Agricultural cooperatives and producer organisations
What cooperatives are, the ICA principles, types of farm cooperatives, famous examples, why some succeed and others fail, and a surplus distribution sum.
On this page
One small farmer selling a few litres of milk or a few bags of grain has little bargaining power and pays high costs for transport, inputs and credit. Hundreds of farmers acting together can own a processing plant, buy fertiliser in bulk, negotiate with supermarkets and run their own bank. Cooperatives are businesses owned and controlled by their members for their mutual benefit, and they have been one of the most important ways for farmers to gain economies of scale and market power.
Cooperatives handle a large share of farm marketing and input supply in many countries, from dairy in New Zealand, the Netherlands, Denmark and India to grain and inputs in North America and Japan. Their principles, types and performance are standard exam topics in agricultural economics and extension.
What a cooperative is
The International Cooperative Alliance (ICA) 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.
Key differences from an investor-owned company:
- Users own it: members are the farmers who supply or buy through it.
- Democratic control: typically one member, one vote, not one share, one vote.
- Surpluses return to members in proportion to their use of the cooperative (patronage), not mainly in proportion to capital.
Members therefore play three roles at once: they are the owners who provide capital, the users who supply or buy, and the controllers who elect the board. Tensions between these roles, such as wanting high milk prices now versus retaining profits for investment, run through cooperative management.
The cooperative principles
The modern principles trace back to the Rochdale Society of Equitable Pioneers, a consumer cooperative founded in England in 1844. The ICA's 1995 Statement on the Cooperative Identity lists seven:
- Voluntary and open membership.
- Democratic member control.
- Member economic participation: members contribute capital, receive limited return on it, and share surpluses by patronage.
- Autonomy and independence, including from governments.
- Education, training and information.
- Cooperation among cooperatives.
- Concern for community.
Types of agricultural cooperatives
- Marketing and processing cooperatives: dairy, fruit, coffee, sugar, grain, cotton.
- Input supply cooperatives: fertiliser, seed, feed and fuel.
- Credit cooperatives: the rural credit societies inspired by Friedrich Wilhelm Raiffeisen in Germany in the 1860s spread worldwide.
- Service cooperatives: machinery sharing, irrigation, artificial insemination, storage.
- Farming cooperatives, where land is pooled and worked jointly; these have had more mixed results.
- Multipurpose cooperatives, combining several functions, common in Asia and Africa.
Many systems are tiered: village societies federate into district unions and national federations.
Notable examples
- Dairy: Amul and the Anand pattern in India, which grew into a national dairy cooperative network involving millions of milk producers; FrieslandCampina (Netherlands), Arla Foods (Denmark and Sweden), Fonterra (New Zealand).
- Marketing and inputs: Ocean Spray (cranberries) and CHS in the United States; the JA (Japan Agricultural Cooperatives) group.
- Coffee and cocoa: many smallholder cooperatives in Africa and Latin America, often linked to fair trade certification.
Why cooperatives succeed or fail
Success factors:
- A clear economic purpose valued by members, such as a better milk price.
- Member commitment and loyalty, supplying the cooperative even when a private trader briefly offers more.
- Professional management under member governance.
- Adequate capital and sound finances.
- Independence from political interference.
Common problems:
- Free riders: farmers who benefit from the cooperative's effect on market prices without joining.
- Horizon problem: members leaving soon have little interest in long-term investment.
- Weak capitalisation, since returns to capital are limited.
- Elite capture and poor governance, where a few members or officials control decisions.
- Government control, which in many countries turned cooperatives into state agencies.
Newer producer organisations and producer companies combine cooperative ownership by farmers with company law, allowing more flexible capital and management.
Distributing a cooperative's surplus
A dairy cooperative ends the year with a net surplus of 100,000 dollars. Its by-laws require:
- 15 per cent to a statutory reserve fund: 15,000.
- A dividend on share capital limited to 10 per cent; members hold 200,000 dollars of shares: 20,000.
- The remainder as a patronage bonus in proportion to milk supplied: 100,000 − 15,000 − 20,000 = 65,000.
Members supplied 1,300,000 litres in the year, so the bonus is 65,000 ÷ 1,300,000 = 0.05 dollars per litre.
A member who supplied 6,000 litres and holds 500 dollars of shares receives 6,000 × 0.05 = 300 in patronage bonus plus 500 × 0.10 = 50 in dividend: 350 dollars. Most of the return follows use, not capital.
Key points
- Cooperatives are user-owned, democratically controlled businesses that return surpluses by patronage.
- Seven ICA principles, rooted in the Rochdale Pioneers (1844): open membership, democratic control, member economic participation, autonomy, education, cooperation among cooperatives, concern for community.
- Types: marketing and processing, input supply, credit (Raiffeisen), service, farming and multipurpose.
- Tiered structures, such as village society, district union and federation, link small farmers to large markets.
- Success needs a clear purpose, committed members, good management, capital and independence; free riding, weak capital and political control cause failures.
What the exams ask
- School-leaving and entrance papers: meaning, principles and types of cooperatives with examples.
- Degree and research-fellowship entrances: cooperative principles and their history, structure of cooperative systems, success and failure factors, and comparisons with companies and producer organisations.
- Professional and policy examinations: cooperative law and governance, capitalisation, surplus distribution, and the role of cooperatives in value chains.
Described in general terms: the kind of examination, not a past paper. Laisha never reproduces exam questions.
Questions people ask
How is a cooperative different from a company?
In a company, investors own it and votes and profits follow shares. In a cooperative, the users own it, each member usually has one vote, and surpluses are shared according to how much each member uses the cooperative.
Why do some cooperatives fail?
Common reasons are poor management, members selling elsewhere when prices are briefly better, lack of capital, and interference by politicians or a few powerful members.
Are producer companies the same as cooperatives?
They share the idea of farmer ownership, but are registered under company law, which can allow more flexible capital and management while keeping control with producers.
Sources
- International Cooperative Alliance. Statement on the Cooperative Identity. ICA, 1995.
- Cook, M. L. "The future of US agricultural cooperatives: a neo-institutional approach." American Journal of Agricultural Economics 77, 1153–1159 (1995).
- Kurien, V. I Too Had a Dream. Roli Books, 2005.
- Birchall, J. Rediscovering the Cooperative Advantage: Poverty Reduction through Self-Help. International Labour Office, 2003.
- Bijman, J., Muradian, R. and Schuurman, J. (eds) Cooperatives, Economic Democratization and Rural Development. Edward Elgar, 2016.
More in agricultural economics and marketing
Discussion
Questions, corrections and notes from readers on this article. Every comment is checked before it appears: keep it on the topic, and do not share phone numbers, links or contact details.