Democratization and decentralization of economic power can bring to agricultural producers not only new incentives but also some problems hitherto unknown. They will be required to perform not only production but also business functions such as marketing of their products, organization of supply, providing services, professional advise, etc. A reversion to the former, state-run business organizations would bring again dependance on the bureaucratic apparatus with all ensuing consequences.
Integration with already mentioned non-agricultural business structures is also fraught with losing of economic independence. Acting as separate market participants, agricultural producers can hold out a certain time because of food market deficit. But this way is out of perspectives. When the market becomes saturated with products, and competition increases, producers will not be able to pay enough attention to both improving production performance and promoting efficient business operations. They can come to economic stability only through joint actions organizing cooperative associations fully controlled by themselves. Development of a cooperative initiative in Ukrainian agriculture will be caused by two main groups factors: organizational and market ones.
Organizational factors is the first group. Privatization and splitting of collective farms into independent economic organizations, generally, can be considered as disintegrating process. No doubt, it will have some negative results when important production and marketing relations will be either broken or cease altogether. Neglect of that can seriously redouble the existing chaos. That is why destroying command system of coordination in agriculture must be simultaneously replaced by new forms of cooperation between producers. The problem is that centralized measures of government do not work in such a situation and can be even dangerous. They would provoke discredit of the cooperative idea (as already some times has happened during the Soviet period). Ukrainian agricultural producers are not familiar with real cooperatives. In their imagination, cooperatives are associated with pseudo-cooperative collective farms and the perestroika-type cooperatives of shady reputation. In both cases they are faced with an distortion of the cooperative idea. This can explain the possible (and in some places already existing) negative attitude of ordinary rural people toward cooperatives. But this is the problem of accepting a name of organization, but not the problem of accepting cooperation as an economic organization. This problem can be solved gradually through education of potential cooperators, demonstration of real cooperatives' advantages, and contrasting them with pseudo-cooperative organizations.
In organizational aspect, appearance and development of a cooperative initiative could be considered at the three levels:
- primary (or production) level;
- level of cooperative associations;
- federated level (Figure 34).
The first level is mainly intended for reforming collective farms1. In order to obtain features of cooperative organizations the primary production units of reorganized collective farms must provide following:
1. Each member of the organization must be one of its owners. Private ownership, of individual or corporate type, must be considered as a basis of primary production organization to guarantee freedom of personal economic choice.
2. The member must contribute agricultural production with his labor, property and investments, and accept the allocation of losses as well as any gains.
3. Members of primary (production) enterprises should elect their board (or board of directors). All elected directors must be member-owners of the enterprise. The board will hire a manager who should not be a member-owner.
4. The production enterprise must use market prices in its relations with other economic partners, including production and service divisions of the same restructuring collective farm. It will guarantee freedom of choice in the selection of marketing channels, supplier, and participation in different economic associations.
5. The production enterprise must be mostly oriented to use of its members' assets for investments or to borrow funds for this purpose, and stimulate capitalizing motives of its members.
Thus the primary (production) enterprise can be turned into an association of independent owners who unite their efforts for mutual benefits on the basis of patronage and control of their organization. This type of economic organization is called cooperative. Such restructuring at the production level will provide the saving advantages of large-scale production and will allow it to use incentives of privatized agriculture.
Next step to the introduction of a cooperative initiative can be at the level of cooperative associations. The distinction of these organizations is that they are not engaged in production, and should be created mainly for marketing, supply and services needs of their founders. There would be two types of these cooperative associations. The first is to be an absolutely new type of organizations, very close in their structure, functions and performances to those which exist in the countries with market economies. Their members will be private producers (individuals or corporations), and these new associations will not have organizational ties with former structure of agriculture. Associations of this type will be able to accept the experience of farmer cooperatives in rather broad scale: fundamental principles, organizational arrangements, democratization of management, marketing options, methods of financing, legal regulations, and so on.
Another type of cooperative associations will be specific for Ukraine because it will replace the former collective farm structure. Necessity to use collective farms as a basis of future cooperative associations is dictated by reasonability to save large-scale business operations, certain already gained marketing experience, relatively skilled personnel, production and social infrastructure, system of communications, etc. However, collective farms must fundamentally change their organizational philosophy, system of management, delegation of power and resources, financial performance, and distribution of income. A reorganized collective farm (which in this situation has already ceased to be a farm) will be voluntary association created and owned by primary production enterprises (see Figure 34) for marketing, supplies, services, and other possible business needs of its founders. It also may make a reason for independent private farmers to join this association if it is beneficial for them. Openness of new associations for both production cooperatives and individuals will give them the status of mixed cooperative organizations.
The system of management in reorganized collective farms is to be similar to that which exists in farmer cooperatives: managerial triangle (members-directors-manager), democratic control, periodical accountability, and independent audit. With the purpose to stimulate member investment and/or patronage, cooperative associations can introduce proportional membership voting. But it will require a certain member education and training of directors because this type of voting is absolutely new for Ukrainian farmers.
The biggest metamorphosis expected for collective farms is that they, as cooperative organizations, will have to turn their profits over to their members (former production divisions and now independent enterprises) not to retain it at the association level for themselves. Voluntary renunciation of its profit in favor of lower level organizations is out of the command economic system's logic. To cross this Rubicon for collective farms means in fact to become real cooperative organizations. Of course, the question is not to deprive reorganized collective farms of profit at all, but to distribute it within the member organization as it is required by new nature of economic relations. To make it easier for understanding let's consider to whom and how basic functions of collective farms' profit can be transferred:
1. Production development. Before restructuring, collective farms use their profit first of all for development of production, or in other words - for reproduction on an expanded scale. Profit was used for increasing property and its maintaining in proper condition. But when property is transferred to the private owners, the function of production development will pass to them also. Unlike collective farms, the cooperative associations will not interfere in production affairs of their members.
2. Compensation of production and commercial losses. Collective farms also used their profit for centralized compensation of losses. After privatization and creation of new type enterprises to compensate losses is a matter for those who made these losses. As for the losses in commercial activities of the association they must be allocated to the members in accordance with the agreement concluded in advance. The creation of unallocated reserves, probably, will be undesirable at this stage because it can decrease the personal responsibility for occurred losses, as it was under collective farming.
3. Stimulating of production. A certain part of collective farms' profit was also directed to the establishment of a special fund of incentives for individual labor contribution to the final results of public production. After restructuring members may expect larger part of the profit if they use their organization more actively.
4. Social development. Important channel of profit distribution was its allocation to social needs of collective farm members. After restructuring responsibility for these social needs must be transmitted to rural municipal authorities (this will have a special consideration below).
Thus, in spite of different background both farmer cooperatives and cooperative associations on the base of reorganized collective farms can gradually become quite similar in their organizational design, functions, management, financing, etc. This homogeneity will lead them even to more advanced organizational level. At this level the federated organizations can appear. They will be based on the same principles and organizational ideology as their member cooperatives. With formation of national federated cooperative associations the alternative organizational structure of Ukrainian agriculture is logically completed.
Besides organizational motives, a cooperative initiative in Ukrainian agriculture will be promoted by market factors. This process is illustrated in Figure 35. Under conditions of command economy, when there was not any real alternative to state property, the state had full control over product flows from agricultural producers to final consumers. Privatization processes have been started only recently, and the situation has not been changed significantly. With a little exception for some collective farms which have processing facilities, the rest of the marketing umbrella belongs to the state. In such spheres as wholesaling and retailing the state is very close to an absolute monopoly (Figure 35-A).
Because of the urge for market reform in Ukraine, the changes can happen very quickly. The process of privatization occurs not only in agriculture but also in each link of the food marketing chain. The state is going to transfer commercial agricultural market activities to new owners who may represent non-agricultural business. The appearance of new competitors is clearly not in favor of agricultural producers. The processes are developed so quickly that there is a threat of incredible expansion of non-agricultural business in the food market (Figure 35-B).
With understanding how profitable can be agribusiness under conditions of food market deficit, numerous non-agricultural business organizations, for example commercial banks, private trade firms, private building companies, etc., actively try to find possibility for their investments in agribusiness and by this means establish control over marketing channels of agricultural producers. Such organization often proposed to use their financial assets for collective farms in order to control even agricultural production. Losing the state support and acting alone collective farms are not able to resist the pressure of non-agricultural private business.
Unification of agricultural producers would seriously change the balance of forces at food market (Figure 35-C). Through their cooperatives, farmers can get not only access to market but also provide control over marketing .channels,,and, finally get a certain market power. Taking into consideration the critical financial situation of Ukrainian agricultural producers, to join cooperatives is the best chance for them to participate in vertical integration and get benefits of value-added business. Hence, market factors also create incentives for cooperative initiative.