Building cooperative capacity: the specialty coffee sector in Nicaragua

1. Introduction

Following considerable debate on market-oriented development approaches such as business development services and making markets work for the poor, researchers and development practitioners have shown growing interest in supporting new or improved value chain links between smallholders and other market actors (Humphrey and Navas-Alemán, 2010; Stoian et al., 2012). Market-oriented development for addressing poverty reduction responds to the need to re-invigorate rural development through, among other things, increased income and a decent standard of living for people in developing and emerging economies (World Bank, 2007). Rapid growth in demand for agrifood products in which smallholders are considered to have a comparative advantage, such as fresh produce and specialty coffee that require extensive labor inputs, creates significant opportunities for market-oriented development. Success in demanding agrifood markets requires smallholders and small businesses to meet high specifications for delivery, volume, and quality, including food safety standards, as well as maintain strong links with processors and other chain actors further downstream.

Development interventions can play an important role in facilitating smallholders’ and small businesses’ ability to participate in these markets (Webber and Labaste, 2010). Intervention design will vary according to the local context as well as the particular interests of funding and implementing organizations (Poole et al., 2013). Some interventions will target privately owned businesses that purchase from smallholders, with the assumption that interventions lead to increased sourcing from smallholders. Other interventions may target improvements in the overall business environment, for example, by facilitating price information to producers and traders or quality information to consumers (The Springfield Centre, 2008). Many interventions target collective producer organizations. Interventions may support the capacity of collective organizations to add value to primary production through more advanced forms of processing, with the expectation that will smallholders will benefit through higher raw material prices. Interventions may also exert leverage over cooperative structures with the aim to increase smallholders’ access to important services, such as technical assistance and credit – services for which the private sector, and in some cases, government agencies have been unable to effectively provide. Many interventions also target social objectives of collective organizations (Donovan and Poole, 2013).

Surveys of the literature and numerous case studies confirm the scale of the challenge for developing collective smallholder organizations (Kachule et al., 2005; Donovan et al., 2008; Poole and de Frece, 2010). There is general recognition that such organizations need considerable external support and productive relations with other chain actors; however, analyses and discussions have yet to cover in depth the complex value chain linkages between smallholder suppliers, collective enterprises, external donors and NGOs, and private sector buyers/intermediaries. Bijman et al. (2011) have drawn attention to the importance of community and democratic governance of cooperatives in value chains. They highlight the tension that arises as a cooperative grows or becomes more heterogeneous, whereby the benefits of democratic governance become attenuated by hierarchical arrangements as the need for efficiency increases. Thus the relationship between cooperative organization structure, strategy and performance are critical. Nevertheless, Bijman et al. (2011) do not consider how tensions between these variables affect stakeholders external to the cooperative, which are no less important for efficient management than the tensions common among internal stakeholders (Ortiz-Miranda et al., 2010). While touching on important issues, their paper is more conceptual than empirical.

Among other reports, recent action research has explored “upgrading” as a means for poor producers to escape poverty (Mitchell and Coles, 2011), and also how fair trade organic cooperatives, such as those for coffee export, can create multiple benefits for members and poor households (Gitter et al., 2012). Nevertheless, more detailed cases are needed of enterprise linkages throughout the chain. In particular, the role of cooperatives in value chains needs more examination as they attempt to address the socioeconomic needs of small-scale producers and the market efficiency and sustainability concerns of other stakeholders: donors, NGOs, and private sector buyers.

This paper examines the potential of cooperatives to engage with development organizations and commercial buyers to improve their business and social performance. It recognizes that cooperatives have the double burden of developing into viable businesses in altogether difficult environments by helping members to upgrade their productive economic capacities and business linkages between grower-suppliers and international markets, as well as addressing broader development objectives such as empowerment. We report a case study of a large Nicaraguan coffee cooperative, Soppexcca, which received substantial donor and buyer support at the time of the international coffee crisis between 1999 and 2004 – a period when coffee prices fell below the cost of production for many smallholders in Central America (Bacon, 2005). External support was used in part to build the management capacities of Soppexcca and its assets for processing, storage, and transport of coffee. However, most of the support addressed the direct needs of the Soppexcca membership, including the need to revitalize coffee production following the crisis. The paper draws on livelihoods literature and develops a framework linking investments in capital asset formation and cooperative performance, and throws light on the significance and development of links between producers, collective organization, the private sector and market development donor organizations.

Section 2 reflects on collective organizations[1] and business viability, and introduces the asset framework for the assessment of Soppexcca. Section 3 provides background information on Nicaragua, introduces the case study cooperative Soppexcca, and describes the interventions for developing the value chain. Section 4 explains the methods used for data collection. Section 5 presents the results concerning the changes in asset endowments over the five-year period 2005-2009. In the final section, we discuss the implications of the finding for the design and assessment of organization development: the Soppexcca case illustrates in particular the pitfalls faced, the support received, and potential short-cuts for achieving cooperative development in less time and with fewer resources.

2. Rural collective organizations

Forming sustainable value chain links between smallholder farmers and buyers of specialty food products typically requires long-term support in building the capacities of producer organizations. There is much evidence that collective enterprise can play an important role in building sustainable market linkages between smallholders and intermediary firms by correcting some market imperfections such as high transaction costs and missing credit markets, and filling coordination gaps (Sergaki, 2010; Gitter et al., 2012). Moreover, by organizing collectively, smallholder farmers may be more able to obtain necessary information, reach quality standards, and operate on a larger scale by pooling their financial and labor resources (Markelova et al., 2009). There is also evidence that farmer-run cooperatives can assume important roles in agricultural development based around technology generation and product transformation (Bebbington et al., 1996; Molnar et al., 2007; Abebaw and Haile, 2013).

The commitment of international agencies to cooperatives is unchanging. A recent Parliamentary report to the UK government recommends policies which direct development support to collective enterprise through organizations such as cooperatives (House of Commons International Development Committee, 2013), and follows reiterated commitments by major international organizations. Nevertheless, there are emerging differences in modalities of delivering support. For example, like many other organizations, the World Bank continues to advocate the strengthening of producer organizations as a means for increasing smallholders’ access per se to market opportunities and to enhance empowerment (World Bank, 2007, 2013). However, a business focus through improved supply chain management and coordination with the private sector is also considered essential to compete in growing higher-value markets. The World Bank strategy of linking with the private sector is endorsed by the FAO in its latest report on The State of Food and Agriculture (FAO, 2013). IFAD, on the other hand, also committed to smallholder farming, are pioneering an approach whereby funding of producer organizations is being channeled by a government directly to the farmers (IFAD, 2013). The existence of a strong national confederation of farmer organizations is a significant enabling feature of this intervention.

No one best way has been found to support the development of producer organizations. There have been many poor experiences, and also successes tempered by disadvantages. Poole and de Frece (2010) and Mitchell and Coles (2011) among others have analyzed and summarized the strengths and weaknesses of formal cooperatives. Cooperatives tend to have diverse concurrent and often conflicting objectives which can be summarized in two points: first, economic and business development; and second, social inclusion and empowerment. The part that organizational capacity building plays in creating viable enterprises is foundational. A persistent theme is that farmer cooperatives lack financial capital to grow in scale and complexity, particularly for investment in physical assets and value addition through processing and manufacturing. They also lack human capital in the form of professional management and efficient governance. Market operations and relationships with both supplier members and buyers tend to be bureaucratic and unresponsive. Moreover, rural cooperatives tend to operate in environments that do not favor enterprise development and suffer from incomplete and irregular access to technical, business, and financial services. According to Poole and de Frece (2010) there are many features of groups and management that are known to be important for producer cooperatives, and there is no absolute guidance about what does and does not work. As circumstances vary, different features can enhance or impair group performance. For a second tier cooperative such as the Nicaraguan cooperative Soppexcca, which is the object of this study, first, the relationship with the membership of the base cooperatives is an important dimension. Second, critical to its international exports will be the enterprise linkages with the downstream buyers who supply coffee to overseas markets. Finally, relationships with development organizations and lenders are important for providing services to poor small-scale coffee producers, such as technical assistance and credit; for addressing environmental concerns and improving the wellbeing of its members; and for financing long-term investments in infrastructure expansion.

Despite the various theoretical explanations for the failure or underperformance, investment in cooperatives remains an important tool for addressing the social and economic objectives of rural development. The fundamental reasons for collaborating continue to hold true: the potential for exploiting production and managerial economies of scale, overcoming market entry barriers, reducing transaction costs, and cultivating supply chain relationships. Where collective organization is necessary for linking producers with private sector development, the key question becomes, how to develop viable cooperatives with fewer external resources and in less time? As noted above, the ability of cooperatives to build their organizational assets, in the form of human, social, financial, and physical assets is critical. But asset building alone is not sufficient to achieve economic and social objectives. In addition, the mechanisms for leveraging assets depend on the organizational characteristics of structure, strategy, and empowerment (Kachule et al., 2005). Poole and de Frece (2010) develop these notions as follows:

1. Structure: performance is closely linked to organizational structure with respect to scale and scope of activities (such as delivering input supplies, provision of information and training, product processing and accessing markets), constitution and governance, and management attributes.

2. Strategy: the deliberative processes whereby organizations develop market position and power in negotiation through alliances and scale, and the creation and/or exploitation of sustainable competitive advantages – but these depend on the dynamics of values, governance, and leadership.

3. Empowerment: mainly concerned with the creation of social and other forms of capital assets, empowerment comes about through participation, individual and collective capacity building, representation, and democratic governance.

4. Performance: the outcomes are measured against economic and social objectives indicating the extent to which the organization achieves higher levels of efficiency (financial stability and investment in assets) and effectiveness (quality of goods and services provided) – and equity (distribution of risks and rewards, rights and responsibilities). In an agro-ecological context, environmental sustainability considerations assume major importance.

The following framework summarizes how pre-existing organizational capital assets, plus external development inputs in the form of technical, financial, and other support from donors and value chain partners, condition the structure and strategy of the organization. Additionally, in the case of a collective entity, the member empowerment processes are fundamental for organization-building. These elements condition the performance of the organizations (and in turn are influenced by performance), as shown in Figure 1.

In this study, indicators of changes in capital assets were assessed for the coffee cooperative and for the changes in the quality of its upstream and downstream chain links, in order to assess the impact of interventions aimed at improving structure, strategy, and empowerment with respect to business viability and linkages between grower-suppliers and international markets.

3. Case study background

4. Study design and methods

This case forms part of a larger effort by the Ford Foundation and international researchers and practitioners to better understand the ability of smallholders to participate in and benefit from value chain development (Donovan and Stoian, 2012). An important focus of attention was the role of collective action in facilitating the participation of smallholders in value chains for more demanding markets, how interventions can help build such collective organizational assets, and thus how such organizations can pursue the desired performance objectives. The focus here is on organization-building. NGOs, projects, and non-for-profit lending organizations provided technical and financial support aimed to address the negative implications of the coffee crisis through the building of relationships in certified coffee markets. Support from the private sector included services that were embedded in trading relationships, such as no-interest advance payments on coffee purchases.

After exploratory and participatory research to validate concepts and methodology, asset changes were assessed using a series of indicators for human, social, physical, and financial capital. For Soppexcca, the following proxy indicators were used to identify the extent to which the organization is able to leverage its characteristics of structure, strategy, empowerment, and performance for achieving economic and social objectives:

1. Human capital: networking building with external stakeholders, development of technical skills for coffee production.

2. Social capital: reciprocity in value chain relationships with coffee buyers, investments in governance skills.

3. Physical capital: investments in machinery and infrastructure for primary production and value addition.

4. Financial capital: loan repayment and provision of member finance.

Data collection were conducted in Jinotega and Matagalpa (north-central Nicaragua) throughout 2009 and focussed on organization-building and changes in the business viability of Soppexcca during the period 2004/2005-2008/2009. More than 20 key informant interviews were carried out with Soppexcca leaders, international coffee buyers, certification agents, and other relevant actors and were supplemented by secondary information from Soppexcca. These data were triangulated against survey data from 296 of the roughly 500 members of the cooperative, covering 11 of Soppexcca’s 18 base cooperatives. To the extent possible, quantitative information was collected to understand the changes in assets, and qualitative information was used to understand the relevance of and the reasons for the changes.

5. Results

This section examines changes in capital assets of the coffee cooperative Soppexcca and the extent to which these changes led to improved business viability in terms of organizational structure, strategy, performance, and empowerment. As detailed in the following discussions, Soppexcca achieved major advances in asset building and these interventions played a pivotal role in building the organization’s capacity to respond to buyers’ demands and market-related shocks. However, results also show that important gaps remain and that addressing these gaps implies changes in how Soppexcca operates and in how interventions for value chain development are designed and assessed.

6. Discussion and conclusions

This paper has applied an asset-building lens to assess the development of Soppexcca, and its ability in collaboration with NGOs, international coffee buyers, and others, to improve its business performance and viability, while addressing the other needs of its membership base. Investments made by coffee buyers and external support from NGOs and donors had led to the formation, out of the ashes of its predecessor Jiprocoop, of a new organization called Soppexcca. This pattern conforms to the phenomenon of “phoenix organizations,” where a viable organization is re-built out of initial collapse through a new and more rigorous (re-) start-up (Kachule et al., 2005). Initially constituted as a corporation, Soppexcca achieved stability through debt repayment and then entered a period of growth. The turnaround was a function of external support, the imposition of strong management by debt-holding coffee buyers, and a willingness of the membership to accept financial sacrifice in the form of reduced coffee prices. With the mutual agreement of coffee buyers and coffee growers, Soppexcca was reconverted into a collectively owned business. The changes in organizational assets of the renewed cooperative were monitored during the recovery period and need to be set against the framework of organizational structure, strategy, performance and empowerment introduced in Section 2 to assess business sustainability and performance.

Regarding the organizational structure, the growth in membership and in sales improved the economic scale of Soppexcca. The external technical, managerial and financial inputs enhanced the delivery of various services to the membership, and enabled valuable credit services and asset building by the organization – and by members. Future growth in membership, but without additional access to credit lines, signals the need for Soppexcca and its supporters to address the low productivity of its grower-members and ensure coffee supplies of high quality and quantity.

The corporate form initially adopted for the turnaround was successful. Once the international buyers’ exposure to the debt risk had been reduced, reversion to a membership organization partially attenuated the external leverage over organizational management. Although the leadership currently in place has been successful, the lack of democratization and transparency suggest that adequate safeguards against the recurrence of the original problems of mismanagement and corruption have not been put in place. Current governance is effective, but comes at the cost of an increased risk to succession following the current manager. The lack of skilled management in Nicaragua means that there has been no alternative.

Regarding strategy, the investments in productive assets by Soppexcca and its members, the development of effective systems for ensuring coffee quality, and the existence of a stable and professional management have positioned Soppexcca firmly in the international certified coffee value chain. These linkages provided the foundation for future interactions with donors and fair-trade organizations, which would later offer the critical support needed for building productive assets and improving quality. The transition to a new membership organization was promoted by the international buyer-partners and enabled producers to maintain access to the competitive specialty fair-trade market and premium prices and to regain the taxation advantages and ease of certification of the cooperative form. Soppexcca’s ability to respond to the needs of its buyers has not diminished with collective ownership.

However, evidence of progress towards empowerment of the producer-members was mixed. On one hand, smallholder members’ own capacities to engage in higher value and volume coffee production through their link to the resurgent organization was increased. Members often benefited financially through their coffee sales to Soppexcca, although the most significant benefits were concentrated among the larger specialized farmers. Members also achieved first-time access to vital services for smallholder coffee production, including technical assistance and credit. The provision of social services by Soppexcca was significant, but was a welfare function rather than something that resulted in member empowerment. On the other hand, the new governance structure did not facilitate effective member participation. There is a significant risk in the failure to engage and train the membership in organizational governance, alongside the potential adverse consequences of the concentration of management power.

Thus, in performance terms, social and economic objectives have both been partially met. However, the tantalizing prospect of long-term sustainability requires a process of serious change in representation, decision making, information handling and human capacity building to sustain the gains in efficiency and effectiveness. It is noteworthy that in her analysis of the ethics of fair trade, Utting (2009) identified a similar management dilemma within a cooperative structure, which is the credibility and operational gap between professional management and membership. She cited the view of Soppexcca’s professional manager on this dilemma, being the constraints imposed by high levels of illiteracy of the majority of the cooperative members, low education levels of the representatives on the board and their lack of knowledge about how to manage legal, commercial, organizational and fair trade requirements. This mirrors more widespread cooperative experience and signals that the empowerment dimension is the critical element, or rather the disempowerment of the membership, which must be addressed to ensure the transition to a sustainable organization.

However, both Soppexcca and its members may be reluctant to spread power in a way that could create a management elite, given previous experiences with cooperative mismanagement and the overall shortage of effective business skills in Nicaragua. In theory, a corporate structure could provide greater input into governance and thus represent an improvement over the cooperative structure in Soppexcca’s case. After all, it was Soppexcca’s previous owners (the debt-holding coffee buyers) who played a key role in establishing the professional management which is credited with Soppexcca’s success in its repositioning within certified coffee markets. In practice, neither Soppexcca nor its members are likely to accept a return to the external oversight, especially if this were to result in reduced support from NGOs and projects, the payment of corporate taxes and other fees, and greater uncertainty in certified high-quality product markets.

Important conclusions can be drawn from this case. The first is the advantage of the hybrid member cooperative- secondary corporate structure, and that by being thus organized during a critical stage in its development, Soppexcca likely accelerated its recovery and development as a viable commercial enterprise. It highlights the importance of having strong professional administration, and market linkages during the initial development phase that can subsequently evolve into enduring, profitable private sector linkages. However, the transition from private enterprise to cooperative has not been easy. Soppexcca has struggled to empower its members to contribute to cooperative governance, and NGO and donor partners have not yet emphasized such democratization and empowerment.

Second, on the “quantity” of support, has it been worth it? The considerable external support involved in the restructuring of Soppexcca implies that it may serve as a model for collective enterprise rescue but should not serve as a model for organizational development in most contexts. But Soppexcca is not alone in having received significant intervention: there are other notable examples of high levels of support given to cooperatives that link smallholders to higher-value markets in Latin America (e.g. Cecocafen in Nicaragua (certified coffee), El Ceibo in Bolivia (organic cacao), Forestcom and El Pino in Guatemala (certified timber and fresh vegetables, respectively), and in Africa (NASFAM in Malawi in diverse agricultural product markets). The Soppexcca case illustrates the willingness of donors and NGOs to support more advanced cooperatives when such support has the potential to impact the wellbeing of smallholder producers. After all, much of the support channeled through Soppexcca was directed towards helping poor coffee growers to build their assets following the coffee crisis. In the context of the coffee crisis, when the external environment was particularly unfavorable for coffee producers, it was not difficult to justify the private and NGO support to rescue the business. And for buyers, the debt was repaid and valued supplies of high quality certified product were secured. But this level of support cannot be widely scaled out.

Third, the case furnishes more evidence also on the quality of support for the creation of sustainable cooperatives. In particular, stimulation of viable collective enterprise is a long-term process and requires patient external support. In this, the experience of Soppexcca again is not unique: also in Nicaragua, Fraser et al. (2013) record the demise due to corruption and mismanagement of the second tier cooperative Giprocoor in the late-1990s. Giprocoor was then reconstituted with an imposed management and the support of European buyers as a private limited company, Sepasa, “to clean up Giprocoor’s corruption and uphold fair-trade values through good management and business principles” (p. 12). Smallholders, who had realized the significance of property rights due to previous experience of land appropriation and forced migration, expressed a willingness to repay to European buyers the accumulated debts. Having tied in external commercial support, Sepasa moved into recovery after 2003. Efforts began later to encourage the organization to revert to a cooperative structure.

Soppexcca and Sepasa have more in common. The reasons for formation were partly cultural and ideological: they included the desire that members might have some democratic participation in governance; the awareness that international donor organizations specifically wanted to work with cooperatives. Equally important were the business reasons, to minimize the organization’s tax burden which is higher for corporate entities than for cooperatives; and to sustain the strong link between the fair trade movement and collective smallholder organization. Moreover, for producers, the memory of the fair trade premium received through sales through the cooperative sector during the coffee crisis will also have persisted. Finally, a favorable macro-political condition was the return of the Sandinista government in 2007 which created a more enabling environment and lent support to the social empowerment aims of cooperatives: it was said that “the only way to secure social development programs was through further embedding the Union of Organized Cooperatives (UCA) within local cooperative ‘reality’ […]” Fraser et al. (2013).

The Soppexcca experience also echoes the analysis by Bebbington et al. (1996) of the development trajectory of the cocoa cooperative El Ceibo in Bolivia. They attributed its success to slow growth through genuine vicissitudes into a complex, multifunctional and modern organization, yet retaining a focus on the core business of cocoa marketing into the international fair trade, organic cocoa sector. They acknowledged that the achievements of El Ceibo “have not come cheaply, and remind us that building capacity in a campesino [sic] organization requires significant and sustained investment of resources” (p. 202). Similarly, among the key factors were the quality of external support: loyal and sensitive donors; the volume and duration of external support: sixteen years of continued technical assistance; donor-facilitated direct network linkages into export markets; and a range of organizational support services, including both technical assistance and continued and intense support for the formation of human resources.

In conclusion, Soppexcca is representative of the traumas of forming collective organizations in developing countries, particularly in agribusiness. The intention of this study is not to claim representativeness, however, but there are wider lessons to be learned as the development community reiterates its policies of support to producer organizations. It highlights the long and winding road for development: the level of support suggests that it is a costly success, but many of those business costs have been recovered. For Soppexcca, and for other development initiatives that could benefit from this lesson, the particularly significant dynamic is the valuable and consistent support from networking with business partners, not just working with NGOs and donors (Sergaki, 2010). Donovan et al. (2008) argued that external stakeholders such as donors, NGOs and value chain partners may have to be committed for longer than a medium term of, say, four to five years, with a focus on building the “soft” assets associated with human skills of management and governance. “Soft asset” formation may continue to be necessary for years after the technical assistance, infrastructure and financial support have been scaled down. Thus the need is urgent to create economically sustainable cooperatives in shorter periods of time. Potential short cuts will depend on delivery of effective and well-articulated technical, business and financial services throughout the organizational development process. The design and delivery of these services require alignment and harmonization between government policy, the approaches of development agencies, NGOs, research and training centers to skills training, and most of all, closer collaboration, communication and coordination in the value chain among cooperatives, buyers and processors.