Located in a beautiful gorge between Nabeghlavi and Bakhmaro, Chkhakaura village is home to tough Guruli trout fishermen. The village is difficult to reach even in a sturdy 4x4 SUV, but this does not prevent locals from taking advantage of dilapidated Soviet infrastructure and unique natural conditions to grow trout.

They are five men, ages 20 to 45, who have been in joint trout farming business for more than 4 years, selling fish, roe, and fry in the nearby Nabeghlavi and Bakhmaro villages. Nabeghlavi and Bakhmaro happen to be premier Georgian mineral water brands belonging to Tskhali Margebeli (“Healthy Water”), and plentiful supply of ‘healthy water’ is perhaps the only locational advantage of the guys from Chkhakaura. The last stretch of the road from Nabeghlavi to Chkhakaura is unpaved, and in wintertime, fish has to be carried by sledge.

For all the talk about the Georgian farmers’ chronic inability to cooperate, what the fishermen from Chkhakaura have created over the years is a real farmer cooperative. They would not have been able to survive, let alone be successful, without helping each other in every aspect of their difficult business – growing fish in the middle of nowhere and bringing it to the market. For them, cooperation is a way of life.

WITH A LITTLE BIT OF HELP FROM EUROPEAN FRIENDS

Responding to a unique opportunity provided by recent changes in Georgia’s legislation, the group has decided to formally register as a farmer cooperative, “Samegobro 2014”. Moreover, they have applied – and have been selected! – for funding and technical support by the European Neighbourhood Programme for Agriculture and Rural Development (ENPARD). A recoverable grant (essentially this is a zero-interest loan to be eventually ‘recovered’ by the Georgian Farmer Association in order to finance future loans) of about GEL 70,000, will allow the group to renovate and expand their facilities, and buy a pick-up truck to distribute trout and deliver feed and other supplies to the farm. Their business plan (which they had to develop in order to qualify for EU funding) talks about the development of agritourism – the construction of a small B&B facility for visitors interested in healthy water, trout fishing, and breathtaking mountain scenery.

The story of the “Samegobro 2014” is part of a big EU-supported push by the Georgian government to establish business-oriented farmer groups across the country. More than 250 agricultural cooperatives have registered with the Agricultural Cooperatives Development Agency (ACDA) to date. Many of these (as well as some other farmer groups) will be incubated through the Eur 40 mln ENPARD-Georgia program, which gives farmers a great opportunity to explore economies of scale in the procurement of inputs and services, agricultural production, and marketing.

The road to effective farmer cooperation in Georgia is not likely to be an easy one. To begin with, fledgling farmer groups will have to learn the basics of cooperation management – how to make collective decisions, how to reward good performers, and punish slackers. Strong leadership skills and the ability to work in a team – standard job interview topics – might prove a binding constraint for groups lacking in prior experience.

While cooperation management may be less of a challenge for more or less experienced groups, such as our Guruli fishermen, farmer coops may go bust like any other business if they fail to achieve a competitive position in their market. Failure can be a result of poor raw material supply management (crucial for processing cooperatives) or competition with larger scale and more efficient producers (like the large trout farm right on the road to Bakhmaro). In the absence of insurance and cash reserves, a potentially successful farmer coop could unravel even as a result of a one-time crop failure.

THE CHALLENGE OF ACHIEVING ECONOMIES OF SCALE AND COMPETITIVENESS

A cursory examination of the list of farmer groups registering with the Agricultural Cooperatives Development Agency (ACDA) and applying for ENPARD support suggests that – perhaps contrary to some expert assessments – most Georgian farmer groups are tiny ‘production coops’, that is groups trying to scale up production by consolidating their assets and jointly acquiring a piece of equipment or machinery.

As previously discussed on the ISET Economist Blog, the distinction between production and service coops is crucial.

“Smallholders are often too small to independently access markets and can be easily exploited by middlemen and local monopolies. Service cooperatives can increase the bargaining power of smallholders versus banks, service providers, input suppliers, processors, and … government. This light form of cooperation is quite effective and relatively easy to manage and sustain, which explains its prevalence in North America and Western Europe.

A more ambitious (and far more demanding) form of cooperation is about pooling fragmented small holdings into larger farms. Examples of such production cooperatives are the Israeli kibbutz and Soviet collective farms. These are said to benefit from economies of scale in primary agricultural production.”

The main raison d'être for production cooperatives, of which “Samegobro 2014” is a good example, is, indeed, the opportunity to reduce costs and gain lucrative contracts with other players in the relevant agricultural value chain, such as large processors, retail and hotel networks. Unfortunately, most newly registered farmer groups are very small, consisting of 3-5 members (often close friends or relatives), which diminishes the scope for achieving economies of scale in production, at least in the short term.

For processing cooperatives (a specific form of production coops that is quite common among newly registered farmer groups), cooperation is typically about undertaking investment in expensive equipment that no single farmer would be able to afford individually. Given the small size of processing cooperatives currently registered with the ACDA, however, their main challenge will be to ensure a stable supply of raw materials (be it tea leaves, nuts, or milk), and thus justify the upfront investment in processing equipment, storage units, and the like.

(As many processing businesses learn the hard way, managing raw material supply is never easy in Georgia given the short planning horizons of smallholder farmers and lack of forwarding markets. In other words, there is a real danger here that donor-financed equipment will be eventually rusting in the corner of a field, to use Tim Stuart’s metaphor.)

Finally, for all types of startup production cooperatives, a real issue is competition in the product market. Instead of cooperating on input and service procurement or marketing, they will be competing with each other, with smallholder farmers (delivering the product to the market at prices that undercut more formal players), and with larger commercial operators (large-scale family farms or LTDs) enjoying economies of scale in production and/or marketing which cannot be matched by startup agricultural cooperatives.

A possible way out for small-scale producers (e.g. wine cooperatives) will be to develop highly differentiated products (a specific grape variety, kvevri wine, locally branded churchkhela, etc.) and invest in their branding and marketing.

Many startup farmer coops will undoubtedly fail to deal with these challenges. Nevertheless, the Guruli fishermen example suggests that farmer cooperation should be given a chance in Georgia. With a bit of support from our European neighbors and the Georgian government, cooperation could give hope to many Georgian households who are willing to help themselves.