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The challenge of entrepreneurship in agricultural cooperatives

Roldan Muradian, Ellen Mangnus | October 07, 2009

Roldan Muradian and Ellen Magnus discuss some of the current entrepreneurial challenges faced by producer organizations, including building strategic alliances with the development and private sectors.

Collective action seems a logical strategy to achieve the integration of smallholders into dynamic markets. Organizing small farmers into producer organizations has long been a common development intervention to increase their bargaining power vis-à-vis other actors in the value chain. Cooperatives offer such a possibility by means of organizing and empowering individual small producers through a commonly owned enterprise. This form of organization is not all at new, but the context in which farmer cooperatives in developing countries have to operate today is quickly changing.

New challenges associated with emerging consumer demands, global standardization processes, market concentration, stricter market requirements and price instability require different roles and capacities from cooperatives operating in agri-food value chains worldwide. Their purpose – the empowerment of small producers – has not changed, but nowadays they need different means to achieve that goal. Instead of holding on to the defensive role they used to play in the past (such as trying to set more favourable prices for producers by reducing the market share of intermediaries, for instance), cooperatives are now challenged to take on a more pro-active role in marketing, updating their organizational structure and engaging in value chain integration. A successful transition to this new role requires the acquisition of particular managerial capacities, especially in the domain of ‘collective entrepreneurship’, as Michael Cook and Brad Plunkett have called it.

Apart from the more conventional features of entrepreneurs, such as being alert to new opportunities, capacity to change organizational structures, good judgement in uncertain conditions and risk-taking attitudes, in order to deal successfully with current challenges, cooperatives also require the capacity to build new partnerships and to make strategic use of networks and relations with other stakeholders. It is worth mentioning that such a transition towards a more entrepreneurial mindset is also conditioned by the socio-political context. For example, cooperatives that were created according to restrictive models, were under government control or operated in a protective environment may find a move towards more entrepreneurial performance much harder.

Entrepreneurship and cooperatives: what does the theory tell us?

How difficult is it for cooperatives in developing countries to develop entrepreneurial skills? From the point of view of economic organization theory, cooperatives are likely to be confronted with several obstacles in this process. First, due to its multiple owners and purposes, the entrepreneurial function within a cooperative tends to be less clearly allocated than in an investor-owned firm. Moreover, members have a greater incentive to devote time to private entrepreneurial tasks on their own farms, since the returns to entrepreneurial efforts at the cooperative level will always be distributed among the group. Second, capital accumulation tends to be a problem in cooperatives, due to the fact that dividends have to be paid to a large number of members. Capital constraints could mean that wages offered to managers are not high enough to attract the most entrepreneurial ones.

Entrepreneurship and the development sector

As argued above, current trends in the agri-food sector call for interventions to strengthen the entrepreneurial capacity of farmer organizations. Furthermore, the theory suggests that there may be some big obstacles to surmount. But is the development sector prepared to undertake such task? Has the entrepreneurial approach already been internalized by development cooperation agencies?

The development sector has traditionally stressed the importance of farmer organizations primarily as tools of political empowerment, advocacy and representation. This was a logical stand at a time when the state played a more important role in steering rural development, setting prices of agricultural products, allocating resources and regulating commercialization. It may yet be misleading nowadays in countries with liberalized agricultural markets and in a context of the growing importance of global agri-food chains. As for their market function, development practitioners have – in part due to their suspicion of (especially large) private commercial agents – promoted cooperatives as countervailing power to existing market forces, which in many developing countries reflect historically very unequal class relations. Above all, cooperatives are conceived by the development sector as agents of social change. They are expected to raise the voice of their constituency against prevalent unjust social and economic relations, and to be an engine of local development. The development sector therefore tends to stress the notion of social entrepreneurship in cooperative development.

Development interventions at the cooperative level have been devoted to different dimensions of organizational strengthening, but often overlooking the economic one. Yet, treating cooperatives not as business partners but as ‘recipients’ of international cooperation can increase the risk of creating dependency on foreign aid, and may hamper the development of the necessary skills to compete successfully in the market.

Private sector entrepreneurship

For private firms, the main benefit of working with cooperatives rather than with multiple individual small producers is lower transaction costs, which include the costs of coordination, establishing and monitoring contracts, quality control of products and collection, sorting and grading practices, etc. Hence, due to these lower costs and economies of scale, cooperatives can have considerable competitive advantages, particularly in sectors that are dominated by small producers.

Compared with the development sector, the private sector holds a rather different vision of the entrepreneurship of cooperatives. Private firms want to source products that meet their demands and standards. They look for reliable business partners who can deliver products in specific volumes, at a good price, on schedule, and that meet quality and other specific requirements. Compared with the ‘project mindset’ of development practitioners, the private sector has a more instrumental view of entrepreneurship (based upon business performance). Firms will clearly define their expectations and the performance indicators before they start any collaboration (which is not always the case with NGOs). And although firms are often prepared to offer support to the development of producers’ organizations (suppliers)– for instance, through training, provision of computers, pre-financing, etc. – they only work with cooperatives that already have a certain level of ‘doing good business’.

Strategic partnerships

How then to combine the collective, social and instrumental views of cooperatives’ entrepreneurship? Are partnerships between these three sectors and visions feasible and can they be fruitful? Indeed, such alliances – unthinkable few decades ago – are starting to evolve, framed by a value chain perspective. One example of such a partnership is the recently created tradehouse Yiriwa, located in Mali, which aims at trading organic products. Yiriwa cooperates with farmers as shareholders in a public–private partnership. The initiative is supported by KIT Sustainable Development Fund, ICCO, AKO and local producers. An export-oriented private enterprise was launched, with the unusual features that the interests of farmers’ organizations are represented, it is partially funded by resources from international cooperation, and development agencies also participate as co-owners of the business.

Such alliances may be appealing not only to small-scale and purposefully created enterprises, but also to large and ‘mainstream’ firms. The ‘inclusive business’ approach adopted by SNV in Latin America, for instance, is based on this idea. It targets conventional private lead firms interested in strengthening the capacity of their small-scale (and often vulnerable) rural providers. The development sector is aware that their interventions often fail due to lack of markets or uncertain sales. Private companies are in a much better position to facilitate (and profit from) the creation of stable markets, so in principle the door should be open for collaboration. Nonetheless, plenty of challenges await those actors willing to engage in such innovative coalitions.

Challenges ahead

There are crucial challenges for each of the three sectors. For agricultural cooperatives in developing countries, one of the main issues is how to deal with the inevitable tension between engaging in new entrepreneurial relations while also remaining an organization that is truly controlled by, and works for the benefit of, its members. The experience of cooperatives in the Netherlands suggests that when managers become more autonomous they gain some entrepreneurial freedom (essential to adapt to new market situations), but at the expense of loss of direct influence of the members on the business. Professionalization and internationalization of cooperatives may result, unintentionally, in the exclusion of their more vulnerable (and less competitive) members. The risk that cooperatives undertaking governance changes towards more entrepreneurial settings drift away from the interests of their members is also present in developing countries. On the other hand, is a board of directors that consists of small farmers (normally with limited education and access to information) capable to deal with the rising challenges of dynamic agri-business? The ability to solve this apparent contradiction between efficiency and equity, and to find the right trade-off between a business orientation and the promise of social inclusion, are among the key features that make the cooperative’s entrepreneur unique.

One of the key challenges for the development sector is how to adopt also a more business- oriented vision without becoming part of the mainstream business (keeping its identity). For instance, what difference does it make when a development agency becomes an investor? Is it only that it is more willing to bear higher risks if the business is expected to be more inclusive?

For the private sector, probably the main question at stake is to convince managers that social concerns are not just a matter of building a good corporate image, but of adopting an ethical approach towards society. The private sector has to become aware that it has the power to change the living conditions of millions, and has a very important role to play in ameliorating global inequalities. The current crisis should encourage the emergence of new business models, able to deal with social and environmental concerns.

Overall, the critical matter is how to mainstream the partnerships between these three sectors without jeopardizing inclusiveness, which at the end of the day is the key element that will hold all the parties together.

This article is based on the ideas developed during the workshop ‘Entrepreneurial capacity and value chain innovation in agricultural cooperatives’, which took place during the CERES summer school at CIDIN, Radboud University Nijmegen, in July 2009. We are grateful to Hedwig Bruggeman (AgriProFocus), Suzanne Nederlof (KIT), Cees van Rij (Agriterra) and Frank Kraaijkamp (van Weely Koffie) for their valuable contributions to the organization and execution of this workshop. We are also indebted to all the participants for the rich exchange of experiences, as well as to Bertus Wennink (KIT) and Bert Helmsing (ISS) for their helpful comments on an earlier draft of this article.

Photo credit main picture: Photo by World Bank Photo Collection

Footnotes

  • 1.

    The International Cooperative Alliance (ICA) defines a cooperative as ‘an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise.


  • 2.

    Cook, M. and Plunkett, B. (2006) Collective entrepreneurship: An emerging phenomenon in producer-owned organizations. Journal of Agricultural and Applied Economics 38 (2): 421-428.


  • 3.

    Poter, P. and Scully, W. (1987) Economic efficiency in cooperatives. Journal of Law and Economics 30(2): 489-512.


  • 4.

    Novkovic, S. (2008) Defining the co-operative difference. Journal of Socio-Economics 37: 2168-2177.


  • 5.

    Development organizations often stress that cooperative business, especially among small and poor agricultural producers, takes considerable time to take off and therefore needs long-term support. Nevertheless, they often face the dilemma of whether to continue supporting unprofitable cooperatives, hoping that they will reach the break-even point soon, or to stop subsidizing these business initiatives that may never be able to survive the market place on their own.
    FAO (2006) Promoting Sustainable Producer Group Enterprises: A review of FAO experience (1981-2006).


  • 6.

    Valentinov, V. (2007) Why are cooperatives important in agriculture? An organizational economics perspective. Journal of Institutional Economics 3(1): 55-69.


  • 7.

    Private firms moreover prefer to engage in long-term business partnerships. Informal mechanisms, such as reputation and implicit norms, are more important for maintaining such partnerships than formal mechanisms based on contract rules, incentives and authority. Managers argue that trust building is probably the most important aspect underlying this kind of partnerships.


  • 8.

    Bijman, J. and van Dijk, G. (2009) Corporate Governance in Agricultural Cooperatives: A Perspective from The Netherlands. Paper presented at the workshop ‘Rural Cooperation in the 21st Century: Lessons from the Past, Pathways to the Future’, Rehovot, Israel, June 2009. View PDF


  • 9.

    Bernard, T. and Speilman, V. (2009) Reaching the rural poor through rural producer organizations? A study of agricultural marketing cooperatives in Ethiopia. Food Policy 34: 60-69.