Agricultural Cooperatives: Types and Its Pros and Cons

Agricultural Cooperatives: Types and Its Pros and Cons
Contributor
Contributor
External Guest Writer
March 16, 2022

Agricultural cooperatives are a hugely beneficial method of organizing a sector that remains largely unorganized in underdeveloped and developing countries. While this system isn’t perfect by any means, it can be a steady and reliable method for farmers to reduce the uncertainties related to their profession. 

In the following article, we discuss the specifics of agricultural cooperatives, take a look at its major subcategories, and highlight its many benefits.

What Are Agricultural Cooperatives?

Agricultural cooperatives are a collection of producers, traders, or suppliers in the agricultural sector, coming together to work with a common motive and agenda. Their primary aim involves maximizing profits, capturing greater market shares, and accessing higher volumes of supplies. 

There is real strength in numbers when it comes to agricultural cooperatives. The more individuals within a given segment come together, the greater the levels of success usually achieved by the group. When a large group of traders, for example, come together to form an agricultural cooperative, they stand a better chance of competing with massive industrial corporations in their region.

How Do They Work?

There are four major principles followed by agricultural cooperatives that set them apart from other business models. This includes:

  • Member representation: One member, one vote is the creed of an agricultural cooperative. All members have equal say and control over the functioning and future of the organization.
  • Service at cost: Cooperatives exist with the goal of uniting various individuals and small businesses and scaling them to achieve numerous benefits. The lower cost of services, materials, and products is a major factor when forming a co-op.
  • Limited return on equity capital: The limited return on equity capital ensures the long-term functioning of the group. The return on investment is usually limited and paid as patronage over extended periods of time.
  • Proportional financial benefits and obligations: The benefits achieved by each member of a co-op is directly proportionate to the amount of work and effort imparted by the members. 

The Different Types of Agricultural Cooperatives

Some of the various types of agricultural co-ops include:

  • Marketing co-ops: This includes front line members, responsible for assembling, processing, packaging, and selling the various types of produce. Their goal is to effectively tap into domestic and global markets. By bringing the produce to the right consumer base, they can help to maximize their profits in a big way.
  • Supply co-ops: The goal of supply co-ops is to purchase supplies for farming instead of selling them. When this type of cooperative is working efficiently, they are capable of reducing costs and generating savings in the short and long run. These savings can then be reallocated to members within the group.
  • Service co-ops: Farming is reliant on various ancillary services that help improve the functioning of the farmland on a daily basis. This includes numerous services such as hulling, sorting, ginning, etc. Members of service cooperatives support each other by lowering the cost of these services when offering them to one another. This helps to reduce overall operating costs and also diminishes the risk of unreliable outsourcing.
  • Bargaining co-ops: The sole purpose of this type of cooperative is to negotiate the price of the end product on behalf of the farmers. More often than not, farmers tend to lose out on the best deal and are bullied out of fair prices. With the help of bargaining co-ops, however, it can be ensured that farmers receive what is due to them based on market prices and not the will of larger corporations.

The Pros and Cons of Agricultural Cooperatives

Pros

There are many advantages to be gained for members belonging to agricultural cooperatives. Some of the most notable ones are mentioned below:

Member-Oriented Organization

Unlike most for-profit organizations around the world, the primary purpose of agricultural cooperatives isn’t centered around the motive of profit maximization. Instead, the attention is firmly set on the members and providing them with as many benefits as possible. Specifically, the benefits stem from the various services provided by not just members within the cooperative, but from neighboring cooperatives as well. 

It becomes easier for members to secure important elements such as materials and products at a reasonable price when working with a large co-op. It also helps members access larger segments of markets that would otherwise be closed off to them

Democratic Nature

Members of agricultural co-ops have the freedom and authority to elect anyone they deem fit to represent them in the board of directors. They can also stand for elections if they believe they are the ideal candidate for a given role. Once elected, they often have to take on the responsibility to ensure the smooth functioning of the cooperative in the short and long run.

Elections are often held annually in agricultural co-ops to ensure that the ideal candidates always take the right post and there is ample circulation within the working members. They also have the option of assigning a CEO to further facilitate the smooth functioning of the organization.

Independent in Nature

By law, it is a guarantee that agricultural sectors can operate independently from both private and public sectors. Most countries also provide these co-ops the benefit of receiving exemption from antitrust laws. Technically speaking, this ensures that governments do not hold any sway when it comes to the administrative and economic functioning of co-ops. This allows them to operate freely and independently, and to pass policies that always uphold their best interests.

Agricultural co-ops also have the authority to deny membership to certain individuals and groups if they believe that the new members will not be able to operate keeping in mind the best interest of the larger group. This ensures that the overall vision and planning of the co-op is never diluted.

Proportional Patronage

The patronage is essentially the share of the overall profits achieved by the agricultural cooperative across the year. The division of this patronage is always done proportionally, keeping in mind the input, effort, and activity offered by each member during the given time frame. 

Plainly speaking, if all the farmers put in the same amount of effort through the year, they reap equal dividends from their work. Conversely, if one individual or set of individuals has contributed greater amounts in any parameter, they are also due to receive a greater amount of patronage.

Mitigating Risk

The idea of one for all and all for one really stands true when it comes to cooperatives. As all the members are in the same boat, they attempt to work with the highest levels of integrity and look out for the best interest of the larger group. This level of dedication, coupled with diluting risks among a large number of individuals, ensures that the overall risk of being a farmer is greatly mitigated.

Cons

There are a few negatives to consider as well before one becomes a part of an agricultural cooperative. One of the most notable disadvantages involves the financial structure of this module. As all the investments going into the functioning of a co-op comes from the members, the flipside is that members are also liable to share all the losses if things don’t pan out according to plan.

Thriving in Unison

The agricultural sector has been unorganized for a majority of our collective history, but cooperatives are an excellent method of providing greater levels of security and control to farmers. When farmers unite for their cause, they are capable of achieving truly incredible results. With a greater level of support and assistance from governments, cooperatives can stand up to the larger corporations and support themselves independent of outside intervention.