Agricultural production cooperatives

In agricultural production cooperatives, all members work together on conjointly owned soil and share the income stemming from selling their agricultural produce.

Agricultural production cooperatives as organizations are not viable in the majority of transition countries due to the problems they face (Gardner & Lerman 2006). The first set of problems consists of finding incentives for managers and workers in allocating on-farm effort, mobilizing members’ savings, distributing the cooperative’s net returns, and dealing with members’ off-farm income. The second set comprises raising capital for investments and reaching the collective decisions needed to adopt innovations (e.g. a new technology) or change the product mix to meet market trends.

All these problems are well-known to agricultural production cooperatives in Western countries as well, and they are the reason for the low occurrence of this type of cooperative in the Western economies. However, farmers in Armenia, which neighbours Georgia, cooperate in the areas of irrigation, joint use of machinery and equipment, and joint sale of products or professional consultation (Bezemer & Lerman 2003).

Often, agricultural cooperatives are quantity and not quality oriented. As customers’ quality demands rise worldwide, cooperatives find themselves having to supply high quality products to meet customers’ requirements. To do so, they need to market high-quality products under a well designed brand (Hanf & Török 2008). If they concentrate on high-quality products, cooperatives are capable of integrating small farmers into the vertical agribusiness supply chain (Hanf & Török 2008). Thus, in order to sort out members who are not willing to produce high-quality products, cooperatives have to offer strictly supervised production contracts to their members.

Furthermore, to ensure well coordinated quality management, they have to group members with the same business aims. Last but not least, restricted membership through limited contracts is crucial to increase product quality (Hanf & Török 2008).

For cooperatives to successfully integrate into the supply chain, it is recommended that they deal with leading retail chains. However, in many CEEs, the leading retail chains are shifting towards the use of centralized procurement systems, cross-border

procurement systems, specialized wholesalers, globalized multinational logistics companies, preferred supplier systems, and private quality standards (Dries et al. 2004 p. 544). One crucial aspect for the success of cooperatives in the vertical supply chain is members’ commitment because it is a measure of how well a cooperative is able to differentiate itself from an investor-owned firm. The greater the cooperative’s ability to differentiate itself from such firms, the easier it is for the cooperative to retain its market share as borders disappear and multinationals move into markets they have traditionally ignored (Fulton 1999). As in CEEs and the CIS, in the Russian federation, attitudes towards cooperatives also tend to be negative (Golovina & Nilsson 2008).

The main reason for this is lack of trust. Golovina and Nilsson (2008) found in their study on Russian farmers that socio-psychological aspects play a major role with regard to cooperatives. Attitudes are crucial to matters such as farmers’ choice between cooperatives and privately owned companies.

The current cooperative systems in CEEs and the CIS emerged from the former Soviet agricultural organizations, the kolkhozes and sovkhozes (large ‘farm enterprises’), which were the collective farming systems in the former Soviet Union.

The Russian word kolkhoz is an abbreviated form of the words kollektivnoye khozyaistvo (‘collective farm’)⁵ (Britannica 2009b), while sovkhoz is an abbreviation of sovyetskoe khozyaistvo (‘soviet farm’)⁶ (Britannica 2009a). According to Gardner &

Lerman (2006 p. 6), collective farms can be defined as ‘large-scale horizontally integrated multifunctional entities operating in a centrally controlled environment

5 Kolkhoz: In the former Soviet Union, a cooperative agricultural enterprise operated on state-owned land by peasants from a number of households who belonged to the collective and who were paid as salaried employees on the basis of quality and quantity of labour contributed. Conceived as a voluntary union of peasants, the kolkhoz became the dominant form of agricultural enterprise as the result of a state program of expropriation of private holdings embarked on in 1929. Operational control was maintained by state authorities through the appointment of kolkhoz chairmen (nominally elected) and (until 1958) through political units in the machine-tractor stations (MTSs), which provided heavy equipment to kolkhozy in return for payments in kind of agricultural produce. Individual households were retained in the kolkhozy, and in 1935 they were allowed garden plots (Britannica 2009b).

6 Sovkhoz: State-operated agricultural estate in the U.S.S.R. organized according to industrial principles for specialized large-scale production. Workers were paid wages but might also cultivate personal garden plots. Its form developed from the few private estates taken over in their entirety by the state in the original Soviet expropriations. The number of sovkhozy increased during the period of collectivization beginning in 1929 and spurted again during the 1950s, when a number of kolkhozy, or collective farms, the more prevalent form of agricultural enterprise, were converted to sovkhozy. The Virgin and Idle Lands Campaign initiated in 1953 relied mainly on the sovkhozy. In 1973 the total area of sovkhozy was greater than that of kolkhozy for the first time. In 1990 the Russian government began encouraging the gradual conversion of sovkhozy to private farms (Britannica 2009a).

which had a responsibility for both economic and social aspects of rural communities and whose members were largely treated as hired hands.’

In the 1930s, the Soviet Union began to implement collective agriculture after having eliminated all private land ownership in October 1917 (Gardner & Lerman 2006 p. 6). Collectivization in the CEEs and the Baltic countries started after 1945 (Mathijs & Swinnen 1998 p. 21). Despite the forced collectivization of farms, the agricultural sector was not able to produce enough food for the growing population in the Soviet Union, which led to food shortages. Thus, the government subsidized food (Lerman et al. 2003). Couture et al. (2002 p. 2) describe the Soviet era with regard to farming as follows:

The State-controlled period was characterized by government interference in cooperative affairs at all levels. Most of the time, member registration was compulsory, and the directors and staff were not appointed or elected by the members, but directly appointed by the State. In many countries, cooperatives were not particularly concerned about profitability since they were subsidized by the government and received preferential treatment. In the same way, they were subjected to rigid State planning, which did not provide them with the possibility to develop their own entrepreneurial strategies. Their business affairs were often restricted to a small range of products and services, and State control extended to instructions and directives concerning, for example, the number of employees and their wages. In many countries, cooperatives were in actual fact instruments of the State, and were used to help meet the nation’s — and not the members’ — needs.

With the breakdown of the Soviet Union in 1989-91, the former command system disappeared almost overnight, creating a vacuum with regard to the large collective farms (Gardner & Lerman 2006). In the following years — the transition period in the 1990s — agricultural output declined rapidly, which can be partly assigned to the difficulties the countries had in creating new laws with respect to landownership. At this time, the so-called ‘decollectivization process’ (Mathijs & Swinnen 1998 p. 1) started, based on the decision of collective farm members to abandon collective agricultural production and start individual farms. The transformation of the former collective farms into private farms took different courses in the various countries that had been within the sphere of Soviet influence. Mathijs & Swinnen (1998) indicate that Albania and Armenia had the highest proportion of ‘decollectivization’, whereas Slovakia and Kazakhstan had the lowest; that is, in the latter two countries, even today almost only collective farms exist. It can be concluded that decollectivization occurs in countries where the productivity of individual farming is higher than that of collective farming. This is especially the case for agriculture with low mechanization, such as

fruit production or animal husbandry (Mathijs & Swinnen 1998). In many transition countries, agricultural cooperatives are mandated by law as the successors of former collectives (Gardner & Lerman 2006). In Russia, Ukraine, and Moldova, agricultural cooperatives are not cooperatives in the Western sense since they do not differ from other corporate farms (Gardner & Lerman 2006). Today, there are three types agriculture in all former Soviet republics: i) the small household plots of rural residents on corporate farms (former kolkhozy and sovkhozy), ii) plots cultivated by urban residents near cities, and iii) new individual farms outside collective or corporate enterprises (Lerman et al. 2003 pp. 14-15). The first two types are successors of the traditional Soviet agricultural system. The most productive type is the first group, individual farms run by rural residents.

A special case among agricultural production and service cooperatives is Israeli moshavim and kibbutzim (the plurals of moshav and kibbutz), which are mentioned here because they are an example of an organizational type that dominates the agriculture of an entire country. Moshavim and kibbutzim are not only methods of agricultural production; behind them stands an ideology that postulates farming as a way of life (Kimhi & Rekah 2008). Lecker & Shachmurove (1999 p. 539) define a kibbutz as a small, collective rural community in Israel based on voluntary membership. The persons working and living in a kibbutz derive income from agricultural production to which they contribute different amounts of labour. Income is distributed according to the individual needs of the kibbutz members. The moshav is organized differently. It is a cooperative village in which usually forty to eighty moshav member households operate their own farms (Haruvi & Kislev 1984).

Cooperation in the moshav differs widely, with some of them having joint cash management, central planning, and strong public services. Others are less organized communities in which farms are run individually. The predominant type of cooperation in moshavim is financial (Haruvi & Kislev 1984); thus, they can be seen as service cooperatives, in contrast to kibbutzim, which are production cooperatives. Moshavim have a long tradition, dating back to the year 1921 (Haruvi & Kislev 1984 p. 55), and were set up with clear aims: maximum self-sufficiency in food, cooperation in services, mutual aid in farm cultivation, handling without hired labour or off-farm work, and democratic government of the cooperative. The farm land belongs to the government and was distributed in equal-sized plots. Initially, moshavim were

implemented to settle large numbers of immigrants in rural areas and to give them the means to make their living. The egalitarian principles of the moshav, were designed to prevent the accumulation of national resources, like land and capital, in the hands of only a few individuals (Haruvi & Kislev 1984 p. 55). A third type of cooperation is the moshav shitufi, which is a combination of a kibbutz and a moshav. Agricultural production is performed collectively, while consumption is an individual matter.

Today, 60 percent of villages are organized as kibbutzim and moshavim and cultivate roughly 75 percent of all crops (Kimhi & Rekah 2008 p. 11).