A recent blogpost on tractor service stations generated an interesting discussion in the comment section. Well worth a read, in particular this insightful comment by Ulrich Koester:

It is a very interesting discussion. Possibly I can contribute somewhat as I am a grown up farm boy, a ‘skilled agricultural worker with exam’ and an agricultural economist and a general economist.

To clarify the issue it might be helpful to look at the experience of other countries, such as Germany. We have small farms in some regions which could be much better of either buying machinery services from machinery contractors, forming a machinery ring with individual ownership of the machines but renting the free capacity to other members of the ring, or even setting up partnerships with joint ownership of the machines. All alternatives had the potential to improve the well-being of many individual farmers. The actual situation shows that many of the farmers suffer from unused capacity of machinery and labor. There is disguised unemployment on many farms and inefficient use of machinery. There are even 30 to 40 percent of full-time farms which make a loss from year to year, indication that they eat up their equity. Hence, these farms would have been better off renting out the land and doing nothing. Of course, there were many extension worker and agricultural economists who tried to convince farmers to join a machinery ring or even to set up a partnership. The breakthrough came only during the last two decades. Note: The use of machineries would have been profitable before! What are the reasons for the delay? Expected profitability is certainly a necessary condition for setting up a private enterprise, but is not a sufficient condition. Uncertainty and risk may be against it.

First, machinery contractors were not at sure that offering the service would have been profitable for them. They have to know whether farmers will actually buy and will actually pay on time (this might be a big problem in Georgia). The contractor has to guess how many hours per year he will be able to sell the service. That depends very much of the cropping pattern in the region and the annual weather conditions. Most likely the contractor will not be able to get agreements on forward contracts and if so he can hardly enforce them. Moreover, he needs specific knowledge how to handle the machineries, including repairing them, and acting as a business man who knows business economics and who can deal with farmers personally. One can imagine that there are few people who are competent in all of these fields.

First conclusion: Even if more use of machinery in Georgian agriculture could be profitable from a macro-economic point of view machinery contractors may not start a business because of lack of know -how and experience, uncertainty about market demand, uncertainty about payment on time of customers.

Second, formation of associations or cooperatives: Whether membership of a coop will pay for the individual farmer largely depends on two aspects: First, how much the individual farmer has to pay at the inception of the coop for the purchase of machinery and for the management of the coop and second, how certain he is about the benefits. The second point bears a significant level of risk. It depends first of all on the rules of the coop and how these are enforced. Moreover, the benefit in individual years can vary significantly depending on the weather and the point of time the individual farmer gets access to the machinery. If famers are not certain that the coop or association will be managed efficiently and in a transparent way, they may not be willing to become member. The trustworthiness of the management is of most importance.

Third, the setting up of machinery rings: There are many machinery rings in Germany nowadays, but it took long to convince farmers. Most important is that the ring is diversified in machineries and faces diversified demands of services and above all has a professional management. It is difficult to start on large-scale in a country which has no experience with these schemes. Note: It may be argued that there are many people in Georgia who can build on their experience in former times where they worked with machineries. However, a contractor or a leader of a coop or a machinery ring has to be not only an expert in technical matters, but also in leading a company. He has to know how to extend the market, increase the use of available capacity, calculate the charges, find out the trustworthiness of client, and make sure that clients pay and so on.

Second conclusion: It is nearly impossible for a founder of a coop or a machinery ring to guaranty that the undertaking will be profitable. There are many uncertainties. No wonder that even clever business men who even would get access to credit have been reluctant to set up respective activities. It should be noted, that the EU Commission is willing to support financially the setting up of producer associations for the first couple of years. The subsidy allows hiring qualified staff. Some of the supported association survived after the gestation period but not all of them.

Is the creation of machinery stations a real alternative?

First, what is the alternative? Continuation as it is? Supporting the alternatives? Continuation as it is seems to be the worst alternative. Setting up a MS would lead to an improvement however as mentioned by some discussants it may undermine the evolution of a private market. To minimize the danger one could foresee the following: MS could be considered as an interim solution. They have to be privatized within a given period of time, say five years. The justification of MS is that they prepare the market for private agents. Farmers learn that machinery rings or machinery contractors or associations or even partnerships can be good for them. In order to maximize these effects MS have to run the business in full transparency. They should have a Supervisory Board with Honorary members of farmers and civil servants. One main task of MS should be that they train young people in the all the wide ranging types of running such an enterprise. It should be clear that the success of the MS largely depends on the management. It might be advisable to send potential would-be leaders of MS and of coops and of associations to foreign countries for some weeks in order to gain experience.