Trade Credit Use in Agricultural Cooperatives: Pricing and Firm Performance

Retail prices of products sold by agricultural input cooperatives are set according to a variety of factors, which may include the cost of offering products on trade credit. A sample of over 300 total pricing decisions for six inputs sold by input cooperatives to their members is used to analyze whether that trade credit volumes and the cooperative’s own financial needs tend to affect retail input price changes. We find that increased trade credit, at levels observed in this sample, tended to increase price inflation. The net combined effect on price inflation reflects upward pressure due to increasing risk associated with trade credit and downward pressure from an increase in through-put quantity. We find no effect on price inflation related to a firm’s internal need for funds as measured by liquidity or solvency measures. Finally, our results suggest that co-ops may not be pricing products using a “cost plus” approach, but rather based on their local market conditions and the need to drive sales. We discuss these results in the context of the role of the cooperative.