2011, Volume 14, Paper 86

Competition and Co-operation in Dairy farm Feed Supplies: Every Player Wins a Prize

Bill Malcolm – University of Melbourne

Introduction

To run a successful business in modern economies, entrepreneurs need to be very good at what they do: the race goes to the fittest, with the greatest will to win – and, at the same time, entrepreneurs need to be very good at co-operating with those they rely on for inputs or to buy
their outputs – I win, you win, we win.

In economics, the theory of the firm holds that firms exist as entities to carry out activities that they can do relatively better than others in the economy. The type of activities a firm engages in, and those activities a firm does not carry out and ‘farms out’ instead, are determined by whether the firm can do it cheapest or another firm can do it cheaper. This consideration, summarized as comparative advantage and  transaction costs, determines the boundaries of the firm, defining and encompassing what the firm does and does not do.

Specialization, doing a few things very well, is one of the keys to the principle of comparative advantage. By harnessing the powers of specialization, dairy farmers for example, can draw the boundaries around their firms and establish relationships- strategic alliances – with suppliers of key inputs such as grain and fodder. Done well, with trust and reliability, increased specialization by dairy farmers in those aspects of production they do best, and co-operation with other firms supplying other aspects of production that these firms do better, can increase competitiveness of dairy farms. Done well, every player can win a prize.

Over time, as the dairy economy in Australia has developed and evolved, the boundaries of dairy farm firms too have evolved. It took little time for dairy farmers right from the start to expand their ownership of economic activity vertically forwards to the processing sector and form horizontal co-operatives at the processing level of the production and marketing chain. Nowadays, good opportunities and good reasons exist for establishing vertical relationships backwards along the production and marketing chain to their feed input suppliers, the feed grain
growers and fodder producers.

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