Establishing commodity cooperatives – role of promoting organizations

[Editor’s Note: This is the final part 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 6 in this series was Establishing commodity cooperatives – Promoter philosophy, leadership and cooperative rules.]

Trilochan Sastry (Academic Dean, IIM-Bangalore)

The promoting organization must have a good grasp of the social mobilization process. At the same time, it must not go into the field without a thorough analysis of the business model. The chosen commodity must be studied thoroughly, particularly the price and market situation. Proper number work needs to be done to ensure that there are profits to be made and that members will indeed benefit. For instance, without value addition, a commodity whose price sometimes goes below the harvest price should not be stocked, but sold immediately – the risk of a loss is not worth taking for small and marginal farmers. If it seems that value addition is even more beneficial, then the markets for processed food and the price movements need to be understood. The entire economic viability of the project has to be worked out, including the investment cost. The promoter would also have to help locate professional staff (and help train them) who will be employees of the processing unit and the farmers.

The promoter would initially also have to raise working capital and investment funds. Later mainstream banks may come in, but that will take a lot of time. (Today Amul is able to raise large funds from Banks). This seems to go against the philosophy of not giving loans to members or providing external funds or loans. But that is not really so. It is the individual loan, especially that given at the time of sowing as a crop loan, that is at high risk. Working capital to a cooperative at the time of harvest a few months later to procure produce from members is far easier to recover. These are not individual loans to members, but a bulk loan to the Cooperative. The produce is collateral. It is easy to arrange for the loan to be recovered from the buyer. Such arrangements work quite well, and the risk of default is largely taken out.

Conclusions

Promoting agricultural commodity cooperatives in dry land, single-harvest regions is a challenge. But that is where the need is the greatest. Wherever there is marketable surplus, there is the potential of forming such cooperatives. Initially they would be marketing cooperatives, perhaps starting out with simple pooling, storing and selling. The members benefit compared to their earlier practice of selling to local money lenders and traders. Later they can start food processing units as membership grows and the quantity of produce is enough to justify such a unit. There is usually a need for an external promoting agency. They need to avoid the standard mistakes of providing grants and subsidies, individual loans to members, and neglecting to build in member stakes. In fact the whole approach suggested here turns the traditional one upside down. Instead of giving grants or subsidies, the approach requires members to in fact give funds, either in cash or kind to the Cooperative. Some exception can be made for the very small and marginal farmers with very small quantity of produce. The promoter needs to not only understand social mobilization, but business as well. The ability to raise resources in the early stages is crucial.

Ultimately it comes down to a deeper philosophical question that underlies the whole approach. The promoter must believe that eventually farmer organizations, cooperatives, or their federations, can thrive on their own with minimal external support. The promoter’s job is to bring the Cooperatives up to that level. Much like executives of well run Corporations, the leaders of these cooperatives would also need continuous training and skill building to help them compete in the market economy. Perhaps the promoter in the long run will morph into the role of providing this continuous education. However, it can be done. As Verghese Kurien often said “Cooperation is an act of faith.” Old world faith apart, today’s promoter should be able to harness all the relevant technology – the Internet and the mobile for information gathering and dissemination, the commodity market exchanges for price realization, latest developments in food processing technology and so on – that will help make the cooperatives more competitive in today’s environment.

 

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