Agricultural cooperative

Cooperatives as a form of business organization are distinct from the more common investor-owned firms (IOFs).[1][4] Both are organized as corporations, but IOFs pursue profit maximization objectives, whereas cooperatives strive to maximize the benefits they generate for their members (which usually involves zero-profit operation). Agricultural cooperatives are therefore created in situations where farmers cannot obtain essential services from IOFs (because the provision of these services is judged to be unprofitable by the IOFs), or when IOFs provide the services at disadvantageous terms to the farmers (i.e., the services are available, but the profit-motivated prices are too high for the farmers). The former situations are characterized in economic theory as market failure or missing services motive. The latter drive the creation of cooperatives as a competitive yardstick or as a means of allowing farmers to build countervailing market power to oppose the IOFs.[1] The concept of competitive yardstick implies that farmers, faced with an unsatisfactory performance by IOFs, may form a cooperative firm whose purpose is to force the IOFs, through competition, to improve their service to farmers.[4]

Headquarters of Hokuren Federation of Agricultural Cooperatives in Sapporo, Japan

A practical motivation for the creation of agricultural cooperatives is related to the ability of farmers to pool production and/or resources. In many situations within agriculture, it is simply too expensive for farmers to manufacture products or undertake a service. Cooperatives provide a method for farmers to join in an 'association', through which a group of farmers can acquire a better outcome, typically financial, than by going alone. This approach is aligned to the concept of economies of scale and can also be related as a form of economic synergy, where "two or more agents working together to produce a result not obtainable by any of the agents independently". While it may seem reasonable to conclude that the larger the cooperative the better, this is not necessarily true. Cooperatives exist across a broad membership base, with some cooperatives having fewer than 20 members while others can have over 10,000.

A smallholder coffee farmer in Colombia contributing her coffee to an agricultural cooperative. Cooperatives give small farmers an opportunity to be more competitive in markets, especially commodity crops like coffee and cocoa where many of the purchasers are large businesses who can manipulate markets.

While the economic benefits are a strong driver in forming cooperatives, it is not the sole consideration. In fact, it is possible for the economic benefits from a cooperative to be replicated in other organisational forms, such as an IOF. An important strength of a cooperative for the farmer is that they retain the governance of the association, thereby ensuring they have ultimate ownership and control. This ensures that the profit reimbursement (either through the dividend payout or rebate) is shared only amongst the farmer members, rather than shareholders as in an IOF.

As agricultural production is often the main source of employment and income in rural and impoverished areas, agricultural cooperatives play an instrumental role in socio-economic development, food security and poverty reduction.[5] They provide smallholder farmers with access to natural and educational resources, tools, and otherwise inaccessible marketplaces.[6] Producer organisations can also empower smallholders to become more resilient; in other words, they build the capacity of farmers to prepare for and react to economic and environmental stressors and shocks in a way that limits vulnerability and promotes their sustainability.[7] Research suggests that membership in a producer organisation is more highly correlated with farmer output or income than other standalone investments such as training, certification, or credit.[8]

Hays Coop elevator and offices, one of hundreds[9] of grain-oriented agricultural marketing coops in the U.S. Interior Plains.

In agriculture, there are broadly three types of cooperatives: a machinery pool, a manufacturing/marketing cooperative, and a credit union.

• Machinery pool: A family farm may be too small to justify the purchase of expensive farm machinery, which may be only used irregularly, say only during harvest; instead local farmers may get together to form a machinery pool that purchases the necessary equipment for all the members to use.
• Manufacturing/marketing cooperative: A farm does not always have the means of transportation necessary for delivering its produce to the market, or else the small volume of its production may put it in an unfavorable negotiating position with respect to intermediaries and wholesalers; a cooperative will act as an integrator, collecting the output from members, sometimes undertaking manufacturing, and delivering it in large aggregated quantities downstream through the marketing channels.
• Credit Union: Farmers, especially in developing countries, can be charged relatively high interest rates by commercial banks, or credit may not even be available for farmers to access. When providing loans, these banks are often mindful of high transaction costs on small loans, or may refuse credit altogether due to lack of collateral – something very acute in developing countries. To provide a source of credit, farmers can group together funds that can be loaned out to members. Alternatively, the credit union can raise loans at better rates from commercial banks due to the cooperative having a larger associative size than an individual farmer. Often members of a credit union will provide mutual or peer-pressure guarantees for repayment of loans. In some instances, manufacturing/marketing cooperatives may have credit unions as part of their broader business. Such an approach allows farmers to have a more direct access to critical farm inputs, such as seeds and implements. The loans for these inputs are repaid when the farmer sends produce to the manufacturing/marketing cooperative.

The first agricultural cooperatives were created in Europe in the seventeenth century in the Military Frontier, where the wives and children of the border guards lived together in organized agricultural cooperatives next to a funfair and a public bath.[10]

The first civil agricultural cooperatives were created also in Europe in the second half of the nineteenth century. They spread later to North America and the other continents. They have become one of the tools of agricultural development in emerging countries. Farmers also cooperated to form mutual farm insurance societies.

Also related are rural credit unions. They were created in the same periods, with the initial purpose of offering farm loans. Some became universal banks such as Crédit Agricole or Rabobank.

Agricultural supply cooperatives aggregate purchases, storage, and distribution of farm inputs for their members. By taking advantage of volume discounts and utilizing other economies of scale, supply cooperatives bring down the cost of the inputs that the members purchase from the cooperative compared with direct purchases from commercial suppliers. Supply cooperatives provide inputs required for agricultural production including seeds, fertilizers, chemicals, fuel, and farm machinery. Some supply cooperatives operate machinery pools that provide mechanical field services (e.g., plowing, harvesting) to their members.

Agricultural marketing cooperatives are cooperative businesses owned by farmers, to undertake transformation, packaging, distribution, and marketing of farm products (both crop and livestock.)

India

Sugarcane weighing at a cooperative sugar mill in Maharashtra, India

In India, there are networks of cooperatives at the local, regional, state and national levels that assist in agricultural marketing. The commodities that are mostly handled are food grains, jute, cotton, sugar, milk and nuts[19]

Dairy farming based on the Anand Pattern, with a single marketing cooperative, is India's largest self-sustaining industry and its largest rural employment provider. Successful implementation of the Anand model has made India the world's largest milk producer.[20] Here small, marginal farmers with a couple or so heads of milch cattle queue up twice daily to pour milk from their small containers into the village union collection points. The milk after processing at the district unions is then marketed by the state cooperative federation nationally under the Amul brand name, India's largest food brand. With the Anand pattern three-fourths of the price paid by the mainly urban consumers goes into the hands of millions of small dairy farmers, who are the owners of the brand and the cooperative. The cooperative hires professionals for their expertise and skills and uses hi-tech research labs and modern processing plants & transport cold-chains, to ensure quality of their produce and value-add to the milk.

Production of sugar from sugarcane mostly takes place at cooperative sugar cane mills owned by local farmers. The shareholders include all farmers, small and large, supplying sugarcane to the mill.[21] Over the last sixty years, the local sugar mills have played a crucial part in encouraging rural political participation and as a stepping stone for aspiring politicians.[22] This is particularly true in the state of Maharashtra where a large number of politicians belonging to the Congress party or NCP had ties to sugar cooperatives from their respective local areas.[23] Unfortunately, mismanagement and manipulation of the cooperative principles have made a number of these operations inefficient.[24]

These are cooperative farms, jointly owned or managed by a cooperative society.

• Winemaking cooperative

• McBride, Glynn (2014), Agricultural Cooperatives: Their Why and Their How
• Derr, Jascha (2013), The cooperative movement of Brazil and South Africa
• Zvi Galor