Not Too Poor to Invest
This post was authored by Julia Baumgartner from Equal Exchange.
This is the fourth post in the Cooperative Development Learning Series, which highlights learning from USAID’s Cooperative Development Project. Click the links to read the first, second, and third posts.
How agricultural cooperatives in Latin America are generating their own capital through member investments
In the global south, many agricultural cooperatives historically were established as development projects, lacking a long-term goal of sustainability, especially of the financial kind, and have since become continually dependent on project funding and loans to get by. Cooperatives, like any other business, need capital to support their membership and provide services that allow their businesses to grow. But both cooperatives and development practitioners alike have underestimated the capacity of small farmers, often with limited resources, to take ownership and lift up their cooperative businesses. Simply put, there is a deep-seated perception that small-scale farmers are too poor to invest in their organizations.
But what happens when we stop and question this paradigm; are small farmers really too poor to invest?
With support from the Cooperative Development Program, Equal Exchange set out to answer this question. In 2010, we began working together with six farmer organizations in Latin America building member investment and savings programs. Seven years later, these six cooperatives have grown their member equity accounts by 550% and have generated $4.8 million dollars through small farmer investments.
How did that happen?
Cooperatives serve as important development engines for rural communities that grow crops like coffee and cocoa. These cooperatives are also essential in purchasing, processing and exporting these products that help wake us up in the morning and sweeten our days. But more than just acting as an entity to sell their goods, cooperatives can also function as an organism that provides small farmers with a sense of ownership, loyalty, and belonging.
As a worker-owned cooperative ourselves, Equal Exchange understands the critical nature of “Member Economic Participation” (Cooperative Principle #3) for the success of a cooperative enterprise. Members’ contribution to the cooperative’s capital base is called member equity, and when those contributions remain in their name, and they are long-term investments.
This value became one of the pillars of our Cooperative Development Program, financed by USAID and carried out with six cocoa and coffee cooperative partners in Peru, Dominican Republic, and Ecuador as a strategy to engage with our supply chain in new and innovative ways.
During initial conversations and baseline analysis work with our project partners and technical experts, we realized that many farmer cooperatives and associations in Latin America are missing this key component of financial investment in the cooperative by members through Member Capitalization Programs. We came to understand that there are few examples of member ownership in Latin America and that there is a lack of resources to support cooperatives and associations interested in starting such programs. So, we set out to do this work.
Over the last seven years, we supported six farmer organizations in building strong member equity and savings programs through support from expert consultants, financial training, cooperative exchanges, and member education.
In doing so, we identified three essential prerequisites that cooperatives should have in order to implement a Member Equity program at their cooperative:
1. Preparation: before implementing a capitalization plan, the board needs to ensure the cooperative is ready to take on the effort. It must have sound financial management systems since members must trust the organization to properly manage and protect their investments. Additional important factors are: operational success, commitment, legal review, financial readiness, integrated financial planning, clarity of objectives, enlightened and supportive board of directors and ability to innovate.
2. Establish a Capital Structure: before a plan can be implemented, the board of directors needs to decide how the plan will be structured, keeping in mind the relevant laws and regulations in their country. The two key components to address are:
- Contribution Plan: defines when and how members will contribute capital to the organization. This can be done through a one-time investment, ongoing fee collection or ongoing per-unit capital retains on farmer’s product deliveries.
- Redemption Plan: defines when and how members will be able to redeem their equity from the organization. This should define the return of both interest and principal and over what time period.
3. Member Education: For producer enterprises, member communication and education should be seen as a sound investment in the future. Members can make better voting decisions and contribute to enterprise development when they understand the business and financial issues that the enterprise faces. Member education programs and communication plans that are continually updated and adapted are critical pieces, both before and after the approval of a Member Capitalization Plan, to build members’ trust and understanding in this capital structure.
What started out as an idea was fully adopted by each of the partner cooperatives/associations who developed their own unique member equity or savings programs relevant to their structure and context. With these programs, members create savings and invest in their co-op, and their business has working capital that allows it to grow and reduce dependence on high-interest loans.
By creating Member Equity programs, the cooperatives in our project have not only added a vehicle through which they can fund their strategic plans, but they have also created more engaged members. Not only have they generated USD $4,824,409 for their organizations, but 100% of members at all cooperatives are now on time with their Member Equity payments. Aside from these numbers, partners have expressed other financial and organizational benefits as a result of these member equity programs, including lower interest rates and better terms from lending institutions.
For example, one of our cocoa and coffee partner cooperatives in Peru was able to continue to decrease interest levels paid to local banks from 13% in 2013 to 5.65% in 2016. According to the cooperative, investment from members serves as collateral and shows a stronger commitment by their member owners.
This has been the result of a major shift in the mentality of not only farmer members and cooperatives, but those that support these organizations. Strong education and communication programs, as well as individual development programs, have been fundamental in creating a shift in the cooperatives - away from a culture of dependency towards a culture of self-reliance. In fact, this mindset change has been one of the most challenging endeavors in this work. Additionally, local organizations which support these cooperatives can also change their mindset and encourage more self-reliant organizations in the future.
By going beyond our commercial relationships as cooperative businesses, our CDP work has opened our eyes to the resilience of our partners and their capacity to incorporate innovative changes to their businesses. This is an ever important focus given the constant challenges farming cooperatives face, including unstable markets, lack of access to financing, climate change, an aging membership, among others.
In the long-term, this type of farmer investment can create a healthy cycle with positive impacts for farmers, cooperatives and communities.
For more information, we invite you to read our newly produced manual “Not Too Poor to Invest: the Case for Smallholder Farmer Ownership Programs” which highlights this work and case studies from several of our cooperative partners.
Julia Baumgartner is a consultant at Equal Exchange for the Cooperative Development Program and has worked with fair trade coffee and cacao cooperatives in Latin America for nearly 10 years. Julia has a Master’s in Development Practice from the Tropical Agriculture Research and Education Center (CATIE) in Costa Rica and a Bachelors of Arts in Spanish and Sociology from the University of Wisconsin - Madison.