Author: Phil Kenkel

There are examples of successful cooperatives in almost every business sector from funeral homes to ski resorts.  Cooperatives are particularly prominent in the U.S. agricultural sector.  Understanding the forces behind that observation reveals a lot about our agricultural sector and the cooperative business model.

Many sectors of U.S. production agriculture are dominated by family farms. Generally speaking, the family farm structure has been successful, and family members, or in many cases extended family members with skin in the game, are able to manage the unique aspects of the farm resources.  However, that family-based organizational structure also leads to inherent challenges.  Many farms are specialized in a single standardized commodity.  They also deal with firms that are much larger than them in both their upstream (input purchase) and downstream (commodity marketing) transactions. 

Agricultural cooperatives function as extensions of the farm firm allowing producers to achieve economies of scale and a better bargaining position for both inputs and marketing. One of the major reasons that agricultural cooperatives are prominent in the U.S. is that family farms are prominent in the U.S. Cooperatives allow farmers to operate independently but still capture the economies of a large-scale business structure. Those scale economies are possible because many producers are sourcing similar inputs and marketing similar commodities.

Geography and transportation also contribute to the rationale for agricultural cooperatives.  A dairy producer in New York cannot sell their milk to a processor in California. Producers depend on input suppliers and marketing outlets near their location.  Their success is dependent upon those outlets remaining in existence.  They also face the possibility that a local input supplier or marketing firm could have a “mini-monopoly” in an area.  Agricultural producers form cooperatives to guarantee access to input and marketing infrastructure and to help keep markets honest.

In my Agricultural Cooperative textbook, I have an entire chapter discussing the economic rationale for cooperatives.  In the case of agricultural cooperatives, their prominence and success relates back to the prominence of family and multi-family farms.  The gap in size between family farms and their upstream and downstream trading partners continues to grow rapidly.  That suggests that agricultural cooperatives are more important now than ever!

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Kenkel, Phil. “Why Are Cooperatives Prominent in U.S. Agriculture?” Southern Ag Today 5(11.5). March 14, 2025. Permalink

Serving on a cooperative board can be a thankless job.  The pay is nominal and dissatisfied members find it easy to blame the board of directors.  Despite those challenges, there is a lot of satisfaction and growth from both running for and serving on the board of directors.  Here are the most compelling reasons you should run for your cooperative board.

• One seldom mentioned perk is the self-satisfaction of stepping up to help your fellow producers. It takes time and energy to oversee a cooperative’s health and ensure that it is there for the next generation. There is personal satisfaction in being part of the solution.

• You will gain an increased understanding of the cooperative. Board members open the hood and learn about the moving pieces, both operational and financial. It can be rewarding to better understand the organization that you use and own. 

• You will gain increased financial knowledge.  Cooperative board members have fiduciary duties to protect the member’s investment.  That forces board members to up their game and take their financial skills to the next level. Many board members report that their time on the cooperative board made them better financial managers of their own operation.

• You will have a chance to broaden your horizons and understanding of agriculture. Board members hear about members’ needs and while that can be challenging, it also provides insights into how other producers manage their farming operation. Strategic planning sessions give board members the opportunity to explore the broader trends in the agricultural industry.  Positioning the cooperative for the future goes hand in hand with future-proofing your own farming operation.

Of course, being willing to run for the board of directors does not guarantee that you will be selected. That willingness to run is also a service to your fellow producers.  As John Minton said: “They also serve who stand and wait!”  By agreeing to run for the board you contribute to the democratic process of member control. Running for the board also broadens your connections with other producers and allows you to evaluate your own leadership and communication skills. Some cooperatives have associate board positions.  Associate board members are usually appointed and serve for shorter terms.  Associate board members attend meetings and participate in discussions but do not have a voting role.  That can be a great way to get a trial view of being a board member.

Consider running for your cooperative board. You can improve your cooperative and become a better farmer!

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Kenkel, Phil. “Why You Should Run for Your Cooperative Board.” Southern Ag Today 4(39.5). September 27, 2024. Permalink

The cooperative business model has been very successful in the U.S. and cooperatives are particularly successful in the agricultural sector.  Many U.S. agricultural cooperatives are approaching or exceeding 100 years of existence.   Despite that historical success we are starting relatively few new agricultural cooperatives.  Many of our existing agricultural cooperatives started with a handful of producers joining together to address a common need.  We don’t see that same type of activity today or, if we do, it is not structured as a cooperative business.  That raises the question of why we don’t start more cooperatives.

The first reason for the infrequency of new cooperatives is lack of understanding of the cooperative business model. Even producers who are members of a cooperative likely do not know that a cooperative is a corporation, how to incorporate a cooperative or all the details of the cooperative financial model. Even if a producer knows that incorporating as a cooperative is an option, they likely feel that the process is more opaque, mysterious, and complicated relative to other options.  That leads to the second impediment to cooperative development, most producers and professional advisors are more familiar with Limited Liability Companies and investor-based business forms. A student could graduate with a business degree and go on to get an MBA while never hearing the word “cooperative”.  Advisors, attorneys, and accountants are more likely to understand LLCs relative to cooperative corporations.  That makes LLC formation the path of least resistance.

The final factor limiting new cooperative development is access to capital.  Most existing U.S. agricultural cooperatives are capitalized from decades of retained profits.  New opportunities for cooperatives often require substantial amounts of up-front capital.  There are cooperative models, such as the closed membership cooperative and the hybrid member-investor model that address those issues.  The formation of those types of cooperatives requires not only an understanding of their structures but also the ability and willingness to make substantial up-front investment.  

I can think of many agricultural situations from machinery sharing, to condo grain storage to feral hog trapping operations where small scale cooperatives could be logical and successful. Those small cooperatives could be formed under the closed membership cooperative model with members receiving a usage right (bushel of grain stored, acre of machinery use, one week usage of trapping equipment) for a share of membership stock.  By receiving patronage in proportion to use the members would achieve services at essentially an at cost basis and the cooperative could issue stock patronage to fund any necessary re-investment in equipment and infrastructure.  Members wishing to exit the cooperative could sell their share and usage rights to another eligible producer with approval of the cooperative board.  The cooperative model would provide economies of scale and let the members receive a service at much lower cost than they could achieve on their own.   Opportunities for new agricultural cooperatives exist but we rarely hear them discussed.  Perhaps we just need to recycle some good old ideas!

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Kenkel, Phil. “Why Don’t We Start More Cooperatives?” Southern Ag Today 4(20.5). May 17, 2024. Permalink

Cooperative firms return profits to their member-owners in proportion to their use of the firm.  Those profit distributions are referred to as “patronage refunds”. In contrast,  most other corporations distribute profits in proportion to investment. Cooperative members may be somewhat familiar with patronage refunds but often do not understand all of the structures and issues.  Producers who are not a member of a cooperative may wonder what they are missing.  Patronage refunds are the most unique and, perhaps, the most interesting feature of cooperatives.

In cooperative terminology, a patron is a cooperative customer who qualifies to receive patronage refunds.  That typically means that they are a member of the cooperative.  Patronage refunds are profits that are distributed in proportion to use. Usage can be measured in multiple ways.  Patronage can be based on the dollar amount of purchases or commodity payments or on physical units such as bushels or tons.  A cooperative can track member use as a single patronage pool, or as multiple pools reflecting separate commodities, products or departments.   Each cooperative selects the patronage base that most fairly represents member use.

Cooperatives can pay patronage as a combination of cash and equity. Equity patronage is eventually redeemed into cash and, for that reason, is often called “revolving equity”.  Equity patronage has two functions.  First, it allows members to build ownership without an out-of-pocket investment.  Second, it capitalizes the cooperative, funding the property, plant and equipment.

Patronage refunds have tax implications.  Cooperatives are taxed as corporations but are allowed to deduct patronage distributions.  Those patronage refunds become taxable income for the patrons. Cash patronage is immediately taxable to the patron but equity patronage can be structured to be taxable when issued or taxed at the later date when it is redeemed into cash.

Many local cooperatives are in turn members of regional cooperatives.  Those regional cooperatives issue patronage refunds to the local cooperatives, which becomes part of the local cooperative’s net income.  Therefore, the patronage refunds that producers receive from their local cooperative reflects both the local cooperative’s profits and the pass through share of the regional cooperative’s profits. 

Many younger producers wonder why a cooperative cannot simply offer more favorable prices (more than what competition might dictate) in lieu of paying patronage refunds.  There are some very good reasons.  Equity patronage capitalizes the cooperative.  One way to think of equity patronage is that the members are receiving their share of the total profits and then temporarily reinvesting a portion of those profits in the cooperative. The second rationale for not substituting favorable prices for patronage is the danger of misestimating costs and creating a loss.  Finally, favorable prices would result in zero profits and zero return on assets and equity.  Basically, profits have been given away in the form of prices. Many members will not perceive the price benefit and conclude that the cooperative is poorly managed.  By setting prices at market level, generating profits and then returning those profits as patronage refunds, members can observe the cooperative’s performance and appreciate its benefit, and the cooperative will be capitalized and able to respond to member needs.

Most producers wish they could purchase their inputs a little cheaper and sell their commodities at a slightly higher price.  Most producers would also like to invest for the future.  Producers can achieve all of the goals with no out-of-pocket investment by joining and patronizing their local cooperative.  When you are a cooperative patron, the check really is in the mail!

Kenkel, Phil. “Demystifying Patronage Refunds.” Southern Ag Today 3(41.5). October 13, 2023. Permalink

Agricultural cooperatives are an important part of the U.S. agricultural industry. In 2020, the USDA counted 1,744 farmer owned cooperatives with 9,500 locations, $200B in sales, $8.4B in net income and 1.8M members (USDA, 2021).  Earlier USDA studies indicated that agricultural supply and marketing cooperatives contributed to slightly over 38% of total farm output, (USDA 2004, 2006).  Despite their prevalence, many producers do not understand the cooperative business model.  That is unfortunate because it may prevent them from understanding the economic value of existing cooperatives or considering the formation of new cooperatives to improve their farm profitability. 

Cooperatives can add value at the farm level as well as at the cooperative level.  That is a result of the cooperative having transactions with and providing service to its member-owners.  In some cases, the existence of the cooperative allows producers to grow a more profitable crop.  For example, in the cotton producing regions of Oklahoma, OSU crop enterprise budgets have consistently shown a $100/acre profit advantage for cotton relative to alternative crops (Kenkel, 2021).  This would not be possible without a cotton gin. Further, a producer-owned cooperative may maintain locations that investor-owned agribusinesses might abandon, or offer services or product lines that would otherwise not be available.  Cooperatives can also create farm level benefit through favorable prices.  The common thread of all these benefits is that they are not reflected on the cooperative’s financial statements and the portion of farm profits attributable to the cooperative is not readily observable.  

However, some benefits of a cooperative are more easily observable.  Most agricultural cooperatives distribute profits to members in a combination of cash and equity (that is still redeemed for cash at a later date).  A classic assessment of the return on investment in a cooperative compares the discounted value of member cash flows to value of the member equity (Reynolds, 2013).  Bear in mind that an individual member’s return on equity is unique in that both the cash return and the equity holdings were a result of the amount of business they did with the cooperative. Thus, there was no out of pocket investment.

The revolving equity in a cooperative is, in essence, profits that are distributed to the member but temporarily lent back to the cooperative to fund investment.  Revolving equity creates value by funding infrastructure investments that can enhance existing activities or create new value through market access, risk reduction or new services. In this way, revolving cooperative equity benefits existing members by enhancing future profits, and supports future generations of producers by ensuring the perpetuation of the business.

Perhaps most importantly, cooperatives play a role in keeping markets competitive.  Many U.S. agricultural cooperatives were formed in the New Deal era to offset the market power of monopolists who threatened farmer welfare (Hogeland, 2006).  The existence of these cooperatives kept other firms “honest” or realistic in prices and services.  This aspect of the cooperative value package has often been termed “the invisible benefit of cooperatives”.  Because it is unobservable, the value of a cooperative’s existence is often only appreciated when it is dissolved or exits a market area.

While a common feature in agricultural industries, the cooperative value equation is quite complex.  Cooperative members can benefit at the farm level and from cooperative level patronage distributions.  Cash patronage distributions provide an immediate benefit while equity patronage distributions allow members to build ownership with no out-of-pocket investment.  In turn, that equity funds infrastructure thereby creating future value. By its very existence, the cooperative is likely improving market access and maintaining competitive market prices.  

When should a producer patronize a cooperative?  When it makes economic sense!  In making that assessment it is important to realize that some of the economic benefits are subtle and long-term.  Like any business, we should not assume that cooperatives will be there if we do not support them.

References

Hogeland, J. (2006) “The Economic Culture of U.S. Agricultural Cooperative” Culture and Change, Vol. 28 No.2 Fall 2006.

Kenkel, P 2021. “Economic Impact of Oklahoma’s Cotton Cooperatives” Oklahoma State University Department of Agricultural Economics Staff Paper AE#2021-1 July 2021

Reynolds, A. (2013) “Determining the Value of the Cooperative Business Model: An Introduction” white paper, CHS Center for Cooperative Growth

USDA, (2004), “Farmer Cooperative Statistics 2002” Service Report 592, Rural Business-Cooperative Service, Washington, D.C.: Rural Development, USDA. United States Department of Agriculture 

USDA. (2006). “2002 Census of Agriculture”. Washington, D.C.: National Agricultural Statistics Service (NASS). United States Department of Agriculture (USDA). 

USDA, (2021) ”Agricultural Cooperative Statistics Summary, 2020” USDA Rural Developmet, Rural Business-Cooperative services,  

https://content.govdelivery.com/accounts/USDARD/bulletins/300bab5

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Kenkel, Phil. “The Economic Value of Agricultural Cooperatives.” Southern Ag Today 3(10.5). March 10, 2023.

Photo by Jonathan Borba: https://www.pexels.com/photo/girl-and-elderly-man-picking-strawberries-15672380/