From the ISET Economist news (http://www.iset.ge/news/?p=3311)
By Eric Livny
(Summary of a debate hosted by ISET as part of SDC-supported Inclusive Growth Dialog series.)
There are many reasons to love the concept of farmer cooperation (and cooperation more generally). To begin with, there is a great aesthetic value in seeing people coming together, sharing resources and helping each other. After all, instinctive collectivism was the basic condition of human existence from time immemorial. But, there are also powerful economic reasons for farmer cooperation.
Smallholders are often too small to independently access markets, and can be easily exploited by middlemen and local monopolies. Service cooperatives can increase the bargaining power of smallholders versus banks, service providers, input suppliers, processors and … government. This light form of cooperation is quite effective and relatively easy to manage and sustain, which explains its prevalence in North America and Western Europe.
A more ambitious (and far more demanding) form of cooperation is about pooling fragmented smallholdings into larger farms. Examples of such production cooperatives are the Israeli kibbutz and Soviet collective farms. These are said to benefit from economies of scale in primary agricultural production.
Yet, despite its aesthetic value and compelling economic reasons, farmer cooperation (of both types) has been a spectacular failure in many transition economies, and particularly on the territory of the former USSR, including Georgia. In the words of Tim Stuart, development practitioners in the post-Soviet space are often confronted “with the reality of failed farmer groups that evaporate once the project ends, with unused equipment rusting in the corner of a field, an image, which has become a cliché of dysfunctional development in the popular press. And for many people engaged in development, farmer groups are a byword for failure.”
Of course, failure and success are terms to be defined relative to expected results. For the likes of Juan Echanove, coordinator of EU’s ENPARD program, the journey of a thousand miles in farmer cooperation begins with a single step. His expectation is that the dramatic changes in the legal and financial context for agricultural cooperation in Georgia will encourage the creation of bottom up farmer organizations based on traditional forms of mutual help and resource sharing that have always existed in Georgia. According to Juan, Georgian farmers have been always establishing informal groups and associations, in many cases without any external support and by their own initiative. Such groups often focused on a very narrow but functional scaling up of everyday economic activities including joint arrangements for pasture management and feeding, livestock management, collective work on plowing and harvesting, etc.
WHO IS TO TAKE FARMER COOPERATION TO THE NEXT LEVEL?
While bottom up cooperation may indeed flourish in the new policy context, there is agreement among all analysts that for farmer cooperation to move to the next level – beyond its primitive forms – Georgian villagers have to be provided with the prerequisite skills and resources. A related question, posed by Simon Appleby, an Australian agronomist and agribusiness consultant with many years of experience in South East Asia and Georgia, is “If development agencies are the “wrong” people to be involved in farmer groups and co-ops, who are the “right” players to be involved?” To his mind, “while it may be jarring to the collectivist sensibilities of some, it is worth looking at corporations as enablers and incubators of co-ops.”
Indeed, Juan sees a very wide spectrum of possibilities for private sector involvement, with or without donor assistance. For instance, some farmer groups will emerge to gain access to better and/or cheaper inputs (fertilizers, seeds, fuel) or services (mechanization, vet services, artificial insemination). In these cases the key business partners are not the buyers of the products, but providers of services and inputs. And, importantly, donors – ENPARD, and USAID’s REAP program – will target these businesses rather than farmer groups.
Juan is quick to admit that the issue becomes trickier if the goal is to create farmer groups jointly selling their primary products. Anyhow, even in this case there will be groups such as mandarin or hazelnut co-ops who will face no problem selling their products to a myriad of middlemen, processors and exporters. If these coop do things the right way, argues Juan, they will have more or better quality product to sell. The buyers are already there, and farmer groups won’t need any help in engaging with the private sector.
Finally, there will be co-ops directly placing their products in the local markets, and there is nothing wrong with that, according to Juan. Producing more and/or at a lower cost in the nearby town marketplace would be an easy and realistic improvement. In many parts of Georgia there is simply no alternative, and we don’t always have to be looking for complex solutions.
One problem with Juan’s arguments, however, is that in none of the simple cases private sector actors would have the incentive to provide Georgian villagers with the skills and resources to do things the right way and to manage cooperation. For instance, while input providers would be quite interested in marketing their products (e.g. fertilizer) to individualfarmers, there is no advantage for them in helping organize and train groups of farmers who, once organized, i) would be much tougher to negotiate with and ii) could switch to competing providers. For exactly the same reason, no single buyer of hazelnuts or mandarins would invest time and effort to help organize and train farmer co-ops even though it may be more convenient for him/her to deal with larger and more reliable growers.
Thus, while businesses may be the (only) right players to be involved in enabling and incubating farmer co-ops, special government or donors schemes would have to be developed to incentivize potentially interested corporate actors. While costly, such schemes could be justified if the resulting supply chain relationships have the potential to be sustained without additional subsidies beyond the necessary period of incubation.
As Simon Appleby explains based on his experience in South East Asia, the government could compel large food processors to take on co-ops as supply chain partners. Government (and donors) could also use carrots, such as tax holidays, low interest loans, or grants. That said, there would be no need for the government to play an active role in micromanaging farmer groups. With corporations providing suppliers with a comprehensive support package (finance, inputs, training, and guaranteed forward contracts), co-ops would pop up in response to business opportunities. Given their small size (3-5 families) and blood or friendship bonds on which they are often based, internal management issues of typical co-ops would not be very complicated. According to Simon, over time co-ops could diversify their activities from basic post-harvest treatment, storage, and logistics, to deep processing, foodstuffs trading and financial services, but this process may take many decades. Rushing the process, however, carries huge operational and financial risks.
THE CASE OF TKIS NOBATI
The challenge of incentivizing corporations to integrate smallholder co-ops into their supply chains is not a trivial one. Mind it that corporations – e.g. large processors – have other options. They can choose to go it alone by developing own supply base or contract large farms that don’t need incubation, and can be trusted to deliver on time and in consistent quality.
Yet, as one can also learn from the recent Georgian experience, there would be situations in which businesses have the incentive to engage in nurturing formal or informal farmer groups. While exceptional, these situations provide an excellent sense of the underlying economics.
In 2008, upon graduating from ISET, Gaga Abashidze has taken over a small family business which has been for years buying and processing rose hips gathered by Georgian villagers in the Shida Kartli region. The business model was extremely simple. Villagers harvested and delivered the fruit. Gaga processed and exported rose hip juice to Europe and Japan. Villagers saw no advantage in cooperation, and Gaga saw no need to engage them as a group.
Things changed when Gaga “discovered” the lucrative market of organic rose hip products, which required adopting a more complicated business model. First and foremost, moving to organic production required certifying all stages in the process, from harvesting to post-harvest treatment/storage to processing. Now, as Gaga quickly understood, there was simply no way to certify hundreds of villagers. To acquire international organic certification his supplier had to be a legal entity which could be trained and certified. Of course, once incorporated, his supplier could also come into possession of necessary equipment, contributing to the efficiency of harvesting, post-harvest treatment and storage, reducing processing costs and improving the quality of the final product.
Gaga had two options of re-organizing his supply chain: help create, and work with, a farmer organization, or expand own business. In weighing these two options, Gaga chose the farmer organization/outsourcing alternative for two main reasons.
- Many of the startup costs could be shouldered by the village community, including labor and land. While there was little to be saved in labor costs by hiring own workers, the co-op could be eligible for donor assistance to offset capital, training and certification costs.
- Gaga knew that the co-op would be a reliable business partner. On the one hand, he had a long history of working with individual members of the group and trusted its leadership. On the other, having access to a lucrative export market he could afford paying a premium for organically certified rose hips, essentially killing any incentives for the group to switch to a different buyer. As much as Gaga needed the group to supply him with a certified product, the group needed him to gain access to the organic export market. Thus, both parties were to be locked into a sustainable win-win relationship.
This particularly account of Tkis Nobati, a small Georgian cooperative in the vicinity of Saguramo is not meant to detract from the role of other players (e.g. the Regional Communities Development Agency, which channeled donor funding, and Elkana, which assisted in the bio-certification process). Rather, the point is to draw attention to the economic rationale for private sector engagement with Georgia’s budding agricultural co-op movement.
The most important insight to be gained from the exceptional story of Gaga Abashidze and Tkis Nobati cooperative is that while the costs of private sector engagement in incubating smallholder “supply” co-ops could be subsidized by donors or governments in the short term, supply linkages thus created are likely to be quite fragile. In the presence of alternative suppliers, co-ops would have to be very well managed to maintain consistent quality and reliability. Otherwise, we may see many more disturbing images of “equipment rusting in the corner of a field”.
To conclude, farmer co-ops can indeed serve many different purposes. Yet, significantproductivity improvements in Georgia’s agricultural sector would only be possible on the basis sustainable supply relationships between farmers and downstream processors and retailers. Only such linkages (embodied in explicit or implicit forward contracts) can provide the basis for new technology adoption and investment.
As Georgia starts exporting to new markets—to Europe under the DCFTA, for example—there will be stronger incentives for smallholder farmers to come together in order improve product quality and achieve market access. Cooperatives and farmer associations may certainly provide the organizational vehicles to take advantage of new export opportunities. Additionally, however, the Georgian parliament and government may want to consider amending the Law on Cooperatives in a manner facilitating corporate involvement in the creation of smallholder co-ops. For example, corporations could be allowed to acquire a stake in co-ops (or “smallholder partnerships”) in return for investment in commonly managed storage or processing facilities.
The participation of Alliances Lesser Caucasus Programme at DCED Global Seminar was highly appreciated and named within the top 3 seasons of the event by the attended audience. The seminar on the Standards for Results Measurement was hosted by DCED in Bangkok from 14 to 16 March 2016.
Women's economic empowerment, assessing attribution, measuring job creation, and using results information to manage programmes – were the main topics of presentations and discussions featured on the seminar. 130 participants from 38 countries, representing 52 organizations, field programmes and donor agencies gathered for the information exchange, for deepening understanding of DCED standards and for participating in plenary discussions on cutting edge themes.
The full agenda, presentations with relevant links and final summary report are available on the following link: DCED Seminar2016
ALCP photo won in the photo competition on Private Sector Development announced by DCED. Photo is taken in programme financed Wool Collecting Center and it was listed among 5 winners in condition of high competition. Winning photo will be displayed on new DCED website, visited by more than 60,000 unique users per year, and materials printed for high-profile events and publications. It will also be shown at the DCED Global Seminal in Bangkok.
After months of intensive construction work and four and a half years of multi-stakeholder advocacy the first Bio Security Point on the AMR has been opened. By the next transhumance season spring 2016, the country will have proper infrastructure for ensuring systematic health control of the livestock in place.
The event was attended by the Regional Director for Swiss Cooperation Office for the South Caucasus, by the Deputy Minister of Agriculture, the Head of the National Food Agency, the Governor and Gamgebelies of Kvemo Kartli region and the representatives of private and non-governmental sector. The event was widely covered by the national media.
Posted by Helen Bradbury: Team Leader, Alliances Lesser Caucasus Programme
ALCP has been featured on BEAM Exchange. See the story below.
Rural farmers can only grow their income when they have access to the drugs and veterinary services to keep their animals healthy and growing too. Alliances has partnered with a national veterinary inputs supply company to improve access to drugs, information and vet services for poor farmers in rural Georgia. There are strong signs competitors are seeking to replicate the model, which is also scaling up nationally and in neighbouring countries.
The challenge
Over 2 million people in rural Georgia rely on subsistence farming, typically owning less than one hectare of land. SDC has been funding a series of programmes in Southern Georgia since 2008 to improve the livelihoods of livestock farmers.
During initial surveys, Alliances learned that less than 10 per cent of farmers were accessing veterinary drugs or services in their community, in rural vet pharmacies mainly self-stocked from trips to Tbilisi. Others bought drugs when travelling to the capital. In the rural vet pharmacies a limited range of often improperly stored drugs were sold at high prices due to the resultant transaction costs. Local advice was minimal, unavailable or out of date. This had led to a lack of farmer trust in local veterinary products and services and unwillingness to invest.
Suppliers had failed to grasp the market potential of developing rural distribution, lacking both the information and capital to do so. The uncertainty about whether farmers would buy their products meant the perceived risk held suppliers back from making the first move.
Last week, NFA officials met with 19 private sector representatives from dairy and meat sectors in Akhaltsikhe, continuing a series of the meetings held in KK and AJ on new FS&H regulations. Key issues, which could restrict market access, such as form #2 requirements in meat sector and HACCP for dairy sector, were discussed.
The heavy rain and strong wind in Ajara last week saw the DRRWG hotlines have been flooded with calls in Kobuleti, Khelvachauri, Keda, Shuakhevi and Khulo municipalities. From Wednesday morning till Saturday night (November 11th-14th), the Government of Ajara and all five municipalities declared a state of emergency and announced the DRR WG hotline number on Ajara TV and online for the farmers seeking help. Municipal DRR WG members, along with a geologist and a representative from the Road Department, formed emergency response groups in each municipality to immediately respond to calls.
