Agriculture Reference
In-Depth Information
When their fi scal year ends, a cooperative then fi gures its earnings on business conducted
on a cooperative basis. If there are any earnings, they are returned to the cooperative's
patrons (as patronage refunds) as cash and/or equity (cooperative stock) allocations on the
basis of business volume conducted with the cooperative that year.
Financing of cooperatives
Cooperatives have some unique fi nancing options at their disposal. Revolving fund fi nanc-
ing is a highly advantageous option that is unique to cooperatives. Based on the principle
that cooperative members should be willing to fi nance growth of their own organization, this
method gives cooperatives the option of issuing patronage refunds in the form of stock or
equity allocations, rather than in the form of cash. The idea is that the cooperative is a logical
extension of the member's own business, and each member has an obligation to contribute
directly to its fi nancing in proportion to that member's use of the cooperative's services.
The advantage to the cooperative is that since ownership of stock represents ownership of
valuable assets, it satisfi es the co-op's obligation to return the excess of income over expenses
to patron-members, while at the same time retaining the actual cash earnings for use in
fi nancing the business. Theoretically, the cooperative “revolves” the stock periodically, thus
allowing older stock to be cashed in.
Non-cooperative businesses argue that this is an unfair advantage, since any excess of
income over expenses (profi ts) that non-cooperatives make is taxed fi rst before it is retained
for use by the business or distributed as dividends. Since 1962, legislation has required coop-
eratives to return a minimum of 20 percent of all patronage refunds in cash rather than in the
form of ownership stock if they use this form of fi nancing.
Refunds in the form of stock are considered to be income; so cooperative patron-members
are required to pay taxes on that stock. Farmers in tax brackets that are higher than 20
percent will fi nd that this type of fi nancing can cause a net outfl ow of cash, since they must
pay out more in taxes on the stock than they actually receive in cash refunds. Hence, many
profi table cooperatives will pay out 40 to 50 percent of their net earnings in cash.
Advantages of agricultural cooperatives
For the farmer-member, a cooperative provides a number of advantages. One of the reasons
cooperatives came about was to allow agricultural producers to “level the playing fi eld”
when they deal with suppliers of inputs, or with those who purchase their farm products. In
essence, farmers are allowed to work together “cooperatively,” or collude, and have been
provided legal authority under the
Capper-Volstead Act of 1922
to do this. This act exempts
them from anti-trust legislation, provided their cooperative meets the criteria discussed pre-
viously. This is a powerful advantage not enjoyed by other types of businesses. A coopera-
tive can also provide a needed market where none existed before—again to provide input
supplies or to process and market products produced by farmers.
Disadvantages of agricultural cooperatives
Those who are critical of cooperatives say that many of them—even the local ones—
have gotten so large that the farmer member is far removed from having any signifi cant
voice in the business. Such critics also argue that the board of directors is sometimes
elected on the basis of popularity rather than genuine ability to make policy decisions in a
