Establishing commodity cooperatives – crucial role of member stakes

[Editor's Note: This is part 5 of a 7-part series on commodity cooperatives in drought prone regions, originally authored as a pre-published paper by Dr. Trilochan Sastry (Academic Dean, IIM-Bangalore and social entrepreneur/activist). Dr. Sastry is shaping a new model for farmer owned-and-run commodity cooperatives in Andhra Pradesh through Center for Collective Development (CCD), a Hyderabad-based NGO he founded in 2003. Part 4 in this series was Establishing commodity cooperatives - perils of using funds to mobilize people.]

Trilochan Sastry (Academic Dean, IIM-Bangalore)

Member stakes are funds of members with the cooperative. It could be in cash or kind. For instance, produce of members lying with the cooperative for which only part payment had been made is also an aspect of member stakes.

In the early stages, one issue that commodity cooperatives face is how much to pay the members when they bring their produce into the cooperative? Some started off by paying the entire amount of the then prevailing price. Since the Cooperative did not have enough funds, they borrowed it from the promoting organization. The pooled stocks were stored, waiting for a higher price. All such early cooperatives are now closed. The problem was that members and their elected leaders did not feel the pressure to repay the loan. Stocks were not carefully kept, there was damage due to rain, moisture, rats and insects. The Cooperative speculated in the market without really understanding how prices move. When price was low, they waited for it to rise. When prices rose, they waited for it to rise further. In other words they were speculating or gambling on someone else’s money. Eventually, they had to sell at a low price, incurred huge losses and eventually closed down.

Often the promoting agency feels that by paying the full prevailing price and perhaps even a small premium, lots of members can be enrolled. There is sometimes a feeling that the poor need to be motivated by such premiums, or that it is humane to do so. Government-run schemes sometimes also do the same. It does help to enroll large numbers at first. However, the Cooperative does not really take responsibility for marketing the produce since they have got their money up front. If the promoter takes responsibility, it will no doubt work, but the cooperative will never become member-owned, member-run and member-controlled.  The moment the promoter withdraws it will collapse. Such an approach also does not allow for scaling up. If the promoting agency’s own staff gets into collusion with the buyers or with the Board of Directors, then they can bleed the cooperative, eventually leading to its closure. There is no great protest since external funds were lost – members really did not lose anything as long as the cooperative ran.

On the other hand, some other cooperatives either did not give any advance at all or paid between 50% and 65% of the value of the produce. Those that did not give any advance faced a problem: if they waited for prices to rise, then members would complain because they needed funds for repayment of loans and for household expenses. So they sold the produce as it came in. The main benefit to the farmers was that the exploitation due to tied sales where produce prices were undervalued by money lenders, was eliminated. Farmers had to wait for at most a week to get payment, which was in any case better than what the local traders gave. In the other model, they waited for the price to rise. However, since their money was also involved to the extent of 35% to 50%, they made sure the produce was free of rain, moisture, rats and insects. They also did not speculate on the market, but were keen to book profits and avoid loss. On the downside, the very small farmers avoid such cooperatives. With only part payment and the need to repay moneylenders, nothing was left for the household. For them the rule was tweaked so that up to some quantity (say 5 quintals), full payment was made, and beyond that, 50%. This motivated a large number of marginal farmers to join the cooperative.

Part 6 of this series continues here – promoter philosophy, leadership and cooperative rules

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