Envisioned Competitive Advantage For Cooperatives?

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While the farmer cooperative business model has a high degree of social desirability and is envisioned to provide the farmer members a better return, mostly by bulking produce to command a better price for volume sales, as well as large purchases of inputs. The question becomes can these bulking benefits to transferred to the members or will they be consumed in overhead costs and operational conveniences needed to obtain them. There are really four concerns.

Direct Financial Competitiveness: Conceptually cooperatives could lose their anticipated competitive advantage over private traders if their overhead costs exceed the profit margins of the private traders. This can result because there are substantial extra administrative processes associated with operating a cooperative that private traders avoid. Most of this would be associated with the accounting needs required to maintain individual accounts mostly for keeping track of preorder and prepaid inputs as well as accepting produce on consignment. This is in comparison to the simple revolving fund accounting, working from a single simple notebook, employed by most family-run, village-based small enterprises. This extra time and effort has a financial cost that must be recovered in the overhead, surcharges or handling fees the organizations must place on their members in order to conduct business. It could also happen if a cooperative attempts to provide social services such as extension education, health clinics and schools. The cost of these community services must come from the cooperatives revenues. Unfortunately, administrative costs tend to be grossly underestimated and underappreciated in planning any business enterprise.

This can be illustrated with the following simplified graph and abstract example. Assuming both the private trader and cooperative are providing farm inputs to the community or marketing a similar commodity. Both will need nearly the same capital to purchase the inputs from a wholesale supplier to take advantage of any volume discounts or purchase produce. However, the cooperative may have obtained some pre-commitments on the inputs or accepted the produce on consignment, so the cooperative’s actual cash flow may be somewhat different time from the private trader. They will then both perform similar managerial functions with possible similar costs, such as transporting the inputs from the wholesale warehouse to the storage facility they have in the community. However, if donor funding has provided the cooperative a truck and an individual warehouse facility, and the private traders are operating with public transportation, such as the roof carrier on a rickety bus as shown, or consolidated  several traders goods in one truck, and store goods in a corner of their homes, the private traders may have a substantial cost saving which would increase the private traders’ competitive advantage. They will also have similar time and effort in distributing the inputs to the community members. This would include dividing imported vegetable seeds obtained in 1 kg cans into 50 or 100 g packets or dividing liter bottles of pesticides into 1/8-liter bottles, without the label with directions and warning icons, but consistent with what the individual farmers’ need for backpack sprayers. Some of this input repackaging could be multi-tasked while waiting for customers or members to come in and collect their goods. These are all simply the costs of providing the needed service to the community. This also includes any hired clerical or casual labor to manage the store or move the goods in and out of the warehouse.

On top of this, the private traders have a mark-up that effectively provides a salary for them and their family and absorbs any losses that are encountered from spilled goods, broken bags, spoilage, etc.

The cooperatives now have some additional time and effort for account management. They must review the individual member accounts and credit them with inputs obtained and perhaps provide receipts for consigned goods, etc. to keep track of what has been either delivered or received. There are costs associated with this. It may be possible to bury these costs from the cooperative accounting system by having a member in charge of this on volunteer basis. However, it is a big thankless hassle for that member. Thus, what happens if they were not able to purchase all the inputs desired from the wholesale dealer because his stock was low? Or perhaps and more likely there was some pilferage or breakage en route back! How would the shortage be prorated over the members? Or would the volunteer manager give priority to his own needs. Given the hassle they are encountering in managing the cooperative would they not have clearly earned the priority as sort of payment for their volunteered time and effort. If this happens too often, what will happen to the rank and file members waiting for inputs? These are some of the additional administrative procedures and legitimate costs associated with managing a cooperative that are not part of private traders’ management activities. For the cooperative to remain financially viable these costs must be covered by overhead, handling fees, or surcharges, etc.

Thus the question is whether the overhead costs and surcharges incurred by a cooperative in managing the individual accounts are more or less than the financial benefits the cooperative obtained for the higher volume transaction or the profit margins of private traders in what remains a Financially Suppressed Economy in which the impoverished public has limited purchase power which in-turn severely limits the potential profit margins?

An example of how a competitive advantage can be financially lost is demonstrated in the experience of Cheetah Ltd. in Zambia.

It is possible with donor support to subsidize the cost of operating a cooperative down to where they can have a competitive advantage over the private traders. If this brings the costs to within the private traders’ profit margins, then it might work. However, if the subsidy brings the costs below the underlying costs of doing business there is no potential for sustaining the cooperative once donor funding ends, and it will collapse shortly after donor funds and facilitation support ends as happened to the Farmapine Cooperative in Ghana. It collapsed within a year after a MSc thesis article promoting it was published. This is one area where the detailed costs of business comparison between the cooperatives and private traders could effectively assist the cooperatives to become more effective in their overall business operations and to reduce their competitive disadvantage, but it is unlikely to provide a competitive advantage as there is just too much additional administrative activity to overcome.

Convenience: Cooperatives and other farmer organizations are normally less convenient than the competing private traders. The need to make advance commitments for inputs including financial arrangements or turn over produce on consignment for future sales and payment is considerably less convenient to the smallholder than simply going to the private trader and paying or receiving cash for the necessary goods. It may also go against a well rationalized out overall Financial Management Strategy the emphasizes retaining assets in kind as long as possible, but requires immediate cash when delivered. Also, the need to consolidate orders in advance of procurement introduces a concern for timing as there will be a desire to delay the consolidation until the last minute to assure all possible orders. It could then become a mad scramble to obtain and distribute the inputs in time to meet the crop needs, which usually have some critical timing components for maximum benefits. Similarly, on the selling side, holding commodities for more favorable prices that occur with time after harvest also can result in substantial post-harvest losses and reduced quality due to molds, other spoilage, rats, weevils, etc. Typically, without expensive fumigation treatment grain can be held for about three generations of grain weevils (2.5 to 3 months) before the weevil population becomes substantial enough to seriously lower quality. The weevils might also be easily removed by re-drying the grain in the sun which will force the weevils to seek the shade under the drying mat, but this is better done on the small quantities in home storage rather than the larger volume in a warehouse. In Madibira after an extensive survey of storage facilitates available in the community, once the crop was in, the farmers, rather than consign it to the cooperative, preferred to store it in their home, often taking up to 50% of the floor space while they waited for the prices to increase with time after harvest, or just the need for cash to pay bills like school fees, or make purchases from the market. This opens the question if farmers need a cooperative to obtain the hire prices associated with time after harvest or can they more easily obtain this through the private traders while storing their crops at home. The introduction of PICS (Purdue Improved Crop Storage) triple hermitically sealed bags maybe able to assist with insect control but are less effective against rats. They also tend to only be available through development projects that emphasis use of cooperative storage facilities.  

The overall importance of convenience to smallholders may be something worth evaluating with their limited cash flows. If you were a smallholder what discount on the cooperative offer price would you accept for immediate cash? In Zambia private traders offered a 20% discount on cooperative prices for immediate cash payment and developed a sufficient competitive advantage to handle a substantial majority share of the produce. It should also be noted that in pre-conflict Iraq with the government providing inputs with an 80% subsidy, private traders still held 30% of the market share based mostly on convenience.

Leverage Loan Payment: The other area where cooperatives can lose their anticipated competitive advantage is on leveraged loan repayments where the cooperative facilitates production loans to members through various credit clubs. Then the produce left on consignment with the cooperative is used first for repayment of any outstanding production loans for all club members prior to any member receiving any money for their produce. This is an open invitation for “side selling”. In Kenya an independent soybean producer tried to market her crop through a cooperative only to have it partly confiscated to cover someone else’s outstanding loan. She was highly disturbed because she had not taken out a loan, was never a member of a credit club, and only gotten involved with the cooperative for marketing. She then opted not to produce soybeans for the next several years, even though she was a member of a vegetarian community for which soybeans would be especially useful. Credit clubs are also somewhat insulting to farmers as it implies distrust and childish treatment of the smallholders.

Smallholders might be poor, and they might be poorly educated, but they are still intelligent, sensitive, business people and need to be respected accordingly. They also have various enterprises from which they receive money and might wish to make their loan payments later from an alternative income source. They should have the freedom to do so. Thus, while it is important to hold the farmers fully accountable for loan repayments, the time and means of making that repayment should be left to the farmers. Again, in the Copperbelt of Zambia the senior local staff of CLUSA (Cooperative League USA now National Cooperative Business Association) estimated that the only produce going through their sponsored cooperatives was that needed for loan repayments. The rest was side sold to private traders for cash at the 20% discount mentioned above. Under these circumstances side selling for a 20% discount should be considered an astute business decision on the part of the smallholder producers, and a reflection on just how poor the cooperative business model is. If the recent article in Forbes Magazine on Microfinance is accurate then it is time to rethink the importance of credit assistance and the means it is administered in smallholder communities.

Social Involvements: In addition to providing business support services cooperatives, particularly those initiated through development projects, tend to get involved in social concerns for the overall general welfare of the community. These are noteworthy and usually desirable. However, if the costs of these desirable social activities are to come from the cooperative, this will increase the overhead costs and reduce the cooperatives competitive advantage. Thus, before a cooperative can engage in social services it first must be a competitive successful business model. Also, to minimize the community members free loading on the social services it is necessary for the cooperative to have active participation of most of the potential members and not just a small minority, as is typically the case.

While this page only list a few areas where cooperatives can loss their envisioned competitive advantage with a little it is possible to delineate 14 Areas of Concern that could easily completely erode any benefits derived from working with a cooperative.

Last Revised: 28 August 2018

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