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Six steps to make cooperatives profitable

June 26, 2017

Associations and organisations of African farmers can be turned into modern and competitive enterprises that still preserve cooperative principles by applying six steps. This allows the development of autonomous, democratic and farmer-owned organisations that can also boost rural employment and agri-business in Africa as shown in a recent study.

Despite widespread prevalence throughout rural Africa, cooperatives have not yet been able to promote rural entrepreneurship and agribusiness on a large scale. One reason for this is that agricultural cooperatives in Africa struggle to mobilise and sustain collective marketing during their life cycle due to disruptive side-selling by member-farmers.

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Side-selling refers to quick, farm-gate and arm-length transactions with itinerant middlemen. Though these activities can generate quick sales, unfortunately, side-selling can also result in low cooperative health and even in organisational dormancy or collapse. To avoid side-selling, a cooperative must strive to procure as much produce as possible from each member-farmer, rather than strive to expand membership. It must also ensure that the amount and quality supplied by member-farmers is as homogeneous as possible, to avoid internal frictions and inefficiencies. Further, it should strive to offer price incentives and quick (or on the spot) payments to member-farmers, and enforce sanctions when these decide to side-sell to competitors. Collective marketing requires the professionalisation of cooperatives through the hiring of University educated and ICT-skilled managers.

Application of the following six steps can prevent further undermining of the cooperative:

  1. Regulate entry: open membership is a traditional cooperative principle, but measures must be taken to avoid the incorporation of free-riders and a supply that exceeds market-demand thus driving the price down.

  2. Incentivise exit: members are usually discouraged from leaving a cooperative, but members who no longer have the interest or capacity to engage in collective marketing should instead receive exit bonuses.

  3. Democracy needs structure: cooperative leaders and managers must take the time to seek internal consensus and external advice in order to define the constitution and bylaws of their organisation, in such a way to anticipate and prevent members' side-selling from the onset.

  4. Voluntary and tradable investments: the indivisible and redeemable part of the asset or endowment of a cooperative needs to be kept as small as possible. Members need to be able to choose what investments to make through the voluntary purchase of shares and they need to be allowed to trade the shares among themselves (albeit upon the approval of their board).

  5. Visionary leadership: external incentives, in the form of grants, subsidies, credit and investments can induce members' disenfranchisement and side-selling. Visionary leadership thus means to anticipate external incentives through pre-emptive and effective communication, in order to keep justifying, motivating and enforcing collective marketing.

  6. Anticipate socio-economic changes: once a cooperative satisfies the initial and most urgent social needs of members, it has to start pursuing more commercial objectives, such as collective marketing and value addition. Cooperatives that are solely established and designed to pursue short-term needs struggle to mobilise collective marketing and add value over time.

Way forward

Over the past year, CTA and its partners have been training and coaching the leaders, managers, donors and service providers, policy and law makers of African cooperatives, on the basis of these six governance principles. To do so, we organised three 'Cooperative Leadership Events' in Uganda, Malawi and Madagascar. Through these events, we gathered detailed data from, and strengthened the governance of 300 agricultural cooperatives and farmer organisations, and kick-started new efforts to reform policy and legal frameworks for cooperative agribusiness development. Please write, join and help us to continue, improve and scale-up this impactful work.