Mórakert Purchasing and Service Co-operative – Hungary

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