Is there future for agricultural cooperatives in Ukraine?
According to the State Statistics Service of Ukraine, the number of agricultural cooperatives increased by 3% in Ukraine in 2017. Considering that this indicator was declining steadily – not bad. Let us not forget that the government has launched a support program to top it off.
₴1 billion is expected to support the farming households and cooperatives. The benign lending systems and compensation for some expenses will also be there to aid their development. So, we read the news and can hardly believe our eyes. Alas, it is not so simple as it may seem.
Goods things first
Betting on cooperatives is a wise move in itself. It is a huge trend in the world. Take a look at our EU neighbors. The cooperative business is becoming more popular there.
According to the European Commission (EC), there are around 250 thousand cooperatives in the EU. In total, they employ 163 million people – one-third of the local population.
Most cooperative associations act only in the agricultural sector. According to the EC, the cooperatives account for 89% of the agricultural market in the Netherlands, 79% – in Finland, 55% – in Italy, 50% – in France. Next in turn are the woodworking cooperatives, banking conglomerates, cooperative retail associations, etc.
Europe is not the only one with cooperatives. Other regions are not far behind and some even got ahead. ZEN-NOH – one of the largest agricultural cooperatives – was created in Japan, and its annual turnover accounts for $50 billion with 4.78 million of participants. There is also CHS (USA) – one of the world-leading agricultural cooperatives. Its annual turnover is $35 billion.
I think we all can agree this figure is huge. So huge that many governments now consider the further development of cooperative business models. Experts even discuss the perspectives to create a social and solidarity economy many times. The kind of economy that would have cooperatives in focus.
These talks alone are already something. The social and solidarity economy has long been viewed as something outdated, a communism relic, a dead end. Now, however, experts have a different perspective.
Of course, it would be a crime for Ukraine not to support this ‘flashmob’, especially in view of our country being the largest exporter of agricultural products. And the reason for that is both the positive experience of our neighbors and simple logic.
Modern cooperative members own a shared capital, commit their harvest to the cooperative, assign the development, marketing and sales functions to it. At the same time, each member retains the right to independent decisions that factor in the specifics of their personal land plot and agriculture, which an agricultural holding cannot do to a full extent. That said, farmers participating in a cooperative can export without intermediaries and raise external investment or use large loans.
In other words, cooperatives allow small entrepreneurs to have same opportunities as agricultural holdings, which they would not have on their own. That is what makes agricultural associations successful. Ukraine’s intention to follow this path is quite reasonable and correct. For now, however, this path is fraught with difficulties.
The fact that the number of cooperatives in Ukraine is growing is surely a positive sign. Unfortunately, that is not the case when the quantity equals quality. Nearly one-third of associations created do not operate de facto. Not only do they lease land to agricultural holdings, they are never engaged in other activities. The effectiveness of other cooperatives also raises some flags. And there are several reasons for this.
First reason is the lack of awareness among farmers. Some do not even know what a cooperative actually is. Others immediately recall the ‘kolkhoz’ (communal farms), ‘prodrazvyorstka’ (food surplus requisitioning) and, perhaps, even collectivization. With these ideas in mind, one can hardly believe that cooperatives can result in real benefits.
First Deputy Minister of Agrarian Policy and Food Maxym Martyniuk has noted in one of his publications that most farmers in Ukraine merge into cooperatives unwillingly on the initiative of local authorities and donor project representatives. He concluded that this is a bad sign. On one hand, it is possible. On the other hand, we have a successful example of Japan, where the government initiated the creation of agricultural cooperatives. Japanese agencies still control many of the local farm associations.
Local farm associations cover 91% of the agricultural market. The largest and world’s most successful agricultural cooperative is already in Japan. That is, the kick in the pants is not an obstacle in this case.
What is more important is reforms and profound support at the government level, as well as professionals with the experience in cooperative governance. So far, Ukraine has made little progress in this regard.
Secondly, the legislation has some problems too. The Ukrainian law qualifies cooperatives as non-profit organizations, and for that reason – tax-exempt.
At the same time, the Tax Code binds cooperatives to pay an income tax, which is indicative of inconsistencies between the law and the code.
In addition, those who service cooperatives have to pay the income tax when selling or buying via the cooperative. Naturally, it affects the cooperatives’ profit and their competitiveness.
If one rids of all the problems above, implements an efficient support program, promotes business awareness among farmers – the bright future will be forthcoming.
The examples of other countries can attest to that and we are yet to see if the government can rise to the challenges.
This post is also available in: Russian