Can diversification explain financial performance in agribusiness co-operatives?

The purpose of this paper is to integrate Brazilian agro-industrial co-operatives’ horizontal, lateral and vertical integration diversification and expansion strategies, such as operation area and membership, with financial models. Several studies have tried to assess the importance of diversification on the financial outcomes in agricultural co-operatives with limited success.

The three main concepts were combined in a working model. A survey was developed to gather data on financial, diversification and expansion strategies from 67 co-operatives (44 per cent return rate). Data were processed using a partial least squares structural equation model.

The findings suggest that expansion is directly responsible for both the financial output and diversification strategy; however, no hard evidence supports the view that the diversification of production in some agro-industrial co-operatives leads to positive financial results.

Only larger Brazilian co-operatives (>$50m in annual revenues) were considered. Co-operatives facing other scenarios or smaller co-operatives could have different outcomes.

Besides diversifying their co-operatives for financial reasons, managers should also consider risk aversion and adapting to new farmers’ portfolios as probable reasons.

Extant literature asserts that diversification leads to financial growth; as the co-operatives studied show no such causal relationship, it follows that they diversify their portfolios for other purposes.