Corporate Governance, Business Ethics,

Risk Management, and Internal Control

AGRICULTURAL COOPERATIVES: OPERATIONS,
RISKS AND RISK MANAGEMENT
Abibico, Pabiana O.
Legoen, Shiela A.
Pachong, Aprelle B.
Pangpangdeo, Keth Lei L.
Seb-aten, Logel G.
Wad-ingan, Cyprene M.
April 16, 2024

Agricultural cooperatives are pivotal in supporting farmers, improving

market reach, and advocating green farming practices. Yet, akin to all
agribusiness ventures, they operate in an inherently risky environment
where potential disruptions can impact their operational continuity and
sustainability. This paper examines key areas such as collective decision-
making, market strategies, member support services, and risk mitigation
approaches within agricultural cooperatives. Possible risks identified include
market risk, operation risk, credit risk, and government or political risks. To
mitigate these risks, these cooperatives may implement risk assessments,
quality control, supplier and customer relationships, market intelligence, and
sustainable practices. By addressing these risks effectively, agricultural
cooperatives can build up their resilience, competitiveness, and long-term
viability, contributing to the prosperity of farming communities and
sustainable agricultural development.

I. Agricultural cooperatives
Most Filipinos have a strong tradition of farming, a profession
that supports many families financially. Historically, economists and
social reformers believed that farmers were significant contributors to
the nation's wealth (Abella & Fajardo, 1993). However, according to
the Philippine Statistics Authority (2023), farmers, along with fisher
folks and individuals residing in rural areas, consistently had the
highest poverty rates among the country's basic sectors in terms of
poverty incidences in 2015, 2018, and 2021. This issue may stem from
the fact that most farmers lack land ownership, restricting their access
to economic opportunities such as efficient production. They also often
need to borrow money for planting and struggle to repay debts with
post-harvest income, leading to financial strain. Additionally,
inadequate infrastructure in rural areas hinders transportation and
communication, causing delays in deliveries, lower product quality,
reduced information exchange, and increased vulnerability to
dishonest market practices. Nevertheless, farmers now have access to
various agricultural investment options and business models, such as
cooperatives, joint ventures, contract farming, and out-grower
schemes that would support them and enhance their agricultural
practices.

One prevalent model is the agricultural cooperative which is a

business organization owned and controlled by its members for their
mutual benefit. Members finance their cooperative through equity
investments. Operating on principles of voluntary membership;
democratic control; member economic participation; autonomy and
independence; education, training, and information; cooperation; and
concern for the community, this type of cooperative unites farmers and
agricultural stakeholders in the same locale as a group and pool their
resources to achieve greater productivity and higher yields which they
are unable to accomplish if they work on their own. In many cases,
however, agricultural cooperatives are multi-purpose cooperatives of
which community residents, including non-farmers, are members. One
of the essential aspects of agricultural cooperatives is their collective
decision-making process. Unlike the typical approach in individual
farming where decisions rest solely with each farmer, cooperatives
operate democratically where every member contributes to decision-
making, enabling them to collaborate in identifying opportunities,
formulating strategic plans, and tackling challenges encountered
during their operations.

Agricultural cooperatives also control supply and marketing

channels on a business level. It can purchase, at lower prices, input
supplies used in agricultural production e.g., seeds, fertilizers,
herbicides, pesticides, fuel, equipment and machinery spare parts,
veterinary medications, etc. in bulk and distributes it to its members
 for nearly wholesale prices (Agricultural Supply Cooperative) and sell
more of its products in larger markets at higher prices (Agricultural
Marketing Cooperative). This way, cooperated members get more with
less. It empowers more the cooperative to negotiate favorable terms
with suppliers and ensure stringent standards for product quality. This
improved bargaining power and control over the production process
lets members further increase their profits, setting up a feedback loop
of higher earnings and greater production. Moreover, agricultural
cooperatives provide support services to its members, enhancing
competitiveness and fulfilling member needs. This includes offering
infrastructure development (transportation networks, storage facilities,
and market outlets), technical assistance and agronomic support,
access to credit, and even assistance with regulatory compliance. Even
more, there are so-called “new generation”, or “value-added”
agricultural cooperatives (Elijah, 2022). These focus on adding value to
agricultural products through processing, branding, packaging, and
creating differentiated products for niche markets. For instance, they
transform raw wheat into cookies.

Agricultural cooperatives vary in structure based on membership

size and geographical coverage, with distinctions between local and
regional cooperatives. Typically, a local cooperative serves several
hundred members within a specific area, whereas a regional
cooperative may encompass thousands of members across multiple
areas or states within the country. Additionally, agricultural
cooperatives can have centralized, federated, or mixed structures. In
centralized cooperatives, individual members manage operations
through a central office or branch offices. Federated cooperatives, on
the other hand, are overseen by the main cooperative's board of
directors, comprising representatives from member local cooperatives.

II. Risks, causes and mitigations

Just as these cooperatives contribute to sustainable agricultural
practices by promoting efficient resource utilization, reducing input costs,
facilitating knowledge sharing among members, and supporting
environmental stewardship initiatives, these are also faced with
challenges and are exposed to various risk factors that can impact their
operations and sustainability. Possible risk exposures include, but not
limited to, the following:
1. Decline in sales. Agricultural cooperatives may encounter decline in
sales especially if these are situated in areas where it faces intense
competition, significantly impacting the profitability of cooperative
members and the cooperative itself leading to reduced sales volumes
and revenue, diminished market competitiveness, and strained
customer relationships.

Availability of alternatives where members may have access to

alternative suppliers or retailers offering similar products at
competitive prices or with added convenience is one of the underlying
causes of this risk. If these alternatives offer better value propositions
or meet specific preferences, members may choose to purchase from
them instead of the cooperative. Another cause lies in the pricing
strategies employed by the cooperative. If the cooperative is unable to
match prices offered by its rivals, it loses appeal among customers,
including its own members. Moreover, economic factors such as
recessions, unemployment, or inflation can impact consumer
purchasing power and discretionary spending, influencing their ability
to afford high-priced products and contributing to slower sales.

Possible mitigations or actions. This risk can be mitigated by

conducting thorough market research and analysis to determine
optimal pricing strategies that balance competitiveness with
profitability. The cooperative may implement dynamic pricing
mechanisms, promotional pricing, volume discounts, or bundling
strategies to attract customers while maintaining healthy profit
margins. It is also crucial to establish relationships with external
suppliers to ensure affordability and availability of supplies so that
members can continue to patronize their products. Another mitigation
strategy is the patronage refund where cooperatives distribute a
portion of their profits back to their members based on their patronage
or purchases from the cooperative. This mechanism is in fact exercised
by the Besao Multipurpose Cooperative, offering its agricultural inputs
like animal feed and ammonia as part of the general merchandise with
matching patronage refund in a percentage (for members only).

2. High operating costs. Operating costs that are high or increasing

can reduce a cooperative's net profit. Operating costs include
transportation, personnel, storage, etc. In our country, most of the
agricultural land is too far from commercial sites to buy these inputs or
supplies for cultivation. This is one reason why they have to form
agricultural cooperatives to pool their money and possibly get cheaper
 prices on large orders of supplies. And because the farmers need so
many products, there are also more suppliers to consider before
purchasing. Even if suppliers agree to give them cheaper prices for
bulk orders, transportation is expensive. On the other way around, the
cooperative can’t increase their commission just to set-off the high
operating costs as the farmers or members expect the products to be
cheaper.

One viewed solution is that, if the cooperative is involved in

supply and marketing services, which is common in most cases, the
management should consider getting its own truck or vehicle, with the
costs borne by both service departments as they would both benefit
from it. Having their own vehicle reduces the costs associated when
renting one as you will also pay for its rent not just the driver and
gasoline for every travel. They just need to add another employee as a
driver, whose fixed salary we estimate is less than the cost of renting a
vehicle for each trip. Another is for the cooperative to strengthen its
partnership with its suppliers so that they don’t have to look for other
suppliers again, because that too would be expensive and time-
consuming. If they already have good connections with the suppliers,
they can make some arrangements where they simply contact the
suppliers rather than going to their outlets just to purchase and come
back. The cooperative should also look for suppliers that have a free
shipping policy for bulk orders. This would certainly reduce on some
operating costs, especially transportation costs which is the most
expensive one.

3. Credit risks. Agricultural cooperatives extend credit to their

members, allowing them to borrow agricultural supplies and return
them once their crops have grown. This practice, often referred to as
input financing or credit sales, is common in such cooperatives—such
as the Besao Multipurpose Cooperative of which members can only
avail—as it helps members manage cash flow constraints and access
essential inputs for crop production. However, there are inherent credit
risks associated with this kind of arrangement.

One of the primary credit risks is the potential for members to

default on their repayment obligations. Factors such as crop failures,
adverse weather conditions, market price fluctuations, or unexpected
financial hardships can lead to members being unable to repay their
debts to the cooperative. The cooperative may also require collateral
or security for the credit extended such as liens on crops, equipment,
 or land. However the value of collateral can fluctuate due to market
conditions or unforeseen events, posing risks if the collateral’s value is
insufficient to cover the outstanding debt. Furthermore, some
agricultural cooperatives allow their members the freedom to select
their preferred payment date, but with limits to how long the payment
can be delayed.

To mitigate these risks, the cooperative may conduct through

credit assessments and risk evaluations of members before extending
credit. It may evaluate members’ financial health, repayment capacity,
credit history, and crop production prospects to assess
creditworthiness. It can also establish clear and enforceable credit
terms, conditions, and repayment schedules to mitigate
misunderstandings or disputes. For instance, the Anabel-Sadanga
Multipurpose Cooperative allows its members to choose their date of
payment, typically within a week after the utilization of credit. The
cooperative does not impose interest on the credit initially, even if
some members are unable to meet the provided timeframe. However,
if payment is not received within a month, interest will be applied to
the credit balance with a minimum interest rate of 1% per month.
Moreover, the cooperative can also seek collateral management by
valuing and monitoring collateral assets to ensure proper
documentation and registration of liens or security interests and to
periodically reassess collateral adequacy. Besides, it may also consider
using risk mitigation instruments such as credit insurance, guarantees,
or hedging strategies to protect against credit losses and unforeseen
events.

4. Government or political risk. Agricultural cooperatives are subject

to regulatory frameworks governing agricultural practices, cooperative
governance, trade policies, environmental standards, etc. These are
then exposed to government or political risk. This risk refers to the
potential impact of government actions, policies, regulations, or
instability on businesses or investments (Pfeffer & Salancik, 2003). The
challenges encompassing such risk can affect the cooperative’s overall
business environment.

Government risk may arise from changes in regulations,

compliance requirements, or regulatory enforcement which can create
uncertainty, administrative burdens, and compliance costs for the
cooperative. It directly impacts agricultural markets, supply chains,
and cooperative operations. This risk may also be caused by policy
 uncertainties or inconsistencies which can disrupt business planning
and decision-making, by political instabilities which can lead to shifts in
resource allocations, and by geopolitical tensions which can affect
trade and exports.

Mitigation mechanisms for this risk may involve engaging in

advocacy efforts, participating in industry associations, and providing
input policy development to influence favorable regulatory outcomes.
Regularly monitoring government policies and political developments
that may impact the cooperative and staying informed about emerging
trends, regulatory proposals, and potential risks through industry
networks, legal advisors, and government sources may also be some of
the proactive measures and strategic actions to mitigate this risk.

In conclusion, effective risk management is imperative for the

sustainable success of agricultural cooperatives. By proactively identifying,
assessing, and mitigating risks across various dimensions, agricultural
cooperatives can transcend beyond. Through continuous learning,
adaptation, and collaboration, these cooperatives can build a robust risk
management framework that fosters innovation and trust and drives
sustainable growth in the agricultural sector.
REFERENCES:

Abella, F., & Fajardo, F. (1993). Cooperatives (3rd ed.). Quezon city: REX
Booskstore.

Elijah, R. (2022). Agricultural cooperatives: Specifics, roles, pros & cons.

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Manfredo, M.R., McDermott, S., & Richards, T.J. (2003). Agricultural

cooperatives and risk management: Impact on financial performance
Pfeffer, J., & Salancik, G.R. (2003). The external control of
organizations:
A resource dependence perspective. Stanford University Press.

Philippine Statistics Authority (2023). Fisherfolks and farmers remain to have

the highest poverty incidences among the basic sectors in 2021.
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