AGRICULTURAL COOPERATIVE SYSTEM: MANAGEMENT CHALLENGES AND FEASIBLE SOLUTIONS

COOPERATIVISMO AGROINDUSTRIAL: DESAFIOS GERENCIAIS E POSSÍVEIS SOLUÇÕES

Osmar de Paula de Oliveira juniorfaj@yahoo.com.br

Faculdade de Jussara, Brazil

Alcido Elenor Wander alcido.wander@embrapa.br

Empresa Brasileira de Pesquisa Agropecuária, Brazil

Agro-industrial cooperatives have great relevance for Brazilian agribusiness. Currently, it is estimated that 50% of the Gross Domestic Product (GDP) of the sector will, at some point, pass through the operations of cooperatives (OCB, 2019). They operate from the supply of productive inputs to the industrialization of numerous types of agricultural origin, playing a strategic coordinating role within the scope of production chains. To get an idea of the grandiosity of the numbers, the Cooperative Yearbook highlights that, currently, 1,613 agro-industrial cooperatives are operating in the country, which brings together just over 1 million cooperative members, directly employing almost 210 thousand people and owning an asset total close to 115 billion Brazilian Reais (OCB, 2019).

Operating in an environment of increasingly intense global competition, where uncertainties arising from natural factors and geopolitical instabilities have become striking, agro-industrial cooperatives are witnessing the challenges to their survival that have grown as fast as their numbers. Thus, cooperative agro-industrial enterprises need to constantly improve to continue to prosper within this scenario, without losing the essence of the principles of the cooperative system nor its social vocation.

The managerial dimension gains excellent relevance for the agro-industrial cooperative system in this context. Cooperatives increasingly need to develop their market orientation. This process involves adopting administrative and strategic practices that allow the maintenance of a competitive standard for private companies that compete. At the same time, cooperatives need to remain attractive to their members, providing them with good services and guaranteeing satisfactory returns, which makes management processes significantly more complex. In addition, as the cooperative membership expands, there is a need for constant improvement in internal governance and social management, with a view to managing conflicts resulting from the significant heterogeneity of stakeholders.

Thus, given this scenario, this paper aims to describe the managerial challenges agro-industrial cooperatives face and list the leading solutions that can be adopted to overcome such bottlenecks. As secondary objectives, the following are mentioned: a) to examine the concept of a cooperative, comparing it with the traditional company; and b) profile the New Generation Cooperatives (NGCs).

To carry out this study, a systematic literature review was done. Through the filter of relevance, we sought to identify references of national and international origin that addressed issues related to the management of cooperative agro-industrial enterprises. As a criterion for selecting references, we adapted the methodology developed by Pagani et al. (2015), called “Methodi Ordinatio”. This procedure consists of a sequence of nine steps (Table 1), allowing the identification and ranking, by relevance, of essential references within a given theme. Therefore, the methodology in question considers the metrics: impact factor, year of publication and number of citations.

Table 1
Sequences of application of “Methodi Ordinatio”.

Source: Own elaboration based on Pagani et al. (2015) and research data.

As a result of applying equation (1), it was found that the most relevant reference among those selected has RI = 2021.7. It is a classic reference from the 1970s, which has 2186 citations. On the other hand, for the least relevant, a classic publication (1984), with only 50 citations, found RI = -80, this being at the limit of the cutoff point. The average RI considering all relevant references, was 92.6.

There are several ways to conceptualize cooperatives. This is a natural phenomenon, given the longevity and importance of the topic in social, economic and academic environments. Likewise, several ways of describing the particularities make them different from conventional companies. Amidst several authors’ theoretical and empirical efforts, two common elements are present in almost all concepts linked to cooperatives, whether agro-industrial or not: the association of people and cooperation (Delarmelina & Salles, 2016; ACI, 2020).

The International Cooperative Alliance (ICA, or ACI, in Portuguese) (ACI, 2020) defines a cooperative as: “an autonomous association of people, who come together voluntarily to meet common economic, social and cultural aspirations and needs, through a collectively owned and democratically managed enterprise”. It is noteworthy that this is an association of people and not capital. The cooperative members, who usually have the same interests and needs, unite to seek mutual help, thus overcoming unfavorable conditions and improving their economic and social situation. The Organization of Brazilian Cooperatives (OCB, 2017, p. 16), by defining the cooperative as “an autonomous society, composed of people who join together, voluntarily, to satisfy economic, social and cultural aspirations and needs, through a company owned and democratically managed”, ideologically corroborates with the precepts promoted by the ICA.

A cooperative is a non-profit organization formed by people whose purpose is to achieve common goals. Each member participates in the management and receives benefits proportional to their activities (Centner, 1988). Benato (2007, p. 61), in turn, follows the same line, defining a cooperative as “a company with special characteristics, a society of people, of a social character, without a vision of profits, constituted and self-managed by the members themselves, with equal rights”. In his definition, the author includes the concept of self-management and emphasizes non-profit orientation.

In general, cooperatives comprise networks of individuals who own or control a business, whose objective is to distribute benefits in proportion to their ownership or participation in operations (Altman, 2009). In the case of agro-industrial cooperatives, such help would be significantly linked to the increased bargaining power of associated producers, gains in scale, stabilization of supply conditions and market access (Ilha, 2006; Bialoskorski Neto, 2007; Ferreira, 2009).

Cooperatives comprise democratic organizations of people, self-managed and egalitarian, constituted to achieve specific goals common to their members, governed by the principles of cooperative ownership, cooperative management and cooperative sharing (Fleury, 1983; Rios, 2007; Scopinho, 2007; Delarmelina & Salles, 2016). The first principle attributes ownership of production goods to cooperative members, emphasizing the association of people and the organization’s social function (Valente, 2006).

Cooperative management indicates that the highest decision-making body is the cooperative members’ assembly; it is a decentralized management model, where each member has an equal right to one vote (Fairbairn, 1994). Finally, the cooperative division deals with the distribution of financial surplus resulting from the cooperative’s activity. Contrary to what happens in the traditional company, the distribution of this surplus is made according to the participation of each member in the operations (Centner, 1988). For this reason, in this case, terms such as profits or dividends are not used, but rather financial surpluses, as these are the result of the members’ work and not the exploitation of the work of others.

The cooperative can be understood as a network of relationships encompassing both cooperation and competition from an economic perspective. This is because their owners compete as individual producers but cooperate in specific stages of the production process (Pascuci et al., 2017). Thus, the intensity of cooperation will depend on the members’ level of commitment, given the principles that govern the cooperative and the balance between their individual and collective interests (Valente, 2006).

From the 1940s onwards, economists began to treat cooperatives under three distinct approaches: farm extension, independent firm and alliance (Cook et al., 2004). The first approach treats the cooperative as a form of vertical integration. The member will only be a part if he perceives that it is advantageous, from an economic point of view, to incorporate the activity performed by the cooperative in its production process. This approach evolved from the 1990s onwards, receiving contributions from the New Institutional Economics, and the cooperative came to be seen as a nexus of contracts (Cook et al., 2004). In other words, it would be defined by the contractual relationships developed with its members and other interested stakeholders.

The independent firm approach is based on the view that the well-being of members and society would be maximized if the cooperative also maximized distributed financial surpluses. Thus, the cooperative firm would be managed in a way oriented towards the common objective of maximizing the well-being of its owners (Delarmelina & Salles, 2016). Finally, the cooperative approach as an alliance suggests heterogeneity among the members. To meet the interests of different economic agents, alliances are made, with the forms of distribution of benefits being negotiated between the parties involved (Cook et al., 2004).

In Brazil, Law No. 5,764 of 1971, Art. 4, delimits the National Policy on Cooperatives and creates the legal standard for the constitution and performance of cooperative societies: “cooperatives are societies of persons, with their legal form and nature, of nature civil law, not subject to bankruptcy, incorporated to provide services to members”. Thus, roughly speaking, it can be said that a cooperative is the union of workers or professionals, who associate through their initiative, with freedom of entry for any person, with a view to production, marketing or provision of services (Crúzios, 2001).

Cooperatives have two main characteristics that differentiate them from conventional firms. First, the members are the owners of the organization. Thus, they will share the results obtained from their operations, whether positive or negative. Second, as the cooperative is managed according to democratic principles, its activities can maximize members’ interests (Levin, 1984). Cooperative ventures are different from traditional firms, as earnings are shared proportionally among their members (Centner, 1988).

In general, cooperative societies from different branches tend to have greater productivity than conventional firms since the members. Also, owners receive more significant economic incentives and have higher morale to devote time and effort to work (Carson, 1977; Santos & Rodríguez, 2005). Given that the cooperative member becomes responsible for the organization’s destiny and sees, in his success, also his success, he becomes more interested and willing to work than the employee of the traditional firm. Thus, cooperatives can become more efficient than conventional organizations (Delarmelina & Salles, 2016). However, in cooperative agro-industrial enterprises, the issue becomes somewhat more complex. In most cases, most of the members’ income comes from selling their products to the cooperative and not from any financial leftovers. Thus, the cooperative member can overlap their interests with the collective ones.

The distinctive characteristics of cooperatives about traditional companies offer their members the possibility to achieve their individual goals. A cooperative enterprise is a simple society governed by specific legislation, aiming not to obtain profits but to provide services to its partners (Fleury, 1983; Delarmelina & Salles, 2016).

The OCB (2017) tried to synthesize the differences between cooperatives, associations and commercial companies (Table 2).

Table 2
Cooperatives vs. Commercial companies.

Source: OCB (2017, p. 18).

According to Law No. 5,764/1971, the OCB is responsible for classifying and registering cooperatives in Brazilian territory. Before registering a new enterprise, detailed studies are carried out to typify it since several cooperatives exist correctly. Agroindustrial cooperatives can attend to all processes related to agribusiness: cultivation, harvesting, treatment, processing, industrialization and sale of products. They aim to bring together members who perform activities in common, providing them with scale and, consequently, greater bargaining power and access to broader markets (OCB, 2017).

There are also three types of cooperative society: singular, central or federation and confederation (OCB, 2017). As a rule, the singular cooperative comprises an enterprise for people, formed by at least twenty members whose objective is to provide services to members directly. Consisting of a minimum number of three cooperatives, the central cooperatives or federations are cooperatives for cooperatives. It aims to centralize services common to the affiliates, gaining greater scale and facilitating their use. To found a confederation; you need at least three centrals. It is a cooperative for federations, and its objectives are also basically linked to gains of scale and facilitating access to services (OCB, 2017).

From another point of view, it can be said that the differential of cooperatives stems from three main factors: primary objective, property rights and decision-making process (Katz & Boland, 2002). The primary aim of a cooperative venture is generally to benefit the business interests of its owners. When dealing with agro-industrial cooperatives, in general, such interests are linked to gains of scale, access to markets and increased bargaining power of members (Bialoskorski Neto, 1999; Gertler, 2001; Gimenes & Gimenes, 2007; Pinto et al., 2012; Deimling et al., 2015; Delarmelina & Sales, 2016).

It appears, therefore, that while in the traditional firm there are several business goals, including profit, cooperatives focus on meeting the interests of members, thus becoming an instrument for each member to achieve their own business goals. Therefore, when designing a cooperative agro-industrial enterprise focused on meeting the needs of internal customers, it is possible to neglect the planning of a business model, which can lead to severe management and competitiveness problems, considering that competition in the agro-industrial segment is particularly fierce.

The case of cooperatives is unique, as their most important customers are, at the same time, their owners. This duality tends to increase conflicts related to property rights, which, in turn, negatively interferes in the democratic decision-making process (Katz & Boland, 2002; Moreira et al., 2016). Cooperative members are consumers, suppliers, owners, and managers of these organizations simultaneously. Their behavior and the principles of a cooperative system interfere in the administration and effective decision-making (Moreira et al., 2016). Thus, the characteristics of cooperative organizations, derived from their associative nature and democratic decision-making process, make them different from traditional firms, mainly because they cause unique problems (Pelegrini et al., 2015).

Likewise, conflicts resulting from issues related to property rights, which will be discussed below, make it difficult or impossible for agro-industrial cooperatives to raise funds (Gimenes & Gimenes, 2007). In general, members are reluctant to authorize increases in the retention of operational surpluses, which makes self-financing difficult (Gozer et al., 2006a). Thus, the possibility of gathering resources for investments and expansion of agro-industrial cooperative ventures is limited to obtaining new members, government assistance, or bank loans, which are usually extremely costly, given the inherent risks of agro-industrial cooperatives. In this context, the indebtedness levels in the sector become incredibly high, which, in many cases, can lead the cooperative to insolvency (Gimenes & Gimenes, 2007). Therefore, the design of self-financing mechanisms becomes vital for the growth, competitiveness and independence of agro-industrial cooperative enterprises (Gozer et al., 2006a; Gimenes & Gimenes, 2007; Barton et al., 2011; Royer, 2017).

It should also be considered that cooperatives differ from other types of society in that they are, at the same time, an association of people and a business (Pascuci et al., 2017). They need to invest their resources considering the principles of a cooperative system and seeking to balance social and economic goals (Moreira et al., 2016). Given their particularities, cooperatives represent the only economic sector whose primary objective is to balance economic and social dimensions (Rodrigues, 1997). The main practical differences between cooperative societies and traditional firms originate from this dual agenda.

At the same time, the need to attend to different audiences, especially cooperative members, who also have a dual role (clients and owners), is the source of operational singularities and specific management problems, very particular to cooperatives. These singularities, in turn, are the origin of the main bottlenecks faced by currently cooperative enterprises. Agro-industrial cooperatives are also subject to the incidence of natural uncertainties, seasonality, perishability and variability particular to agribusiness, which make their management somewhat more complex.

Cooperative enterprises invest their resources, considering the principles of a cooperative system and, at the same time, trying to balance economic and social objectives (Pinho, 1966; Royer, 2014; Moreira et al., 2016). Maintaining a balance between social and economic perspectives, essential for preserving the cooperative essence, is probably the most significant challenge facing cooperatives in the current economy (Valente, 2006; Pascuci et al., 2017). Society needs to remain attractive to members, given that it exists for them. At the same time, it needs to be competitive against traditional organizations. It is precisely this ability to compete and generate surpluses that will be the source of attraction and retention of members.

To survive, cooperatives need to face the challenge of acting like private companies in the competitive environment and, simultaneously, preserving the best possible relationships with their members (Dornelas, 1998). In short, it can be said that cooperative enterprises need to face the challenge of being competitive without, however, abdicating their values and principles (Battaglia et al., 2015; Castilla-Polo et al., 2017). Given their strategic position in coordination, Agro-industrial cooperatives also play an essential role in promoting systemic competitiveness (Delarmelina & Sales, 2016; Iliopoulos et al., 2016).

Moreira et al. (2016) also mention the need for cooperatives to balance their members’ economic, social, and political interests. The economic dimension involves the business growth of society and its members. Social expectations refer to the services and benefits expected by the partners. Political interests, in turn, usually create disputes for power and representation (Antonialli & Souki, 2005). The cooperative’s inability to keep the different types of interests in balance can cause serious management problems, leading to questions about its ability to survive and prosper in a globalized and notoriously competitive environment.

In the case of agro-industrial cooperatives, it is believed that property rights, guaranteed to members, can impose a high level of conflict in the decision-making process (Katz & Bolland, 2002; Moreira et al., 2016). As a result of this inherent conflict, which is significantly associated with innovative decisions involving risks or significant changes, five fundamental problems of property rights result (Cook, 1995), constituting yet another challenge to be overcome:

• Free-rider problem: occurs because, traditionally, property rights are non-transferable, complex and insecure;

• Horizon problem: the partners, usually, when investing in the cooperative, have interests and short-term return objectives;

• Portfolio problem: high level of risk aversion perceived among cooperative members, which leads to low diversification of cooperative investments;

• Control problem: conflict of interest between cooperative members and professional managers hired; and

• Stakeholder conflict problem: an attempt by some groups to influence the decisions and strategies adopted by the cooperative.

Furthermore, the activities performed by agro-industrial cooperatives bear significantly more significant risks than those incurred by companies or cooperatives operating in other segments (Moreira et al., 2016). Such additional risks are associated with the influence of uncontrollable natural factors, seasonality, state interventions, international competition and commodity price volatility (Briggeman et al., 2013; Moreira et al., 2016). Uncertainties related to agribusiness activities are growing and will always exist to a greater or lesser extent. Thus, agro-industrial cooperatives need to learn to live with risks and take advantage of the opportunities they create. Therefore, they need to develop a series of risk management options and strategies, representing the difference between success and failure for a cooperative agro-industrial enterprise (Lomott & Łyskawa, 2014).

There is no doubt about the complexity of the business model represented by agribusiness cooperatives. This is mainly due to the wide range of objectives and functions to be performed by an organization of this nature. Due to the need to satisfy the interests of quite heterogeneous audiences, including internally, the challenge of establishing governance structures capable of efficiently coordinating the relationships between multiple stakeholders becomes emerging (Miles et al., 1997; Birchal, 2014; Iliopoulos et al., 2016). Thus, forming and coordinating networks and supply chains becomes a key point for the survival of modern cooperative agro-industrial enterprises.

The differentiated legal regime, under which organizations in the cooperative segment operate, cannot, by itself, be considered a competitive differential (Oliveira, 2012). Given that cooperatives compete with market companies, these must consolidate efficient and effective management models, which provide genuine, sustained and lasting competitive advantages. Furthermore, only by achieving economic efficiency, the cooperative will be able to fulfill its primary function of generating and distributing income (Bialoskorski Neto, 2004).

Despite bringing together aspirations and aspirations of a social nature, the agro-industrial cooperative is focused on the economic universe and should therefore be managed as a company (Benato, 1992; Antonialli & Souki, 2005). In this way, management must seek to design and implement strategic and management models to find a competitive position vis-à-vis market companies (Miles et al., 1997). Such a position would be fundamentally important for the maintenance of the cooperative enterprise in the long term. This, by becoming attractive to the market, also becomes more interesting for the cooperative members.

Thus, currently, the professionalization of the management of agro-industrial cooperatives represents an emerging need (Zylbersztajn, 1994; Antonialli & Souki, 2005; Pelegrini et al., 2015; Moreira et al., 2016; Pascuci et al., 2017). Cook (1995) points out that this has been a reality in American and European organizations since the 1990s. The modern cooperative organization no longer serves only to offer work under fair conditions to its members. It must be efficient, effective and competitive (Pascuci et al., 2017). It so happens that, in Brazil, the adaptation of cooperatives, despite increasing market signals, is slow and complex (Bernardo-Rocha, 1999).

Despite the difficulties and managerial problems, one of the main obstacles to the modernization of Brazilian cooperatives lies in the fact that it is closely linked to the need to modernize some of the principles of the cooperative system. In this context, the principle of democratic management stands out, which tends to make decisions slower and subject to the influence of personal and political interests (Santos & Rodríguez, 2005). Thus, the cooperative may find it difficult to respond promptly to the demands imposed by the markets and have business results harmed by the imposition of personal goals on the global interests of the business. Likewise, the influence of the principle of free membership is noted, which, among other problems, can encourage opportunistic behavior on the part of members, negatively interfering in the stability of the cooperative’s supply, as well as in its profit margins, reducing, consequently, the reinvestment capacity.

Pascuci et al. (2017) highlight that the conflict between the original principles of the cooperative system and the behavior requirements established by the markets, both on the part of the cooperative and on the part of the partners, has become evident. As they are based on socialist principles and ideals, Brazilian cooperatives have faced difficulties adapting to the new competitive patterns that govern the national economy (Antonialli & Souki, 2005).

The environment in which agro-industrial cooperatives operate has become increasingly turbulent. This instability requires faster and more accurate responses. In many cases, such answers arise through the adoption of hybrid management models, characterized by the combination of democratic management aspects with professionalized administration, called by some authors New Generation Cooperatives (NGC) (Harris et al., 1996; Waner, 1999; Coltrain et al., 2000; Katz & Boland, 2002; Carlberg et al., 2006).

The agro-industrial segment was a pioneer in converting common cooperatives to NGCs. In the 1990s, groups of North American farmers decided to add value to their production, making their enterprises strongly oriented towards the market. For this purpose, selection criteria for members were established, high levels of capital commitment and the delivery of commodities were required, in addition to facilitating access to leftovers and the transferability of quotas (Holland & King, 2004).

Most of the original NGCs reached large scales and continue to operate today. However, the number of enterprises that went bankrupt or were liquidated is also relevant, thus evidencing the inherent complexity of managing cooperatives, especially in the agro-industrial segment, where natural uncertainties add up, in addition to the high levels of specificity assets (Grashuis & Cook, 2018).

The emergence of NGCs represented organizational innovation that drove a new wave of investments in infrastructure and value-adding processes. The structure based on tradable quotas and contractual rights and duties, associated with the mandatory delivery of specific quantities of raw material, helped to overcome most of the fundamental problems of the cooperative organization: free rider, horizon, portfolio and control (Holland & King, 2004). Thus, the NGCs represented a starting point for the modernization of the agro-industrial cooperative system, especially about management practices.

In this sense, good cooperative governance practices also gain importance, defined by the OCB (2015, p.13) as “a model of strategic direction, based on cooperative values and principles, which establishes ethical practices to ensure the achievement of social and ensure the management of the cooperative sustainably in line with the interests of the members”. Good cooperative governance practices aim to create a professionalized and transparent management structure, in line with the principles of cooperative system and cooperative governance (Table 3), which can be monitored by inspection and compliance bodies (in compliance with legislation and regulations). Thus, good cooperative governance practices play an essential role in the managerial evolution of cooperatives, especially for the agro-industrial segment, where there is no evidence of regulatory bodies, as is the case in the financial and health sectors, for example.

Table 3
Principles of cooperative governance.

Source: OCB (2015, p. 14).

It appears that, currently, there have been severe changes in the competitive environment, requiring the constant evolution of the administrative models adopted. Thus, from now on, some emerging practices and tools will be presented within the agro-industrial cooperative system, which can be used to improve the managerial performance of Brazilian agro-industrial cooperative enterprises, which, in general, according to the consulted literature, still operate in a context quite distant from the more developed countries.

Brazilian agro-industrial cooperatives have undergone profound changes to adapt to emerging competition patterns, especially in cooperative management and governance. To survive and, above all, thrive in globalized and highly competitive markets, there are signs that cooperative agro-industrial enterprises need to become market-oriented, thus shifting the focus of the cooperative’s business (internal customers) to customers externally. It is not about abandoning the social vocation but rather reaching social objectives through the results generated in the business dimension.

The systematic literature review indicated that this process necessarily involves the professionalization of management, characterized by the separation between control and ownership. The cooperative must adopt a series of good management and governance practices and a strategic positioning that guarantees a competitive position, putting it on an equal footing with private firms. This paper was concerned with identifying and describing some of the modern management tools, which have potential for growth in the environment and can help agro-industrial cooperatives to achieve their goals: separation between control and ownership, strategic management, strategic alliances and partnerships, management branding, restricted membership, social management, self-financing and risk management, with numerous other management options available.

The literature analyzed by this study pointed to the need to modernize the management of agro-industrial cooperatives, showing, however, that there are still difficulties for its implementation. The analysis also showed that such obstacles could be linked to two factors: the first would be linked to conservatism and resistance to prevailing changes in the environment of most organizations; the second would be related to the need to modernize the legal basis of some of the doctrinal principles of the cooperative system, which, as they currently stand in Brazil, make some evolutions unfeasible, such as restricted membership, for example.

As limitation of this study, we mention the scarcity, within the adopted relevance criteria, of empirical research and case studies that could show, in a broad way, the effects of the application of the practices described here, specifically in agro-industrial cooperatives. Also, due to time and availability constraints, this study could not rely on primary data that could fill the mentioned gap. Thus, as a research agenda, it is suggested that case studies be carried out to analyze the effects of implementing modern management practices in agro-industrial cooperatives. Likewise, it is recommended the application of sample studies, with the collection, in the field, and treatment of primary data, aiming at the statistical verification of the issues raised by this paper.