IFPRI

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Market Forces and the Boundary of Agricultural Cooperatives in Ethiopia

Tadiwos Zewdie and Getaw Tadesse

September 19, 2016

Outline

Motives

Data and descriptive statistics

Estimation approach

Estimation results

Discussion

Conclusion

Motives

Since 1967 Ethiopia had always been trying to promote cooperatives with varying emphasizes and objectives.

Currently, cooperatives are being expanded and promoted to develop themselves into autonomous, self-help and competent institutions. E.g GTP II

However, their performance is not as good as expected (Bernard et al., 2008; Bernard and Spielman, 2009; Francesconi and Heerink, 2010; Getnet and Tsegaye, 2012)

Possible reasons:

Capacity

Deviance from cooperative principles: participatory, voluntary, etc.

Deviance from market principles: missing market, high transaction cost, economies of scale, market power etc.

Motive … cont’d

This prompt us to question:

» Do cooperatives set their boundaries (type and number of activities they are engaged in) based on market principles? How important are market forces?

» Which market forces are important for coops’ participation in different markets/services?

Objective:

» to assess the effect of market indicators - transaction cost, market power, economies of scale etc. - on the probability of coops engaging on different commodity and service markets

Data and descriptive statistics

Structured questionnaire

We identified 25 commodities and services in which cooperatives can possibly engage in

These include: output marketing for 9 grains, input marketing for 5 inputs, financial services, rural agricultural services like transportation, milling, machinery rental etc.

Multi stage sampling

171 primary cooperatives selected, from Oromiya and Amhara

Intensive interview were made with the leaders of the cooperatives

Data and descriptive statistics …cont’d

We assed:

the performance local markets of these commodities/ services in terms of functionality, transaction cost, distance from markets, type of roads, riskiness of the market and frequency of the transaction

the extent of cooperatives participation (boundary) in each of the commodity /service markets

the capacity of the cooperatives in terms of asset, finance, capital and human resources

That means, 171 coops asked for about 25 commodities/services, which makes the data a sort of panel

Both descriptive and econometric analysis were employed

Table 1. The capacity of sample cooperatives

Mean Median P10 P90

Capital holdings (in 000 ETB)

Total asset value 1486.088 551.983 78.000 2703.91

Working capital 2104.184 919.445 45.000 5770.708

Fixed capital 440.392 130.2 13.098 715.212

Per capita total asset 1.440 0.414 0.119 4.021

Per capita working capital 1.378 0.832 0.079 3.562

Members’ size

Number of members 1467 1094 285 3183

Proportion of female-headed 0.170 0.149 0.065 0.331

Proportion members who own share 0.960 1.000 0.980 1.000

Membership growth rate 0.032 0.008 0.000 0.060

Total employed people 4.4 4 0 9

Manager with at least college diploma 0.0124224 0 0 0

Experience of cooperative manager (years) 2.795031 2 0 6

Members’ participation in general assembly 0.5438596 1 0 1

Age of cooperative 29.68421 36.00 7.00 38

Proportion of sample cooperatives engaged in different activities

0.06

0.67

0.13

0.99

0.81

0 .2 .4 .6 .8 1Proportion of coops providng the services

Financial services

Extension and information

Rental services

Input marketing

Output marketing

Table 2: Extent of cooperatives participation in rural markets

Type of market:

(commodity/

Service)

Service provision Beneficiaries Business volume

Number

of

markets

evaluated

Coops

participatio

n (in %)

Number

beneficiarie

s per coop.

per year

Beneficiari

es over

members

Value of

transaction

per coop

Value of

transaction

per

beneficiary

Output markets 2052 22 61.12 4 83178.32 2481.536

Input markets 855 48 550.19 55 10,39371 1610.966

Rental service 1026 2 36.99 2 1082.02 2782.697

Information ser. 513 24 327.04 32 0 0

Financial service 513 2 11.00 1 22700.1 1567.802

Total 4959 20 174.33 16 223058 1685.406

Overall, • Significant number of coops are idly present without function• Members are not using their coop, as expected: may be because coops

are unable to creating better bargaining power and market channels.• Performance (measured in business volume) is not as good as expected

Table 3: The performance of rural markets /services (proportions)

Performance indicators Output

market

Input

market

other agri.

Services

Overall

agri.

serviceNumber of markets evaluated 2,052 855 2,052 4,959

Missing village markets 0.72 0.76 0.56 0.66

Missing district markets 0.30 0.17 0.18 0.22

Distance from the markets(km) 5.17 5.19 4.62 4.92

Villages with asphalt road 0.17 0.17 0.16 0.17

Villages without road 0.13 0.15 0.16 0.15

Villages without transport 0.97 0.94 --- 0.96

Monopolistic/monopsonic 0.05 0.56 0.55 0.43

Oligopolistic/oligopolistic 0.17 0.28 0.28 0.25

Competitive market 0.55 0.07 0.09 0.20

Proportion of risky markets 0.88 0.34 0.34 0.48

Proportion of frequent

transactions

0.26 0.17 0.47 0.34

Estimation approach

The study of organizational boundary is as old as the seminal work of Coase in 1963 and further works of Wilimason (1979) on the boundary of the firm

According to these works, the boundary of the firm should be guided by efficiency principle, mainly by transaction costs

More recent works in organization boundary, however, suggest other determinants, such as market power

Though these suggestions are made for business firms, they can equally be applicable to cooperative organizations, which aimed at being market-oriented, and competitive

Thus, we regressed the probability of a cooperative engagement on in a given market/service as a function of market forces and capacity of cooperatives

List of market forces and their proxy variables

Table 4: What derives the boundary of agricultural cooperatives: how important are market forces, which market forces?

***, ** and * are significant at 1, 5 and 10 percent significant levels, respectively.

VariableProbit Xtprobit

Coefficient SE Coefficient SE

Nonexistence of village market 0.201** -0.1 0.281*** -0.1

Market distance -0.045*** -0.01 -0.042*** -0.01

Village with Asphalt road -0.184* -0.1 -0.138 -0.1

Lack of transportation service -0.104 -0.24 -0.216 -0.24

Monopolistic/Monopsonistic

Oligopolistic/Oligopsonistic -1.084*** -0.13 -1.261*** -0.13

Competitive market -0.909*** -0.11 -1.363*** -0.15

Risky market 0.296* -0.18 0.203 -0.18

Frequency of transaction -0.131 -0.13 -0.146 -0.13

Member size 0.001*** 0 0.001*** 0

Age of coop 0.003 0 0.003 0

Total capital -0.003 -0.02 0.003 -0.02

Edu. status leader -0.209 -0.48 -0.104 -0.49

Experience of leader -0.022 -0.02 -0.021 -0.02

cash loan support 0.401*** -0.09 0.427*** -0.09

_cons 0.299 -0.31 0.547 -0.38

N 1012 1012

It appears that both transaction cost and market power explains cooperatives choice of activities

However, the market power effect is stronger than transaction cost effect

As expected external support (cash) strongly explains cooperatives choice of activities

Table 5. Which market forces are important for cooperatives participation in

different markets/services?

Market performance

indicators

Grain markets Input markets Other rural service

Nonexistence of village market -0.513*** 1.358*** 0.625***

Market distance -0.033** -0.048*** -0.017**

Village with Asphalt road -0.494*** 0.090 0.025

Villages with road transport 0.102 -0.321

Competitiveness of the market

Oligopolistic market

Competitive market

-1.002**

-1.235***

-1.407***

-1.269***

-0.691***

-0.593***

Riskiness of the market 0.373* 1.379** 0.001

Frequency of transaction 0.140 -1.365*** 0.772***

Members size 0.001*** 0.000 0.000

Age of coop 0.002 0.017** -0.003

Total capital in ETB 0.001* -0.001 -0.001

Education status of leader 1.005** 0.246 -0.009

Experience of leader 0.037 -0.020 0.001

N 505 507 1187

***, ** and * are significant at 1, 5 and 10 percent significant levels, respectively.

The drivers of cooperatives participation in input and output markets are different

» While participation in input markets is driven by market failures, participation in output markets is driven by market power

» Cooperatives tends to buy crops in markets which are functional but less competitive

» Is cooperative the best intervention to make markets competitive?

Conclusion

Despite early establishment of coops across the region and country, coops couldn’t flourish and benefit members as expected.

The majority are simply present without function, except input (fertilizer) distribution.

Ethiopian cooperatives’ boundary is influenced by market power more importantly than transaction costs

The poor performance of cooperatives in output markets could be related to the improper choice of markets or commodities

» Participating in markets that function well, will lead to poor performance

» Example : the market for tef is fairly functional and competitive, cooperatives may not need to engage in this market

Thank you!