Agriculture co-operative societies

Agriculture co-operative societies

An agricultural cooperative, also known as a farmers’ co-op, is a cooperative where farmers pool their resources in certain areas of activity.

A broad typology of agricultural cooperatives distinguishes between agricultural service cooperatives, which provide various services to their individually farming members, and agricultural production cooperatives, where production resources (land, machinery) are pooled and members farm jointly. Agricultural production cooperatives are relatively rare in the world, and known examples are limited to collective farms in former socialist countries and the kibbutzim in Israel. Worker cooperatives provide an example of production cooperatives outside agriculture.

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The default meaning of agricultural cooperative in English is usually an agricultural service cooperative, which is the numerically dominant form in the world. There are two primary types of agricultural service cooperatives, supply cooperative and marketing cooperative. Supply cooperatives supply their members with inputs for agricultural production, including seeds, fertilizers, fuel, and machinery services. Marketing cooperatives are established by farmers to undertake transformation, packaging, distribution, and marketing of farm products (both crop and livestock). Farmers also widely rely on credit cooperatives as a source of financing for both working capital and investments.

Why farmers form cooperatives

Cooperatives as a form of business organization are distinct from the more common investor-owned firms (IOFs). Both are organized as corporations, but IOFs pursue profit maximization objectives, whereas cooperatives strive to maximize the benefits they generate for their members (which usually involves zero-profit operation). Agricultural cooperatives are therefore created in situations where farmers cannot obtain essential services from IOFs (because the provision of these services is judged to be unprofitable by the IOFs), or when IOFs provide the services at disadvantageous terms to the farmers (i.e., the services are available, but the profit-motivated prices are too high for the farmers). The former situations are characterized in economic theory as market failure or missing services motive. The latter drive the creation of cooperatives as a competitive yardstick or as a means of allowing farmers to build countervailing market power to oppose the IOFs. The concept of competitive yardstick implies that farmers, faced with unsatisfactory performance by IOFs, may form a cooperative firm whose purpose is to force the IOFs, through competition, to improve their service to farmers.

A practical motivation for the creation of agricultural cooperatives is sometimes described as “overcoming the curse of smallness”. A cooperative, being an association of a large number of small farmers, acts as a large business entity in the market, reaping the significant advantages of economies of scale that are not available to its members individually. Three typical examples are a machinery pool, a marketing cooperative, and a credit union. A family farm may be too small to justify the purchase of a tractor or another piece of farm machinery for its own use; a machinery pool is a cooperative that purchases the necessary equipment for the joint use of all its members as needed. A small farm does not always have the means of transportation necessary for delivering its produce to the market, or else the small volume of its production may put it in an unfavorable negotiating position with respect to intermediaries and wholesalers; a cooperative will act as an integrator, collecting the output of its small members and delivering it in large aggregated quantities downstream through the marketing channels. A small farmer may be charged relatively high interest rates by commercial banks, which are mindful of high transaction costs on small loans, or may be refused credit altogether due to lack of collateral; a farmers’ credit union will be able to raise loan funds at advantageous rates from commercial banks because of its large associative size and will then distribute loans to its members on the strength of mutual or peer-pressure guarantees for repayment.

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Agriculture cooperatives