Costs of Doing Business: Village Enterprises vs. Farmer Cooperatives

ThaiInputShopOptOver the past 20 years or more, much of the development effort to provide support services for smallholders has been funneled through farmer organizations such as cooperatives. The total investments have reached billions of US dollars. However, no one appears to have ever confirmed if farmer organizations are the most cost-effective means of supporting smallholders that will allow farmer organizations to continue without some form of external facilitation. This is in contrast to the private shop owners such as the one from Thailand depicted. Such traders are usually vilified as exploitive of smallholders. However, how much of this is unsubstantiated hype by host country clients, anxious to promote continued public sector support services even though they have long been identified as highly inefficient, or by development professionals anxious to promote farmer organizations. Thus, the most urgent question in smallholder development is “Which is greater: private traders’ profit margins or the farmer organizations’ sustainable overhead costs?” That is the overhead cost to operate the cooperative after donor funding and external facilitation end. There is the need for a good comparative analysis of the two. Basically, what are the costs in procuring inputs or selling produce? What are the required procedures in providing these essential services to the smallholders? Wouldn’t both private traders and farmer organizations would have transportation, repackaging to more convenient sizes, and collecting from or distributing to the smallholders. Then, the farmer organizations would have additional administrative procedures, mostly accounting, needed to maintain individual members’ records. Such administrative procedures are usually a greatly underestimated cost. Once all this is taken into account, which is really offering the smallholder the best deal? Remember that in financially-suppressed economies in which can severely restrict what traders can charge for their services.

The analysis has to be careful to remove the external facilitation costs provided by the technical assistance team assisting the farmer organizations and which would be expected to end at some point. However, the extra cost that farmer organizations incur would have to be included if they have major capital costs such as maintaining the donor financed lorries, while the private trader is relying on public transportation or contracted vehicles. The emphasis has to be on cost incurred to sustain a farmer’s organization without donor support, subsidies, or external facilitation.

In addition to the financial costs, there is also the concern for convenience in getting the inputs or marketing produce through the private traders or cooperatives. The concern is that cooperatives often require a pre-commitment and funding prior to ordering inputs, and accept produce on consignment with expectation of holding the produce, waiting for the normal increases in prices with time after harvest, but having to absorb all the post-harvest losses to rats, birds, and spoilage. Another concern would be a possible overall Financial Management Strategy that emphasis retaining assets in kind, and only marketing small quantities at a time over a prolonged marketing season, but needing immediate cash once marketed. All of these issues must be dealt with, in addition to the delay in payment while waiting for produce to be sold. How important is cash payments for inputs and immediate payment for produce for the smallholder producers? How much of a discount will smallholders accept for an immediate cash payment? Finally, is there a tendency for cooperative to persist through some Deceptive Bordering on Dishonest reporting to the donor and in periodical articles promoting the cooperative model.

Last Revised: 5 October 2005 .

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