Future Of AID: Commitment To Cooperatives

FOA-CompetitiveMechanism for Assistance: Over the past couple decades the mechanism for funneling assistance to smallholders has been almost exclusive via farmer organizations, particularly farmer cooperatives. This now represents full career commitments of the senior individuals involved and the vested interest that implies. However, if one reads the documentation carefully there may be more commitment to this mechanism than to the beneficiaries. The question remains, are Farmer Organizations the most effective means of assisting smallholder, or do they represent a multi-billion dollar, multi-decade scandal based on slander? Furthermore, the latter claim may be easily supported with the reports readily available, not so much by what they contain, which is honest and accurate, but by what is omitted that would separate donor facilitators promotions from sustainable innovation that can continue beyond donor assistance. Such reporting may be the best example of how promotional reporting up the development hierarchy, and willingly accepted by the donors anxious to see some initial success, as mentioned earlier, can lead to the institutionalization of innovations well beyond their overall effectiveness in promoting sustainable poverty alleviation. While donors promoting farmer organizations as the primary mechanism for assisting smallholders may be looking beyond the initial business support services to provide various social benefits to its members or community, aren’t these social benefits dependent on farmers’ organizations first being a viable competitive business and second having a reasonable quorum of the beneficiary pool actively participating. In most case neither of these occurs. In the first case if the farmers’ organization is not competitive the members will simply side sell to the private traders. In the latter case if there is not a sizeable quorum participating then there could be considerable free loading on the social benefits by the non-members which will very quickly develop resentment from the members footing the bill.

Farmer Associations vs. Farmer Cooperatives: In proceeding with this analysis first, it might be desirable to distinguish between Farmer Associations and Farmer Cooperatives. Farmer Associations are primarily farmer organizations involved in information sharing and political empowering which most farmers in the USA and presumably other developed countries are members. Farmer Associations do not normally become involved in business activities providing support services to members. Such informational organization most likely can be useful and effective in assisting smallholder communities, provided they can obtain a reasonable quorum of those they claim to represent, and the representation is via consultation instead of individual representation and the political base in the association does not slip to become mostly representing larger farmers at the exclusion of the smallholders. Unfortunately in the context of developing country administrative environment the latter is more likely.

In contrast to Farmer Associations, Farmer Cooperatives are farmer owned business providing support services such as production inputs and marketing services and have to compete as a business. The concern is the competitiveness of the business model relative to the private competition, particularly in a financial suppressed economy, in which food can be produced and marketed with consumer prices that may average 1/3 rd those in the US, while some of the major costs incurred in marketing, such as imported fuel and most likely spare parts with import duties that can exceed 100%, may actually be at a premium to US prices. Under this economic environment it is possible that the marketing costs, as normally expresses as a percent of the consumer price, will be substantially higher than percent marketing costs occurring in developed countries, and still be fully accounted for. It is also reasonable that the marketing costs if expressed in the less frequent $/kg basis could be less than in the US and other developed countries. An example is the MSc thesis from Nepal where marketing through private traders the consumer price for tomatoes in Katmandu during the peak winter production was triple the farm gate price in the Terai, but the consumer price was only 1/5 th the US price. The thesis was able to fully account for the differences in legitimate costs with the traders’ income consistent with a mid-level civil servant. Thus, under these economic environmental conditions it may be extremely difficult for a cooperative to obtain the envisioned competitive advantage over the private traders, unless they are extremely careful to minimize their business overhead expenses.

Competitive Business Model: The question is “are farmer cooperatives a lean mean competitive business model”? The answer is, “not normally”. Cooperatives have tremendous ideological support based on their ownership and management model, and promise for profit sharing dividends. The ideological appeal also makes for good publicity and makes one wonder how much of our development efforts is based on ease of publicity. However, does all this translate into business efficiency? If you look at the US, the cooperative system commands less than 30% market share. This was also in a long term decline in both membership and market share, at least that was five years ago which is the last published information available. An inquiry to the USDA (United States Department of Agriculture) a year ago indicated they were not interested in updating the previous publication. Why?? Only the dairy cooperatives were able to command a majority market share. Often the actual retail charges of US cooperative are higher than other suppliers. For example a sheep rancher operating along the Front Range of Colorado within the service area of the AgLand cooperative claimed that AgLand’s prices were 10 to 20% higher then he could get from other supplies, and the only advantage of the cooperative was the end of the year dividends. That is, if the dividend exceeded the extra charges incurred during the year plus potential interest that could have been earned even if only in a checking account. If that is the case it sounds more like a lay-away savings plan then sound business operation. Other cooperatives in Eastern Colorado were experiencing similar price differential that were not compensated for by the year end dividends so members were diverting business to private suppliers. All in all this is not really a very strong business model. It is noted that the TV commercial promoting cooperatives such as the Touchstone Electric Cooperative in northern Colorado emphasizes the ownership management model and not the cost efficiency and savings. They allow that to remain implied without confirmation. As was the case of irrigation scheduling in an earlier section, in the US and perhaps other developed countries cooperatives a heavily promoted by governments and universities, but not as extensively utilized by the designated end users.

Application to Smallholder Communities: Now when this basically weak cooperative business model is moved to developing countries, there are some that are effective but these are usually organized by the farmers serving some of the larger more specialized producers with some high capital costs for post harvest processing. When the cooperative model is applied to smallholders as part of development projects, the business model tends to be modified further away from good business practices, particularly regarding the emphasis on production credits and providing credits to groups instead of individuals. The latter is effectively asking a smallholder, who is basically a private entrepreneur, to become a communal farmer. The justification for these development cooperatives is to prevent exploitation by the evil private traders. It is based on statements such as the following from Zambia:

Increased market opportunities to enable farmers to improve their produce (both in quality and quantity/variety) and prices by eluding unethical middlemen dictating exploitative prices to farmers will provide a conducive environment for sustained farmer participation and growth.

This is put forth without any evidence to substantiate it. Most likely such statements originated with hosts personnel and their vested interest in promoting government owned or managed support services, and continued even after such support services proved to be highly ineffective and privatized under donor pressure, but with the government retaining substantial or even majority shares in the residual organization such as ADMARC in Malawi. However, after being nominally privatized government officers continue to steer development projects toward ADMARC. Without evidence substantiating it, statements such as the one quoted above constitute slander and it would not take much of an attorney to organize some of the private traders into some form of class action litigation against individuals within donor or contracting organizations signing off, and thus taking legal responsibility, for documents containing such comments. The saving grace might be that development cooperatives usually don’t divert enough business away from the private traders to warrant their concern, particularly when members divert the bulk of material, contracted for the cooperative or stipulated by the by-laws, to the private traders.

Comparative Business Costs: Without such statements the justification for funneling development assistance through cooperatives would virtually disappear. Does anyone know of any verifiable and quantitative studies comparing the costs of doing business between private traders and development cooperatives? For example, for an input supplier such studies would have to include among other items:

initial costs of the inputs

transportation costs from supplier to village for distribution

distribution costs in adjusting the bulk volumes to that needed by the members

market volume

profit margin, and

individual income

Again, are these not fairly simple computations? How much time, effort, and expense would be required relative to the investment in organizing and promoting a independent supply and marketing system needed to funnel services through a cooperative? Would it take more than a couple weeks? Would such an analysis determine if the project would have a potential to be sustained beyond donor assistance? What does the absence of such simple basic computations say about the commitment to the smallholder beneficiaries relative to the publicity potential of the idealized intervention?

While the term exploitive is extremely difficult to define and quantify, as it may fit into one of those “I don’t know how to define it or quantify it, but I know it when I see it” statements. Under any definition it would be very difficult to demonstrate in the suppressed economy found it developing countries. The economic environment fully suppresses what private traders can charge, and profits, which can be razor thin, are mostly associated with business efficiency, with many of the private traders actually living near or below the international poverty level. Please note that as market volume goes down the minimum mark-ups have to go up to prevent the traders from slipping below the poverty level.

If anyone takes a close look at the evil private traders’ business model they might find the ultimate in business cost cutting efficiency in terms of keeping capital costs down, make the most effective use of the commercial transportation available, minimizing the personnel involved, particularly full time personnel, etc. This is most likely essential just to make a modest living consistent with the risk involved. One might also find it a highly fragmented business model, which makes for good competition but forces the minimum mark-up to be somewhat high. One would think the first thing one does in setting up a business model such as a cooperative it to evaluate the competition, to see what improvements can be made, if any.

Unanswered Questions: Instead there appears to be an assumption of a competitive advantage, and then a lot of promotional reporting that is accurate in what it contains, and is most likely essential to appease the donors and assure future funding in terms of project extension or future projects. However, most of the reporting avoids those issues that will separate donor and advisors’/facilitators’ promotions from sustainable innovations that will continue beyond donor assistance. It appears impossible to find answers to the following basic business questions:

1. As mentioned above, the verifiable and quantitative costs of doing business comparison between the development cooperatives and the competing private traders. This would have to extend all the way to the farm gate and not end at the cooperative, thus avoiding the overhead costs of the cooperative, and inflating the perceived benefits to the farmer. The overhead costs should be only the sustainable overhead costs, mostly the local hired staff, which would be needed to sustain the cooperative without the external support and expatriate facilitation.

2. The percent of the total beneficiary pool actually involved in the cooperative? If this is less than 50% or some other reasonable target that would be acceptable to the tax payers that are ultimately providing the public funds, then some explanation as to why the rest are not participating should be included.

3. The total market share of the cooperative relative to that of the competing private traders.

4. The overhead costs, commissions, surcharges and other charges the cooperative charges it members that are needed to meet the cooperative costs, or that will at least be needed once the initial donor assistance and possible subsidizes end.

5. The percent side selling of goods contracted or by-law obligated that are deliberately diverted to the private traders.

What does the side selling represent? Most of the time it is attributed to a breech in contract on the part of smallholders, but why would they do that unless they were getting a better deal elsewhere? Thus, doesn’t the side selling, that often constitutes the majority of the produce, really represent the failure of the cooperative business model to meet the farmers expectations, and the farmers, who were justifiably not involved in the project identification and design, possibly leveraged into accepting it as part of some initial participatory process in which nothing else was open for consideration, finally getting to exercise their prerogative and simply taking their business elsewhere? Also, how much of this can be attributed to not wanting to pay their neighbors share on any group loans? Are they acting any different than anyone else? In the end, does the extent of side selling really represent the ultimate in unleveraged participatory input in which the farmer beneficiaries simply walk away? Why, in light of the extensive side selling are there no adjustments in the cooperative business model?

It also must be noted that if the development effort is expecting to provide social benefits to the community from cooperative’s profits then no benefits will be available from goods that are side sold.

6. How much of a discount from what the cooperative receives are the farmers accepting from private traders for an immediate cash settlement. If the sustainable overhead were factored in, would that actually be to the farmers’ financial advantage? Again it seems the importance of cash to smallholders is well recognized, so why are the donor promoted cooperatives not making any adjustments in their business model?

7. How about all those dividends promised in the by-laws? How come they are rarely mentioned in the reporting as being paid or even projections of when they will be paid?

8. As the true test of a cooperatives success, how many have survived for two or more years after donor funding ends? Two years usually represents two full agriculture cycles and should be sufficient to sort out any problems in transferring from donor assistance to non-assistance. If they have survived, what have been the adjustments that allowed them to survive, that could then be used to improve the overall business model of the cooperatives?

9. Of course, the ultimate test of effectiveness is, how many cooperatives have been spontaneously initiated in neighboring communities using the development cooperative as a model? If the model is so good there should be fairly high percent of spin-offs.

Please look at any quarterly progress or other reports available and see how these issues are addressed. Are they addressed at all, or if addressed are they comprehensively evaluated, or skillfully danced around? Perhaps project officers administering development projects that involve voluntary cooperatives should ask the respective team leaders to respond to the above questions. It might save some embarrassment if their stewardship of the public fund entrusted to their care is publicly questioned.

Promotional Reporting: An example of how skillful promotional reporting can be is the Choices article on the Farmapine Cooperative in Ghana. This is a World Bank funded pineapple marketing initiative. The article is based on the MSc thesis by the author. In the brief discussion on sampling techniques he mentions he interviewed 60 pineapple producers. Thirty were sampled from the 272 Farmapine members and the other 30 from the “hundreds” of non members. What does the word “hundreds” imply? What would that imply about the percent of the beneficiary pool actually participating? However, in an email exchange with the author the word “hundreds” was an editorial adjustment requested by the author’s academic advisor from “thousands”. What does that do to the percent participating? In that case it is unlikely that the cooperative was able to exert any substantial influence on the overall marketing of pineapples. Further on the article mentions the unreliability in working with smallholders because they were selling to private traders offering a better deal. They didn’t mention if immediate cash payments were involved. No mention was made of the percent side sold, but left it up to the reader to interpret. It had to be substantially enough to justify mentioning it as a problem. The article does some elaborate computations on the benefits to the cooperative, but makes no mention of the overhead costs needed to operate the cooperative thus making it unclear if the accounting stopped at the cooperative or extended to the farm gate, or were covered by the donor subsidies, and thus Farmapine as a cooperative would not be sustainable once donor funding and facilitation ended. Wouldn’t it be interesting to ask some of the competing private traders what their opinion is of Farmapine or other development cooperatives, and if they consider them a competitive threat to their business?

If these questions represent the difference between a donor’s promotion and a sustainable innovation, why are they not part of the routine quarterly progress reports to the donor? The implication is the information is never collected, or if it was, it was not favorably supporting the cooperatives, and was cut out as too embarrassing. If the information was collected and supportive of the cooperatives, it would certainly be highlighted in the progress reports. Why are the donors not taking the lead and insisting this information be included in the progress reports? Also, why is it not a requirement in the RFPs to make the initial analysis of the competition, and provision to revise the program if necessary? Does this justify the statement about the four layers of isolation between donor and beneficiaries mentioned in a previous section?

Beneficiaries vs. Mechanism: Without answers to the above set of basic business questions, what are the prospects for the cooperatives to continue after donor assistance ends? Isn’t part of the project design a favorable projection on the sustainability of the innovation past donor assistance? If there are no real intentions on seeing this come about, is the use of cooperatives for funneling assistance at least bordering on scandal? Also, the lack of information on the above basic business questions clearly implies that despite all the rhetoric promoting smallholder assistance, there is very little, if any, sincere commitment to assisting the smallholders. Instead, the commitment is almost exclusively to the mechanism by which the assistance is to be provided, that has to be imposed on the smallholder regardless of how weak the overall business model and extent the beneficiaries are operating around it. If there was a sincere commitment to assisting the smallholder, this information would have been forthcoming a couple decades ago, the limitation of the cooperative mechanism would have been recognized, and the rural poverty alleviation effort would have moved on to find something more effective, mostly likely by working with those evil private traders that just happen to be providing the farmers with the most cost effective support services. Does any one have any verifiable data to contradict this statement?

Last Revised: 4 July 2007 .

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