1. The Question
Individual farmers working through fragmented upstream channels, consisting of a few processors, exporters, or traders, will face a standard case of bargaining power dilemma, too small in size to bargain for price, too scattered to coordinate without an organized structure, and too capital-constrained to invest in quality management or certification needed to access high-value channels. The traditional way out of such problems is through agricultural marketing cooperatives, which help aggregate farmers' supply, negotiate as large sellers, invest in shared facilities such as dairy coolers, coffee wet-mills, tea factories, and provide services such as inputs, extension and credit that farmers individually cannot afford.
The Cooperative Movement in Kenya is one of the largest in Africa, consisting of 14,000+ cooperatives, and including historical coffee cooperatives representing over 700,000 small farmers and current KTDA tea cooperatives representing over 600,000 small tea farmers. The obvious question is: does this institutional form actually deliver the income gains the theory predicts, and, since the Kenyan evidence turns out to be sharply divided by sector, what determines when it does and when it doesn’t?
2. The Microeconomic Mechanism
A cooperative attempts to solve the smallholder bargain power problem in two ways: through aggregation (by aggregating supplies into one seller that benefits from quality infrastructure and market access at lower unit costs due to spreading the fixed cost over many members) and disintermediation (by reducing at least one intermediary in the chain of trading that would otherwise get a margin). These two mechanisms imply the existence of a real income increase for the members compared to atomistic selling by farmers individually.
However, a cooperative organization generates another microeconomic problem, namely, the principal-agent problem, that needs to be solved for the income increase to occur. The farmers as principals delegate decisions regarding marketing, pricing and payment to cooperative management as agents, who are responsible for huge financial flows (namely, export revenues) that need to be distributed among the farmers. Whether the mechanism works in favor of the farmers depends on how strong the accountability mechanisms for farmers exist: exit (can a dissatisfied farmer find other channel for selling his product?) and voice (can the members effectively control cooperative management and remove them through elections?).
In cases where both voice and exit are limited, as has traditionally been the case in the Kenyan regulated coffee sector where farmers are forced to sell only via the cooperative in which they are enrolled and cooperative leaders are found to be vulnerable to non-formal vote buying tactics, the cooperative is effectively a local monopsony over its own members and possesses the same power of rent extraction from farmers as the cooperative was created to protect against. In such cases, the benefits of aggregation and disintermediation remain, but accrue to the insiders of the cooperative rather than to the members themselves. In cases where voice and exit are stronger, for example, where there is better supervision, better competitive leadership elections, or where it is possible to sell outside the cooperative, the benefits of aggregation are more likely to accrue to farmers.
3. Evidence
Dairy cooperatives show a measurable, positive income effect. The endogenous switching regression model on 277 dairy farmers in Nyamira and Homa Bay Counties revealed in a 2023 study that participation in the cooperative market made farmers earn an additional 10% income. This result can be seen as direct evidence that aggregation and disintermediation are working as per the expectations of the cooperative model.
Tea cooperatives under KTDA represent Kenya’s largest and, by reputation, most institutionally stable cooperative-organized value chain. KTDA coordinates the activities of over 600,000 smallholder tea farmers who produce most of Kenya’s exported tea, and it has been pointed to often as an example of one of the more resilient cases of agricultural collective action in Kenya, although it should be noted that an estimate of the economic premium associated with being a tea farmer (similar to the dairy case above) could not be found in the sources used in this paper.
Coffee cooperatives present the clearest case of governance failure eroding the theoretical gains. Coffee production in Kenya was reduced by an estimated 70 percent from its peak in 1987 to around 40,000 tonnes in 2021; and while such a reduction may be due to loss of the country’s comparative advantage (coffee of Kenyan origin is still highly sought after in international markets at premiums), it is largely believed to be the result of institutional failures within the cooperative marketing systems, according to the report of a national taskforce set up to review the coffee sector in the country. Specifically, in explaining why cooperative costs were relatively high, the report pointed out “low capacity utilisation, inefficiencies, poor governance, financial mismanagement, abuse of borrowing powers and rent-seeking,” such that farmers are often paid their dues only after six to eight months from the time of selling their coffee. In a research study based on data gathered from more than 200 farmers in nine coffee cooperatives in the country, researchers found that there exists a significant relationship between corruption within the cooperative and technical inefficiency within the farming community, clear evidence of the mechanism proposed by this paper.
Recent reform evidence supports the governance-mechanism interpretation directly. The Kenyan government rolled out the Direct Settlement System (DSS), which sees money for coffee paid directly into farmers' individual bank accounts without going through the management of the cooperative system in April 2025. Reports indicate that there has been an improvement in production as a result of the implementation of the new payment process, with the Coffee Directorate predicting an increase of about 13.3% in the production levels in the 2025/26 season, with some cooperatives seeing prices at the farm gate between KSh 155-156 per kg of coffee cherries. Farmers have also started cultivating coffee in land that had lain fallow for years before in counties such as Nyeri, Kirinyaga, and Murang'a. These facts indicate that there has been no issue with the structure of the cooperatives but with the governance aspect of the same, which when corrected, has improved incomes as well.
4. Argument
However, taking the evidence from various sectors in Kenya as a whole, it appears to be consistent with the conditional, but not unconditional, version of the cooperative-bargaining-power hypothesis. Cooperatives clearly resolve the smallholders’ problem with access to markets and transaction costs mentioned above, the dairy income premium and the size of the KTDA tea marketing cooperative provide a clear proof of the operation of the aggregation effect once it is given an opportunity to take place. The collapse of the coffee sector over several decades proves that the same organizational model, when it lacks the appropriate internal accountability mechanisms, not only fails to deliver on expectations, but may also actually expropriate the rents that were meant to go to farmers, transferring them to cooperative insiders, and leave farmers alone with all production risks and uncertain payments for their labor efforts. This is not a question about how effective cooperatives “are” in Kenya; this is a question about specific institutional attributes of the organizational models that make the difference between success and failure of particular cooperatives.
5. Implications
- For cooperative sector policy: The findings favor focusing on governance and transparency of payments reform (such as what is being done in the case of direct settlements system for the coffee industry) rather than expanding the use of cooperatives because of the success of their aggregation functions in more accountable sectors like dairy and tea.
- For farmer organizations more broadly: Any collectivist arrangement, whether co-ops or the chama saving schemes analyzed elsewhere in this research series, confronts the same basic question of design involving “exit” and “voice.” The example of the coffee-growers is an important warning for assessing the staying power of any newly created farmers’ collectivity.
- For future primary research: An appropriate scope for such an extension to this research project would be to conduct a side-by-side comparison of the farmers’ levels of trust, payment punctuality, and leadership accountability within a dairy cooperative and a coffee cooperative, based in the same geographic location, examining whether it is exit/voice that better explains the difference between the two outcomes.
6. Limitations
The estimate of the income premium associated with dairy cooperatives (around 10%) is taken from one regional study (Nyamira and Homa Bay counties) employing endogenous switching regression estimation, which is a suitable methodology for controlling self-selection effects, although it is not necessarily indicative of the performance of dairy cooperatives on a national level. The comparable and causally identified income premium of the tea cooperatives could not be found for this research paper, hence, the qualitative consideration of the tea cooperatives as an example of institutional robustness, rather than a quantitative comparison to the dairy estimate, a significant limitation of the literature search. Apart from the effects of poor governance in coffee cooperatives, there exist numerous other causes of the fall in production in this sector (land subdivision, high input costs, reduced international competitiveness of the coffee), and although the econometric study cited by the paper does prove the direct effect of corruption on technical inefficiency of the farmers, it would be advantageous to employ a cross-sector comparison model rather than sectoral synthesis.
References (selected)
- Onyango, B. et al. (2023). Impact of cooperatives on smallholder dairy farmers’ income in Kenya. Cogent Food & Agriculture.
- Fischer, E. & Qaim, M. (2012). Linking smallholders to markets: determinants and impacts of farmer collective action in Kenya. World Development.
- Institutional Incompatibility and Deregulation: Explaining the Dismal Performance of Kenya’s Coffee Cooperatives (c. 2006).
- National Task Force on Coffee Sub-Sector Reforms, Kenya, report on coffee cooperative governance and financial mismanagement.
- Global Coffee Report, Trabocca, Coffee Intelligence, Kenya News Agency, Kilimo News, reporting on Kenya’s coffee sector decline, the Direct Settlement System reform, and 2025/26 production recovery.
- International Journal of Research and Innovation in Social Science, Impact of Cooperative Membership on Tea Marketing Strategies and Farmers’ Income in Kericho, Kenya.
- Huduma Global Guide. The Cooperative Movement in Kenya: How SACCOs, Dairy Cooperatives, and Coffee Societies Built the Economy.
Prepared as part of the East Africa Microeconomics Research Series. This is a student working paper that synthesises existing research and published data rather than presenting original fieldwork; feedback and data corrections are welcome via the contact page.