COPA COGECA 2012 CONGRESS OF EUROPEAN FARMERS The Diversity of Agri-Cooperatives in Europe and Central Asia: How Can Different Experiences be Shared and Utilized? FAO Session: Wednesday, 3 October 2012, Intercontinental Hotel, Budapest

EMERGING CO-OPERATIVES IN THE NEW MEMBER STATES: HUNGARIAN EXPERIENCE Dr. Gábor G. SZABÓ Senior Research Fellow Institute of Economics, Research Center for Economic and Regional Studies Hungarian Academy of Sciences, Budapest, Hungary E-mail: [email protected]

Outlines of the Presentation 1.Introduction – Objective of the presentation and methods of the research – The background situation of Co-operatives (POs/PGs) in Hungary 2. Coordination by Co-operatives (POs/PGs) 3. Main types and situation of agricultural co-operatives in Hungary 4. Main reasons and explanations for failure of new, emerging cooperatives – Macroeconomic and external problems – Microeconomic and internal issues – Human factor related problems 5. Conditions of successful collective action done by producer owned organisations 6. Conclusions

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Introduction Objective of the presentation • To give an overview and critical assessment on the development of the new, emerging types of agricultural (marketing, supply and service) Co-operatives and POs/PGs in Hungary • To review – the main reasons and explanations for failure or success of new, emerging co-operatives and – the conditions for successful collective action (marketing) done by producer-owned organisations

Methods of the research • • • • •

EU and Hungarian (OTKA) research projects Literature review, Secondary data collection, Conduct of interviews and Case study analysis

Introduction The background situation of Co-operatives (POs/PGs) in Hungary • „Historical” reasons from the nineties (compensation and privatisation processes, always changing legal environment) • Dual farm structure: – big companies (esp. in the cereal sector), but also – fragmented productions structure (esp. in fruit & veg.) and atomistic structure ownership of land • Significant uncertainty in Hungarian agriculture (in a transition economy) due to deficiency of market institutions • Lack of capital and appr. credit system for agr. producers • Lack of transparency - black market and shadow economy • Very low level of trust and willingness to co-operate • Multinationals and other big companies can co-ordinate up to a certain level, but it is not enough

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Coordination by Co-operatives (POs/PGs) •

Starting point of our analysis: Independent privately owned farm organisations can not countervail the market power of their business partners → coordination seems an appropriate solution to solve one of the most critical problem today

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Two main types of coordination in market economy: • By the state (EU): • • •

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Regulations, Administrative rules, Support measures and co-op „incentive schemes”, Taxation etc.

By private institutions: •

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Established by the processors/retailers (by contracts) Producer owned organisations: co-operatives, producers’ organisations and producers’ group

Coordination by co-operatives (POs/PGs) Economic Advantages – – – – – – – –

Access to secure markets for the long term: stability and safety Carry out services (e.g. inputs) only available at high costs Build up countervailing power – better prices (in Hungary?) Increase technological and market efficiency Decrease and internalise transaction (information) costs Lower both economic and technological uncertainties Avoid (ex post) hold-up problems Reimbursement of the surplus for the members made at another level of the marketing channel – As a conclusion: co-op can save a relatively high degree of independence of economic action – partial integration, bottomup organisation, school of democracy – Additionally in Hungary : secured payment and time saving on supply and sales operations for members

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Coordination by co-operatives (POs/PGs) Non-Economic Advantages of Producer owned Organisations (Co-ops, POs, PGs) – They can contribute to rural development and secure jobs (by multifunctional agriculture, rural tourism, employment by the coco-operative etc.) which are very important tasks especially in less favoured areas. – They also help to save the environment by offering traceability partly due to the long and close social relationship between farmers and consumers. consumers. – They contribute to social benefits (ethics, values etc.) as well as being socially responsible by nature. – The effect of strengthening informal networks networks,, as well as trust and social capital has has primary importance apart from direct economic aims – however trust is also a precondition for co co--operation!!! operation!!!

Co-operatives in Hungary Recent legislation regarding co-ops - Co-op Law • The definition of the co-operative: „The co-operative is an economic organisation and a legal entity, with open membership and variable capital, aiming to meet the requirement of promoting (complementing) the members’ business (farming) and in certain cases to meet the demands of membership according to their cultural, educational and social needs.” (X/2006) • Personal contribution can be required from the potential members applying for membership • So-termed investor-member in the new law (60§/X/2006) • Altruism and business at cost principle • Institutions of the self-governance [Gen. Assembly, Board of directors (5 pers.) – Board of supervisors (3 pers.) etc.] still the same • The one member – one vote principle is still valid • The law fixed the common rules for the organisational changes

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Co-operatives in Hungary 3 main types of agricultural co-ops in Hungary • A) “Production type” co-ops (in Hungarian “TSZ”) )which are most of the time multipurpose co-ops as well and transformed many times due to the ever changing co-operative laws. • B) Supply and Marketing Co-operatives (in Hungarian “BÉSZ”) organised on territorial bases (e.g. integrating more activities and marketing channels) which have not got any support at present (2012). • C) Marketing or”new”, western type co-operatives, like POs (in Hungarian “TÉSZ”) and PGs (in Hungarian “termelői csoport”), which are often single purposed ones focused on one marketing channel and got support from EU and/or national budget. (These are mostly marketing and/or supply co-ops which does not carry out production, but they supplement the farmers’ production activity). We focus our attention to the C) type of co-ops since the emerging organisations in Hungarian agriculture belong to that that category.

Co-operatives in Hungary Situation of co-operatives in Hungary • Co-operatives and other producers’ owned organisations can solve the market vulnerability of producers and increase their income • However: – Decreasing number of „traditional” agr. co-ops, – Very low market shares of the new, emerging agricultural co-ops (POs/PGS), – Limited concentration, very low level of secondary co-operation, – The capitalization is very low and access to credit is very hard in case of agricultural co-ops, – Low level of trust and willingness to co-operate.

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Main reasons and explanations for failure or success of new, emerging co-operatives Macroeconomic and external problems • Financial and economic crisis from 2008 resulting less domestic demand for food products (e.g. fruit and vegetables). • Higher share of import (e.g. in case of fruit and vegetables) in the Hungarian food market. • Producers’ organisations and co-operatives are not competitive because of the black and grey trade on „spot” markets. • Banks willingness declines regarding financing current assets (revolving funds). • Late pay-off of the supports (EU funds). • Delayed payments (60-70 days after delivery) from the retail chains. • High financial burden due to “non-price character financial parameters” (e.g.: listing and the so-called “shelf” fee, various donations and bonuses etc.) set up by the majority of retail chains.

Main reasons and explanations for failure or success of new, emerging co-operatives Microeconomic and internal issues • Usually, there are no reserve funds due to non-profit character of the co-operative. • Too fast development and growth (e.g. Mórakert Co-op). • Structural problems of the some organisations. • Efficiency problems, regarding delivery the right quality and quantity to the market (retail chains). Possible solutions of the above problems : • members’ loan from the local authority (municipality), • members’ contribution in different ways and • remodelling (restructuring) the co-operative into a “forprofit” organisation including a cost saving plan and changes in the management.

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Main reasons and explanations for failure or success of new, emerging co-operatives Human factor related problems in case of Cooperatives (POs/PGs) in Hungary •

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Heterogenity of members – different interest: – Big and specialised farmers: do like and able to invest – Small farmers: do not like and/or not able to invest Trust: – among the members and – between members and the management Commitment: members are only interested in business By-passing the co-operative: selling on spot market Contract enforcement is weak Possible causes for exclusion of members – very rare

Conditions of successful collective action done by producer owned organisations • Real economic necessity, • Willingness to co-operate – demolition of mental/psychological barriers, • Screening of potential members, • Strict and exact quality and quantity requirements for products delivered to Co-op/POs/PGs, • Consistent adherence to delivery obligations, • Ensuring balanced (liquid) financing both short- and long-term, • Efficient and multi-way communication, • Trust between members and management, • To get a qualified, skilled and trustworthy manager (either outsider or an active member but professional). • The crucial issue for the future of agricultural co-ops is the loyalty of farmers to their co-op and to the leaders of the co-operative, especially under uncertainties dominating in transition agriculture like Hungary.

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Conclusions • Problems of farmers and co-ordination of chains cannot be solved simply by EU and/or government support – but it helps a lot as in the case of most of Hungarian co-ops • Actions needed in order to help co-operative development: –To change morals/attitude of farmers and demolish mental and psychological barriers –To solve the problem of the black market – with decreasing (high) VAT –To offer (prefential) short term credits for curent assets • Two very important directions of future co-operative research in Hungary: – One is about the statistics on co-operatives – The other is on the economic, sociological and psychological prerequisites and constrains in the agri-food economy in Hungary including the role of trust in co-operation.

• Co-operative law: a new regulation will come into force from January 2013.

Thank You for Your attention! Please, ask questions or contact me if You will have any question or comment!

Dr. Gábor G. SZABÓ E-mail: [email protected]

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