Mórakert Purchasing and Service Co-operative – Hungary

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By , May 16, 2013 10:42 am

The Mórakert Purchasing and Service Cooperative, in Mórahalom in Csongrád county, located in the southeast of Hungary, is active in the fruit and vegetable sector. In 2005-2007 it had 730 members (2005)  and procured also from around 2000 non-members. The co-operative has a site equipped with a full infrastructure. A handling, sorting and packaging line for vegetables and fruit was put into operation in 1999 and in 2003 a so-called “agri-logistics centrum” was set up by the co-operative, which covered 4,000m2 including a cold storage depot which was 1/4 of the total area. In June 2006 the cooperative was occupying 15,000m2 and a further six hectares, reflecting a rapid increase in activities. From 2008, the cooperative faced increasing financial costs and entered in bankruptcy in January 2011.

The Common Agricultural and Entrepreneurial Society, Mórahalom was established in January 1994 with the aim of organizing small-holders within a loose network. It was a non-profit organization. The number of founding members of the Society was 35. The main activity, in addition to organizing joint projects, was the organizing of collective purchasing activities. It worked as a coordination mechanism with farmers that were engaged in direct sales of their vegetables to larger buyers. The society had only limited common funds, the membership fees. This common fund proved far insufficient to finance purchases. In practice, each individual member generated amongst themselves the sums required for the quantities to be purchased. Members were informed of delivery dates, and they transported the supply by means of their own vehicles and stored them on their sites. (Bakucs et al, 2007)

However, the main problem was still the need to coordinate the marketing of the smallholders’ produce. Therefore, the next step was to set up the Mórakert Purchasing and Service Cooperative in April 1995. The co-operative extended its membership  and circle of suppliers. The cooperative grew very fast and managed a large infrastructure. In June 2006 the cooperative was occupying 15,000m2 and a further six hectares in Mórahalom, which is a significant increase from the initial area. The facilities are fitted with modern sorting and packaging lines, qualifying 20 per cent of the cooperative’s products for export. A computer supported information system helped the work in the new headquarters. Mórakert Cooperative started to supply Plus, Penny Market and Profi stores, and later they delivered to almost all retail chains in Hungary.

Anticipating free-riding

 Already in 2007, when the cooperative was considered as being extremely successful and innovative (Regoverning Markets), some ‘cracks in the surface’, some disintegrative tendencies,  became visible:

“However, in order to establish such countervailing power and reduce transaction costs, the cooperative is becoming more and more dependent on non-member trade, which lead to ‘free-rider’ problems. Although the cooperative can resolve some such problems, if it is going to grow this is an issue that will have to be dealt with more fully.” (Bakucs et al, 2007)

This high incidence of services to non-members even threatened their eligibility for EU-CMO support to producer organisations. Indeed, this triggered the need to develop a new organizational model. A limited company was set-up to which members and other suppliers could sell their products. The cooperative who is owner of this limited company, called Mórakert TÉSZ KFt, together with the local authority of Mórahalom (8%). In this construction the limited company is still a producer-owned organization, while the cooperative provides only services to members as required for eligibility of CMO-support (Bakucs et al, 2007).

Non-member trade was very important for the cooperative because of the growing turnover, however these products are only accepted when members’ fruit and vegetables have already been purchased. Non-members will not get any reimbursements or price supplements and they have no voting rights; therefore the ‘free rider’ problem had been contained a long time.  The cooperative provided a pre-financing service by covering some of the productions costs for contracted members if they fulfil certain criteria. Over a year members must have delivered at least 80 per cent of the quantity stated in their contract. However, these measures had been implemented because the contracting discipline has proved to be so weak. (Bakucs et al, 2007)

  Coping with working capital constraints

The co-operative had to invest significantly in order to keep its growth. The co-op reinvested most of the annual profits/surplus in the co-operative upscaling. The value of the so-termed co-operative share, which represents the ownership increased from HUF 25,000  (around €100) in 1995 to HUF 190,000 (around €750) in 2009. This contribution was only partly enough for providing financial support needed for the development described above. New members had to pay an additional amount of HUF 330,000 (around €1,300) as a single payment contribution. Apart from the self-financing with member contributions and cooperative revenues, the co-operative organization had access to some state support from the Ministry of Agriculture, the Ministry of Economy and the Ministry of Employment, and managed to get European Union support through successful tenders. The co-op got 150 million (around €600,000) from the budget of European Union, since it met the requirement regarding POs in the fruit and vegetable sector. They used also bank credits and loans, including a revolving charge account. In 2005, the share of own equity of the co-op was 42 per cent.

Some products are sold on a contractual basis according to weekly prices to the retail. The co-operative is more or less satisfied with the contracts and connections already established, but it should be noted that it is extremely difficult to fulfil the exacting requirements with respect to quality, quantity and range, as well as the other terms of trade and payment stipulated by the retail chains (Szabó, 2011). Mórakert suffered from the constraints in getting access to working capital. The need for prompt payment in the absence of patrimony or significant reserve funds, created a liquidity problem that had to be resolved through four different sources (Szabo, 2012), when after the 2008 banking crisis, the access to bank credit became more and more constrained. The combination of prompt payment to farmers and delays in payments by the contracted buyers resulted in high costs of working capital. The tension is especially manifest as the cooperatives faces competition with other potential marketing service providers, e.g. traders in the black and grey trade on spot markets, and a dependency on trade with non-members without binding obligations to supply to the cooperative.

Szabo (2011) points to two different type of liabilities that strangled the cooperative: 1) Huge delays in payments to members for the their products (2 billion HUF), and 2) Loans to third parties, mainly for investments and development (1 billion HUF). In 2011, the Court of Csongrad County (SE Hungary) has ordered farm co-operative Mórakert under liquidation. Mórakert’s accumulated debts reached HUF 3.6bn in 2010 (around 12 million Euro), a third owed to its suppliers. About half of the money owed to suppliers was paid with the cooperation of the Hungarian Development Bank (MFB), state-owned Datesz  cPLc and a factoring company, and the rest will depend on what can be realised from the liquidation. Mórakert continued to operate more or less during the liquidation procedure, and probably a kind of integration of horticultural producers will be established on their industrial site, with full equipment, possibly with partial state ownership thereafter. (Regional daily Delmagyarorszag, Budapest, January 26, 2011)

 
Source:

Ton, G. & G.G. Szabó (2012). Support for Farmers’ Cooperatives. Case Study Report. Organisational mechanisms to solve collective action challenges in vegetables marketing. Wageningen: Wageningen UR. http://edepot.wur.nl/244836

Veiling REO – Belgium

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By , May 16, 2013 10:34 am

REO Veiling was established in 1942, in order to address the burgeoning fruit and vegetable culture, which was steadily developing into a unique phenomenon in Mid-West Flanders. The present supply hall and auction room, which have been in operation since 1 April 1991, are located on the “De Klauwaertbeek” industrial estate in Roeselare, and cover a 20 ha surface area. The packaging department and buyers’ depots are taking up more than 9 ha. REO Veiling is number five in the ranking of largest farmers’ cooperatives in the food chain in Belgium. There are 1,400 members supplying through REO.

Fair Pricing

 The REO Veiling has maintained the auction clock as its core mechanism of price determination. The growers needed to have trust in the capabilities to the cooperative to generate fair prices to them. The change to bilateral transactions and future contracts, was considered to be a threat to this transparency and could generate problems in the membership when the price for their products as settled by REO in these direct transactions were lower than the prices paid to other producers in similar auctions.  Director Rita Demaré summarize the major challenge that auction cooperatives face:

 “The auction has the task to get the best out of the market. We make decisions in the interest of our members, but that is not immediately clear for all. We definitely can improve our communication to our farmers. As auction we need to watch that there is sufficient market for  our products.” (Van Bavel 2012)

To adjust the cooperative to the tendency of buyers demanding more diversified, high quality and packaged vegetables, REO Veiling decided for a major internal reorganisation. In 2008, they added a commercial service to their core-activity and employed their former crop advisors to market and product managers. This shift was accompanied with a series of necessary training to their staff and an increase in the margins that members pay to the auction as a percentage of the turn-over (1,2%). (REO Actueel #59, February 2008)

 “The REO Veiling has consciously – after a thorough reflection with you, colleague-producers – chosen to keep the auction clock. The sales of the commercial entity has been activated but is supportive for the auction-sales. This is not the easiest way, but a way that must keep your trust in your sales organisation.” (Rita Demaré in REO Actueel #69, October 2009)

The commercial entity of REO Veiling negotiates future contracts directly with buyers. Contracts can vary between one week and one year.  This addition of future contracts was not a decision taken solely by REO. This is has been the strategy in most Belgium auction cooperatives, united in LAVA.

  “I do not see the future contracting as an end in itself, as it was considered in the Netherlands, but as an extra service to the client, attractive to clients at moments when the auction system does not run smoothly enough for them. The facility covered in 2007 on average around 10-15% of total turn-over of all Belgium auction cooperatives, with some products at a quarter of the volume” (Maarten De Moor interviewed by Vlaams Infocentrum Land- en Tuinbouw, 29-04-2007)

Anticipating Free-riding

To reduce the fluctuations in supply and resulting price volatility in the auction system, and to guarantee threshold supply to invest in value adding activities, like packaging for the retail, REO Veiling introduced a system of binding supply agreements. Producers have to state the amount of produce that they are going to deliver and are being controlled on deviations.

 “When there are unexplainable differences between the outlook and the supply, the producer will have to cost part of the costs.” (Rik Decadt interviewed in Boerderij Vandaag, March 15, 2006).

To further bind the members to the cooperative, in spite of these stricter requirement, additional services have been introduced. An important service is the collection of the vegetables directly from the members farm. REO Veiling together with a private company established a special transport firm for this, Rejo Fresh.

 

Source:

Ton, G. & G.G. Szabó (2012). Support for Farmers’ Cooperatives. Case Study Report. Organisational mechanisms to solve collective action challenges in vegetables marketing. Wageningen: Wageningen UR. http://edepot.wur.nl/244836

ZON Fruit & Vegetables – Netherlands

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By , May 16, 2013 10:31 am

ZON Fruit and Vegetables was set up as the Cooperative Auction Association in 1915. Eighty-seven years later, midway through 2002, after various mergers and structural changes ZON has developed into one of the largest fresh produce cooperatives in Europe. Until 2001 the growers were members of local sales cooperatives that in turn were members of ZON. A major growth step was made with the incorporation of the various business activities in a number of operating companies that are controlled by ZON Holding B.V. The cooperative has about 400 members. Recently, ZON has entered a partnership with the Spanish cooperative UNICA to facilitate year-round deliveries to its retail clients. ZON also manages a 130 ha industrial zone.

Fair Pricing

ZON Fruit & Vegetables uses a mix of three different price-determination mechanisms. The auction clock, historically the main mechanism, became increasingly less important. A second function performed by ZON is as a broker, offering prices to potential buyers. The third mechanism is the use of long-term contracts. Most of the supply, from 85% of the members, comes from the region round the cooperative, Venlo, and a small but increasing part of the supply is imported from Spain. The cooperative provides logistic services to its members. They manage a fleet of (subcontracted) trucks that take the product from the place of production to the auction or, when sold through the other two mechanisms, directly to the buyer. Buyers are generally whole-sellers, and to a lesser extent supermarkets in the Netherlands. In 2010, ZON has re-engineered its commercial division to expand the volume of direct sales to the retail. In 2011, ZON started a pilot to supply directly to US supermarkets.

In general, in the Netherlands, the growers’ associations and trading houses have succeeded in concluding long-term agreements with the supermarket chains to only a limited extent: the auction clocks have been largely abolished in most marketing cooperatives, even though a sort of  spot market has remained. The negotiations have retained their short-term character since the contracts relate to at most a couple of weeks. With the short-term character of the delivery and price agreements the market remains, in essence, a spot market. Solely the rules governing the spot market have changed: firstly, the transparency of the market has decreased since the market’s equilibrium price is known only approximately. Secondly, scope for renegotiations has been created. Transactions carried out using the auction clock were confirmed by pressing a button, but bilateral agreements offer scope for the renegotiation of agreements (Klemperer, 1989; Jansen et al., 2001). The combination of these developments has not been beneficial to mutual confidence between the market players in the greenhouse vegetable chain. More than in the past, confidence now needs to be acquired and maintained (Bunte 2009).

 Anticipating Free-riding

ZON Fruit & Vegetables offers a choice to its members and the use (and benefits)  of the clock auction system differs among sectors. From 2010 onward, the tomato growers have increased the volume that they market through the clock auction, while the pepper producers had a contrary stance towards the auction clock.  The growers of pepper like to negotiate directly with retailers and prevent low prices in a context of high volumes and low prices. They complain about ‘desperate’ growers that accept low prices, and the atomisation of supply over several marketing cooperatives as the major weakness of price-determination. They want to reduce the amount negotiated through the auction clock to the minimum. Till 2007, the pepper producers (responsible for a quarter of total turn-over) of ZON had been coordinating prices with other cooperatives, specifically with FresQ, and has been observed for monopolistic behaviour. Interestingly, a fusion of activities of the marketing cooperatives, instead of this informal price coordination, to get alignments in prices would have been acceptable under anti-monopoly regulation.

These tensions between pepper producers wish for more bargaining power and the wish of ZON to keep the supply through ZON cooperative evolved towards a situation that half of the produce of the pepper produer group being negotiated through FresQ and half through ZON.

 

Source:

Ton, G. & G.G. Szabó (2012). Support for Farmers’ Cooperatives. Case Study Report. Organisational mechanisms to solve collective action challenges in vegetables marketing. Wageningen: Wageningen UR. http://edepot.wur.nl/244836

Alito Joint Christian Farmers’ Group (AJOCFG): oil seed marketing

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By , October 24, 2012 9:20 am

Context
The Alito Joint Christian Farmers’ Group (AJOCFG) in Uganda, was founded in 1998, consisting of 5 members. Their joint interest was to market high quality oil seed production (predominantly sunflower seeds). In 2004 the organization registered as Community Based Organization to expand its function to input provision for production, and extension. By then the core group had expanded to 58 members. In 2005 the group started growing, because there was demand from other regions to benefit from the services. In all the AJOCFG grew to a constituency of 62 cluster sub groups, totaling a number of 1860 members by 2010. These sub-groups are organized as a second tier of producers. Collection of seeds takes place at the sub-groups level. Marketing is done at the level of AJOCFG. In order to manage the growth of the producer group, the AJOCFG installed a governance system for fair and transparent treatment of both incumbent, as well as new-coming members in terms of contribution, access to services, and pricing of their produce..

Mechanisms
The governance system to manage growth comprises of a set of complementary mechanisms:

Differentiating services between members and non-members.
For new member groups AJOFCG applies an admission fees to select for the most motivated of farmers. On top of that an annual membership fee is put in place for all members for rendered marketing services. Every member sub group thus contributes more or less the same in proportion to used services . Non-members may sell their seed to AJOFCG, but will not profit form the added value which is created in sales after bulking.

Anticipating side selling
AJOFCG applies two mechanisms to aid in anticipating side selling. First and foremost they encourage delivery commitment by farmers through providing credit to the farmer subgroups, or support farmer groups to banking institutions for credit indirectly. This credit can be used to finance farming activities during the planting, and growing season. The farmers can repay their loan at harvest time, when they come to sell their produce. Repayment is strictly enforced. In case of side-selling, producer groups as a whole are reprimanded, with the ultimate sanction of barring them from membership at AJOCFG.

Secondly, AJOFCG always makes sure that the price for seeds offered to member-farmers is always set higher than the market price. This provides and fosters loyalty towards selling produce through the AJOCFG channel.

Quality assurance
To guarantee quality of supply each individual farmer has record of his or her supply provided at the subgroup (second tier) level. When the bulked produce is collected by AJOCG the average quality of the bulk is used to determine price levels. The farmer groups are thus remunerated for their average quality, providing an incentive to the group to maintain and control the quality levels of the produce they supply.

Outcome
Fair terms, and clear rules ensure that supply is tightly arranged and free riding is prevented. This results in stable and predictable quality and volumes of oil seed, which provides AJOCFG with a credible proposition to their buyers’ market.

Reference

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