Cooperatives: Adding Value and Market Power

1. Cooperatives: Adding Value and Market Power IFAP Congress 2006 by Marcus H. Borgström, President of the Board of PELLERVO Confederation of Finnish Cooperatives and Vice-President of the IFAP Cooperative Committee Presented by Veikko Hämäläinen, Managing Director of PELLERVO

2. Point of view • This presentation has somewhat European or even Finnish point of view. • The reason to this is the high degree of cooperatives in all steps of the food chain in Finland. So there may be points that some of you do not agree. • The basic ideas behind the presentation are worth thinking. Food chain • Food chain includes all activities from agricultural production to the consumers’ purchase decision. From stable to table - From farm to fork!

3. Conflict of economic interests in the food chain • Farmers try to get the best possible price for the products. • Private firms doing collecting, processing, marketing and delivering activities in the food chain try to make the best possible profit. • Private retail chains try to make the best possible profit. • Cooperative retail chains try to serve their members with cheap products and make reasonable profit. • Consumers want to have quality products at a reasonable price. Consumers have the money that everybody wants! • Who will get it and how much? In this competition the farmers’ situation is not good, because the closer you are to the consumer, the better possibilities you have to get the money! Farmer owned cooperatives are tools by which farmers can make money. But as any tool they must be kept in a good condition.

4. More money to the farmers. How? • Get a bigger share of the revenue in the food chain. => More market power • More money to the food chain. That is better price from the products. => Added value • Decrease the cost of the food chain, e.g. increase the efficiency of the food chain.

5. Market power • Farmer’s weak market power is basically due to the large number of farmers, and only few concentrated buyers (retail chains). In the worst case farmers are competing with each other. • Although the average farm size is growing, the farms are still small suppliers and they sell raw materials. • The trade of farm products is usually “push driven” instead of market driven.

6. Means to increase the market power • Farmers must unite into farmer unions. • Farmers must join/establish a firm, preferably a cooperative and as big as possible. For instance, if there are two retail chains, the equal counter force is two farm product suppliers. • Selling what consumers want, gives better price than selling what you have. • To change the push driven production to market driven production the cooperative has to listen carefully to the market signals. The cooperative must study the market and then produce and sell the products that consumers want and are willing to pay for. The better this is done, the more market power the cooperative has. • This may also mean changes between the farmer and cooperative: The cooperative must set standards for the farm products such as quality, method of production, use of pesticides, animal welfare etc. Continues…

7. € £ $ Means to increase the market power (2) • In many cases this means contract farming. The word contract farming may sound awful. The farmer is no more independent. But it is a difference to be contract farmer to a private company or to an own cooperative. The cooperative and the farmer are on the same side. • Anyway, if your cooperative does not sell what the customers want, somebody else will be happy to sell. • The cooperative must have a strategy how to act in the vicinity; neighbouring countries, where the local farmers try to do their best. • But one must remember that a cooperative is not a magic box that changes the situation automatically. A lot of hard work must be done, but it is worth it. • The goal must be the control of the food chain. The added value is in the chain. The better you control it, the more you can get.

8. OIL Added value • Raw materials have raw material markets and raw material prices = a low added value.Only, if there is a shortage of certain raw material (oil), the price may be good. • The added value comes from • processing: the cooperative prepares the food on behalf of the consumer • strong brands are a promise of a quality: origin, safety, taste etc. • professional marketing • not selling raw materials: sell meals, enjoyable moments with the food etc.

9. Increasing the efficiency of the food chain • As to the money the farmer is the last operator in the food chain. The retail chain and the (cooperative) processors take their share and pay what is left to the farmer. Therefore the reduction of the costs of the farmer controlled food chain benefits the farmers. • Increasing of the volume reduces unit costs. • The more there are independent operators in the food chain, the more profit must be made and the less the farmer gets. • The better the collecting, processing, delivering and marketing is the hands of farmers, the more efficient the chain can be and the more value will stay in the chain. This does not mean that the cooperative must do everything by itself. It can outsource certain activities and keep the control.

10. Hypermarket Threats • Multinational retail chains • Import of raw materials and processed goods from other continents.Low-cost countries can destroy high-cost countries. For instance in Europe, USA and Japan quality, safety, animal welfare, sustainability, family farming and living landscape are preferred factors. But it costs.These products must compete with products coming in countries where the production circumstances are not important or are unknown. • Creditability of domestic brands (to meet up to quality, safety, etc.) • Development of domestic trade; market share of hard discounters • Trade controlled processing at home or abroad; private labels.

11. Ownership / corporate governancein a cooperative • A cooperative is an enterprise, it is a demanding enter-prise to manage. • To run a cooperative is business, it is not agricultural policy. The most important and maybe the most difficult task of members is to elect the people to the board (and the supervisory board) and the most important task of the board is to elect the CEO. • When farmers are the owners of a cooperative, they should capitalize the firm. But usually they need the money to develop their own farm. • After a small start capital, the income capitalizing by earned profits is the most common method to increase the own capital. • Members must have patience grow the cooperative to a profitable and solid firm.

12. Summary • The farmers’ cooperation through cooperatives is a strong counterforce to the negative sides of globalisation. Cross boarder cooperatives and alliances are useful tools. • The basic principles of a cooperative are noble: democratic, one-member-one vote, freedom to leave, easy access etc. • Acting and working in a cooperative with these principles on the grass root level is a challenging task. • One has to be open-minded, ready to take and give and ready to work in a group of likeminded. • These abilities are as important as the knowledge of cultivation techniques or animal breeding. • With a talented board and personnel and committed farmer members the cooperative cannot fail.