Agribusiness Management · Agri-sector specialisation · also ABM 525, Management of Agribusiness Co-operatives, Agricultural Finance & Co-operation (AICE-JRF Unit 6)
Farmer-owned businesses: cooperative principles and history, how cooperatives and producer companies are governed and managed, and the public programmes that promote producer organisations.
In the exams: agricultural master's entrance examinations, cooperation (heavy); agricultural economics PhD entrance and fellowship examinations (heavy); agribusiness management PhD entrance and fellowship examinations, producer organisations (present); agricultural development bank officer recruitment (heavy)
A cooperative is a business owned and controlled by the people who use it. A dairy cooperative is owned by the farmers who sell it milk, a credit cooperative by the people who save in it and borrow from it, a consumer cooperative by the households that shop in it. The member is at once owner, customer and controller, and that triple role is the source of both the strength and the typical problems of the form. 'Producer organisation' is the wider term for any legally registered body of primary producers that does business on their behalf. It may be a cooperative society, a producer company, an association or a group recognised under a support programme. The European Union speaks of recognised producer organisations, China of farmers' specialised cooperatives, and South Asian and many donor programmes of farmer producer organisations (FPOs).
The subject matters because smallholders are too small to deal on equal terms with input suppliers, processors, traders and banks. Pooling their purchases, their produce and their savings lets them buy cheaper, sell better, get credit and reach processing and export markets. Where the form has worked, cooperatives handle a large share of national output: dairying in Denmark, the Netherlands, New Zealand and western India; grain and farm supply in North America; coffee in Kenya and Colombia; and almost every farm service in Japan. Where it has failed, the usual causes are state control, political capture of boards, weak professional management, poor recovery of loans and members who see the society as a government office rather than their own business.
This manual starts from the International Co-operative Alliance (ICA) principles, compares cooperative systems on several continents and examines how the state shapes cooperatives, before turning to credit, federations, management, reform, producer organisations, support programmes and collective farming.
The subject appears in postgraduate entrance and research-fellowship examinations in agricultural economics and agribusiness, in recruitment examinations for agricultural and rural development banks, and in university economics and management examinations. Laws and programme rules change, so check every dated figure against current rules.
The International Co-operative Alliance (ICA), the world body of the movement founded in London in 1895, adopted the Statement on the Co-operative Identity at its Manchester Congress in 1995. It defines a cooperative as 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. Each part of the definition carries weight. 'Autonomous' separates a cooperative from a government department. 'Persons united voluntarily' separates it from a compulsory body. 'Jointly owned and democratically controlled' separates it from an investor-owned firm, in which votes follow capital.
Its values are self-help, self-responsibility, democracy, equality, equity and solidarity, with the ethical values of honesty, openness, social responsibility and caring for others.
Three features distinguish the cooperative from an investor-owned firm, and textbooks of agricultural cooperation summarise them as the user-owner, user-control and user-benefit principles. The user-owner principle says the people who use the cooperative finance it. The user-control principle says the people who use it control it, classically one member one vote. The user-benefit principle says the cooperative exists to benefit its users through their use of it, so surplus is returned in proportion to use (patronage), not in proportion to capital. An investor-owned firm maximises return on capital; a cooperative is expected to maximise the benefit of its members as suppliers or buyers, which is why economists model it differently.
The 1995 Statement sets out seven principles, the guidelines by which cooperatives put their values into practice. They are examined in this order and wording.
First, voluntary and open membership: cooperatives are open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political or religious discrimination. Second, democratic member control: members actively participate in setting policies and making decisions; elected representatives are accountable to the membership; in primary cooperatives members have equal voting rights (one member, one vote), and cooperatives at other levels are also organised democratically. Third, member economic participation: members contribute equitably to and democratically control the capital; at least part of that capital is usually the common property of the cooperative; members usually receive limited compensation, if any, on capital subscribed; surpluses are allocated to developing the cooperative (partly through indivisible reserves), to benefiting members in proportion to their transactions, and to other activities members approve. Fourth, autonomy and independence: agreements with governments or outside capital must preserve democratic control and autonomy. Fifth, education, training and information for members, elected representatives, managers and employees, and informing the public. Sixth, cooperation among cooperatives, through local, national, regional and international structures. Seventh, concern for community: sustainable development of their communities through policies approved by members.
The ICA had formulated principles twice before, in 1937 (Paris) and 1966 (Vienna). The 1995 revision added the principle of autonomy and independence and the principle of concern for community. The United Nations declared 2012 and 2025 International Years of Cooperatives, and the International Day of Cooperatives falls on the first Saturday of July.
The modern movement is usually dated to 1844, when 28 working men in Rochdale, Lancashire, formed the Rochdale Society of Equitable Pioneers and opened a shop in Toad Lane. It was a consumer cooperative. Its rules, later called the Rochdale principles, included open membership, one member one vote, limited interest on capital, distribution of surplus as a dividend in proportion to purchases, cash trading, sale of pure and unadulterated goods, political and religious neutrality, and promotion of education. Robert Owen is counted as a forerunner, but Rochdale was the first society to survive and be widely copied.
Cooperative credit began in Germany. Hermann Schulze-Delitzsch organised credit associations for artisans and small traders in towns from the 1850s; these became the people's banks, with share capital and paid management. Friedrich Wilhelm Raiffeisen, a mayor in the Rhineland, organised rural credit for peasants; the Heddesdorf loan society of 1864 is taken as the model. Raiffeisen societies had a small area of operation so that members knew one another, unlimited liability of members, little or no share capital, honorary (unpaid) management, loans only to members for productive purposes, and indivisible reserves. Mutual knowledge and unlimited liability substituted for collateral. Wilhelm Haas later organised agricultural supply and marketing cooperatives in Germany.
The Raiffeisen model travelled widely. Local Raiffeisen-type banks spread through the Netherlands, Austria, Italy, Scandinavia and Quebec, where Alphonse Desjardins founded his first caisse populaire in 1900. Colonial governments also exported it. A report to the Madras government in the 1890s ended with the advice 'Find Raiffeisen', and the 1904 credit societies law of British India followed the Raiffeisen pattern for rural societies. That law, with a government registrar at its centre, was later copied in British colonies in Africa and Asia.
Economic theory gives several reasons for farmer cooperatives. They add countervailing power when farmers face few buyers (monopsony) or few sellers of inputs. Edwin Nourse argued in the 1920s that a cooperative acts as a competitive yardstick: even a modest cooperative presence forces private traders to pay fairer prices, because farmers have somewhere else to go. Cooperatives reduce transaction costs and risk, give access to scale economies in processing and storage, and can guarantee a market to members.
The same ownership structure creates recurring problems. Michael Cook's 1995 analysis traced them to vaguely defined property rights. The free-rider problem arises when new members gain the same benefits as old members without paying for the reserves the old members built, and when non-members benefit from the yardstick effect. The horizon problem arises because a member's claim on the cooperative ends when he stops patronising it, so older members prefer cash payouts to long-term investment. The portfolio problem arises because members cannot adjust their investment to their own appetite for risk. The control problem is the difficulty members and boards have in monitoring professional managers, since there is no share price to discipline them. The influence-cost problem arises when members with different interests spend effort lobbying over decisions. They explain chronic undercapitalisation and reforms such as tradable delivery rights and outside investors.
Denmark is the classic case of cooperatives transforming a farm economy. When cheap grain from the Americas hit European prices in the 1870s and 1880s, Danish farmers shifted to butter and bacon for the British market. The first cooperative dairy was founded at Hjedding in 1882, and the first cooperative bacon factory at Horsens in 1887. Within a few decades most Danish milk passed through cooperative dairies. Features included binding delivery contracts, one member one vote regardless of herd size, and the folk high schools inspired by N. F. S. Grundtvig. Over the twentieth century the many small dairies and slaughterhouses merged into a few very large cooperatives, some of them multinational, still owned by farmer members.
In the Netherlands cooperatives hold large shares of dairy processing, sugar, potato starch and horticultural marketing. Horticultural auctions, run cooperatively, developed the clock auction, a descending-price (Dutch) auction in which the price falls until the first buyer stops the clock. Dutch rural credit grew from Raiffeisen-type local banks with two central organisations, which merged in 1972 into one cooperative banking group. Dutch law, in Book 2 of the Civil Code, lets a cooperative choose the liability of members on dissolution: unlimited (WA), limited (BA) or excluded (UA). Dutch cooperatives have been leaders in modernising cooperative finance, for example by issuing member certificates or placing operations in a subsidiary company in which the cooperative holds most of the shares while outside investors hold a minority.
American agricultural cooperatives are mainly marketing and supply cooperatives, plus a farm credit system and rural electric cooperatives. Two laws are basic. Section 6 of the Clayton Act of 1914 and, more fully, the Capper-Volstead Act of 1922 allow farmers to act together in associations to process and market their products without that alone being treated as an illegal combination under antitrust law; the Capper-Volstead Act requires that the association operate for the mutual benefit of members, and either follow one member one vote or limit dividends on stock to 8 per cent a year, and that it not deal in more products of non-members than of members.
The Farm Credit System began with the Federal Farm Loan Act of 1916 and is a borrower-owned network of lending institutions. Rural electric cooperatives spread after the Rural Electrification Act of 1936. Under Subchapter T of the Internal Revenue Code (1962), a cooperative can deduct patronage refunds from its taxable income; if it pays part in cash and retains part as equity through a qualified written notice of allocation, at least 20 per cent must be paid in cash, and the member is taxed on the whole allocation.
In the 1990s 'new generation cooperatives' in the Upper Midwest used closed membership, delivery rights tied to shares (a member buys shares in proportion to the volume he will deliver), and transferable shares whose price could rise, a design meant to overcome the free-rider and horizon problems when investing in processing.
Kenya has one of the largest cooperative sectors in Africa, historically strong in coffee, dairy and, above all, savings and credit cooperatives (SACCOs). Cooperatives are registered under the Co-operative Societies Act (Cap 490), administered by a Commissioner for Co-operative Development. The Act was rewritten in 1997 during economic liberalisation to reduce state control, and amended in 2004 after problems of mismanagement appeared. Deposit-taking SACCOs are prudentially regulated by the Sacco Societies Regulatory Authority under the Sacco Societies Act of 2008.
Japan's agricultural cooperatives, known as JA, were organised under the Agricultural Cooperative Act of 1947, soon after land reform created a nation of small owner-farmers. A local JA is multipurpose: it gives farm guidance, supplies inputs, markets produce, takes deposits and lends, sells mutual insurance, and runs welfare services. Local JAs are federated at prefectural and national level, with national bodies for marketing and supply, for banking, for mutual insurance, and a central union that historically audited and guided local cooperatives. Almost all farm households are members, and many non-farmer residents join as associate members to use the bank and shops. A reform enacted in 2015 ended the central union's statutory audit and guidance authority over local JAs, moved their audit to certified accountants, and pressed JAs to focus on raising farm incomes.
Elsewhere in Africa, Ethiopia promoted multipurpose primary cooperatives federated into cooperative unions, several of which export coffee directly after a reform let unions bypass the national commodity auction. In Ghana, a farmer-owned cocoa cooperative formed in 1993 became a well-known fair-trade supplier. In Latin America, Brazil's cooperatives are strong in grain, dairy and credit in the southern states, and the 1988 Constitution says that creating a cooperative needs no state authorisation and that the state may not interfere in its functioning. Colombia's coffee growers are organised in a national federation and in many local coffee cooperatives that buy from members under a purchase guarantee. China's Law on Farmers' Specialised Cooperatives took effect in 2007 and was revised in 2017. It requires that at least 60 per cent of distributable surplus be returned to members in proportion to their transactions, writing the patronage principle into statute.
Cooperatives reached the world's farmers by two routes. In north-western Europe and North America they grew mostly from below. Farmers, artisans and consumers formed societies, and the state's role was to pass an enabling law. Examples are the British consumer movement after Rochdale, the German credit societies, the Danish dairies and the American marketing associations. In much of South Asia, Africa, the Caribbean and the Pacific, cooperatives were introduced from above by colonial administrations, usually as a remedy for rural indebtedness or a way to organise export crops. The colonial model law first drafted in 1904 and 1912 put a government Registrar of Co-operative Societies at the centre. The Registrar registered societies, audited them, inspected them and could dissolve them. The same pattern was copied in Ceylon, Burma, Malaya and British colonies in East and West Africa between the 1910s and the 1940s. Francophone Africa had its own state-run rural societies.
The two origins left different legacies. Where cooperatives grew from below, the state mostly regulates them as it regulates other businesses. Where they were planted from above, governments kept wide powers over registration, elections, audit and management after independence. Many also used cooperatives as instruments of planned development, as channels for subsidised credit, input distribution and crop procurement.
After the Second World War many newly independent countries made cooperatives a pillar of rural policy. A typical approach was state partnership: government bought shares in cooperatives at every level, guaranteed their borrowing and lent them refinance through a development bank. In return, government nominated directors and officials, and the registrar gained power to supersede boards, that is, to replace an elected board with an administrator. A South Asian rural credit survey of 1954 put the dilemma in a phrase still quoted: cooperation has failed, but cooperation must succeed. Its remedy was state partnership. Similar policies shaped cooperatives across much of Africa, Asia and Latin America.
State money gave cooperatives capital but also brought 'officialisation': boards dominated by nominees, managers who were civil servants on transfer, and decisions taken for political ends. Loan waivers and postponed elections weakened repayment discipline. The fourth ICA principle, autonomy and independence, added in 1995, was largely a response to this experience.
Cooperative banks raise a separate problem, 'dual control'. A cooperative bank is registered under cooperative law, so the registrar controls its registration, elections and audit. As a bank, it is supervised by the central bank or a financial regulator. When the two authorities overlap or leave gaps, supervision weakens. Countries resolve this in different ways. Some place deposit-taking cooperatives fully under the banking regulator, as European cooperative banks are. Others create a specialised regulator, as Kenya did for savings and credit cooperatives in 2008. Others extend the central bank's powers over cooperative banks while leaving cooperative matters to the registrar.
In federal countries cooperative law may be made by states or provinces. A cooperative whose members span several states then needs a framework of its own. The United States leaves incorporation to state statutes and handles antitrust and tax federally. Some federal countries have a separate national law for multi-state cooperative societies. The European Union created the Statute for a European Cooperative Society in 2003 (Council Regulation No 1435/2003) for cooperatives with members or activities in more than one member state.
Two international texts frame cooperative law today. The first is the ICA Statement on the Co-operative Identity (1995), with the ICA's Guidance Notes on the principles (2015). The second is ILO Recommendation No. 193 on the Promotion of Cooperatives (2002), adopted by governments, employers and workers at the International Labour Conference. Recommendation 193 replaced Recommendation 127 of 1966, which applied only to developing countries and accepted a strong state role. The 2002 text applies to all countries. It asks governments to provide a supportive legal framework consistent with the cooperative values and principles, and to treat cooperatives on terms no less favourable than other forms of enterprise. It also asks them to avoid the kind of control that would undermine cooperative autonomy. It is a recommendation, not a binding convention.
Some constitutions protect cooperatives directly. Brazil's 1988 Constitution states that creating a cooperative does not depend on authorisation and bars state interference in its functioning. Several other constitutions direct the state to promote cooperatives, including Portugal's, Italy's and those of a number of Latin American and African countries. India's 2011 constitutional amendment added the right to form cooperatives to the fundamental freedoms and set rules on board size, elections, audit and the supersession of boards. A 2021 court ruling confined most of those rules to multi-state societies, because the subject belongs to the states.
Some governments have also created ministries for cooperatives. Kenya has long had a ministry responsible for cooperative development, and India created a separate Ministry of Cooperation in 2021. A dedicated ministry can raise the sector's profile but also risks closer state direction. The test is whether policy strengthens member control or replaces it.
Cooperative credit is usually organised in tiers. At the base are local societies or banks owned by members, who save and borrow there. Above them are regional or district cooperative banks that pool surplus funds, lend to the local units and supervise them. At the top is an apex or central institution that manages liquidity, reaches money and capital markets, and provides payment and other services. Germany's Volksbanken and Raiffeisenbanken now work with a single central institution. France's local and regional Crédit Agricole banks own a listed central company. Quebec's Desjardins caisses and the Dutch cooperative banking group, which merged its local banks into one bank in 2016, show the trend towards consolidation. In South Asia the classic short-term structure has three tiers: primary agricultural credit societies at village level, district central cooperative banks, and a state cooperative bank at the apex, which draws refinance from a national development bank.
Each tier adds a margin to its cost of funds, so a member of a three-tier system pays the refinance rate plus several margins. For example, refinance at 4.5 per cent with margins of 0.5, 1.0 and 1.0 points gives a farmer rate of 7.0 per cent. This is one reason many structures have cut tiers. Deposit-based systems are usually stronger, because savers watch the lenders.
Long-term farm credit was historically supplied by separate land mortgage institutions that lent against land for drainage, irrigation and machinery. Examples are the Landschaften of Prussia from the eighteenth century, the federal land banks of the United States Farm Credit System from 1916, and the land development banks of South Asia. Many have since merged into general-purpose lenders.
The recurring weaknesses of weak cooperative credit systems are the same in many countries. They include poor recovery and high overdues, dependence on refinance rather than deposits, political interference through loan waivers and elections, too many thin tiers, and weak primary societies. Savings and credit cooperatives (SACCOs) and credit unions, which lend members' own savings, are the main alternative model. They are strong in East Africa, North America and parts of Latin America and Asia, and deposit-taking ones are increasingly placed under prudential regulation.
Non-credit cooperatives do business other than lending. Marketing cooperatives sell members' produce. Local societies assemble and grade it, and regional or national federations sell it, store it and sometimes export it. They may advance money against produce and, in some countries, act as government agents in price-support procurement. Processing cooperatives add value: dairies, sugar factories, cotton gins, oil mills, rice mills, wineries, and fruit and vegetable plants. Farmer-owned sugar factories in western India from 1950, sugar-beet cooperatives in France and the northern United States, and wine cooperatives in southern Europe pay members on the quality of what they deliver. Payment for sugar factories is based on sugar recovery, not weight alone, much as dairies pay on fat and solids-not-fat.
Supply cooperatives buy or manufacture inputs in bulk and return the surplus to members as patronage refunds. Farm supply federations in North America and Europe, and fertiliser cooperatives in South Asia that own factories and sell through village societies, are among the largest cooperatives in the world by turnover. Other important types include fisheries cooperatives, which often manage access to fishing grounds and market the catch, as well as forestry, labour, consumer, housing and rural electricity cooperatives.
A multipurpose cooperative combines credit and non-credit business in one body. An example is a village society that lends crop loans, sells fertiliser, stores grain and buys produce. Japan's local JAs are the fullest example. Reformers in many countries recommended this integration because a society that sells the member's crop can recover its loan from the sale proceeds, which is called linking credit with marketing. A single-purpose society is simpler to manage and audit. A multipurpose society spreads overheads and serves the farmer at one point, but it needs better accounts and managers.
Dairy is the sector in which cooperatives are strongest worldwide, because milk is perishable, is produced daily by many small suppliers, and needs immediate collection, chilling and processing. A farmer facing a single private buyer has no alternative outlet. Cooperatives dominate milk processing in Denmark, Sweden, Finland, the Netherlands, Ireland and New Zealand. They hold a large share in the United States and France and are strong in Kenya's highlands and in South Asia.
The Anand pattern, from western India, is the standard case study of a dairy cooperative system built among very small producers. In 1946 farmers in Kaira (now Kheda) district, supplying the Bombay milk scheme through contractors who paid them little, formed a district milk producers' union of village societies. Under its general manager Verghese Kurien the union built processing plants and, in the 1950s, learned to make milk powder from buffalo milk. This let the flush-season surplus be stored rather than wasted.
The pattern has three tiers. The village dairy cooperative society collects milk twice a day, tests each member's milk for fat and solids-not-fat (SNF), and pays on both quality and quantity. The district union owns chilling, processing and cattle-feed plants, and gives members veterinary care, artificial insemination and extension. A state federation markets the products of all unions. Producers own the whole chain, professionals run it under elected boards, and payment on fat and SNF rewards quality and makes dilution pointless.
Governments and donors have repeatedly tried to copy successful dairy cooperatives. India's national dairy development board (1965) designed Operation Flood (1970-1996) to replicate the Anand pattern in major milksheds. Its first phase was financed by selling dairy commodities donated through the World Food Programme from European surpluses, so gifted food built a domestic industry rather than displacing it. Later phases drew on World Bank credit. Kenya's dairy cooperatives grew after the state dairy monopoly was liberalised in the 1990s, and some large highland societies now process and brand their own milk. New Zealand's dairy cooperatives merged in 2001 into one national cooperative. In 2012 it let farmers trade shares among themselves, so that departing members no longer drained capital by redeeming shares.
The common lessons are a daily business that members value, transparent quality-based pricing, producer ownership of processing and marketing, and professional managers answerable to farmer boards, with the state at a distance. Where governments ran dairy federations through officials, results were weaker. Building cooperatives with outside money works only if that money strengthens, rather than replaces, member control.
In line with the sixth ICA principle, cooperation among cooperatives, primary societies join together in secondary and tertiary federations that give them scale and a voice. Business federations are themselves cooperatives, owned by their member cooperatives. They process and market produce, manufacture or import inputs, run banking and insurance, and export. Japan's local JAs own national federations for marketing and supply, for banking and for mutual insurance. Local dairy societies own district unions in the Anand pattern. Ethiopian primary cooperatives own the regional unions that export coffee, and European cooperative banks own their central institutions.
Representative federations, or national cooperative unions, speak for the whole movement to government, run education and publicity, and keep statistics. Examples include Brazil's national cooperative organisation, Japan's central union of agricultural cooperatives, the national cooperative unions of Kenya, Tanzania and several Asian countries, and the farm cooperative bodies in the European Union and the United States. At world level the ICA, founded in London in 1895, has regional offices for Africa, the Americas, Asia-Pacific and Europe. The ICA does not register, regulate or lend to cooperatives. Regulation is national.
Federations work best when they have a real business that primaries value, such as dairy marketing, fertiliser supply or central banking. Purely representative federations that depend on government grants and subscriptions often add little. Federations can also form new businesses that no small society could reach alone, for example export houses, organic-certification groups and seed companies.
Alongside the cooperatives' own federations, many countries have statutory bodies created by acts of parliament to finance or develop cooperatives. They are not cooperatives themselves: they answer to government, not to members. Examples are national cooperative development corporations that lend for processing, storage and marketing, national dairy development boards, and agricultural development banks that refinance cooperative banks. The United States Farm Credit System began with federal capital but became borrower-owned. Confusing statutory bodies with federations is a common error. A statutory body is created by law and governed by appointees; a federation is owned and controlled by its members.
Some governments use cooperative marketing federations as agents for price-support procurement. The arrangement brings volume but ties the federation's business to government policy, a trade-off judged by the fourth ICA principle.
Education is the fifth ICA principle, and cooperative colleges and universities put it into practice. Examples are the Co-operative College in the United Kingdom, the Moshi Co-operative University in Tanzania and the Co-operative University of Kenya and a national cooperative university founded at Anand, India, in 2025. A rural management institute founded at Anand in 1979 trains managers for farmer organisations.
A cooperative has three organs. The general body of all members is the supreme authority: it adopts bye-laws and amends them, elects the board, approves the annual accounts and the audit report, decides on the distribution of surplus, and approves the budget and plans. The board of directors is elected by the general body; it sets policy, approves major decisions, appoints and supervises the chief executive, and reports to the general body. The chief executive (secretary, manager, managing director or CEO) runs day-to-day operations within policy, employs staff, keeps accounts and implements board decisions. In small societies the secretary may be the only paid employee.
Common failures are boards that interfere in daily operations such as hiring, purchase and loan sanction; chief executives who dominate a board of part-time farmers who cannot read financial statements; officials of the Registrar or State government nominated to boards who owe loyalty elsewhere; and long-serving chairmen who treat the society as a personal or political base. The ICA principles answer these with democratic member control, education of elected representatives, and autonomy.
Agency theory explains the control problem: members (principals) cannot easily monitor managers (agents), and a cooperative lacks the share price and takeover threat that discipline managers of investor-owned firms. It must rely on the board, audit and clear measures such as member price relative to the market, cost per unit handled and loan recovery.
Professional management means that people with technical and managerial skill, hired on merit and paid market salaries, run the business while elected boards set direction. Large European dairy and meat cooperatives employ professional chief executives under elected boards and member councils, and the Anand-pattern unions hired professional managers and technologists. Where managers were government officers on deputation, often transferred and with no stake in the society's success, or local appointees without training, performance was poorer. This was common under state partnership in parts of Asia and Africa.
Reforms in several countries aim to raise management quality. Some cooperative laws let boards co-opt a limited number of experts in finance or management. Co-opted directors usually cannot vote in electing office-bearers, so skills are added without diluting member control. Liberal cooperative laws give boards freedom to appoint and pay their chief executives. Computerised, standardised accounts linked to higher tiers improve audit and reduce manipulation.
By the 1980s many state-sponsored cooperatives in Asia, Africa and Latin America were loss-making, politically controlled and dependent on government. Structural adjustment and liberalisation in the late 1980s and 1990s changed the setting. Marketing boards were dismantled, subsidies were cut and cooperatives had to compete. Reform moved in two directions: making cooperative law liberal so that cooperatives regain autonomy, and repairing the finances of cooperative credit.
Liberal laws limit state shareholding, nomination of directors and supersession of boards, and they return control to members. Many African countries rewrote their cooperative laws in the 1990s, including Uganda in 1991, Kenya in 1997 and Ethiopia in 1998. Kenya's experience is instructive. When state control was withdrawn faster than member oversight and audit were built, mismanagement grew, and the law was amended in 2004 to restore some supervision. In parts of South Asia a 1991 model law was followed by 'parallel' acts, beginning in 1995. These let societies that take no government share capital become largely self-regulating, trading state money for autonomy.
Credit revival has followed a common pattern. Governments offered recapitalisation to clean up accumulated losses, and the better packages were conditional on governance reform. A 2004 South Asian task force on rural cooperative credit is a well-documented case. It tied money to legal changes restricting state nomination and supersession, to member-driven primary societies free to borrow from any regulated lender, and to professional audit and prudential norms. The recurring lesson in every country is that money alone does not revive cooperatives; governance must change with it.
Large agricultural cooperatives in competitive markets face the property-rights problems described in Chapter 1, above all a shortage of capital. Responses include retained patronage and individual capital accounts, which are common in the United States. Others are member bonds and certificates in Dutch and Nordic cooperatives, and processing subsidiaries in which the cooperative keeps a majority and outside investors hold a minority. New generation cooperatives tie shares to delivery rights. At the extreme there is conversion. Several Irish dairy cooperatives floated their processing businesses on the stock exchange from the 1980s, and New Zealand's national dairy cooperative created a farmer-only share market in 2012 to remove redemption risk. Each step brings capital but moves decisions towards return on capital, so members must judge how much control they will trade.
Recent reforms aimed at governance include independent election authorities that take elections out of the hands of registrars and sitting boards. Others are cooperative ombudsmen who hear members' complaints quickly, information officers, reserved board seats for women, and stronger audit and disclosure rules. Prudential regulation of deposit-taking cooperatives has spread, as with Kenya's SACCO regulator from 2008 and the extension of central-bank powers over cooperative banks in India in 2020. Governments have also tried to make village societies multipurpose. India's 2023 model bye-laws, for example, let village credit societies take up dairy, fisheries, storage, input retail and service centres. Judged by the ICA principles, such measures cut both ways: they bring business to primary societies and also tie them more closely to government programmes.
A farmer needs credit, seed, fertiliser, pesticide, machinery services, advice, storage, and a buyer for the crop. When each comes from a different agency in a different town, the farmer spends time and money, and no agency sees the whole farm. The single-window idea is that one local institution, usually the village cooperative or FPO, provides all or most of these at one point, and links them: the loan finances inputs bought from the same society, and the crop is sold through it so that the loan is recovered at source.
Cooperative theory supports this. Integrating credit with supply and marketing lowers transaction costs, improves recovery, and lets the society earn margins on several lines to cover its overheads. Japan's multipurpose JAs are built on this idea. Reformers in South Asia and Africa promoted service cooperatives on it from the 1950s, and today's multipurpose village societies, one-stop farmer service centres and producer organisations that sell inputs and aggregate output all aim at the same thing. The risks are locked-up working capital, contagion between business lines and complex accounts; good practice is separate accounts and cost-covering prices for each line, adding lines only when management capacity exists.
Input aggregation means the FPO or cooperative collects members' demand before the season, buys in bulk from manufacturers or wholesalers, and sells to members. Gains come from bulk discounts, lower transport cost per unit, assured quality (fewer spurious inputs), and timely availability. The society must hold the licences required for dealing in seed, fertiliser and pesticide, which differ by country and product, and must manage credit sales carefully.
Output aggregation means the society collects produce from many members, grades and sorts it, stores it if prices are expected to rise, and sells in bulk to processors, exporters, institutional buyers, electronic market platforms or wholesale markets. Gains come from bargaining power, lower cost per unit of transport and handling, access to buyers who want volume and consistent quality, and the chance to capture processing margins. Members are paid either an agreed price on delivery or through pooling: produce of the same grade is pooled, sold over the season, and each member receives the average net price of the pool after costs, in proportion to the quantity delivered. Pooling spreads price risk but delays payment; many societies pay an advance on delivery and a final settlement later.
Two examples of calculation recur in exams and practice. Break-even volume equals annual fixed cost of the aggregation business divided by the net margin per unit handled. A producer organisation with fixed costs of 600,000 currency units a year and a net margin of 1,500 currency units a tonne must handle 400 tonnes to break even. The pool price equals total sale proceeds minus pool costs, divided by total quantity delivered to the pool. Warehouse receipts from registered warehouses can let members or the FPO borrow against stored produce instead of selling at harvest.
Farmers who want to do business together can choose among several legal forms, and the choice shapes ownership, control, capital and regulation. The traditional cooperative society is registered under cooperative law, follows one member one vote, limits the return on capital and distributes surplus by patronage. Where registrars have wide powers, it is exposed to state control. New generation cooperatives in North America, described in Chapter 2, kept the cooperative form but closed membership and tied transferable shares to delivery rights. The European Union recognises producer organisations (POs) under its common market rules (Regulation (EU) No 1308/2013). A recognised PO is formed and controlled by producers to concentrate supply, plan production, improve quality and market members' output. It may be a cooperative or another legal form, and fruit and vegetable POs can receive co-financed operational programmes. China's farmers' specialised cooperatives (2007 law) are a further type, and many African countries register farmer groups, associations and cooperative unions under different laws.
A hybrid form is the producer company, introduced in Indian company law in 2002 for farmers who wanted the autonomy of a company with the member ownership of a cooperative. Its objects are the production, procurement, grading, pooling, processing and marketing of members' primary produce, input supply and services to members. Primary produce covers agriculture, horticulture, animal husbandry, forestry and fisheries, and in that law also handloom and handicraft products. It is formed by ten or more individual producers, two or more producer institutions, or a combination, and membership is limited to producers and their institutions. Liability is limited, but shares cannot be listed or publicly traded and can be transferred only to members. Members receive a limited return on capital and share surplus by patronage bonus, and voting is democratic.
Laws also differ on member liability. Early Raiffeisen societies had unlimited liability. Dutch law lets a cooperative choose unlimited (WA), limited (BA) or excluded (UA) liability on dissolution. Most modern producer organisations have limited liability, which makes it easier to recruit members but means lenders look for capital, collateral or guarantees instead.
Formation is less a legal event than a social process that ends with registration. A promoting agency, often an NGO, a cooperative development agency or a specialised organisation engaged under a public or donor programme, usually follows these stages.
First, diagnosis: choose a cluster of villages with a common product and enough farmers; study the value chain, current prices, buyers, input suppliers and the gap the FPO can fill. Second, mobilisation: meet farmers, explain the idea and the obligations of members, and form farmer interest groups of about fifteen to twenty farmers each, which can meet regularly and later elect representatives. Third, business planning: agree on the first business, often input supply because it earns cash quickly, and then output aggregation; prepare a business plan with volumes, margins and working capital. Fourth, legal registration: choose the form (for example a cooperative society with the cooperative registrar, or a producer company or association with the companies registrar), prepare memorandum and articles or bye-laws, collect share capital, appoint first directors and register. Fifth, building systems: open a bank account; set up accounts, share register and member records; hire a CEO and accountant; obtain licences for input trade; hold the first general meeting. Sixth, business operations and linkages to buyers, banks and public programmes, followed by gradual withdrawal of the promoter.
Where cooperative law gives registrars wide powers, a company-type form offers uniform rules and less interference but carries company-law compliance costs. A cooperative may reach cooperative bank credit and public programmes more easily but is more exposed to the registrar's control.
Whatever the legal form, the members in general meeting are the ultimate authority. They approve the annual accounts, appoint auditors, elect directors, approve the distribution of surplus (including patronage bonus and limited return on share capital) and amend the rules. Voting follows cooperative rather than capitalist rules. Where members are individual producers, each has one vote whatever his shareholding. Where members include producer institutions, some laws allow votes in proportion to each member's business with the organisation. Many laws let an organisation transfer the shares of a member who stops producing or trading with it to active members, so that ownership stays with users.
Laws usually set a minimum and maximum board size, typically from a handful to about twenty directors. The minimum ensures collective oversight and the maximum keeps the board workable; one producer company law, for example, sets five to fifteen. Directors are elected by members from among themselves, and some laws allow a limited number of co-opted experts. The chief executive is appointed by the board, works full-time and manages the business under the board's supervision. In some laws, including the producer company law, the chief executive is also an ex-officio director. Producer organisations must keep reserves, pay patronage bonus in proportion to members' business, have their accounts audited and file annual returns. Some laws also require an internal audit.
A producer organisation must distinguish between surplus and profit in the ordinary sense. The patronage bonus is a return to the member for the business he did with the organisation, not a dividend on capital, and the return on share capital is limited. A withheld price may also be used: the organisation pays an advance on delivery and settles the balance once its accounts are closed.
Most FPO failures are failures of governance and management rather than of law. Common problems are directors who are not active farmers or who represent only one village; a CEO hired by the promoting agency whose loyalty remains with the promoter; members who do not know they are owners and sell to traders when prices differ slightly (side-selling); little paid-up capital and hence little working capital; poor record-keeping; and board meetings held only on paper. Many FPOs registered on a target are inactive within a few years.
Practical governance tools include: an active share register and member database; regular member meetings at the interest-group level; a board calendar with monthly review of sales, stock, receivables and cash; clear policies for input sales on credit and for pricing produce; a written agreement between members and the FPO on delivery; separation of the CEO's management role from the chairman's; training for directors; timely statutory filing; and transparency about margins so that members see why the FPO keeps part of the price.
Gender and inclusion are part of governance. Women do much of the farm work but own less land and are less often members. Some support programmes require at least one woman on the board of a supported organisation, and promoters in South Asia, East Africa and Latin America also form women-only producer groups.
Governments and donors in many countries fund the formation of producer organisations, because the start-up costs of mobilising farmers, building systems and finding markets are high, and the benefits are shared. Programmes differ, but most combine some of the same instruments. The first is formation and incubation support, which pays a promoting organisation to mobilise farmers and handhold the new body for several years. The second is management cost support for the salaries of a chief executive and accountant and for office costs, tapered and time-limited. The third is a matching equity grant that adds to the capital members contribute. The fourth is a credit guarantee that lets banks lend without collateral. The European Union co-finances operational programmes of recognised fruit and vegetable producer organisations. India's 2020 programme to form 10,000 farmer producer organisations used all four instruments, with a five-year support period for each organisation.
A programme usually sets eligibility conditions. One is a minimum membership, often lower in hill, remote or sparsely settled areas where large groups are hard to form. That programme set 300 members in the plains and 100 in hill areas above 1,000 metres and the north-east. Others are a required share of small and marginal or landless tenant farmers, and governance rules such as at least one woman director. Implementation is usually shared among several agencies, such as development banks, cooperative development corporations and agribusiness bodies. A national project management agency coordinates them, tracks progress and keeps the programme database.
Management cost support lets a new organisation employ a professional chief executive and accountant before its business can pay for them. It is tapered and time-limited, often to three years, so that the organisation learns to cover its overheads from its own margins. A worked example: support of 1,800,000 currency units over three years, with a chief executive paid 25,000 and an accountant 10,000 a month, leaves 1,800,000 - (35,000 x 36) = 540,000 for all other heads.
A matching equity grant adds to the capital members raise, subject to limits, and the grant is the lowest of them. Suppose the grant matches member equity one-for-one, up to 2,000 currency units per member and 1,500,000 per organisation. An organisation of 450 members that has raised 500,000 gets 500,000; member equity limits it, since 450 x 2,000 = 900,000. An organisation of 900 members that has raised 2,000,000 gets 1,500,000, because the ceiling binds (matching gives 2,000,000 and 900 x 2,000 gives 1,800,000). The grant strengthens the capital base so that the organisation can borrow, and it is credited as shares to members. Because it is a matching grant, organisations whose members can contribute more receive more, which may favour better-off groups.
A credit guarantee covers part of a lender's loss if a collateral-free loan to a producer organisation defaults. It lowers the lender's risk; it does not reduce what the organisation must repay. Guarantees are usually tiered. Suppose cover is 85 per cent for loans up to 10 million currency units (ceiling 8.5 million) and 75 per cent for loans above 10 million up to 20 million (ceiling 15 million), parameters modelled on that 2020 programme. Then a loan of 8 million is covered up to 6.8 million, a loan of 18 million up to 13.5 million, and a loan of 20 million up to 15 million. Guarantee funds charge a fee and limit how often one borrower can use them.
Evaluations in several countries report a familiar pattern. Many organisations formed under targets remain small, thinly capitalised and dependent on their promoters. The real test of any programme is whether organisations stay viable after support ends and whether members' incomes rise.
Cooperative farming means farmers pooling land, labour or both to farm together. A classification used in many agricultural cooperation textbooks distinguishes four types. In a cooperative better farming society, members keep ownership and cultivation of their own land but cooperate in specific operations, such as buying inputs, using machinery or adopting improved practices. In a cooperative joint farming society, members pool their land for joint cultivation while keeping ownership; they work on the joint farm for wages and receive a return on their land in proportion to its area or value, plus a share of surplus. In a cooperative tenant farming society, the society owns or leases land and rents it out in plots to members, who cultivate individually and pay rent, and it supplies inputs and marketing. In a cooperative collective farming society, land is owned or leased by the society, members work on it collectively for wages, and the surplus is shared in proportion to wages or labour, not land; this is the most complete pooling.
Several governments promoted voluntary joint farming in the 1950s and 1960s, for example in India's five-year plans and in some Latin American and African land-reform programmes. Critics argued that peasants were attached to their own land and that large joint farms would weaken incentives. Many of the societies formed were set up to obtain concessions, were dominated by large owners or families, and did not last.
Collective farming on a national scale occurred in socialist states. The Soviet Union collectivised agriculture from 1929 into collective farms (kolkhozy), in which members worked land held by the collective and were paid according to work, and state farms (sovkhozy), run as state enterprises with wage labour; collectivisation was forced and caused great loss of life. China organised peasants into mutual-aid teams, then cooperatives, then people's communes from 1958; the communes were followed by famine, and from about 1978 the household responsibility system returned land use and residual income to households, raising output sharply. Tanzania's ujamaa villages of the 1970s are another example of state-led collective farming that fell short. The textbook lesson is that compulsory collectivisation weakens individual incentives and is hard to manage; incentive problems grow with group size.
Voluntary collective forms have done better in particular conditions. Israel's kibbutz (a collective community sharing property and income) and moshav (a cooperative village of individual family farms with shared marketing and supply) are the standard examples. Small groups can also farm together successfully. Examples are women's joint liability groups that lease land in South Asia under a state poverty-reduction programme, and group farming schemes in parts of East Africa and Latin America. They work when members share interests, the group is small enough to monitor effort, and credit and extension are available.
Modern FPOs mostly aggregate services, not land. Some combine the two, through group farming of a single crop to a common schedule, shared machinery, and contract production for a buyer, while leaving land in individual ownership. This keeps the scale economies in marketing and machinery without the incentive problems of pooling ownership.
A student needs the structure of the subject in a form that survives multiple-choice questions. That means the seven ICA principles in order; the dates of Rochdale, Raiffeisen, the ICA Statement and ILO Recommendation 193; the tiers of cooperative credit and of the Anand pattern; the main cooperative systems of Europe, the Americas, Africa and Asia; and the four types of cooperative farming. The student should also practise short calculations: equity grant as the lowest of three limits, credit guarantee cover, patronage distribution, pool price and break-even volume. For interviews at management institutes, be ready to explain why member-controlled, professionally managed cooperatives succeeded where state-controlled ones failed.
Five years into work as an producer-organisation CEO, cooperative manager, promoting-agency professional or bank field officer, the tasks are concrete. Prepare a business plan with break-even volumes and working capital; claim the equity grant correctly and credit shares to members; get a project loan under the credit guarantee; keep the share register, accounts, board minutes and statutory filings current; set member pricing rules and pool settlement; stop side-selling with delivery agreements and prompt payment; and train directors to read monthly accounts. A bank officer appraising an producer organisation checks membership, paid-up capital, business turnover, receivables, filings and the guarantee cover before sanction.
After twenty-five years, the work is institution building and policy. A senior cooperative or bank executive decides whether to merge weak societies, how to recapitalise a regional cooperative bank, how to separate board and management, whether to raise outside capital, and whether a federation should enter processing or exports. A senior official designs or evaluates programmes: whether equity grants and management cost support produce viable producer organisations, which agency model works, how to prevent registration to meet targets, and how cooperative law should balance supervision with autonomy. The judgement required is to balance state support against the autonomy that the ICA principles and experience show is essential.
A researcher with long field experience works on the unresolved questions. What determines producer-organisation survival and member income gains, and how can the effect of promotion be identified when organisations are not formed at random? How do cooperative property-rights problems (free rider, horizon, portfolio, control, influence costs) show up in different countries, and which capital designs solve them? Does the competitive yardstick effect exist in milk and produce markets with many smallholders? Why do member-controlled dairy systems outperform state-run federations? Comparative work across Europe, the Americas, Africa and Asia, and panel data from computerised cooperative records, are promising sources of evidence.
This manual does not give current counts of cooperatives, members or registered producer organisations in any country, because these change every year and published figures differ between sources; national cooperative registers, the ICA's World Cooperative Monitor and programme portals give current numbers. It does not reproduce any country's cooperative act (rules on dividend limits, reserve transfers, audit and elections differ widely), nor current guarantee fees or later amendments to the programme parameters used in the worked examples, which are modelled on a 2020 programme and stated in currency units. Coverage of Latin American cooperative law, China's farmers' specialised cooperatives, the EU's operational-programme rules and Francophone African cooperative law (the OHADA uniform act) is brief.
Original practice questions written to the syllabus and pattern of the exams named in each question's examTags. They are not past papers and do not reproduce any board's questions. Questions with empty examTags are practitioner cases. Programme parameters in numerical questions are illustrative, modelled on real producer-organisation support programmes, and are stated in each question; money is in neutral currency units.
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