Small-Scale Farmers in South Africa: Can Agricultural Cooperatives Facilitate Access to Input and Product Markets?

Small-scale (communal) farmers in South Africa have limited access to factors of production, credit and information, and markets are often constrained by inadequate property rights and high transaction costs. The objective of this research is to investigate whether agricultural cooperatives - considered by the South African (SA) government as organizations that could help promote community and economic development - can facilitate smallholder access to input and product markets that could enhance their development. This paper initially discusses the principles of cooperation, and briefly describes the history and development of agricultural cooperatives in developed and less-developed countries, with an emphasis on the United States and South Africa. A new Cooperatives Act, based on international principles of cooperation, was promulgated in South Africa in August 2005. The theory of cooperatives, and new institutional economics theory (NIE) (including transaction cost economics, agency theory, and property rights theory) and its applicability to the cooperative organizational form, are also presented, as are the inherent problems of traditional cooperatives, namely free-rider, horizon, portfolio, control, and influence cost problems caused by vaguely defined property rights. An analysis of the future of cooperatives in general, based on a NIE approach, suggests a life cycle for cooperatives (formation, growth, reorganization or exit) as they adapt to a changing economic environment characterized by technological change, industrialization of agriculture, and growing individualism.