A Cooperative venture
is a “user owned and user controlled” business for the benefit of the users.
Unlike an investor owned firm where the shareholder need not use its services
to benefit from the investment, in a cooperative the benefits accrue only when
the member investor use its services.
A shareholder, for
example, in a Ford Motor Co or Maruti Suzuki need not purchase these cars to
get dividend or realize the appreciated value of the share of these companies.
However, for a cooperative share there is no secondary market nor there any
mechanism to estimate its true value due to the nature of the institution as
user owned and user controlled. The members benefit when they use the services
of the cooperative. In case a farmer is a member of a marketing cooperative he
would be getting a better price for his produce compared to the non member.
Similarly, if he is a member of a cooperative supplying input such as seeds,
fertilizer, pesticides etc he would be getting them at a lower price compared
to the market. He can be also confident about the quality of the input supplied
as well as its timely availability.
Cooperatives can be reliable suppliers especially during the times of
shortages.
Whatever profit the cooperative
may make is returned to the members based on their patronage that is proportion
in which the members used the services of the cooperative. Therefore, the
relationship between the members and the cooperative is transactional rather
than financial as in the case of investor owned firms. The principle of any
enterprise is pursuing owner interests. In case of a firm it is the shareholder
value whereas in a cooperative it is user value.
The user of the
services of the cooperative is a patron. The patrons are members of the
cooperative and are eligible to vote in running its affairs. Each member has
only one vote regardless of the number of shares he held or the volume of
business he did with the cooperative. Thus control of cooperative is truly
democratic.
Cooperatives
and Market Failure
Cooperatives emerge
because the existing businesses were not able to provide the goods and services
as expected. For example, as the farmers are scattered there may be few who
would be involved in aggregating the surplus output. These few may again face a
limited business opportunity in an area or a region and hence a given area is
serviced by a single buyer to achieve some scale. Thus with no competition they
offer lower price to the farmers and extract a larger profit from their
ventures. This is more so in case of perishables like milk, vegetables, fruits
etc. Similarly, there would be few input suppliers who would charge higher
price for the inputs in the absence of competition. Many time quality brands
may not be available as the suppliers may be getting higher margin from other
brands and hence little incentive to stock them. Therefore, it makes sense for
the farmers to come together to form cooperatives to reap the economies of
scale. They can pool their resources to make market arrangements for their output
or buy the inputs in bulk thus lowering the cost and price which as individual
farmers they cannot realize. Cooperatives improve the bargaining power of the
farmers when dealing with other business to get a better deal for their output.
Purchase in large volumes of inputs reduces the cost of transaction as well as in
getting the discount. Cooperatives can also broaden the market opportunities
for farmers by getting into value added processing. However, the nature of the
organization itself is a constraint in raising enough capital.
Value
Addition
If the farmers are able to raise enough
capital they can also invest in value added processing. However, as the
incentive is in the use of the services and the voting rights have no relation
to number of shares held it is always difficult for cooperatives to raise enough
capital to invest and operate at a higher level in the value chain. Further if
the cooperative aims to go up the value chain into processing and marketing it
would be a challenge to coordinate the customer demand with that of member
farmers’ activities. For example, if the quality expectations of the consumers
and the input supplied are to be matched. In case it was difficult or not
possible to measure objectively the quality of the input supplied to the
processing units, to monitor and enforce compliance among the member farmers
would be daunting.
Governance
Cooperatives are
governed by an elected board and day to today business done by paid techno
managerial cadre. Therefore, apart from the general body which consists of all
members who own the cooperative the governing mechanism include a board and
paid employees of management. Participation of the members, governance by the
board keeping the interest of the farmers and the efficiency in day to day
operations brought about by the management are three critical pillars for the
cooperative. However, in India, a fourth dimension is added in the form of
government through the registrar of cooperatives. Registrar is supposed to act
as friend, philosopher and guide to the cooperatives and ensures that
cooperatives function in accordance with the Cooperative Act. Since the
registrar has no stake in the cooperative many feel registrar is a hindrance to
efficient functioning of the cooperatives rather than facilitate their smooth and
efficient functioning.
