An agricultural cooperative is a business association into which farmers pool their resources. By doing so, farmers can increase their revenues, reduce costs or share risks, depending on the type of cooperative.
There are two types of farmers that interact with a cooperative. A patron is any person or other entity with which a cooperative does business on a cooperative basis. A member is an owner-patron, who can vote at its corporate meetings.
The following are common types of cooperatives:
- Supply and service cooperatives. These entities produce or buy goods and materials for their members. The prices charged are typically at market rates, but cooperatives may distribute patronage refunds to their members, thereby reducing member costs.
- Marketing cooperatives. These entities provide sales outlets for the products supplied to them by their members and patrons.
- Federated cooperatives. These are associations of cooperatives within a region.
A cooperative has the following characteristics:
- Its earnings are usually distributed to its patrons based on their proportional patronage of the cooperative, though some profits may be retained in the organization. In essence, all amounts received in excess of costs are returned to patrons.
- Cooperative members control the organization due to their roles as patrons; there are no equity investors.
- Membership in the cooperative is limited to patrons.
- At least half of the cooperative’s business is performed on a patronage basis.
- There is a limited return paid out on capital investment.
- Earnings allocated back to patrons are treated as a tax deduction; earnings not allocated are taxed at the corporate income tax rate.