Farmers Organizations and Cooperatives: Is There a Competitive Adantage?

With the overall financially-suppressed economies in which most smallholder producers operate, where most income and production are required to meet subsistence needs, it is essential that the costs of doing business be kept to a minimum. Since most development projects are funneled through farmer organizations and cooperatives as stipulated in the original request for proposals, the question is, “in working with farmer organizations as a business model to provide necessary support services, is it possible to keep the managerial overhead costs below the profit margins of the competing private traders, and make the services equally as convenient as the cash on delivery systems used by the private traders”? If not, then funneling development through farmer organizations could unintentionally be providing a disservice to the smallholder producers. Also, often the farmers' organization are interested in providing some highly desirable social services beyond the business services. However, how often are these social service dependent on the farmers' organization being a business success to fund the social activities, as well as needing a majority of the beneficiaries actively participating.

The funneling of assistance to smallholder producers through cooperatives has now been institutionalized for over two decades. The expectation is that by consolidating produce for bulk sale they can demand a higher price when selling goods, or similar by consolidating input orders they can get a volume discount. However, there are administrative costs associated with this that have to come from the overhead charges if the cooperative is to be competitive and sustainable beyond donor support. This has been done under the assumption, normally put forth without verification, that private traders were exploitative, and thus a cooperative would provide a competitive financial benefit to the smallholders. However, it appears that no one has taken the time to determine if, in the context of developing countries' overall financial and economic business environment, including the possible financial management strategy that emphasis retaining assets in kind, is there a competitive advantage in working through cooperatives. Or is the overall financially-suppressed economy sufficient to prevent excessive exploitation by private traders?

In the spring of 2004, DFID, the UK international development agency, sponsored an E-forum to discuss how it could best assist the agriculture sector of developing countries. There were over 500 individuals subscribed to the forum from all around the world. The included donors and donor country based personnel, donor field staff and host country professional staff. Many individual subscribers had 30 years or more of experience in assisting developing countries. Thirty years typically represents a full professional career. Three inquires into this forum specifically seeking comparative studies of the cost of conducting business through cooperatives vs. private traders provided zero responses. By default, the implication is that no studies have been conducted and thus there is no solid evidence that cooperatives are providing a sustainable financial benefit to their members. It does appear that cooperatives have problems with members “side selling” the majority of their goods and services to pirate or "coyote" traders, as well as difficulty in being sustained without external facilitation.

In the absence of such studies, it is possible that funneling development assistance through farmer organizations may unintentionally impose on the smallholders beneficiaries the:

  • Most expensive,
  • Least convenient, and
  • Most prone to financial irregularities

of any support service available.

When this happens smallholders simply exercising their rights as individual entrepreneurs to seek the support services they feel are providing them the best competitive advantage and side sell most of their produce to the private traders. What does side selling really represent, a breach of contract on the part of the beneficiary, or an astute business decision to avoid what might be a horrendous business model. The side selling reduces the funds available for social benefits to the community as envisioned in the Fair Trade Coffee cooperatives, and the social tax levied on fair trade commodities.

There are several issues associated with working with farmer organizations that become too long to be effectively included in a single web page and thus better discussed on separate pages along with some specific case study examples. These are:

Bottom Line

The bottom line is that while from a sociology perspective cooperatives have a lot of academic and conceptual appeal from donors, and those development workers assisting them can take great pleasure in their work with smallholder based farmer organizations. However, from a business perspective which is the perspective most smallholders will be most concerned with, if cooperatives are not economically competitive with competing private traders providing similar services, they cannot be sustained beyond external donor facilitation. When this happens members will abandon them and revert to obtaining their services from the private trader, the default providers. In reviewing the business model of the cooperative system with a little effort is is possible to quickly list up to 14 point of concern where the cooperative model as used in development projects will lose the envisioned competitive advantage to the competing often vilified private traders. This shoud be sufficient to offset any negotiated advantage for group bulking of inputs or produce. When this happens the development cooperatives will become mostly a source for publicity of donors’ good intentions while providing little, if any, sustainable development. However, by this time the donor representatives will have left, happily promoting their accomplishments fully unaware of how quickly their efforts collapsed once they left.

Those deriving pleasure from working with smallholders through cooperatives must consider if the enjoyment they are experiencing is because of the farmers' organization or simply from assisting smallholders. If the latter, could they have an equally enjoyable experience, if not more enjoyable, working directly with smallholders and avoid the frustration of cooperatives and goods diverted to the competing private traders. This could include enhancing the resources available to smallholder to more expediently manage their lands with access to private contract mechanization, or other means to reduce the drudgery of smallholder farm life.

Unfortunately, the emphasis on cooperatives and farmer organizations as the only business model for funneling assistance to smallholder has been severely caught up in the Development Hierarchy that stipulates working with cooperatives in the RFP and virtually mandates more promotional than objective reporting to assure continued funding and institutionalizes cooperatives into the Development Process well beyond their overall effectiveness in assisting with the poverty alleviation of smallholders. Some of this can be through some deceptive bordering on dishonest reporting. Such reporting will accurate discuss the limited contributions the programs have made while overlooking such items:

  • as the percent of the overall beneficiary pool that are actively participating,
  • the percent of produce being side sold to the competing private traders,
  • the comparative costs of doing business of the cooperative vs. the competing private traders,
  • payment or projected payment of promised dividends, and
  • overall potential for sustaining the cooperative without donor facilitation.

It could also involve some promotional accounting that stops at cooperative, and fails to extend the accounting to the farm gate by excluding the overhead costs of operating the cooperative, or surcharges and handling fees on materials handled. Meanwhile, vilifying the profits of the private trades, which are reported to the farm gate. Not a valid objective comparison.

Unfortunately, the specification of cooperatives in RFPs impliedes the mechanism for assisting the smallholders is more important then the effectiveness of the assistance provided. This then implies a less than sincere effort to assist the smallholders.

There is a real need to follow-up on donor promoted cooperatives two years after all donor facilitation ends. This would include at least two agriculture cycles and enough time to see if the cooperatives have a potential for long term sustainability and what forms they may have evolved into to make them more sustainable. Failure to do so could place those insisting on working with cooperatives vulnerable to class action litigation by taxpayers for misuse of public funds, or from private traders in host countries being slandered as exploitive of the smallholders as the primary justification for mandating the cooperatives.

Cooperatives in the USA

It might be interesting to note the role cooperatives play in the USA and possible other developed countries. In the USA cooperatives average only 30% and decline market share for agriculture commodities they handle with only the dairy cooperatives having a majority market share. However, cooperatives remain highly promoted by the USDA and various colleges of agriculture that make up the Land Grant University System. The promotion is based on the social desirable member ownership, participatory management, and profit sharing dividends, but usually not their competitive advantage in providing the intended support services. It is assumed that because of the ownership, management, and promised dividends the competitive advantage will follow. In most cases this competitive advantage may not be realized, as often cooperatives are not the cheapest source of inputs for farmers particularly, non-members, nor provide the best return on marketed produce. What advantage cooperatives have may come primarily from the dividends distributed to members at the end of the financial year, sort of a lay-away savings plan of undetermined value. This lack of competitive advantage may largely account for the limited 30% and declining market share. It should also be noted that the USDA is no longer tracking the membership or market share, and has no plans to resume. The latest data is that shown in the figure and is now over 10 years old.

The bankruptcy debacle of Farmland Industries should also be noted in a review of the agriculture cooperative system in the USA. Farmland was a conglomerate of agriculture cooperatives and thus the biggest cooperative entity in the USA. It attempted to do an value chain vertical integration from producer to consumer similar to what many development projects are currently attempting. The result was eventually the total collapse of the enterprise. The brand name continues to exist but the surviving divisions were bought out by private corporations and are no longer part of the cooperative system. Those working on value chain projects should take careful note to make certain the added sustainable overhead costs for moving up the value chain does not exceed the benefits to the farmers. If so the value chain will suffer the same fate as Farmland once the donor funding and external facilitation ends.

Anyone working in close association with farmer organizations an wish to follow-up on this page are welcome to respond to the request for information questionnaire.

Last Revised: 21 Nov. 2006 .

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