ACTIVATION OF POLISH FARMERS BY AGRI-PRODUCER GROUPS ORGANISATION

Marzena Lemanowicz

ABSTRACT

The paper presents conditions that contributed to development of agri-producer groups in Poland. The major part of the paper describes results of empirical research conducted in 62 agri-producer groups in Poland on year 2002. These results indicate many advantages achieved by farmers taking up integrated actions. They are mainly: gaining new sale markets, improvement in the quality of offered products, assuring regular supplies and proper preparation of products for sale. Moreover, members’ farms have undergone changes, which contribute to increase of competitiveness of Polish farms. The paper also presents regulations and laws that determine establishing and works of agri-producer groups and producer organisations in Poland.

Key words: agri-producer groups, producer organisations, horizontal integration..

INTRODUCTION

The 15-year period of transformation, adjusting Polish food industry and agricultural market to the market economy, ends in 2004. In this period many events have happened. These changes do not concern our country only, but also the whole worldwide economy. The most essential global processes, which have an impact on Polish economy, are:

• Globalisation, insisting on unification of people, capital, technical and technological thought and free circulation of these factors.

• Trade liberalization, causing opening the borders, removing customs barriers and free circulation of goods.

• Rapid informatics and transport infrastructure development.

• Improvement of work effectiveness, technological progress, increase of competitiveness.

At the beginning of the 1990s structures of existing agri-cooperatives fell apart, thus breaking organisational bounds between farmers and cooperatives that purchased agri-products from farmers. New entities of primary wholesale began to take place of the co-operatives. They had a wide range of requirements on the quality, quantity and ways of preparing agri-products for sale. Single, small farms were helpless facing such requirements.

The need to strengthen competitive position of farmers led to establishing new forms of organisational co-operation. Horizontal integration of agri-producers is the way to overcome both cost and sale barrier. Bad negotiation position of individual farmers, when compared to next stages of distribution channel, can be improved by horizontal integration activities. Horizontal functional integration means creating agri-producer groups. Thanks to acting in a group, farmers can win a lot of benefits, which would be either very difficult or even impossible in case of dispersed actions. Among basic benefits that farmers can obtain from horizontal integration, we can list stronger competitive position of farmers in the market, improvement of economic efficiency of agri-production, better opportunities to create a base for storage, trade and processing, all due to joining capital. It can also help to implement and develop marketing orientation of producers.

Contradictions between agri-producers and agri-industry make establishing the groups a necessity. There are five defined contradictions [3]:

• quantity – because of considerable dispersion of farms, agri-producers can make and supply small batches adjusted to requirements of purchasers;

• quality – agri-producers offer differentiated quality of plant and animal products while agri-industry plants expect regular and standardized quality of agri-products;

• time – agri-production and food-production do not take place at the same time;

• space – agri-production is geographically dispersed, while agri-industry is characterised by spatial concentration;

• information – lack of sufficient information on the supply of agri-products and on the demand for such products.

Moreover setting up producer and marketing groups is a starting point to take up vertical integration actions, i.e. taking over the preliminary wholesale by the group, or even taking over preliminary processing, thus decreasing imbalance in negotiation position between agri-producers and next stages of distribution channel.

MATERIALS AND METHODS

The general aim of research carried out in producer groups was to investigate how group actions improve competitiveness of farmers in agri-market.

Next, within the main aim, we defined the following detailed aims:

1. to define benefits and advantages resulting from group actions taken by farmers;

2. to indicate changes that took place on farms of group members, regarding improvement of their competitiveness;

3. to define competitive position of organised groups of agri-producers in the market and indicating factors that contribute to it.

In order to achieve those aims the author carried out empirical research at the end of 2001 and the beginning of 2002 in five voivodships: lubelskie, świętokrzyskie, mazowieckie, kujawsko-pomorskie and podlaskie. The author used individual interview (questionnaires) as a research technique [4].

The surveyed group consisted of producer-groups acting in different product markets, namely: fruit and vegetable market, cereals, pigs and milk. The research embraced 62 groups of agri-producers in all. In each group both the leader and individual members were interviewed, which made 279 interviews total. Fruit and vegetable groups made 46,8% of the surveyed population, it means that 29 groups of fruit and vegetable producers were surveyed. The average farm area in the surveyed population was 21.3 ha, while in case of fruit and vegetable farms it was 13 ha.

RESULTS AND COMMENTS

In Poland agri-producer group can establish in accordance with two different legal regulations. The first of them is Law of the 15^th of September, 2000, on agri-producer groups and their unions [2]. The Law defines conditions that must be fulfilled if farmers want to apply for subsidies from public finances. The phrase ‘agri-producer group’ used in the Law does not relate to a legal form, but to any organisation whose main target is to bring goods produced on members’ farms to the market. Such groups, applying for financial support granted by the State, must be registered on voivodes’ lists. Since May 1^st, 2004, it is granted to applicants within a program titled Plan of Rural Areas Development [6]. On August 31^st, 2004, there were 76 agri-producer groups registered in accordance with the law, of which 22 fruit and vegetable producer groups, 18 cereals, 10 pigs, 9 tobacco, 5 poultry and 12 other. On the whole, there are more groups actin g on the fruit and vegetable market in Poland, however not all of them are registered. According to the statistics of Rural Cooperative Foundation, there are more than 100 fruit and vegetable groups in Poland. Registration on the viovode’s list requires fulfilling many conditions defined by the afore mentioned law and by the Regulation of the Minister of Agriculture and Rural Development of the 4^th of July, 2003 [5]. The regulation includes a list of products and groups of products for which farmers can establish producer groups. It also describes requirements on the minimal annual volume of commodity production and minimal number of members within a group. It should be stressed that this is a domestic law, so groups registered on the voivodes’ list may not be regarded or preliminarily regarded as groups in accordance to the law of the EU.

Fruit and vegetable producers can establish groups by the law mentioned above or the Law of the 19^th of December, 2003, on the organisation of fruit and vegetable market, hop market, tobacco market and dried fodder market [1].

Recognizing or preliminary recognizing of producer groups according to the law, means that they are also recognized or preliminarily recognized as producer groups by the law of the EU. These groups can receive the same financial support as producer groups in other member countries. Until August 31^st, 2004, there were 19 preliminarily recognized groups and 7 recognized producer groups in Poland. Process of registering groups in accordance with domestic law and the law on common organisation of fruit and vegetable markets is very dynamic. New producer groups and producer organisations are registered all the time.

Empirical research was carried out in 62 groups. The research confirmed that it is necessary to promote and support the idea of developing groups of agri-producers. Thanks to group actions farmers gained a lot of benefits unreachable in case of dispersed actions. Furthermore, Polish farmers have overcome many mental barriers resulting from previous experience at farmers’ cooperativeness in central-planned economy.

Changes in Area of Farms after Accessing to the Group

Contracting the dispersion of farms and taking actions aimed at concentration of supply are two conditions of improving competitive position of Polish agri-producers. Concentration of production is the main target of producer groups’ actions. These groups are an example of functional integration, i.e. joined efforts of many producers, who acting in the same quality standard are not able to cumulate an adequate amount of products. Capital integration is another important task of producer group members. It is aimed at enlarging farm area by purchasing land.

Farm area increased in 56% of surveyed farms, after they accessed producer groups. There was no decrease of land in any of them. Other 44% of farms did not do anything about increasing their land. Farm area after accessing the group increased on average by 15%. In 2001 the average area of a surveyed farm equalled 21.3 ha, while before the access it equalled 18.53 ha. Area of farms producing different kinds of products changed in a different way (Figure 1).

In fruit and vegetable groups, farm area increased on average by 18% and thus average farm area after accessing the group was 13 ha.

Changes in Distribution of Output after Accessing Producer Groups

The main task of distribution is to provide final customers with products expected by them at the adequate time, place and at the possibly best price for them. Hence, when we speak of distribution we mean the process of transferring products from producer to consumer via distribution channels.

Empirical research helped to diagnose main changes in distribution channels after farmers accessed producer groups. In order to define these changes the author calculated the percentage of farmers using different channels before and after accessing groups. On this basis, the author defined general tendencies, such as: decrease in the number of farmers selling their products at retail bazaars as well as decreasing share of farmers selling their products to agents. This is an advantageous phenomenon from the point of view of changes in distribution of agri-products as bazaar sale is highly ineffective due to relatively high costs and considerable waste of time when compared to profits gained from the sale.

Another positive change is that those distribution channels are shorter as private agents cumulating agri-products in bigger batches are eliminated. Figure 2 presents the discussed changes.

It is worth stressing that decrease in the number of farmers selling their products to private agents and at bazaars was accompanied by an increasing percentage of farmers delivering their products directly to processing plants (13.9% increase), retail shops (4.3% increase), wholesale markets and wholesalers.

In order to better illustrate changes in organisation of sale of the output, the author calculated not only the share of farmers using different distribution channels, but also the average share that each channel takes in the sale of output. Table 1 contains proper data.

Analysis of the data from Table 1 allows establishing a hierarchy of distribution channels on the basis of percentage share in the sale of output. Direct sale to processing plants dominates strongly (the channel takes 55% of total sale), next there are private agents. However, their share in the sale of output is not very high and makes 12.7%. It has been observed that this distribution channel decreased by 50% after farmers accessed groups, which also proves that there is a tendency to shorten distribution channels. Volume of bazaar sale diminished as well. It equalled 9.0% of total output sale before farmers accessed producer groups, after taking up integration actions it declined to 4.1%, which is by more than a half. At the same time we can see that wholesale markets, retail shops, wholesalers and export firms (except processing plants) take bigger and bigger share.

Table 2 shows average share of individual distribution channels on farms representing different kinds of production. Regardless the kind of production, on all surveyed farms there was a constant tendency to eliminate agents and bazaar sale from the distribution. Escalation of these changes may vary on farms representing different kinds of production. Private agents, processing plants and bazaars were the basic distribution channels for fruit and vegetable farms before they accessed groups. Share of those channels equalled 65% of total output sale. After taking up group actions both the share of private agents and bazaars declined most, while direct sale to processing plants and retail shops increased. The share of wholesale markets in sale of fruit and vegetable also increased. Because farmers met quality and quantity requirements they could also sell their products directly to processing plants. More retail shops began to purchase output of fruit and vegetable farms, because producer groups started to refine their agri-products e.g. to wash (vegetables), to sort, to pack.

Contracts between Groups and Purchasers

Contracts between agri-producer groups and purchasers are a form of vertical integration in agri-business. Contract integration is the most common form of vertical integration in agri-business. It results from the fact that this form does not change ownership relations and is widely accepted by farmers. In Poland, contractation was known as a common system of contract agreements providing food industry and trade with raw material. It was also a universal form of influencing private sector of economy by state. The contract itself did not differ much from this accepted in market economy, but the contents varied. Depending on its form and range, contractation may affect creating vertical relation in a smaller or larger degree. Casual contracts on supply of products are not so significant in this aspect. Production contracts that include elements of agri-production control play more important role, as it comes to an assistance in organizing and planning the production, assistance in obtaining i nvestment resources, training and credit abilities.

The most of surveyed groups (72.6%) had contracts with purchasers. Among these groups 69% had yearly contracts, and 40% long-term contracts.

Table 3 illustrates share of groups that have contracts with different purchasers, regarding the type of production. Groups producing fruit and vegetable have contracts with different purchasers. Most of such groups have contracts with processing entities (71% of groups), retail chain (33,3%) and wholesalers (29%). Agri-producer groups in this branch are the only that act in foreign markets (19% have contracts with entities in eastern markets and 14% with entities in EU markets).

Factors Contributing to the Success of Farmers Acting in the Groups of Agri-producers

When taking decision on accessing the group, farmers wanted to gain benefits, which could not be won by dispersed actions. When asked about the reason for accessing the group farmers most often answered that they came across difficulties in finding sale markets, that they wanted to eliminate agents from distribution and to reduce too high production costs, etc.

The research allowed defining main benefits resulting from group actions, which were called factors of success. Figure 3 presents factors of farmers’ success, achieved by accessing the group.

After analysing answer distribution we conclude that group cooperation of farmers led to measurable benefits. Those actions fulfilled expectation, which made basis for accessing the group.

Undertaken cooperation resulted in winning new sale markets for agri-output (60.2% of farmers gained the benefit). And finding new sale markets was most frequently pointed out as the most important reason for taking actions in a form of organised groups (which is the basic effect of the cooperation). Group activities contributed to reducing production and sale costs (66.3% of surveyed farmers). It was possible because of shared purchase of production means that allowed negotiating lower prices, as well as shared sale reduced cost of sale. Moreover costs were reduced by shared use of some machines that belong to farmers and are rent to other members of the group at a lower price. More than half of farmers (62.4%) claim that quality of goods improved after accessing the group. It results from application of ‘technological regime’ by group members. Another advantage gained by cooperation is regular supplies that allow eliminating seasonal character of supply (60.2% of farmers). If members of p roducer groups managed to eliminate this phenomena thanks to shared use of warehouses and storage facilities then it means that it is a vital factor improving competitive position of the group in the market as it enables farmers to supply agri-products over all the year - not only after harvest.

REGRESSION AND CORRELATION BETWEEN THE FACTORS OF SUCCESS

As finding new sale markets was both the oftenest mentioned benefit resulting from cooperation and the most important reason for accessing producer and marketing groups, it was taken as a dependent variable.

In order to show how other variables influence it, a model of logistic regression was built. The aim of building such a model was to define factors favourable to market expansion of the producer group. Among explaining variables there are: improving the quality, increasing possibilities to negotiate favourable cooperation conditions, preparing products for sale, assuring regular supplies.

The selection of variables used to build the model was based on subjective estimation relating to the strength with which given factor could influence the explained variable. Estimated parameters of the model were presented in Table 4.

The following equation is a product of our calculations:

All variables taken into consideration stimulate the probability of finding new sale markets after accessing a group, for its value is bigger than 0.

Besides, we can interpret probability coefficient [7]. On the basis of probability coefficient we can conclude that:

• if a farmer decides to sell his products by his agri-group, the chance (probability) to gain new sale markets increases on average by 275%, provided that impact of other factors remains under control;
• regular supplies increase chances to enter a new market by 120% on average, provided that impact of other factors remains under control;
• reduction of costs considerably influences the probability of finding new markets. Farmers who reduced costs nearly 3-fold, increase chances to enter new markets (provided that impact of other factors remains under control);
• preparing products for sale is another factor strongly affecting the probability of finding new markets. This factor increases chances to find a new market by 230%, provided that impact of other factors remains under control.

CONCLUSIONS

Theoretical considerations and analysis of empirical research relating to activities of agri-producer groups allow making the following conclusions:

1. Taking horizontal integration activities of functional character (establishing agri-producer groups) initiated changes on members’ farms, thus increasing competitiveness of these farms.

2. Joined efforts enabled farmers to gain benefits that cannot be obtained while individual acting. These are, among others: finding new sale markets, improving quality of commodities offered for sale, regular supplies and preparing products for sale.

3. Farmers who own bigger farms and who are better educated than an average farmer in Poland mostly take up group activities.

4. Changes in distribution channels aim at making them shorter, at eliminating private agents, at increasing the volume of goods being sold directly to processing plants, at increasing the share of wholesale markets and retail chain in distribution of agri-output. What is more, the share of bazaars in distribution of products decreased after accessing the group.

5. Overwhelming majority of groups sell their products within contracts of supply, however, they were mostly one-year contracts.

6. Such factors as meeting quality and quantity requirements, regular supplies and contracts with purchasers of products contribute to strengthening market position of organised groups.

7. Group actions enabled application of promotion tools in order to stimulate demand for agri-products. However, only groups set up by fruit and vegetable producers have been active in this field.

8. Analysis of empirical data indicates that fruit and vegetable producers take a dominating position in the process of integrating farmers. It is confirmed by a widespread belief that this producer group represents a much higher level of entrepreneurship. It also should be mentioned that fruit and vegetable producers had previously acted in accordance with free market rules, which resulted in good defence of their business and further development of market behaviour.

9. Agri-producer groups help to lessen the imbalance of market positions between agri-producer and next stages of the distribution chain. It is possible thanks to supply concentration and adjusting it to the demand on the market. Besides, groups begin to take a role of an integrator purchasing agri-products from other farmers, who have not been members of the group yet.

1. Act from December 12^th 2003 on Organisation of fruit and vegetable market, hop market, tobacco market and dried fodder market (Dz. U. No 223. p. 2221)

2. Act from September 15^th 2000 on Agri-producer groups and their unions (Dz. U. No 88, p. 983)

3. Karasiewicz G., 2001: Systems of food products distribution on Polish market. Diagnosis and conceptions of changes. School of Management - Warsaw University Pub., Warsaw.

4. Lemanowicz M., 2003: Producer and marketing groups as the way of improvement of farmers’ competitive position on the market – PhD thesis, Department of Agrarian Policy and Marketing, Warsaw Agricultural University, Warsaw.

5. Ministry of Agriculture and Rural Development regulation (Dz. U. No 138 p. 1319).

6. Plan of Rural Areas Development 2004-2006 [in:] Ministry of Agriculture and Rural Development: http://www.minrol.gov.pl/DesktopDefault.aspx?TabOrgId=1319

7. Rószkiewicz M., 2002: Statistic tools in marketing analysis, C.H. BECK, Warsaw.

Responses to this article, comments are invited and should be submitted within three months of the publication of the article. If accepted for publication, they will be published in the chapter headed ‘Discussions’ in each series and hyperlinked to the article.