Many pages and links in this web site are devoted to taking a closer look at the overall effectiveness of the cooperative system for funneling assistance to the smallholder producers. The basic concern is that the cooperative business model, while it may be social ideal, desirable, and thus politically correct, is just administratively too cumbersome to effectively Financially Compete with Private Traders in the overall Financially Suppressed Economy encountered in most developing countries that already substantially suppresses profit margins. It is also highly probably the costs for managing the administratively cumbersome cooperative business model will quickly exceed the envisioned financial benefits from bulking produce and consolidating input as well as exceeding the profit margins of competing private service providers. This would result in compelling those farmers relying on the cooperative to accept lower prices than what the private traders offer, this in turn would lower the farmers’ profits and force them deeper into poverty.
The cooperatives model of consigned sales may also be highly inconvenient in a society that emphasis clean cash transactions, and incompatible with the basic Financial Management Strategy that emphasis retaining assets in kind if possible and only monetizing them, as needed, to meet immediate cash requirements. This appears a fairly well conceived Financial Management Strategy for an impoverished society with limited banking facilities, and the need to reduce temptation of cash in the “cookie jar”. The question comes, if this is the case, why does the cooperative model persist in the development effort.
Vilifying Private Traders – Slander!!
The use of the cooperative model was initiated in response to concerns that private traders were exploiting the smallholders by selling inputs at inflated prices and buying produce at suppressed prices. This is done through blanket vilification statements such as the following taken from the RFP of a recent Zambia project:
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.
Such statements appear to be accepted at face value and never really validated to determine how much of the possible tripling of the nominal farmgate price represents business costs vs. profit margin. Typical business costs that need to be consider are any repackaging needed, the casual piece meal labor to do the repacking, transport costs including any informal road taxes, market access fees, etc. Once the business costs are factor are the buying and selling prices are reasonable, particularly for remote off-tarmac areas where transportation costs could Transparently Triple compared to highway travel. Such a simple investigation could easily verify if the proposed cooperative business will have a sustainable competitive advantage over the competition once external support and subsidies end, or if will be too cumbersome and push the farmers deeper into poverty.
Most likely the vilification originated with host country officials trying to promote public sector support services with a potential vested interested in them for personal financial benefits as appears to occur in the AfDB funded irrigation project in Madibira, Tanzania. Such vilification, if not substantiated, could constitute slander and exposure those legally responsible to Substantial Slander Litigation by an easily organized association of private traders with additional class action litigation to refund the treasury for squandering money on projects based on false assumptions, and vertically no sustainability potential, once external assistance ends. It should also be noted that while someone such as a host country official might have proclaimed this as fact, once individuals as part of a implementing NGO repeated it they are responsible for the accuracy and liable to anyone slandered.
It would be difficult to image that most those involved in working with development cooperatives, particularly those contracted to implement projects and in direct contact with the beneficiaries are not aware of the limited effectiveness of the cooperative model, and both willing and capable of looking at alternatives, if required or given the opportunity to do so. They have to be well aware that the projects are attracting only a minority of the Potential Beneficiaries, and often even those participating are diverting the bulk of their business elsewhere. Most likely only consigning to the cooperative enough produce to cover their input loan obligations and astutely side-selling the remainder to avoid additional consigned goods being confiscated to pay a neighbor’s debt, as well as getting a better and much more convenient financial return. They also must be equally aware of the extensive facilitation effort needed to sustain the cooperatives even while benefiting from external facilitation and financial support, the limited attendance at cooperative meeting as well as the degree to which the facilitating NGO dominates the participatory process to leverage decisions toward what they are offering, and turnover of “elected” leaders. Perhaps the reason a business model comparison between private trader and donor promoted cooperative is not readily done is tied to the Overall Development Process which emphasizes the donor conceptualization of what ideally should be done, specifying in detail what is to be done, with only limited if any direct involvement of the beneficiaries, and with limited opportunity for innovations. This is then reinforced by the implementing contractors “spin” reporting as the best way to appease donors and assure project extensions and success in bidding for future projects. This also represents a vested interest in extending the facilitation process, if possible, for the job security it represents. However, it does nothing for poverty alleviation of the beneficiaries and could easily force them deeper into poverty.
Deceptive (Spin) Reporting
Ultimately, this results in some deceptive, bordering on dishonest, reporting in progress reports and periodicals of the effectiveness and contributions projects have on their beneficiaries. Typically this reporting will overlook the Basic Business Parameters, that would determine not only the willingness of farmer/beneficiaries to participate in the program but more important the extent they are relying on the project for the services offered. As such the spin reporting represents a far greater commitment to the mechanism by which smallholders are to be assisted, then to improving the economic well-being of the intended beneficiaries, who are reduced to being mere pawns in the continuation of the “Great Game” as so well defined a century ago by Rudyard Kipling in his classic book Kim.
Disregarding Overhead Costs: The most common means of deceptive reporting is to disregard the overhead costs for operating a cooperative that, for the cooperative to be sustained beyond external donor funding and facilitation as normally stipulated in the initial project documents, must be charged back to the members. Can any business operate without incurring operating costs that must be taken from the mark-up and profit margins? Frequently, in development projects the operating costs are co-mingled with the facilitation costs needed to initiate the project. These may need to be disaggregate as much as possible and reported separately. These operating/overhead costs can be extensive and greatly exceed the financial benefits of cooperative membership. When that happens attempting to continue the cooperative after donor funding ends, will reduce the money farmers can receive for good consigned to the cooperative, which also reduces the farmers profit margins, and force them deeper into poverty. Thus, while the rhetoric is poverty alleviation the model is poverty enhancement.
On occasion cooperative operating costs are conveyed as being distributed to the farmers as a financial benefit. Something the farmers would never realize unless artificially subsidized by the donor funded facilitation effort, and prevents the project initiated cooperative from continuing without external funding and facilitation. Such reporting practices take what is basically a deceptive report and makes it a dishonest report.
An example would be the bag of fair trade coffee shown in the figure. Here the pound of fair trade coffee indicates the growers receive $1.55 of the $8.95 retail price for roasted beans sold in the USA. According to most English semantics, the term grower implies the farmers who grew the coffee trees, and not an intermediary representing the farmers such as the cooperative they are mandated to be members. However, this is fair trade and mandated to go through a cooperative. Thus, most likely this $1.55 is what export buyer paid the growers’ cooperative for green bean upon delivery to the exporter’s warehouse, most likely at the nearest seaport or major city. What else could it be? To determine what the growers really received it would be necessary to back up the transportation costs between the point where the coffee was purchased to the growers’ cooperative in the village and including any off-tarmac transport that can cost substantially and transparently more than Triple the paved highway t/km rate. In addition, any processing cost undertaken by the cooperative instead of the farmers in getting from the harvested cherries to parchment coffee and finally to marketable green bean coffee. Typically, the hulling to remove the parchment layer requires expensive machinery that individual smallholder farmers cannot afford and they either sell their coffee as parchment or rely on a cooperative to hull it to green bean. Other costs would be the overhead costs for operating the cooperative that would include employees’ salaries and fringe benefits, if any, storage losses including pilferage, maintenance of any physical facilities including vehicles, capital depreciation of any equipment, utilities, etc. as described on Another Page. Finally, since it is fair trade there will be a social tax designed to assist with community improvements. The bottom line might be that the growers will be very fortunate if they received $1.00 of the $1.55 claimed to be their portion. This of course with the usual consignment delays etc. associated with the cooperative business model. With all this how much easier would it be to just to side-sell the parchment coffee to a private trader for immediate cash and be done with it?
While the illustration above may be a more obvious indication of the deceptive bordering on dishonest reporting, it is almost universal in development reports to overlook the cooperative operational overhead costs. This was done in the case of the World Bank financed Farmapine Cooperative in Ghana that was trying to extend the value chain of pineapples for direct export to Europe. The article makes an extensive but bewildering effort to demonstrate a financial benefit for the members, but also acknowledges considerable side-selling for a better price but using the proxy statement concerning farmers not honoring their contracts. The result was that one year after the article was published the cooperative collapsed under a mountain of debt. In reality, the cooperative only represented about five percent of the smallholder pineapple producers and given the extent of side-selling a considerable smaller market share. Thus, the project was virtually a non-entity in the pineapple industry of Ghana even for the smallholder component of the industry.
Use of Aggregate Data: Another way of spinning reporting to give a more favorable impression and hid the reality is to concentrate on aggregate data. This was done in another fair trade coffee report from Ethiopia. It contains the following passage:
The Oromia Coffee Farmers’ Cooperative Union, launched in June 1999, requested and received permission from the government to become a direct exporter of its members coffee bypassing the central auction and giving more control and market share to the producer. With ACDI/VOCA assistance, the union – representing 21,891 coffee growers – last year exported 181 tons of coffee directly to specialty buyers in Europe and the US.
While as written it sounds impressive, but by doing the simple arithmetic of dividing the number of members (21,891) by the market volume (181 tons) will indicate only 8.3 kg/member. That is really a trivial amount. Furthermore, the actual benefit to the farmer is at most the price difference between the Fair Trade preferential price and the open market price offered by private traders. What would that be? Perhaps it would be at most US$ 0.50 per kg or a total benefit of only US$4.00/member. In addition, if the average smallholder production is 450 kg/ha and they manage only 0.5 ha of coffee, the expected production per member farmer would be 225 kg, for which the 8.3 kg/member would represent only 4% of the typical farmers production and represent an area of only 200 m2 and perhaps only 60 plants. What happened to the rest? Was it side-sold to the vilified private traders who actually provided the farmers a better financial deal than the cumbersome cooperative. Thus, the question is then how many of the 21,891 members are really active members vs. just having their name kept on the books. The final question is how someone can have the audacity to publish as a success a program that accounts for only 4% of the produce and provides an annual benefit of only US$4.00. It appears the overall article is more interested in seeing how many members can be recruited then how well they are served. Unmentioned is how the value of the 181 tons of marketed coffee compares with any input loan in-kind repayments, which is often the limit of produce committed to a cooperative, a possible quick index of extent member farmers rely on the cooperative for the services offered.
Market Share – Only In-Kind Loan Repayments: Again, a careful analysis of reports promoting the cooperative model for poverty alleviations could show farmers relying on the cooperative system for little more than the in-kind repayment of input loans amounting to perhaps 10% of their marketed crop and side-selling the bulk. This is well illustrated for Thailand in an article coming from Kesetsart University intended to promote cooperative for Poverty Reduction that I was requested by an internet forum based in Laos to evaluate. Shifting through all the data, the article lists the overall Thai population at 65 million, of which 40% or 26 million are involved in farming. Of these 6.2 million (9.5% of total population) were members of agricultural cooperatives representing only 23% of the farming community. The agriculture cooperatives assisted their members in marketing 59,448 million Baht of produce. However, using a separate FAO report providing farm income during that time period, which would be the potential value of produce which, according to most cooperative by-laws, should have been marketed through the cooperative, was 131,193 Baht/family. Thus the 6.2 million members should have marketed some 813,397 million Baht through the cooperatives. Thus, the farmers only relied on the cooperative to marketed only 7% (59,448/813,397) of their marketed production. Not really a sufficient amount for major poverty reduction. However, the 59,448 million Baht of marketed produce is very consistent with the 52,805 million Baht of cooperative purchases. Thus, it appears the farmers were relying on the cooperative only for procurements of inputs and consigning only sufficient produce to cover the repayment of their input loans, and then side-selling the bulk of their produce. One can only assume that if consigning only what is needed for loan repayment the complex accounting for initial payments and delayed dividends payments become mostly an internal accounting exercise in the cooperative and a mute issue to the farmers, as little money actually was exchanged.
While the detailed example is from Thailand, it is consistent with interview comments from the local staff of CLUSA in Zambia claiming the cooperatives they were sponsoring only marketed the equivalent of member loan repayments.
The ultimate result is that cooperatives originating as part of development projects and directly competing with private service providers require continuous extensive facilitation and financial subsidies by donors and advisors just to remain open for business. An example would be another periodical report praising the coffee Fair Trade program in Haiti that required five NGO to continuously facilitate the program which had to be supported by some taxpayers somewhere. Even then, perhaps somewhat better than the case in Ethiopia, some simple computation would show that the average member of the cooperative marketed less than a standard 60 kg bag of green coffee through the Fair-Trade program. This was estimated to represent only 100 coffee plants and 1/20th of a hectare of land. Even by smallholder standards this does not appear realistic, and either most of the members have become inactive or most of the coffee is being side-sold.
Finally, virtually all cooperatives initiated as part of a development project collapse almost immediately when the donor assistance ends, as happened to the Farmapine Cooperative mention above in Ghana. That seems to be a common result for the development cooperatives including the one pictured at the top of the page. This was a cooperative initiated as part of a FAO sponsored women’s income generation project for processing cassava to gari, a dried less perishable form of cassava consumed extensively in West Africa. The cooperative is now locked with all the equipment inside. It does not appear to have processed any cassava for months. It took more than 30 minutes just to find the person with the key to unlock it for the consultant’s visit. Meanwhile, across the road, 100 m away, a small private family enterprise is processing cassava into gari at full capacity. The proprietress could easily have been a member of the defunct cooperative. Is also interesting to note the photo at the top of the page and accompanying one of the apparently successful family enterprise along with all the commentary that the farmers may be more interested in out-sourcing the value added then having it done by a cooperative were expunged from the Submitted Version of the consulting report and replaced with commentary proclaiming this was an ideal opportunity to introducing a cooperative. This allow the final version to be more politically correct, assure the continuation of the current approach, discouraging any project evolution, but what does it do for the plight of the smallholder producers, and their interest in out-sourcing this value-added component of the value chain? It might be worth noting that most smallholder farmers are well overextended and taking time to process goods through a cooperative, would be a distraction from their primary concern of crop management. Thus, avoiding cooperative involvement in favor of crop management might be an astute business decision.
Class Action Exposure
The degree to which this deceptive, bordering on dishonest, reporting is pervasive throughout the agriculture development effort for smallholder producers so that it involves virtually all projects, all donors, and all countries, as noted in all the cases mention represent different donors and different counties, has to result in substantial exposure to Class Action Litigation from the funding tax payers, against the contractors who write the reports as well as the donor’s project and contractor officers that accept the reports and even encourage the deceptive reporting. Why should tax payers continue to pay for projects requiring mechanism with a clear history of very limited success and sustainability? Just on historic probabilities what percent of cooperatives or producer organizations survive for 2 years, 2 complete agriculture cycles, beyond donor support and facilitation? Would it be less than 5%?
The concern for the misrepresentation, lack of including basic business parameters that would separate projects that are fully appreciated by the beneficiaries from those that are more publicity stunts, and spin reporting has resulted in an inquiry to the USAID Office of Inspector General with the assistance of the good offices of former Senator Mark Udall of Colorado. The inquiry has been assigned case number 12-0189 and produced a formal reply from the Assistant Administrator for Audit. The reply acknowledged that the information was important, not available and indicated intention in the future to collect the business parameters data but was concerned that collecting the data would be costly. How much the reply was simple an administrative ploy to put off an inquiry and how much a serious effort for future project efficiency remains to be seen. Anyone who has seen any effort to include the business parameters I would appreciate hearing from them or anyone wishing to follow up on the are welcome to do so.
If anyone has an alternative to litigation to bring forth the necessary changes in these programs, please contact the web site organizer.