CHAPTER-3

ORGANIZATION OFAGRIBUSINESS

3.1 Distinctive Features of Agribusiness Management

Basically, the principles and knowledge of management
are the same for any kind of business. The smallest one
person agribusiness and the largest businesses in the
world are guided by the same general principles of
management. The difference between agribusiness and
other kind of businesses lay in the art of application of
basic principles of management to the running of the
business.

The important distinctive features or the principal

characteristics of agribusiness are as follows:
 Management varies from business to business depending on the kind
and type of business. It varies from basic producer to brokers,
wholesalers, processors, packagers, manufacturers, storage
proprietors, transporters, retailers etc.
 Management varies with several million of farmers who produce
hundreds of food and livestock products
 There is large variation in the size of agri-business; some are very large,
while many other are one person or one family organization.
 Agri-business evolved to handle the products through various
marketing channels from producers to consumers.
 Most of the Agri-business units are conservative and subsistence in
nature due to traditional philosophy of life.
 Agribusiness is family oriented and deals with business that is run by
family members.
 The production of Agri-business is seasonal.
 Agribusiness deals with vagaries nature &depends on farm production.
Droughts, floods, insects, pests and diseases are constant threat for
many agribusinesses. Everyone from the processor to the fertilizer
manufacturer is concerned with the weather.
 Agri-business is always market oriented.
 There is direct impact of govt. programs on the production and
performance of Agribusiness.

Each of these special features of the agribusiness world requires the agribusiness
manager to use the principle of management in a very special way. Agribusiness is
unique, and requires unique abilities and skills of its managers.

1
 3.2Organizational Forms of Agribusiness Firms
Agribusiness firms can be either a small shop selling agricultural products worth
hardly hundreds of birr per year to multinational cooperation having sales
billions of dollars. So agribusiness firms are found from the smallest to the
largest of business enterprises, that is, a one-man enterprise to a corporation
employing thousands of employees all over the world.
All agribusinesses are owned by someone and it is the circumstances of
ownership that give an organization its definite legal form. Four business forms
are basic: The Sole proprietorship, The Partnership, The Corporation and The Cooperative.
The form of organization is not necessarily dictated by the size or kind of
agribusiness; nearly every size and kind of agribusiness may occupy any of the
four legal categories.
1. The Sole Proprietorship: The Sole Proprietorship is the oldest and simplest
form of business organization. Sole proprietorship is an organization owned
and controlled by one person, although it may have many employees. Among
all forms of business organizations, sole proprietorship is the most popular
form. The term sole proprietor is interchangeable with that of sole trader, sole
owner, or proprietor.
In the sole proprietorship form of business organization, the owner provides
capital, management, and perhaps part of labor. The owner is entitled to all
profits arising from the agribusiness but also the owner has to assume fully all
the losses or risks in the agribusiness.

 Advantage of Sole Proprietorship

 Ease and low cost of formation: The formalities required for setting up an
agribusiness as a sole proprietorship is minimal. Based on which country the
particular agribusiness is being started depends the formalities. In some
countries there is a need of license to start agribusiness as a sole
proprietorship. In some countries there is no need of a license at all. What is
importantly required is the individual’s desire to establish a business.
 Control: Sole proprietorship gives the individual owner complete control over
the business. The sole proprietor has complete control over plans, programs,
capital, policies, and other management decisions.
 Freedom and promptness of action: The sole proprietor need not seek
permission from anyone to make management decisions. The sole proprietor
can take prompt decisions especially when an emergency arises.
 Business secrecy: Secrecy is vital to any business. The business affairs of sole
proprietorship are completely secret from all outsiders as they don’t, have to
reveal information to anybody except for selected government departments.
 Easy to dissolve, if desired
 Single tax

 Disadvantages of Sole Proprietorship

i. Unlimited liability: The sole proprietor will be legally liable for all debts of the
business. The sole proprietors’ personal assets can be attached and claimed
by creditors if business assets are not sufficient to repay the business debts.
2
 ii. Limited financial resources: The amount of capital funds that one person can
contribute to the agribusiness is limited. Because of this, the business
expansion cannot take place easily.
iii. Lacks stability and continuity: As it depends heavily on one person and if
something happens to that one person, that is, the sole proprietor by way of
death or disability, then the business may destabilize and even collapse.
iv. Heavy risk: The owner talks all the decisions by himself and so there is a
possibility that wrong decisions may be taken.
v. Long hours: The owner has to work for long hours so as to make the ends
meet, or to expand the business.

2. Partnerships: A Partnership is the association of two or more people as

owners of a business. There is no limit to the number of people who may join a
partnership. Apart from the fact that a partnership involves more than one
person, it is similar to the proprietorship. Partnerships are the simplest form
of business organization by which a number of people can pool their resources
and talents for mutual benefit.

 There are basically two kind of partnerships; general partnerships and limited
partnerships.
 General Partnerships: In a general partnership each individual
partner, regardless of the percentage of capital contributed, has
equal rights and liabilities. Partners divide responsibilities of
management and operation of the business and share profit & loss
according to their internal agreement. If misfortune happens the
partnership, all liabilities are shared equally among partners for as
long as sufficient personal resources exist. General partnership is
most common form of partnership.
 Limited Partnerships: This type of partnership has two cases of
partners and they are general partner and limited partner. All
partnerships are required by law to have at least one general partner.
This general partner is responsible for the operation and activities of
the partnership. The limited partners have limited liability and their
liability is equal to the money they have contributed to the
partnership. The limited partner’s personal assets cannot be claimed
by creditors when the partnership assets do not cover the full
amount owed to the creditors.
The limited partner’s rights in management affairs are limited as
their liability is limited. Limited partners are needed basically to
increase the capital of the agribusiness firm. Limited partnerships
are relatively few in number.

 Advantages of partnerships
i. Ease of starting: Partnership is just about as essay to start as sole proprietorship.
They require very little expensive, except for lawyer expenses to draw up the
partnership agreement.

3
 ii. Increased source of capital and credit: Partnership offers numerous sources of capital.
First, there is direct contribution by the partners. Second, the partnership can
get loans from friends, investors, and banks. Finally, the partnership can get
credit from the suppliers.
iii. Reduced risk: As there are many partners in the partnership, there is no need for
one person like in sole proprietorship to take all the risks or losses and the
losses or risk will be shared among all the partners according to the partnership
agreement.
iv. Motivation: As partners share in responsibility and profits, they are more likely to
be motivated than employees of sole proprietorship or corporation.
 Disadvantage of partnerships
i. Unlimited liability: The partners’ liability in the partnership is unlimited. If at all
the partnership incurs losses and the assets of the partnership are not sufficient
to cover the losses of the partnership of the partnership, then the personal
assets of the partners have to be sacrificed to write of the losses of the
partnership.
ii. Lack of continuity: Partnership is dissolved on the death, retirement, or insolvency
of any partner. This situation leads to the disruption of the activities of the
partnership.
iii. Lack of smooth relationship: As many people are involved in the running of
business and this leads to lack of understanding and unity among partners. So
when this occurs it would lead to differences and conflicts among the partners.
iv.Investment withdrawal difficulty/restriction on share transfer: A partner can sell or
transfer his share in the partnership to outsiders only when he gets the consent
of the remaining partners. So this is a impediment in the withdrawal of
investment from the partnership.

3. The Corporation: A corporation is an artificial being, endowed by law with the

powers, rights, liabilities, and duties of a natural person. Without the corporate
form of organization it is impossible to imagine the creation of today’s huge
business entities, which employ hundreds of thousands of people and are worth
billions of dollars. A Corporation can own property, incur debts, sue or can be
sued for damages, among other things. The important distinction to remember
is that the owners and managers do not own anything directly. The assets of
the corporation are owned by the corporation itself.

The corporations act through their directors. Directors are individuals elected by
the corporation’s common stockholders to manage the affairs and to make
important decisions concerning the direction the corporation should take.
Directions take important decisions in the areas of mergers, acquisitions,
investments etc.

The number of directors that a corporation can have depends on the bylaws of
the corporation. The appointment and power of the directions are given in the
Articles of Association. The group of directors is known as board of directors. The
board of director’s responsibility is to manage the activities of the corporation.

4
 The board of directors represents the interests of stockholders as they are elected
by the stockholders to look after their interests. The major function of the board
of directors is to select and hire top executives, and to evaluate the progress of
the corporation.

 Advantage of corporation
I. Limited liability: The stock holders are not responsible for the debts of the
corporation beyond their original investment. The personal assets of the
stockholders cannot be claimed to cover the debts of the corporation.
II. Better Management: The corporate structure allows the organization to recruit
excellent and highly motivated people and also it allows the delegation of
authority, responsibility, and establishment of accountability.
III. Ease in transfer of ownership: Generally, there are no restrictions on the transfer
of stock from one stock holder to another stock holder. Normally the stock
holder can sell it to any outsider without the permission of the board. Or
otherwise they can gift it to anybody whom they wish to without the
permission of the management or the consent of the board of directors of the
corporation.
IV. Stability: The Corporation is perpetual in nature. It means that the
corporation is not affected by the death or withdrawal of its stockholders and
can continue its operation without any hindrance.
V. Large finance: A corporation can mobilize large amounts of funds through sale
of stock and/or through issues of bonds. And as the stock is freely tradable,
it can help in mobilizing more funds.
 Disadvantage of corporation
I. Double Taxation: The Corporation is first taxed on its income and then when it
passes the profits to the stockholders as dividends. The dividend income of
the stockholders is again taxed as his personal income. So thus you see
double taxation.
II. Highly regulated: A corporation has to abide by many laws and regulations when
compared to the earlier forms of business organization like sole
proprietorships.
III. Lack of Secrecy: The Corporation has to provide information about its activities
regularly to its stockholders and many government departments. As much
information must be made available to the public and to government agencies
there is a lack of secrecy in the affairs of the corporation.
IV. Separation of ownership and control: Generally in most corporations the owners and
the mangers are different. So the owners, that is, the stock holders do not
have any say in the affairs of the corporation. And if they are dissatisfied with
the affairs of the corporation either they have to change the board of directors
or simply sell their ownership in the corporation.
V. Expensive to operate: When compared to the other forms of business organization
like sole proprietorships and partnerships the corporate form of business is
highly expensive. This is so because it has to pay more taxes, maintain
records, and spend more on operative expenses.

5
 4. Co-Operatives: A co-operative is entirely different from all other forms of
organisation. Cooperatives are business organizations owned and controlled by
those who use them. Their basic purpose is to serve the needs of their members
rather than make a profit on their own.
The main objectives of co-operative society are:
(a) Rendering service rather than earning profit
(b) Mutual help instead of competition
(c) Self help in place of dependence.
On the basis of objectives, various types of co-operatives like consumer co-operatives, producers’
cooperatives, marketing co-operatives, credit co-operatives etc can be formed.

3.3 The Cooperatives in Agribusiness

Cooperatives play a major role in agribusiness. Farmers own and operate a
distinctive form of agribusiness called as agricultural cooperatives. The cooperative
method of business has been an important way for an individual farmer to join
with other farmers to improve their economic well-being.

Cooperatives enable farmers to obtain products and services that are properly
adapted to their special needs at fair prices throughout the year. The purpose of a
cooperative is to help farmers reduce the prices paid to their inputs and to
enhance their output prices.

The farm supply cooperatives help its farmer members with the purchase of inputs
to the farm, such as seed, feed, chemicals, fertilizers, fuel, etc. Farm marketing
cooperatives assist farmer members with the marketing of their products. The farm
marketing cooperatives play a major role in the marketing of many farm products,
and they are particularly strong in the marketing of dairy products and food
grains.

All over the world, cooperative forms of business have been a major player to the
success of agribusiness. Agricultural cooperatives have become big businesses and
are numbered among the largest businesses organizations with regard to sales in
USA. Some examples of larger cooperatives in sales are Land O’Lakes, Sunkist
Growers (oranges), and Sun-Diamond Growers.

The objective of Agricultural Cooperatives: The agricultural cooperatives have two

fundamental objectives and these are:
I. Honest market: Provide a dependable, honest, and accurate market to the
farmers for their inputs which they purchase and the outputs which they sell.
Farmers prefer a business that could provide them with the needed inputs and
services for their specific needs and at the same time offer a fair and
reasonable price for their outputs.
II. Increase in income: To increase the income of farmers by increasing their returns
for agricultural outputs and at the same time reduce the cost of agricultural

6
 inputs and services. The agricultural cooperatives provide them with the
needed products and services which help them to lower their production costs
and to operate more efficiently.
 Principles of cooperatives: The major principles of cooperatives are:
1. Member controlled, member owned: This principle makes sure that only the
farmer gates advantage from these cooperatives. It is normal and essential
that cooperatives maintain their orientation toward servicing their patron
members. And this is the best way to insure that the cooperative is
controlled by its patron members who are also the owner of it.
2. One person, One vote: Through the enforcement of this principle the
cooperatives provide the same kind of treatment to all members whatever be
their holding of membership. This principle also insures that members
having big holding do not dominate the organization.
3. Limited return on capital: This principle makes sure that the emphasis is not on
capital appreciation or return on investment but to improve the efficiency in
marketing activities.
4. Operate at cost: This principle makes sure that this organization functions for
the mutual benefit of its farmer members as most of the profits are passed on
to its members. The profits are passed on to individual members according to
the volume of business that they had conducted with the cooperative.

 Classification of Agricultural Cooperatives

Agricultural cooperatives can be classified in several ways. The agricultural

cooperatives can be classified according to:

a) The type of commodity traded

b) The organizational structure utilized
c) The territorial or geographical area covered
d) The type of marketing function performed

a. The type of commodity traded: This classification of agricultural cooperatives is

according to the type of commodity or product handled. The examples of these
types of cooperatives are those cooperatives which specialize in marketing teff,
corn, cotton, milk, etc. most of these types of cooperatives start their operations in
one commodity or product and then move on to several commodities or products.

b. The organizational structure utilized: The agricultural cooperatives can be

organized as federated structure or centralized association. The majority of
agricultural cooperatives are owned directly by their farmer members. This type of
structure is called the centralized association. This type of cooperatives serves
local customers by operating local facilities near them. Federated structure is a
type of organizational structure in which the membership is taken by other
cooperatives and mostly by local cooperatives.

7
 c. The territory or geographical area covered: Cooperatives not only serve a local
community, district, but also a region. So as to serve efficiently in all areas it
divides the organization in to different parts. To accomplish this, the cooperatives
use either a centralized or federated organizational structure where each part
serves a particular geographical area.

d. The type of marketing function performed: Majority of cooperatives either perform

any one of the marketing functions. They either perform supply of inputs to
farmers or provide agricultural products to the consumers. But there are many
other marketing functions like storage, transportation, etc. that have to be
provided and these are usually handled by the parts of the federated structure.