alcoholic beverages NA
1021 Wine, except ‘sake’ (Japanese rice wine) 150.5
1022 Malt liquors 108.8
1023 ‘Sake’ (Japanese rice wine) 23.9
1024 Distilled, rectified and blended liquors 127.9
103 Tea and coffee NA
1031 Tea 49.8
1032 Coffee 570.4
Note: NA, note applicable; n.e.c., not elsewhere classified.

Source: Ministry of Economy, Trade and Industry, Census of Manufacturers, 1980 –2003.
from an international point of view, Japanese people seem to have a particularly

strong preference for food safety.28 Second, Japan depends heavily upon
imports of food from overseas.29 Generally speaking, the safety of food is harder
to recognize for imported food than for domestic food. For this reason, pro-
cessed foods that are wholly made of domestic farm products gain prestige value
in the Japanese food market. Indeed, processed foods produced in this way
by agriculture cooperatives sustain competitiveness in the market even if they
are priced higher than their substitutes produced by major food manufacturing
companies.
In contrast to market power and asymmetric information, monitoring costs
and risk bearing appear less influential in the formation of food processing
cooperatives. We found only limited evidence in statistical data or in case
studies that these factors might have promoted the establishment of this type of
cooperative firm.
28. For example, such a national characteristic is revealed in the testing methods for screening
Bovine Spongiform Encephalopathy-infected cattle that are adopted in each country. Although
sample testing is under way in, for example, the USA and Europe, Japan keeps administering com-
prehensive tests. Japan had banned imports of US beef for an extended period of time, which
caused trade friction between the two countries.
29. Japan’s self-sufficiency ratio for food is 40 percent, which is quite a low level among devel-
oped countries. The ratio is 237 percent in Australia, 145 percent in Canada, 128 percent in the
USA, 122 percent in France, 84 percent in Germany, 70 percent in the UK, and 62 percent in Italy.
Data for 2003 are from the Ministry of Agriculture, Forestry and Fisheries, and are available at
http://www.kanbou.maff.go.jp/www/jukyuuritsu/index.html.
© 2008 The Authors

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Asian Economic Journal 2008, Vol. 22 No.

Food Processing Business and Agriculture

Kazuhiko Mikami and Satoru Tanaka

Food processing businesses run by agriculture cooperatives (in this paper

Keywords: food processing business, agriculture cooperative, market power,

* Mikami (corresponding author): Department of Applied Economics, University of Hyogo, Nishi

© 2008 The Authors

© 2008 The Authors

© 2008 The Authors

information. Section IV considers the implications of other economic factors for

II. Analytical Framework

II.1 Market power

II.2 Asymmetric information

© 2008 The Authors

resource allocation because of moral hazard or adverse selection. These infor-

III. Empirical Observations

III.1 Meat products and dairy products7

© 2008 The Authors

ASIAN ECONOMIC JOURNAL

Food category 1980 1985 1990 1995 2000 2005

Table 2 The number of food processing businesses run by agriculture cooperatives

Food category Agriculture Joint stock Women’s Voluntary

Number % Number % Number % Number %

Starch 67 5.6 22 5.6 5 0.7 19 1.4

Source: National Central Union of Agricultural Cooperatives, National Survey on Activities of

other types of noncapitalistic firms is approximately 4.4 to 6.6 percent in live-

© 2008 The Authors

Table 3 The ratio of non-company corporations and unincorporated associations in the

Code Industry 1981 1986 1991 1996 2001

091 Livestock products 6.68 6.88 6.20 6.10 4.42

Note: NA, not applicable.

with the domination of the market by downstream firms such as manufacturers,

© 2008 The Authors

Table 4 The ratio of cooperatives and other types of noncapitalistic firms

Code Industry 1980 1985 1990 1995 2000 2003

091 Livestock products 7.31 7.40 7.58 7.14 6.76 6.60

© 2008 The Authors

Code Industry 1980 1985 1990 1995 2000 2003

0979 Miscellaneous bakery and 0.91 NA NA NA 1.43 1.42

Note: NA, not applicable; n.e.c., not elsewhere classified.

Table 5 The CR3 for processed foods (%)

Food category 1980 1985 1990 1995 2000 2004

© 2008 The Authors

Such differences in the style of production between meat processing co-

III.2 Fruit and vegetable products except pickles15

© 2008 The Authors

III.3 Starch [1292]16

© 2008 The Authors

III.4 Tea [1331]18

© 2008 The Authors

© 2008 The Authors

IV. Other Economic Factors

IV.1 Hold-up problems

© 2008 The Authors

factories long term or own the factories themselves by mortgaging their

IV.2 Monitoring costs

© 2008 The Authors

ASIAN ECONOMIC JOURNAL

Code Industry 1980 1985 1990 1995 2000 2004

091 Livestock products 202.13 231.78 306.40 396.34 418.71 431.79

0991 Starch 152.02 284.94 197.05 341.27 417.82 332.48

ASIAN ECONOMIC JOURNAL

Code Industry 1980 1985 1990 1995 2000 2004