Nepal’s new constitution makes strong commitments to cooperatives, many of which are agricultural. But what needs to happen so that agricultural cooperatives really have a major influence on agricultural development and on Nepal’s economy overall?  An obvious answer is that cooperatives here must at least match the large proportion of agricultural output which is handled by cooperatives in Europe and North America, where they play a major role. If this happens, Nepal’s agricultural cooperatives can indeed be an important force for development, contributing to the achievement of the Sustainable Development Goals (which, under goal 2, address farm incomes).

Can Nepal’s agricultural cooperatives do this? Making sure they make money for their members is obviously key and it is worth remembering that cooperatives are first and foremost commercial organisations. Cooperatives help improve members’ returns by buying and selling in bulk and so getting better prices. This is particularly important in Nepal where average farm size is small and falling, with individual farmers only buying small amounts of inputs and selling small amounts of produce.

A bigger incentive

Bulk-buying inputs (principally seed, fertiliser, and insecticide) keeps costs down since cooperatives can get better deals with suppliers than individual farmers can. Selling output in bulk also means better prices, particularly if the cooperative can consistently supply buyers with the amounts they need. Market intermediaries often complain that small farmers cannot reliably do this and that quality is often poor. Cooperatives’ ability to provide acceptable quality is therefore also very important.

So, do agricultural cooperatives in the world’s poorer countries make their members better off? Studies suggest that they mostly do. But these studies also show that the difference that cooperatives make to farmers’ incomes needs to increase if they are to make a marked difference to incomes from farming. In other words, if farmers are to go through the trouble of forming and making a cooperative work, there must be a bigger incentive.

How could this be done? One way would be for cooperatives to increase their bargaining power by becoming bigger. If cooperatives had more members and put more land under members’ control, they would buy more inputs and sell more output. This could help further improve the prices they can get for inputs and outputs, since bulk purchases and sales increase in size. A cooperative comprising small numbers of small farmers is still a small enterprise and wields limited influence with suppliers and buyers, whereas a larger cooperative has the chance to make better deals.

Bigger cooperatives would also allow them to hire professional managers. Most small agricultural cooperatives are run by their members, with individual farmers taking time off from farming work to manage the cooperative. This inevitably distracts from their farming and member-farmers may not have the business skills to run what is, in effect, a private company. In contrast, cooperatives in richer countries usually have professional managers, with all the necessary business skills.

Plausible solutions

Nepal will also need to grapple with the problem that, internationally, not all agricultural cooperatives want the smallest farmers as members and some of the smaller farmers seem not to want to join. This could be because having very small farmers as members adds too much to cooperatives’ administrative burden relative to the amounts these farmers buy and sell. Conversely, the smallest farmers may decide not to join because benefits are too low relative to the confines of working within a cooperative.

This probably means that Nepal needs also to act on farm size. In fact, Nepal’s Agricultural Development Strategy looks at increasing farm size through a ‘land lease’ corporation. This is an innovative solution where farmers would voluntarily lease their farmland to the corporation, with the right to take back the land at the end of the lease.  The corporation would then lease out the land to other users, combining landholdings to create bigger farms. Making this work would almost certainly be part of the solution to the problem of small farm size that cooperatives also respond to.

Contract farming can sometimes be a better solution to small farm size. This involves a buyer guaranteeing to buy farmers’ produce provided they grow what the buyer requires and meet quality standards. The buyer will often provide inputs and technical advice on production (‘extension’). This exists in many countries, with studies showing increased farm incomes from contract farming, making farmers commercially-oriented in the process and often with links to agroprocessing.

Cooperatives should indeed be part of the solution to the problem of Nepal’s very small farms, provided they are themselves large enough to get the best deals and succeed commercially. But reversing the trend towards smaller-and-smaller farms will also be important, as will making sure that there is a good legal base for contract farming so that it can be used when it looks like a better option.

Kemkhadze is Deputy Country Director at UNDP Nepal