Expanding Competitiveness of the Moldova HVA Sector through Formation of Marketing Associations and Cooperatives

[Prepared by: Valentina Plesca and Viorel Leahu, Team Leaders Agribusiness Development Project; Sergiu Botezatu, Acting CTO Agribusiness Development Project; and Conrad Fritsch, COP Agribusiness Development Project for presentation at the USAID sponsored 3rd RCI Competitiveness Conference, May 20-22 at Przno, Montenegro.]

The formation of marketing cooperatives to provide production inputs and to coordinate and promote the sales of farm grown products has been a long-standing objective of many USAID agricultural development projects in successor states of the Former Soviet Union (FSU). Unfortunately, many of these attempts have met with limited success. The reason for this outcome, in the context of the FSU countries, is a combination of one or more of the following factors:

• The FSU kolhoz system did not support the needed culture of cooperation among the newly created private farmers as it was based on state management of agricultural production rather than private sector management of production within a supportive public sector enabling environment;
• At the time of FSU disintegration, there were no private sector input suppliers and no private sector buyers of farm products to provide a model for future development, as these functions were also undertaken by the state;
• Most post FSU farmer cooperative legislation was based on FSU cooperative law or existing limited liability law that did not provide tax incentives to encourage payment of patronage dividends or other financial incentives needed to promote a western type of farm cooperative movement, and therefore supported formation of “cooperatives” that operated in fact more like a kolhoz or a limited liability company;
• FSU successor states did not provide suitable financial incentives or educational support to sustain a business cooperative structure after withdrawal of donor financial and technical support.

Moldova is fortunate in that it has cooperative legislation that supports payment of patronage dividends on pre tax income, unlike most legislation for post FSU and Yugoslav states that levies profit taxes on cooperative earnings prior to distribution of patronage dividends. The legislation is recognized by many international experts as one of the most progressive in Europe. However, the other four identified constraints remained relevant to the Moldova situation.

The four year USAID Farm Store Project (2000 – 2004) that was managed by CNFA provides a successful model for building a commercially viable farmer managed cooperative input supply system that today is the second largest agricultural input supplier in the country. The central cooperative organization (Agrostoc) supports a network of more than 85 private sector members most of whom are independent cooperatives or limited liability companies that provide inputs and agronomic services to both members and non-members. While this success story can provide many useful lessons for developing a post FSU farmer input supply cooperative structure, this paper is oriented to addressing the issue of product marketing cooperatives, principally for the sale of high value fresh produce.

Marketing Associations as an Integral Component of Sustainable Grower Marketing Cooperatives

The major constraint hindering development of post FSU marketing cooperatives is arguably the lack of trust among private farmers to give up ownership of their product to a cooperative. However, in order to function as a successful marketing and sales organization, the cooperative must be able to exercise control over a sufficiently large volume of products with known quality characteristics that meet market requirements. The inability to successfully address this issue renders most attempts at organizing sustainable marketing cooperatives quite futile when using only donor project resources.

The formation of a Grower Marketing Association can serve as an initial organizational structure to support development of a common grower marketing strategy and brand identification even though it cannot take the important step of product ownership as a basis for developing a bargaining position for its members. This approach was introduced by the Agribusiness Development Project (ADP) in June 2006 by facilitating formation of the Moldova Fruct Association (MFA) as a way to foster communication among five of the largest Moldovan apple producers to develop a common marketing strategy. Although these growers were large by Moldovan standards they realized that they were quite small by international standards and could not provide sufficient quantity or bargaining representation when negotiating with foreign buyers.

Annual association membership fees were set at $1,000 to support the hiring of a part time Executive Director and the basis for a future earnings stream was provided by including a provision in the by-laws that the Association could charge a set fee (currently 10 U.S. cents) for each 12kg box of fruit sold using the Association brand, logo and common packaging.

The success of the association was by no means assured as Russia, which was the major export market for these growers, had slapped an embargo on the import of fresh produce from Moldova in spring of 2005. However, an additional objective for the Association was to gain an understanding of the European Union export requirements and to provide support to members in meeting the requirements of this market. In support of the association objectives ADP staff facilitated the development of a brand and logo and supported development of common packaging materials. In addition, the ADP provides a comprehensive training and facilitation program to growers (of all F & V products) in EurepGAP (now GlobalGAP) technology and record keeping procedures in order to qualify for annual certification that is required to meet export requirements to high quality EU fresh produce retail markets. Currently two of the five MFA members are GlobalGAP certified and the others are adapting their production and post harvest practices and records to qualify for this certification standard.

While the Russian fresh produce embargo created severe market dislocations, MFA members succeeded in exporting a small quantity of fresh apples to EU countries notably Romania. German supermarkets expressed interest in buying Moldovan fresh apples in 2007 but MFA members could not meet the required quantities on a regular basis. A major breakthrough occurred in March 2007 when the Russian ban on Moldovan fresh produce was lifted. To gain an understanding of this “new” Russian market ADP supported the MFA in preparing promotional materials and a booth for the Second IFE Fresh Produce Trade show in Moscow that was held in October 2007. All five members (paying their own expenses) attended along with two ADP staff. The show also attracted exporters from major European and South American fresh fruit producing countries. Their presence indicated the degree of importance afforded to the emerging Russian market that is increasingly dominated by upwardly mobile consumers with the purchasing power to gradually transform this market to one with a quality emphasis that may one day match that of the major European Union states.

During the three-day Trade Show MFA made more than 200 new contacts and by March 2008, fresh apples bearing the MFA brand and logo and packaging valued at more than $750,000 were sold into this new market. (See Annex I)

Next Steps

The initial success in using the common MFA brand, logo, packaging and promotional materials led MFA members to amend Association by-laws to support 10 full members and up to 30 Associate Members. A round table discussion is scheduled for the end of May to initiate the expansion process. With this step, larger growers and marketing cooperatives can qualify for full membership, with smaller growers and cooperatives joining as non-voting members.

Moreover, the MFA is now establishing a GlobalGAP based food safety quality standard which will be applicable to all members and it is interested in providing technical training to members in best production and post harvest practices that are essential to attaining GlobalGAP certification status. Developing this capacity within the MFA organizational structure for its current and future members is an important ADP objective for the 2008 – 2009 production and marketing year. Implicit in this development strategy is the longer term potential for the MFA brand and logo to take on a “Seal of Quality” symbol for all members who market their fresh produce through the Association.

The initial success of the MFA led to a request by leading Moldovan table grape growers, in late 2007, to form a similar association of table grape growers. The resulting Table Grape Growers Export Association (TGGEA) was legally registered in Moldova on April 9, 2008 with eleven founding members and MFA style by-laws. ADP staff is now in the process of develop a common brand, logo, packaging and marketing strategy for the new association and, in addition, will support development of a technical training program to promote introduction of GlobalGAP production and postharvest food safety quality practices leading to ultimate certification status as an association membership requirement.

With reduction in the CIS wine market share in recent years, caused in part by the Russian ban on wines imported from Moldova, many Moldova wine grape growers realized that there is an expanding table grape market in Moldova and in CIS countries that is experiencing middle class consumer growth. As with apples and other fresh produce, this new market requires a competitively priced product that meets recognized international quality and safety standards and marketing strategies must meet international retail sale packaging requirements. Prior to forming the Association, ADP technical staff developed and implemented a countrywide series of cluster technical training meetings to promote table grape production. This training model included growers, researchers, input suppliers, and buyers in a common training and display venue and introduced growers to table grape best practices using a new ADP facilitated technical manual that was authored by international and local experts.

Drawing from the MFI objectives, the ADP will adopt a TGGEA development strategy during the 2008-2009 production and marketing season that is similar to the one being implemented with the MFA.