Farmers Organizations and Cooperatives: Is There a Competitive Advantage?

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 we could unintentionally be providing a disservice to the smallholder producers.

The funneling of assistance to smallholder producers through cooperatives has now been institutionalized for over two decades. This has been done under the assumption 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, there is 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. The side selling reduces the funds available for social benefits to the community as envisioned in the Fair Trade Coffee cooperatives.

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:

• Competitive Advantage
  • Cheetah in Zambia
• Financial Transparency
  • Madibira in Tanzania
• Regulatory Impact
• Reconciliation with Private Traders,
• Smallholder Empowerment

Bottom Line

The bottom line is that while 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, 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 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.

Unfortunately, the emphasis on cooperatives and farmer organizations as a 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. 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,
• the comparative costs of the competing private trader, 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, condemning 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 implies 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 cooperative 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 expolitive of the smallholders as the primary justufucation 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 have on 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 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. This lack of competitive advantage may largely account for the limited 30% and declining market share.

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 .