Producer Organizations and Cooperatives: Is There a Competitive Adantage?

ZambiaGroup

With the overall Financially-Suppressed Economies in which most smallholder producers operate, the impoverished general public spends most of their income or crop production just to meet their subsistence needs. The result is a general public with limited buying power which exerts substantial downward pressure on Consumer Prices so, that for goods produced in-country, the consumer costs are only 1/3rd to 1/5th of the USA prices. Under such conditions it is essential that the costs of doing business be kept to a very minimum. Since most rural poverty alleviation development projects are funneled through producer organizations and cooperatives as mandated in the original request for proposals, the question is, “in working with producer 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, as well as below the financial benefits obtained from bulking production for sale and consolidating inputs for purchase, and make the services equally as convenient as the cash on delivery systems used by the private traders”? If not, then funneling development through producer organizations could unintentionally be providing a major disservice to the smallholder producers even forcing them deeper into poverty. Also, often the producers’ organizations are interested in providing some highly desirable social services beyond the business services. However, how often are these social service dependents on the producers’ organization being a sufficiently profitable business to fund the social activities, as well as needing a substantial majority of the beneficiaries actively participating to prevent extensive freeloading on the social benefits by non-members.

The funneling of assistance to smallholder producers through cooperatives has now been institutionalized for over three 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. While these benefits are available and highly promoted, they are rarely quantified. Given the financially suppressed economy mention above and the limited buying power of the general population putting downward pressure on consumer prices how much can these unquantified financial bulking/consolidating benefits be? What would be reasonable? Five percent, 10%, could it be as high as the 35% the Central Growers Association in Kitwe, Zambia mention as their overhead costs. With that overhead cost the Association, which has monopoly control over the tobacco auction floor, and that is all the business they receive. All other crops produced by their members were side-sold to private traders in contradiction to the association by-laws.

While a producer organization can derive some financial benefits for bulking sales and consolidating input purchases, there are administrative costs associated with obtaining these benefits. Most of this would be associated with hiring external staff including general managers, accountants, warehouse managers, and casual labors as well as maintain warehouse storage facilities, to hold the bulked goods until sold, housing for externally hired staff, operating and maintaining any vehicles, and including adsorbing any spillage or pilferage loses. Such cost must be substantially lower than the unquantified financial benefits to still allow the promised dividend payments at the end of the season, if the cooperative is to be competitive and sustainable beyond donor support as normally specified in the project documents, and for which the failure to continue beyond external assistance would constitute non-compliance by the implementing facilitating contractor and subject the contractor to possible litigation to refund the money squandered on projects with predictably high potential for failure.  Is this realistic in the overall economic environment described above that could severely limited financial benefits for bulking and consolidating? If the administrative overhead costs are greater than the unquantified benefits what are the management options to balance the budget? Is this only possibility reducing what is paid to the farmer, lowering their limited profit margins, and forcing them deeper into poverty?

The need for producers’ organizations is 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, there is a competitive advantage in working through cooperatives. Or is the overall financially-suppressed economy with the limited the buying power of most of the population sufficient to prevent excessive exploitation by private traders? Perhaps what has been decreed to be a predator-prey relationship is more a Symbiotic relationship.

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 inquiries 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 bulk of their goods and services to pirate or “coyote” traders, as well as difficulty in being sustained without external facilitation. Since this E-forum continued probing into various forums, webinars, etc. continue to get no replies and implying no such comparative business studies have been made, or if made the results are too embarrassing to be published. The producer organizations are simply declared to be competitive and advantageous for the smallholder farmers!!

This then leaves the question, just on pure historic probabilities over the past 30+ years of relying on producer organizations to funnel assistance to smallholders, what are the chances of a producer organization, organized by a development project for poverty alleviation of smallholder farmers, surviving for two years beyond after eternal financial support and technical facilitation have ended. Would <5% be a reasonable assumption?

In the absence of such studies or the publication of such studies, it is possible that funneling development assistance through producer organizations may unintentionally impose on the smallholder beneficiaries the:

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

support service available.

When this happens smallholders simply exercise 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. On close analysis the market volume actually going through the producer organization is frequently little more than in-kind loan repayments with the bulk of business being side-sold.

As one reviews the unverified vilification of private service providers to justification the emphasis on producer organizations to assist smallholder beneficiaries, one must wonder what is the source? Is it the host government and its civil officers, who may have a vested professional interest in promoting public sector institutions as well as potential for personal benefits to be derived from facilitating farmers participating in at least state sponsored producer organizations? This could easily be receiving gratuities for approving purchase of such deliberating scarce inputs like fertilizer and certified seed. However, isn’t such unsubstantiated vilification slander and subject to litigation. If development personal repeat this slander as fact or include it in project documentation as a justification for use of producer organizations, are they not equally Liable for its Accuracy as well as any funds for projects approved and implemented based on this slander when the projects fail?

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, producer organizations 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 producer organizations. However, from a business perspective, which is the perspective most smallholders will be mainly concerned with, if producer organizations 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 traders as the default providers. In reviewing the business model of the cooperative system with a little effort it is possible to quickly list up to 14 Point of Concern where the producer organizations model, as used in development projects, will lose the envisioned competitive advantage to the competing often vilified private traders. This should be sufficient to offset any negotiated advantage for group bulking of inputs or produce. When this happens the development producer organizations 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 but fully unaware of how quickly their efforts collapsed once they left.

Those deriving pleasure from working with smallholders through producer organizations must consider if the enjoyment they are experiencing is because of the producer organizations 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 operational 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 producer 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, appeasement orientated 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 and potential for pushing the beneficiaries deeper into poverty. Some of this can be through some Deceptive Bordering on Dishonest reporting. Such reporting will accurately discuss the limited positive contributions the programs have made while overlooking such items:

  • the percent 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. This effectively allocates the cooperative overhead costs as a financial benefit to the farmers they will never see. Meanwhile, vilifying the profits of the private trades, which are reported to the farm gate. Not a valid objective comparison. What are the possibility of such promotional reporting resulting in Major Liabilities & Class Action Litigation for both slandering the private trader and misrepresenting the success of the programs?

Unfortunately, the specification of producer organizations in RFPs implies the mechanism for assisting the smallholders is more important than 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 producer organizations two years after all donor facilitation ends. This would include at least two agriculture cycles and enough time to see if the producer organizations have a potential for long term sustainability and what forms they may have evolved into to make them more sustainable.

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 been around for a century or more and when created made some major contributions to making certain farmers received a fair return on their crops etc. However, as the private providers became more competitive the role of cooperatives declined until today they 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, the federal government department responsible for promoting and assisting cooperatives, 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 approaching 25 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 a 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 and wish to follow-up on this webpage are welcome to respond to the Request for Information questionnaire, and send me the results.

Last Revised: 28 August 2018

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