Author: Phil Kenkel

Most farmers and rural residents know that agricultural cooperatives are farmer-owned but don’t think much more about their structure or how they are financed. While all businesses are financed by a combination of debt and owner equity, there are fundamental differences in financing a cooperative relative to a typical investor-owned business.

Typical Business Financing is Separate from Operations

Most businesses in the U.S. are owned by one group of individuals, the investors, and do business with another group, the customers.  Under this structure, it is logical to separate financing from operations. If the business is generating, or projected to generate, adequate profits, there should be a pool of outside investors willing to provide equity capital. This structure allows for business financing to be separate from operations and marketing.

Profits from typical businesses are returned to their owners and investors in the form of retained earnings, dividends, and stock buy-backs. Those profit distributions create the incentive for equity investment. Customers of these businesses (who are not investors) do not receive a share of the profits.

Cooperative Financing is Combined with Operations

Under the cooperative business model, cooperative customers are also owners. Due to this structure, identifying financing for a new cooperative cannot be separated from the process of identifying its customers. New cooperative organizers must simultaneously identify individuals to be both cooperative users and investors and established cooperatives must obtain all the capital they need for future expansion through their user-investors.

Cooperatives distribute profits to its owner-customers in proportion to use. Therefore, there is no direct benefit from owning equity in a cooperative, rather the rationale for equity ownership is related to the use of the cooperative. In traditional, open membership cooperatives, a portion of the profits are distributed in the form of equity, often called “stock patronage”.  That equity is typically redeemed into cash by the cooperative at a later date and is thus referred to as “revolving equity”.  Under this cooperative structure, equity ownership is accumulated as a by-product of using the cooperative. In other situations, such as processing cooperatives which are more capital intensive, the cooperative stock is combined with a usage right.  Under that structure the equity investment is a prerequisite to use.

Understanding Cooperative Equity Financing

Agricultural cooperatives are an important part of our rural landscape, with many of our legacy cooperatives having been in business for over 100 years. Understanding cooperative structures for acquiring and managing equity is key for continuing the cooperative business model. Merging the roles of users and investors has major implications for cooperative operations and planning. Groups who are interested in forming a cooperative must not only analyze the customer base, but they must also determine whether potential customers are interested in investing in a user-owned business. Established cooperatives must create systems to match use and investment on a long-term basis.

Having two stakeholder groups, investors and customers, sounds complicated while merging those two groups sounds simple.  In reality, the ownership element of the cooperative business model is more complicated relative to other firms.  Agricultural cooperatives create great benefits in keeping markets competitive and improving the financial results of their farmer-owners.  I view cooperatives as a better, but not necessarily simpler, business structure.

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Kenkel, Phil. “What is Different About Financing a Cooperative?” Southern Ag Today 6(31.5). July 31, 2026. Permalink

More than 23% of agricultural cooperatives are more than 100 years old and 77% are more than 50 years old. Part of the clientele for those cooperatives are young producers. Almost 300,000 farmers (9% of the total) are under 35 years of age. This small but growing segment of the farm population often has limited access to land and credit and has greater financial vulnerability.  Old cooperatives and young farmers can clearly benefit from each other but there are challenges involved in successfully matching the two.

Most legacy U.S. agricultural cooperatives operate under the open membership model where members invest in the business by receiving a portion of profits as revolving equity. That structure is young producer friendly in that it allows membership without a large up-front investment.  On the other hand, the benefit stream from a cooperative is long-term in nature. Revolving equity patronage only turns into cash after a multi-year delay, and unlike corporate stock, cooperative equity is non-tradable and non-liquid. Agricultural cooperatives may have to re-think long revolving periods if they want to appeal to young producers.

Agricultural cooperatives are also user-controlled, and most cooperatives are eager to have young producers serve on their boards of directors. Unfortunately, young producers may be reluctant to join the board due to the competing use of their time from farm, family and off-farm work obligations.  Agricultural cooperatives need new blood and new ideas. They may have to explore new, and less time-demanding, options to involve younger producers.

Despite these challenges, old cooperative and young producers can help each other.  Agricultural cooperatives are constantly regenerating themselves and they need new members to create new equity. Young producers face operational and financial challenges. They need secure market access and improved profitability from supply chain ownership. Agricultural cooperatives were formed to allow producers to collectively accomplish what they could not do on their own. 

While it is true that young producers may desire a different set of products and services relative to their more experienced brethren, they still represent the future of agricultural cooperatives. For example, young producers may be more interested in input financing and less interested in pre-pay discounts.  Their participation may represent new opportunities and new risks for cooperatives. Young producers also tend to be technology savvy.  Cooperatives and young producers might make excellent partners in the journey to evaluate and adopt new technologies.

Established cooperatives can benefit from young producers, and young producers can benefit from established cooperatives.  Perhaps both sides can explore these opportunities together!

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Kenkel, Phil. “Old Cooperatives and New Farmers.” Southern Ag Today 6(13.5). March 27, 2026. Permalink

Recent tax discussions have focused on extending some of the provisions of the 2017 Tax Cuts and Jobs Act (TCJA), which were set to expire in 2025.  One of the lesser-known provisions that impact agricultural producers is the Section 199A deduction.  As in all tax provisions, the details are quite complex, but a layman’s explanation can give a flavor of the key provisions.  The history of the provision dates to 2004 when Congress passed the domestic production activities deduction (DPAD) which provided a deduction to companies that manufactured inside the U.S. Farming was included in the definition of manufacturing, so agricultural producers qualified, but there was also a W-2 wage requirement that limited the value to many commodity producers. Agricultural cooperatives were also included, and they could elect to reflect the farmer’s production and associated tax deduction at the cooperative level.

The DPAD was eliminated by the 2017 tax bill in exchange for the reduction of the corporate tax rates.  Because over 98% of producers are operating pass-through taxation entities, few farmers benefited from the decrease in the corporate tax rates.  Agricultural cooperatives also did not benefit from the tax rate decrease since they typically pass on profits and the taxation of those profits on to their members through patronage.  In order to create parity for those groups the TCJA created the Section 199A qualified business income deduction.

As a simplification, Section 199A provides a deduction equal to 20% of qualified income, which is roughly equivalent to taxable income.  That deduction lowers the effective rate on pass-through taxation entities such as sole proprietorships, partnerships and limited liability companies to be more on par with the corporate tax rate.  The deduction is limited to 50% of W-2 wages paid since the original intent of the DPAD legislation was to encourage manufacturing and employment in the U.S. 

The cooperative provisions of Section 199A are somewhat complex.  The cooperative calculates the deduction based on their qualified income and it is limited to 50% of the cooperative’s W-2 wages.  In the case of cooperatives, qualified business income is calculated before patronage distribution, which is analogous to before tax income in a corporate firm. The cooperative can either retain the deduction at the cooperative level or pass a portion or all of it on to the producer. Because of that pass-through possibility, producers who market commodities through a cooperative have their farm-level Section 199A deduction reduced.  Unfortunately (in terms of complication) the cooperative member’s offset is based on formulas relating to the farm qualified income and W-2 wages and is not related to the amount of deduction (if any) passed on by the cooperative.  

Because of that structure, cooperative boards of directors face complicated decisions on the amount of the cooperative level Section 199A deduction that is retained or passed on.  Those boards must consider both the loss of deduction that the member received from marketing through the cooperative and the value of the deduction to both the cooperative firm and cooperative member.The Section 199A deduction has been an important tool in creating tax parity between corporations, farm businesses and agricultural cooperatives.  As with many tax provisions it is perhaps unnecessarily complex. It has positively benefited both producers and agricultural cooperatives which typically did not benefit from the corporate tax rate reduction.  It has also created a new, and somewhat complex, role for agricultural cooperatives in pooling and distributing tax deductions. If Section 199A becomes and remains a permanent feature of the tax code, that tax deduction management may come to be viewed as just another aspect of the traditional roles of agricultural cooperatives.  I wonder if the Rochdale Pioneers envisioned that role when they developed the original cooperative principles in 1844?

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Kenkel, Phil. “Understanding the Section 199A Tax Deduction.” Southern Ag Today 5(23.5). June 6, 2025. Permalink

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