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87. What do high market prices mean for cooperatives?

2010-08-30 Comments Off on 87. What do high market prices mean for cooperatives?

The New York “C” market price for coffee has been soaring in recent months, spending some time above the $1.80 per pound mark before settling this week into the less stratospheric but still heady $1.65 range.  While high prices generally do mean good news for smallholder farmers, they can create complications for cooperatives.

Smallholder farmers form voluntary associations because they believe — rightly — that they stand a better chance in the market together than they do as individuals. This is an ancient and proven strategy for overcoming the disadvantage of smallness in markets that reward size and economies of scale.  Farmer organizations can help their members get goods and services they could not access on their own, and negotiate better prices in the marketplace by aggregating the supply of many small-scale producers into commercially viable lots. 

Cooperatives sign contracts with coffee importers based on the expectation that they will collect from their members all the coffee they have committed to deliver to their customers. But the association is voluntary.  Actually collecting all that coffee at harvest time is a perennial struggle, even for many well established cooperatives with a long track record in the market.

  • Selling coffee to the cooperative.
    At harvest time, cooperatives need to pay their members for their coffee.  They rarely pay the full price up front, because few smallholder farmer organizations have enough working capital to do so.  The amount they pay upon receiving the coffee from their members, then, is usually just a portion of end value of the coffee, and is financed with loans.  The cooperative can pay the remainder of the value of the coffee to its members only later — sometimes months later — after the coffee reaches its destination and is paid for in full.  This is one of the drawbacks of loyalty — farmers who make good on their commitments to their cooperatives have to wait to get the full value of their coffee.

    Once the coffee has been purchased and the remainder of its value is available to farmers, cooperatives must discount the interest from the partial payment that was made at the time the coffee was collected — since these payments that were made out of  a loan to the cooperative. the cooperative must repay with interest, which it collects from its members.  While cooperatives help farmers get the loans they could not have accessed on their own, farmers sometimes balk at having to pay interest at all.

  • Selling coffee outside the cooperative.
    The alternative for farmers is to sell to the buyers who crowd the coffeelands at harvest time.  They pay farmers less than their coffee is worth, but they pay cash-on-the-barrel.  Farmers who need money immediately — the poorest farmers or farmers facing acute financial stress at home — are often willing to sell at a discount to avoid the wait and the interest payments.  When one or two farmers with urgent needs sell outside the cooperative, it usually doesn’t present a problem.  But when too many opt to sell their coffee to local buyers, cooperatives can struggle to meet their commitments in the marketplace.
  • How the market can affect the decision regarding where to sell.
    When market prices are low and cooperatives can secure even small differentials, farmers may be more willing to wait for a full payout.  But when prices are high, farmers may be less sensitive to differentials between what they can earn at harvest and what they can earn if they are willing to wait.  When markets are high, as they are now, selling to local intermediaries can net farmers more than they may have earned by selling through the cooperative during years when markets are low.
  • Collecting coffee in today’s market.
    With prices at historic highs and showing no signs of decline, farmer organizations here are already beginning to worry about how they will compete with local buyers during the next harvest.  Higher prices mean that cooperatives may need more credit to bring in the coffee they have committed to their customers.  And more credit means more interest payments for farmers, which may make them even more inclined to sell outside the cooperative.

    While selling outside the cooperative may make sense for a given household over the short term, if it happens too broadly, it could be a path to ruin for smallholder farmer organizations over the long term.