Meeting Private Grades And Standards In Transition Agriculture: Experiences From The Armenian Dairy Industry

One of the main trends emerging from the agroindustrialization process is the rise of 'grades and standards' (G&S) in food products. G&S were initially developed by the public sector to reduce transaction costs and ensure product quality and safety but have become a strategic instrument of competition in differentiated product markets (Reardon et al, 2001). Firms are using grades and standards to protect and develop brands in the international marketplace and in some cases to fill in for missing public standards. While producers in developed countries have the resources to meet these requirements, in developing countries these changes have tended to exclude small firms and farmers from participating in market growth, because of the implied investment requirements (Reardon et al, 2001). This is leading to already disadvantaged farmers in these countries being forced to produce basic subsistence food crops and become further excluded from the opportunity to join the global food industry. While past research has evaluated the effects and trends of G&S (Reardon, et al, 2001; Farina & Reardon, 2000; Reardon & Farina, 2002) the organizational structure to enable small farmers to meet these requirements has largely been overlooked. In this paper we use a theoretical contract enforcement framework to argue that private enforcement capital developed through the facilitation of an external aid agency can be an effective means for creating credible and sustainable relationships capable of meeting G&S. We draw upon theory from Cocks and Gow (2002), Oliver and Gow (2002) and Gow et al. (2000) to argue that in situations characterized by high discount rates and low reputation or trust levels (such as transition agriculture) that the use of a third party external enforcement agent can be used to provide the necessary linkage between the parties to facilitate transactions. Through the facilitation role of the external agency, private enforcement capital is developed between the firm and the farmers, opening the path for a sustainable mutually beneficial relationship. Empirical evidence is provided by the case of the United States Department of Agriculture Marketing Assistance Project (USDA MAP) in Armenia and its role in establishing farmer owned milk marketing cooperatives. By acting as an external facilitator in the initial establishment and ongoing development of milk supply cooperatives the USDA MAP has provided a solution to the dual market failure problems of reliable supply of the consistent quality of milk required by processors while enabling farmers access to markets and ensuring timely payment and therefore enabling farmers and firms to credibly contract for the collective marketing of their milk. Through the establishment of a unique and flexibly designed combination of leadership development, training in governance, financial management, dairy management, and quality improvement programs, the USDA MAP has assisted the groups in expanding the self enforcing range in such a manner that the cooperative should be capable of sustaining long term credible exchange relationships once the external agency withdraws. This is important as aid programs have often failed at ensuring sustainability once external management and financial support is removed. Data for this paper was collected through a series of semi-structured interview with USDA MAP staff, dairy processing firm managers, cooperative managers, and cooperative presidents during the fall of 2002, and over a two week period in March, 2003.