That development agencies are acknowledging the importance of producer organisations (POs) goes hand in hand with the increasing attention placed on the value chains (or supply chains) that connect farmers with consumers. Such value chains demonstrate the interrelatedness of the production, transportation, processing and marketing of farm products. Improving the coordination of activities of different actors (such as firms) in the chain can reduce transaction costs, help guarantee product quality and safety, and enhance the design of marketing strategies. Producer organisations are considered instrumental in increasing the value generated throughout the chain, such as by ensuring that the quality of products is in line with the standard demanded. They can also mobilise support from other stakeholders and can help farmers negotiate a fair share of the total profit generated.

Major changes are taking place in the markets for agricultural products. The liberalisation of markets in many developing countries, including the dismantling of state-controlled marketing boards, has led to increased competition. The rise of international specialty value chains, such as those for organic and fair trade products, has provided an impetus for the formation of new POs. Fair trade arrangements result in a premium price only for farmers who are organised. The growth of supermarkets as major outlets for food products has led to the restructuring of supply chains, because supermarkets tend to work with preferred suppliers that can offer them products of high volume and consistent quality. As individual producers are hardly ever large enough to supply all the stores in a supermarket chain, there is a need for organisations to collect, sort, grade and perform quality control of products from different producers.

The most recent World Development Report, Agriculture for Development (WDR 2008) makes the case for producer organisations as key actors in agricultural development. The report argues that they are a major part of institutional reconstruction, one that uses collective action to strengthen the position of smallholders in the markets for farm inputs and outputs. By reducing transaction costs, strengthening bargaining power and giving smallholders a voice in the policy process, POs are a fundamental building block of the agriculture for development agenda.
Enhanced product quality is key for getting market access in modern chains. POs can help their members achieve this in various ways. They can provide information to farmers about customers’ quality requirements. Particularly with international chains, this includes assessing the many options for international certification schemes. POs can implement quality control systems. They can organise and facilitate innovation processes targeted at reaching higher product quality by, for instance, providing technical assistance to improve on-farm production methods. Finally, POs can go beyond facilitating the production and marketing process and take on the processing and marketing functions themselves.

Enhanced product quality is key for getting market access in modern chains. POs can help their members achieve this in various ways. They can provide information to farmers about customers’ quality requirements. Particularly with international chains, this includes assessing the many options for international certification schemes. POs can implement quality control systems. They can organise and facilitate innovation processes targeted at reaching higher product quality by, for instance, providing technical assistance to improve on-farm production methods. Finally, POs can go beyond facilitating the production and marketing process and take on the processing and marketing functions themselves.

What are POs?

Producer organisations can take many forms, ranging from formal institutions, such as cooperatives, to informal producer groups and village associations. A number of typologies have been developed that distinguish POs on the basis of their legal status, function, geographical scope and size. The WDR 2008, for instance, distinguishes three categories of functions: economic services by commodity-specific organisations, broad interest representation by advocacy groups, and diverse economic and social services by multipurpose organisations.

Organisations that provide economic services include cooperatives that process and/or market the products of their member farmers. A typical example is the dairy cooperative, which processes the raw milk supplied by farmers into less perishable dairy products. POs can give smallholders a political voice, enabling them to hold policy makers and implementing agencies accountable by participating in agricultural policy making, monitoring budgets and engaging in policy implementation. Such advocacy organisations, or farmer unions, may lobby local, regional or national policy makers on behalf of their members. Multipurpose organisations, particularly those at the community level, often combine economic, political and social functions. They provide farm inputs and credit to their members, process and/or market their products, offer community services and carry out advocacy activities.

POs exist at the village, regional, national and even international level. Both commodity-specific organisations and advocacy organisations often have both local and regional/national branches. Multilayer POs are structured as federations, with the lower-level organisations being members of the higher-level organisation.

All POs are characterised by two principles: utility and identity. The utility principle ensures that POs are useful to members and that members are actively committed to achieving jointly agreed upon objectives. The identity principle refers to the fact that members usually share a history and a geographical space, that they have agreed upon a set of rules that govern internal relations among members, and external relations with the outside world, and that they have a common vision of the future, both for themselves and for the group. This shared identity is a strong social mechanism that supports continued interactions among the members of the organisation.

Cooperatives

Probably the best known formal PO is the cooperative. According to the International Cooperative Alliance (ICA), a cooperative is an ‘autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically-controlled enterprise’. This definition emphasises that a cooperative is both an association of members and a jointly owned commercial enterprise. The latter engages in commercial activities such as the processing and marketing of farm products or the purchasing of farm inputs.

In many countries in Africa and eastern Europe cooperatives have a negative connotation because in the past they were initiated and managed by the state. Producers were forced to become members and were obliged to sell their products through the cooperative marketing organisation. The distribution of farm inputs was also carried out by state-run organisations called cooperatives. In many countries, these organisations were used by the elite as vehicles for individual or partisan political enterprises. The state domination, low efficiency and even fraud that accompanied many of these organisations has led to a deep distrust among producers of any collective organisation. To reduce some of this distrust, the word ‘cooperative’ is no longer used in former socialist countries, even as collective organisations are now reappearing.

Formal and informal organisations

POs can be formal or informal. Informal organisations may be formed by a group of producers that come together to exchange experiences or market information, to receive technical assistance or to help each other in difficult times. Formal POs include cooperatives, associations and societies that are distinguished by a formal constitution and the legislation that applies. An association is a non-profit organisation that enables members to collaborate for services, information exchange and representation. A typical example is the bargaining association, which negotiates on behalf of its members with the buyers of their products. Through collective bargaining, the POs can obtain better prices or more favourable trading conditions than could an individual producer.

There are advantages and disadvantages to formalisation, depending on the particular social, political and legal context. With formal legal status, a producer organisation can enter into contracts and borrow money. Without legal status, any contract with a third party must be with an individual member of the PO. Also, a formal organisation and its membership can more easily be protected from abuses such as the fraudulent use of funds or the misuse of the PO’s name and identity. Legal status clarifies the liability of the organisation and its members.

Informal organisations are more flexible in adapting to changing environments, particularly in countries where legislation (such as cooperative law) is rather restrictive. Also, registering a PO can be so expensive that the costs exceed the benefits. Moreover, formalisation provides state authorities with the opportunity to tax the PO and/or its members. In situations where competitors such as informal traders and middlemen do not pay taxes, establishing a formal marketing organisation may not be desirable.

The advantages of formalisation become important when POs want to enter into contracts with buyers regarding the delivery of special quantities and qualities of farm products. Thus, formalisation seems to be a basic requirement for POs that want to establish a sustainable trading relationship with downstream participants in the value chain.

Challenges

POs are member-based organisations, i.e. they are owned and controlled by their members. Ideally, member ownership is defined both in economic terms (members are shareholders) and in psychological terms (members feel ownership of the organisation). Member control is defined by members holding the decision rights on both the activities and investments of the PO. Both ownership and control are collective in nature.

Being a member-based organisation also presents a number of challenges. For a PO that wants to strengthen its coordination role in the value chain, for example, it has to solve problems related to the heterogeneous membership, the trade-off between equity and efficiency, the need to improve managerial capacity and the balance between obtaining outside support and maintaining member control.

Modern POs are voluntary organisations. A producer may decide to become a member on the basis of a common interest with other producers. This common interest leads to a homogeneous membership, which can facilitate joint decision making. However, when the functions of the PO become more specialised on strengthening market access and coordination with processors and retailers, the interests of members in these new activities may diverge.

New market opportunities may strain the relationship between large and small (or traditional and modern) members. Large farmers often are indispensable because they are the primary users of the PO and thus create the volume in services that allows the organisation to be economically viable. In addition, large farmers have the capacity and capability to play leadership roles within the organisation. When the interests of small and large farmers start to diverge, perhaps because large farmers see business opportunities that are not available to the smaller members, this heterogeneity can lead to cumbersome and inefficient decision-making processes. For the leadership, the challenge is to find and defend common ground. Transparent decision making and accountability of the leaders are important for keeping all members on board.

Equity versus efficiency

POs are typically community-based, operating under community norms and values of social inclusion and solidarity. Members, and often employees, are drawn from the community, and the benefits of the organisation directly and indirectly support the community. This social embeddedness keeps transaction costs low, and creates a strong sense of ownership. Some disadvantages of the community-based nature of POs include the multiplicity of goals, the limited pool of expertise and leadership available and the entanglement of the organisation’s governance with wider political and social structures, such as local hierarchies. Identities within a PO are often not purely based on economic position or even market orientation. Cultural and political factors can influence the governance of a PO, hampering market success. Additionally, well intended support from NGOs to increase market-oriented capabilities may conflict with the local political or social configuration. The article by Julio Berdegue in this issue argues for a clear allocation of the costs and benefits of POs.

When a PO aims to strengthen vertical coordination in the value chain, it may need to become stricter regarding members’ compliance with agreements and obligations. POs entering into agreements with foreign customers have contractual and moral obligations to deliver the agreed quality and quantity. If members fail to comply with these obligations, the reputation of the organisation is at stake. Thus, more emphasis of the PO on its role in the value chain will most likely result in the relationship between members and the PO becoming more contractual, with stricter rules regarding performance, the allocation of costs and benefits and enforcement of agreements.

Managerial capacity

POs need to have the management and organisational capacity to play an intermediary role between producers and their customers. Whether the members themselves carry out management tasks or whether they hire outside professionals, managerial ability needs to be strengthened. POs participating in high-value supply chains need to have expertise in marketing, in the technical aspects of production, in input procurement and distribution, in meeting phytosanitary and food safety standards, and in financial management. When outside professionals are brought in to manage the organisation, the governance relationship between the management and the board of directors requires extra attention. The members of the board will only be able to direct and control the management if they themselves have sufficient knowledge of marketing strategies and customer requirements.

Outside support

POs in developing and transition economies often receive substantial support from external stakeholders, such as government agencies, donors and NGOs. This support in general is greatly appreciated, and in some cases even indispensable for the establishment of economic activities by the PO. However, POs are and should remain autonomous member-based organisations. External stakeholders supporting the PO should not take control. Financial and technical support may be welcome, but it should not become so dominant that the PO becomes dependent on it for its very existence. Even when receiving outside support, decisions on strategies and policies should be made by the members themselves. The history of state-dominated cooperatives has shown that too much control by external stakeholders can lead to problems, such as a weak sense of ownership among members, which leads to low member commitment, and weak accountability by the board and management. In sum, one of the main challenges for a PO receiving outside support is to remain a truly controlled by its members.

Notwithstanding these risks, support for the empowerment of producers and their POs seems necessary. Such empowerment can consist of several clusters of activities (see the article in this issue by Peter Otimodoch). First, support can focus on the PO itself, such as building the capacities of leaders, members or managers and other types of organisational strengthening; improving the skills needed to develop and lobby for favourable legislation; and improving negotiation skills to enter into and maintain partnerships (both vertical and horizontal). This type of capacity building is a slow and uneven process that requires donors to be patient and to develop long-term support programmes.

Second, development cooperation agencies can help POs to set up market information systems in order to collect, assess and distribute the information producers need to improve their competitiveness. Third, they can help POs provide technical assistance to their members and help them comply with quality standards and certification requirements. Whatever the focus of donor/NGO support, it should be based on a long-term strategy, since building a viable PO that will play a major role in linking its members to foreign markets requires a sustainable commitment.
Much of the NGO community has experience working with producer organisations. Although there is a large variety of POs and institutional environments differ, there are commonalities in the management and organisation of POs and in the challenges they face. Acknowledging these commonalities opens the door to learning from the experiences of others, and for joint development of pathways for PO facilitation. Particularly the rise of national and international supply chains and the need to help smallholder farmers and their POs to strengthen their position in these chains provides multiple opportunities for collaboration, collective learning trajectories and joint support projects.

Further reading

Da Silva, C.A. and H.M. de Souzo Filho, H.M. (2007) Guidelines for Rapid Appraisal of Agrifood Chain Performance in Developing Countries, Agricultural Management, Marketing and Finance, Occasional Paper 20, FAO.

Penrose-Buckley, C. (2007) Producer Organisations: A Guide to Developing Collective Rural Enterprises. Oxfam GB.

Rondot, P. and M.H. Collion (eds) (2001) Agricultural Producer Organisations: Their Contribution to Rural Capacity Building and Poverty Reduction. World Bank.

Ton, G., J. Bijman and J. Oorthuisen (eds) (2007) Producer Organisations and Chain Development: Facilitating Trajectories of Change in Developing Countries. Wageningen Academic Publishers.

Links

International Cooperative Alliance (ICA)

Wageningen University and Research Centre