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AGRICULTURAL CONSUMER COOPERATIVES AS A BASIS OF RURAL DEVELOPMENT∗

Alexander Itskovich1

INTRODUCTION

There are two basic forms in cooperative collaboration according Russian law: pro-duction and consumer. In the first case there is an manufacturers unification of agri-cultural production in horizontal section, which is treated as production cooperation, in the second case – managing subjects, keeping legal and economic independence, allocate one or several secondary functions for the purpose of further activity optimi-zation. Consumer co-ops are second level cooperatives or vertical ones. That’s why in the system of agricultural cooperation it is possible to isolate horizontal and verti-cal development. In the first case, having reached the certain degree of socialization, cooperative forms a primary (industrial) level, which represents a basis for vertical growth. The industrial form of cooperative association doesn’t allow to solve all the circle of economic problem, therefore secondary level appearance and creation it re-gional co-op unions and they national centres is natural.

According to the Civil Code of the Russian Federation (RF) the production co-ops are commercial organizations with enterprise orientation of their economic activi-ties. That at first sight is not logical, because, according to classical rules, the main purpose of such association is not profit getting. Economic relations organic activ-ity of primary and secondary agricultural co-ops, producing, processing and selling products for the high added cost allow to agrarian sphere to overcome “economic egoism” of branches, adjacent and connected to agriculture. First of all, it concerns to the third (processing) sphere of agro-industrial complex (AIC). Organizational and legal isolation of processing enterprises occurred with their reorganization to managing societies is characterized as withstanding (opposition) of joint-stock companies and agro co-ops. Incompatibility of corporate and cooperative systems doesn’t allow building integrated technological line in consideration of economic interests of each structure element. In many cases this situation is caused by co-op system primitiveness of Russian agrarian law. The restrictions, connected with the personal labour participation in horizontal co-ops, exclude from the system of pri-mary relations enterprises, that doesn’t allow developing cooperation between co-op formations. ∗ The paper fulfilled under financial support of International scientific fund of economic

researches by Academician N.P. Fedorenko. Project # 2006-073 1 Alexander Itskovich, State agricultural academy, Volgograd, Russia

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In this aspect, cooperative society’s classification, accepted in the USA, is very revealing for Russian agrarian sphere. In first variant, proceeding on territorial, functional and structural attributes are classified local, super-local (which serve a few neighbouring counties), regional, national and international co-ops. In second – on the basis of key functions, all co-ops are incorporated in marketing, supplying and service cooperatives. In third case, according to the organization and manage-ment structure, cooperatives are allocated as follows: centralized, assuming physi-cal membership (farmers) and legal (partnership, societies with limited liability, family corporations) persons; federal co-ops, which are based on membership of separate co-ops of legal persons; mixed, which assume unification of physical per-sons and co-ops In Russian agrarian law it could lead to the opportunity of produc-tion cooperative formation by legal persons and allocation of the new co-op kinds – intereconomic (intermanaging) unifications.

THE CURRENT ORGANIZATIONAL STRUCTURE OF COOPERATIVE SYSTEM

Institutional, structural, price, tax and credit-banking reforms, realizing in Russia with different speed and intensity led to the priority development of organizational-legal forms of atomic agrarian manufacture and to the economic isolation of proc-essing sphere, depriving agriculture of significant profit part. Monopoly position of the organizations of processing sphere allow them to lower agroproducers share in final price of products from 60-70 % in 1991 to 20-40 % anon, that continues to be the main reason of financial weakness of enterprises and agrarian organizations.

Trying to overcome consequences of organizational agroindustrial production di-viding up, Ministry of Agriculture and Food Production of Russia offers a number of recommendations on transfers of control stack shares of privatized processing enterprises to agroproducers, on transformation of joint-stock companies of open type into cooperative enterprises, that will lead to complex formations creation, allowing to weaken “holding down” effect of limited technical and financial oppor-tunities with the help of combining, specialization or centralization in coordinates of actual managing space. It is possible to exclude similar economic lacks with the help of unification of cooperative formations and law recognition them as agro commodity producers. Such approach was realized in clause 346.2 of Part Two of Tax Code RF from 03.11.2006, when agro consumer co-ops were recognized as a taxpayer of single agricultural tax, including animal breeding and plant growing co-ops, which have the might not to process and sell, but also to produce agro products. Amalgamating the primary and secondary functions, the “combined” co-operatives allow to exclude the main reason of agrarian and processing spheres iso-lation of agro-industrial complex – contradiction of economic interests of its basic branches. Unification of functional spaces promotes an equivalent exchange and

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harmonizes redistributions relations between agrarian and industrial branches of AIC. In Law new organizational status configuration gets the form of agricultural “combined” co-op, reflecting integrated essence of agro-industrial manufacture. Statements, those now large agro-enterprises, changing their quality, turn to com-plex economic systems; only confirm necessity of quality improving theory of co-operative construction in RF. In practical aspect the “combined” form of the co-op hides the unique potential of synergetic effect.

Tables 1 Planned special indicators of Main National Project “Development of Agro-Industrial Complex” in the field of “Stimulation of development

small enterprises in AIC” on 2005-2007 years

Agricultural coop-eratives – in all

Including – credit co-ops

Name Of Federal Territory And Russian Region 2005 2006 2007

Total 2005 -2007 2005 2006 2007

Total 2005 -2007

Russian Federation 1256 1920 1940 5032 441 678 645 1721 Central Federal Territory (District) 57 489 480 1026 36 177 170 383

Northwest District 33 75 69 177 12 33 22 67 Southern District, Including 248 289 275 812 137 68 43 248 Republic of Adegeia 14 41 12 67 14 14 2 24 Republic of Dagestan 12 29 42 83 1 5 7 13 Republic of Ingushetia 2 5 6 13 1 1 1 3 Kabargino-Balkaria Republic 14 18 19 51 - 12 12 24 Republic of Kalmikia 16 21 15 52 15 10 1 26 Karachaivo-Cherkes Republic - - - - - - - - Republic of North Osetia-Alania - 62 64 126 - 8 8 16

Krasnodar Region 12 36 40 88 10 2 3 15 Stavropol Region 1 11 16 28 - 4 6 10 Astrahan Region 8 10 7 25 7 4 1 12 Volgograd Region 148 45 42 235 68 2 2 72 Rostov Region 21 11 12 44 21 6 - 27 Chechen Republic - - - - - - - - Privolzhski District 256 490 439 1185 99 179 171 449 Ural District 113 61 52 226 36 16 7 59 Siberian District 175 417 502 1010 99 167 188 411 Fareast District 374 99 123 596 22 38 44 104

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Its components are: the technique-technological economy, allowing to optimize volumes of production and an available quantity of equipment; significant reduc-tion of transaction expenses; effect of wide range of assortment, arising at closed cycle of production, processing and selling.

By 2004 the total amount of consumer co-ops in Russia made up 1.1 thou, which of them 270 – processing, 260-service, 400 – marketing (selling), 230 - credit co-ops. For primary industrial co-ops, their quantity has reduced from 12.3 thou in 2002 to almost 10 thou by 2006, that is about third part of total agrifirms amount. Unbal-anced state of two parts of united agro cooperative system is a real factor of struc-tural deformation. Unfortunately, agrarian statistics doesn’t characterized scales and depth of this deformation. However, according to the author’s data, processing co-ops get less than 1% of all volume of produced agro production. Planned quan-tity indicators of MNP in co-op sphere are presented in Tables 1.

From the tables data we must mark that at 2005 148 agro co-ops in Volgograd re-gion were mistaken information because such quantity was reached only by end of 2006 yr. Despite of exclusive role, which consumer cooperatives play, their total amount on 01.01.2005 in reality reached only 702, reduction to compare to 2004 was because of statistics correction; in addition it has not been created any agro consumer co-ops in 21 from nearly 90 regions of Russian Federation, any process-ing co-ops in 24, any service co-ops in 47 and any marketing co-ops in 48 regions of RF. For some comparison, it is possible to note, that there are 500 dairy con-sumer co-ops – marketing and processing in tiny Austria.

Allocation of the new agro cooperation form assumes the expansion of fixed frames of agrarian legislature, that causes the addition to productive and consumer forms of cooperation with one more – combined. The structural disproportion of industrial productive and consumer forms is obvious, there are nearly 10 thou of productive co-ops and almost 260 thousand of farmers as potential cooperators. Hipper development of horizontal cooperation with respect to vertical collaboration characterizes not only structural instability of all agricultural cooperative system in Russia, but also its financial weakness. The solution of rural territory’s problems may be resolve by the collective agency – trustful partnership-working and there-fore strong “social capital” as a term and essential indicator to social-economic model of co-op development. To agree with definition of “social capital” as net-works, norms and social trust that facilitate co-ordination and co-operation we may to mark the weakness that intangible asserts in Russian agriculture and the confir-mation is embryonic state of agro co-op system.

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INTERPERSONAL CONTRADICTIONS OF SHAREHOLDERS

The main problem of the increasing the co-op sector are the contradiction between “old members of co-op” and “newcomers” that had the form of:

Ai=Vi-C;

where Ai is a privilege of the individual from economic benefits, Vi is a value of benefits for members of co-op; C is a outlay on receiving additional benefits. Join-ing the co-op, new member acquire the right of property and vote. That scares “old members” and restricts the growth of co-op. For example, in Volgograd region (Southern Russia levelled by area with Latvia, Estonia and Lithuania all together) till spring 2007 was formed more than 80 consumer co-ops, excluding credit co-ops. For this territory such quality may consider as sufficient. However, the aver-age number of co-op members is less than 10 persons, mainly relatives. As a matter of fact this is a family firm. According to Russian legislature the economic bounda-ries of consumer co-ops may be easy determinate – more than 50 % of the total services must be given to shareholders. That’s why the co-ops of 5-7 members pro-ducing insignificant quantity of agro provisions can’t get privileged credits from banks for their development. To regulations of new Russian agricultural policy the government support sending to consumer co-ops at amount to 10 millions rubles (about 300 thousands euro) as subsidized credits with completely pay off interest rates by state. Nowadays only one co-op got such credit due to unite more than 20 farmers. So the potential of state support not working. The task is to transform this firms into true co-ops, numerous by members and mighty organizations of minor peasants and large-scale farmers or large/medium agro enterprise.

Tables 2 Main indicators of development agricultural credit co-ops

in Russian Federation by 2006

Name of federal District

Quantity of Districts

Quantity of

Co-ops

Members Quantity

Total asserts, Mill. Rbl.

Remainder loans, million

rbl.

Central 18 42 2 870 96,4 87,4 Northwest 11 22 3 197 57,7 49,0 Southern 13 132 49 836 1 026,3 898,9 Privolzhski 15 108 7 192 459,9 429,9 Ural 6 26 731 14,0 13,8 Siberian 16 97 8 647 165,1 156,5 Fareast 10 19 769 15,3 13,2 Total 89 446 73 242 1835 1649

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But at the same time Volgograd region, fitted into Southern District of RF charac-terized by outstanding development of credit co-op’s sector – nearly a half of all shareholders of Russia belong to Volgograd credit co-ops – more than 40 thou-sands members and almost 50 % of all credits at area are go through co-op’s sys-tem, what confirmed data of Tables 2.

SOCIAL MISSION OF CO-OPS AND RURAL DEVELPMENT

The latest practice is indicate that in Volgograd region and in Russia more exten-sion will achieve the some kind of co-ops second generation with dividend pay-ments. Mechanism of distribution in such co-ops now is under way but some scholars point to violation of traditional co-op principles. Considering Wyoming Processing Cooperative Law that authorizes a structure, called a co-op that varies in many ways from the traditional perception of an agro co-op we may suppose a diversity of types, forms and species of co-ops. In Russian legislature there are two types of co-ops – vertical and horizontal, without combine type and two forms – production and consumer and a great number of species – kolhoz (artel), coophoz, credit, service, marketing, insurance and so on co-ops.

The last decade in Volgograd region were wide spreading credit co-ops as a struc-ture of micro financial business. Abundant credit reserves ensured an increase of agro production and slump in profits and sales. Moreover “old members” of credit co-ops try to get benefits from they statute and limited information. They don’t shy to resell cheap government credits to peasants and farmers – members of the same co-ops. The question is how to avoid or restrain risks of opportunism within a weak co-op’s regional system (Tables 3).

Table 3 Results and description of a system of agricultural consumer cooperatives Volgograd region

including* Agricultural consumer

cooperatives

Quantity of

co-ops

Members quantity PF1 HP2 AM3

Share funds,

thou rbl.

Volume of services, thou rbl.

Supply-sailing 12 162 1 161 - 933,3 10574,4

Purchasing 12 208 - 208 - 1430 29886,6 Processing 6 97 - 97 - 123 13315,6 Complex services 48 598 10 582 6 1312,7 19471,9

In total 78 1065 11 1048 6 3799,2 73248,5

PF – private farmers; HP – house plot; AM – associated members of consumer co-ops

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Realization of social mission consumer cooperation in the Russian conditions in-cludes such problems as a foundation of new workplaces, inclusive non-agrarian activity, transformation co-op shops and facilities into rural communication centres between dwellers of community, development of social infrastructure rural settle-ments.

One of methods of evaluation a social effectiveness the system of consumer enter-prises is a construction of a social-economic models co-op development through local financial, industrial, cultural, human potentials. The final model, constructed on the basis of multifactors correlation-regressive analysis, to indicate a depend-ence of levels social development and local potentials and have a form:

Yx = a0+a1X1+ a2X2+ a3X3 + a4X4 + a5X5+ a6X6, where Yx - social effectiveness of the co-op system; a0 – free number; a1, a2, a3, a4, a5, a6 – a power and type of influence an appropriate factor in social-economic de-velopment of local communities; X1 - level of social defence of rural dwellers; X2 - level of human potential; X3 – social infrastructure of rural settlements; X4 - finan-cial and industrial potential of shareholders; X5 - share of co-op services to mem-bers and non- members of co-ops; X6 - average incomes of shareholders. The level of social development of rural community in every direction may be de-fined on main components method. In case of construction the model of social de-fence and improving of living standards inserts such indicators as share of co-ops payments, the share of co-op employment, the sums of co-ops benefits, government investment grants and subsidies. The possible and convenient way to modern Russian agrarian sector is to establish extensive net of co-ops different levels - i.e. to form system on the co-op principles with inserted mechanism of self-regulation. The parts of this mechanism are asso-ciations or unions agro co-ops, audit and revision commissions, co-op education, special editions, newspapers, radio. But main standards of co-op behaviour by the experience of author are bringing in co-op system from outside. The reason of such approach is simply – the society interested in sustainable development of rural community. In Russia the answer to this threats by opinion of author is a consumer co-op system as a conglomerate, including manufacture, service, marketing, con-sulting, etc. departments of unified whole. Numerous, self-regulated co-op system get access to people, funding, new markets, benefits from public sector initiatives. But the new structure allowing to pool the resources, receive stronger social sup-port in terms of access to assistance from Federal and Regional programs, to pro-vide benefits for development of communities, however need conceptual frame-work to put endogenous resources of rural development, first of all – social capital. The propensity to form local associations different forms, based on personal trust-ful, explain quality of co-op potential of rural territory. Insignificance of this poten-tial are the main problem of current structural transformation agrarian sphere.

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