An Introduction to Cooperation and Mutualism

🧭 Overview

🧠 One-sentence thesis

Cooperatives should compete aggressively to maximize profits and then distribute those profits back to patron-owners in ways that balance immediate cash returns with long-term sustainability through active balance sheet management.

📌 Key points (3–5)

• Service at cost principle: cooperatives should compete for maximum profit, then distribute residual cash and profits to patron-owners—not set prices to eliminate profit opportunity.
• Equity creation and destruction: cooperatives uniquely create equity when paying patronage refunds as common stock and destroy equity when redeeming that stock for cash.
• Balance sheet management: cooperatives must actively manage liquidity and solvency by retaining adequate risk capital before distributing residual cash.
• Member heterogeneity: patron-owners have different interests based on their life cycles (age, business expansion/contraction), requiring distribution strategies that maximize long-run benefits.
• Common confusion: "operation at cost" does not mean setting prices to break even; it means being competitive, earning profit, and then returning profits to patrons.

💰 The service at cost principle

💰 What "at cost" really means

Service or operation at cost: a core principle of the cooperative and mutual business model.

• Not setting prices to eliminate profit opportunity.
• Instead: be competitive in the marketplace, make as much profit as possible, then distribute profits and residual cash to patron-owners.
• The principle is implemented through distribution, not through pricing strategy.

🔄 How distribution implements the principle

• Patron-owners receive what is left over through:
  • Cash patronage payments (immediate redemption)
  • Cash equity redemption payments
  • Cash payments of net marketing proceeds
• Distribution of patronage refunds or per-unit retains is how the service at cost principle is actually realized.
• Example: A cooperative competes at market prices, earns profit, then returns that profit to members—members effectively paid "at cost" after the refund.

🏢 Unique equity dynamics

🏢 Creating and destroying equity

Cooperatives have a distinctive equity mechanism not found in other business forms:

Action	Effect on equity	How it happens
Pay patronage refunds in common stock	Creates equity	Members receive ownership shares instead of cash
Redeem previously issued equity for cash	Destroys equity	Cooperative buys back shares with cash

• This is unique to cooperative firms.
• Both actions must be managed as part of an integrated balance sheet strategy.

⚖️ Balance sheet management philosophy

• Cooperatives must position the business for short-run and long-run sustainability.
• Two key dimensions to manage:
  • Liquidity: ability to meet short-term obligations
  • Solvency: long-term financial health
• Adequate risk capital must be retained and managed as part of overall business strategy.
• Only after protecting the balance sheet should the cooperative pay out residual cash as patronage refunds and equity redemptions.

👥 Member participation and heterogeneity

👥 Three ways members participate

The excerpt mentions three interrelated ways (two are detailed here):

1. Benefits: how members receive returns from the cooperative
2. Ownership: how members hold equity in the cooperative
3. (Control is mentioned in Chapter Two but not detailed here)

• These create an interrelated set of decisions.
• They influence each member differently.
• They provide unique challenges for boards and management in developing business strategy.

🔄 Member life cycles

• A member's life cycle encompasses their use as a customer of the cooperative.
• Life cycle factors:
  • Age
  • Business stage (begin, expand, or contract)
  • Household stage
• Members have heterogeneous interests due to their unique places in business and personal life cycles.
• Distribution strategies must maximize long-run benefits while accounting for this heterogeneity.
• Example: A young member expanding their business may prefer equity retention for growth, while an older member contracting may prefer cash redemptions.

🎯 Strategic framework

🎯 Dual perspectives

Cooperatives require evaluation from two viewpoints:

Perspective	Description	Focus
Patron perspective	Cooperative as extension of patron's business (farm or house)	Individual member benefit
Business perspective	Cooperative as independent firm in market economy	Competitive sustainability

• Both perspectives are important.
• Decisions must integrate both views.

🎯 Integrated decision framework

• Evaluation and choice of strategies must be done within an integrated and comprehensive framework covering:
  • Finance
  • Strategy
  • Risk management
• For cooperatives, this framework should include both patron and business perspectives.
• Owners are residual claimants—they get what is left over in any business.
• The cooperative must balance competitive market performance with member service objectives.

🧭 Overview

🧠 One-sentence thesis

A firm's success depends on clearly defined and assignable property rights, which enable efficient economic organization and decision-making, and cooperatives succeed when they can provide value to member-owners through collective action that individuals cannot achieve alone.

📌 Key points (3–5)

• Property rights foundation: Clear, legally enforced property rights that specify who can use economic goods and transfer those rights are essential for firm success and market efficiency.
• Firms as contract networks: Firms exist because contracting through markets has costs; firms bundle contracts with suppliers, employees, lenders, and buyers to reduce these transaction costs.
• Cooperative distinction: In cooperatives, some contracts exist with the firm's own owners (members consume goods in consumer coops; members supply products in producer coops), unlike traditional corporations.
• Ownership = control + residual claim: Firm ownership means both the right to control the firm and the right to residual earnings after all contractual expenses are paid.
• Common confusion: Don't confuse renting (using a property right) with owning (using and transferring a property right)—these rights can be separated.

🏛️ Property rights as the foundation

🔑 What property rights are

Property right: a legally enforced right to select the uses of an economic good produced by a firm.

Private property rights: those assigned to an individual person.

Alienable property right: one that can be given or transferred to someone else.

• Property rights specify who can decide how an economic good is used.
• Governments enforce these rights through police and legal systems.
• Ownership includes both use and alienability (ability to transfer).

🔀 Separation of use and transfer rights

• These two aspects of property rights can be separated.
• Example: A person renting an apartment has the right to use it but cannot sell (transfer) it.
• Don't confuse: Having a property right to use something ≠ owning it; ownership requires both use and the ability to transfer.

🎯 Why clear property rights matter

Market economies achieve high efficiency when:

• Property rights are clearly known
• Property rights are assignable to individuals
• Contracting costs are known (search, information, bargaining, decision, drafting, policing, enforcement)

Mechanism: When property rights are clear and assignable, individuals have specific knowledge that enables more productive decision-making.

🏢 Why firms exist

💰 Contracting costs create firms

• Markets involve contracting costs: search costs, information costs, bargaining costs, decision costs, drafting costs, policing costs, enforcement costs.
• Firms exist because these contracting costs may be lower when organized within a firm rather than through individual market transactions.
• Example: In a proprietorship, one person makes all decisions and signs all contracts—simpler than each transaction going through the market.

🕸️ Firms as bundles of contracts

Research suggests firms are actually "a connection of a group of contracts."

A firm signs contracts with:

1. Suppliers – to purchase inputs
2. Employees – to provide labor services
3. Lenders, bondholders, preferred stockholders – to provide capital
4. Buyers – to purchase products or services
5. Any other entity doing business with the firm

Key insight: This contractual view becomes more complex in cooperatives and mutuals, where some contracts exist with the firm's own owners.

🤝 Cooperatives as a special case

🔄 Contracts with member-owners

In a cooperative, some contracts exist with owners and employees of the firm—a key difference from traditional corporations.

Cooperative type	How members relate to the firm
Consumer cooperative	Members consume the goods and services provided by the cooperative
Producer cooperative	Members supply the products that the cooperative markets

🛠️ The Make or Buy decision

Cooperatives are successful if they are able to make something for their members either through purchasing supplies or providing inputs rather than having members do this in the market as individuals with no ownership.

• Core question: Should members act individually in the market, or collectively through a cooperative?
• This "Make or Buy decision" has been widely studied in the context of contractual arrangements.
• Success criterion: The cooperative must provide value that members cannot achieve as efficiently acting alone.

Example: Instead of each farmer individually negotiating with buyers, a producer cooperative markets all members' products collectively, potentially achieving better terms.

🧩 Key concepts for understanding cooperatives

Three concepts are fundamental to grasping the unique nature of cooperatives:

• Ownership structure
• Property rights allocation
• Purpose of the firm

These differ from traditional corporations in how they align member interests with firm operations.

👑 Ownership of a firm

📋 Definition of ownership

An owner of a firm is someone who has the right to control the firm and the right to any residual earnings after the firm has contracted its expenses with its suppliers, employees, lenders, and others with whom it has a contractual arrangement.

Two linked rights:

1. Control – the right to make decisions about the firm
2. Residual claimant – the right to earnings after all contractual obligations are paid

🔗 Joint nature of ownership rights

• In a corporation, control and residual claim are linked together or obtained jointly.
• These two rights form the fundamental basis of ownership.
• They cannot be easily separated in traditional corporate structures.

⚖️ Costs of ownership rights

Ownership rights come with associated costs:

Risk and strategy choice:

• The right to residual earnings involves bearing risk.
• More business units in a firm may lead to greater diversification.
• Diversification can reduce risk if the correlation between earnings in different business units is negative or close to zero.

Don't confuse: Diversification only reduces risk when business units' earnings are not positively correlated—simply having more units doesn't automatically reduce risk.

🧭 Overview

🧠 One-sentence thesis

A firm's owner holds both the right to control the firm and the right to residual earnings after all contractual expenses are paid, but these rights come with costs related to risk, monitoring management, and collective decision-making.

📌 Key points (3–5)

• What ownership means: two linked rights—control over the firm and claim to residual earnings after all contracted expenses.
• Firms as contract networks: firms are connections of contracts with suppliers, employees, lenders, buyers, and others.
• Cooperatives vs corporations: in cooperatives, some contracts exist with owners/members themselves (consumer or producer cooperatives); in corporations, control and residual-claim rights are obtained jointly.
• Common confusion: ownership is not just about earnings—it includes control rights, and both rights carry costs (risk, monitoring, collective decision-making).
• Key trade-off: the make-or-buy decision determines whether members obtain benefits individually in the market or through cooperative ownership.

🏢 The firm as a network of contracts

📜 What a firm actually is

A firm is a connection of a group of contracts.

• The firm signs contracts with multiple parties:

  1. Suppliers: to purchase inputs.
  2. Employees: to provide labor services.
  3. Lenders, bondholders, preferred stockholders: to provide capital.
  4. Buyers: to purchase products or services.
  5. Other entities: doing any form of business with the firm.

• This contractual view emphasizes that a firm is not a single entity but a web of agreements.

🤝 How cooperatives differ

• In a cooperative, some of these contracts exist with the owners and employees themselves.
• Consumer cooperative: members consume the goods and services provided by the cooperative.
• Producer cooperative: the cooperative markets products supplied by the members.
• Cooperatives succeed when they can make or provide something for members more effectively than members acting individually in the market with no ownership.

🔑 The two rights of ownership

🎯 Right to control

• The owner has the right to control the firm—make decisions about its operations and direction.

💰 Right to residual earnings

An owner of a firm is someone who has the right to control the firm and the right to any residual earnings after the firm has contracted its expenses with its suppliers, employees, lenders, and others with whom it has a contractual arrangement.

• Residual earnings: what remains after all contractual expenses are paid.
• In a corporation, these two rights—control and residual claimant—are linked together or obtained jointly.
• This joint ownership of both rights is the fundamental basis of ownership.

🔗 Why the two rights are linked

• The excerpt states that in a corporation, control and residual-claim rights are obtained jointly.
• This means you cannot have one without the other in the standard corporate form.
• Example: if you own shares in a corporation, you have both voting rights (control) and a claim to dividends/profits (residual earnings).

💸 Costs of ownership rights

⚠️ Costs of the right to residual earnings: risk

• Key cost: risk and the firm's strategy choice.
• Diversification: more business units in a firm may lead to greater diversification, which can reduce risk.
• Condition: diversification reduces risk as long as the correlation between earnings in each business unit is negative or close to zero.
• Example: if one business unit's earnings fall while another's rise, the overall firm's earnings are more stable.

👀 Costs of the right to control: monitoring management

• Monitoring difficulty: when there are many owners (common in cooperatives and mutuals), monitoring management actions is difficult.
• Solutions owners use:
  • Ensure outside audits are conducted.
  • Put internal controls in place.
  • Compose the board of directors of individuals with the best knowledge to monitor management.
• Cooperative limitation: cooperatives are limited because their directors must come from members (discussed in the next chapter).

🗳️ Costs of the right to control: collective decision-making

• When costs are high: if owners have differing opinions arising from different needs regarding the cooperative's products and services.
• The greater these differences, the greater the costs of collective decision-making.
• Don't confuse: this is not about the number of owners alone—it's about the diversity of their needs and opinions.

🛠️ The make-or-buy decision

🤔 What the decision is about

The Make or Buy decision has been widely studied within the context of the contractual arrangements that make up a firm.

• Core question: Can consumers or producers obtain benefits (volume premiums, volume discounts, missing products/services) on their own?
• This decision determines whether members act individually in the market or create/join a cooperative.

🧭 Decision framework (from Exhibit 1.0)

The excerpt provides a decision tree:

Question	If YES	If NO
Can consumers/producers obtain benefits on their own?	Check: Is vertical coordination easy?	Consider: Would a supply agreement/alliance work?
Is vertical coordination easy?	Buy the product/service	(Move to next question)
Would a supply agreement/alliance work?	Check: Is mutual benefit a solution?	Buy via contracting
Is mutual benefit a solution to coordination?	Create supply agreement/alliance	Vertically integrate to make

• Mutual benefit solution: if detailed production or marketing contracts are not needed, a cooperative arrangement may work.
• Vertical integration: if coordination is difficult and mutual benefit applies, consumers or producers should vertically integrate (i.e., form a cooperative) to make the product or service themselves.

🎯 Why cooperatives exist

• Cooperatives are successful when they can provide something for members more effectively than members acting individually.
• This ties back to the make-or-buy decision: when "buy" (individual market action) is inefficient, "make" (cooperative ownership) becomes the solution.

🏛️ Ownership, property rights, and purpose

🔍 Key concepts for understanding cooperatives

The excerpt states:

The concepts of ownership, property rights, and purpose of a firm are key to understanding the unique nature of a cooperative.

• Ownership: the joint rights to control and residual earnings.
• Property rights: the allocation of these rights among different parties.
• Purpose: in cooperatives, the purpose is to serve members' needs, not just maximize residual earnings for external investors.

🆚 Cooperatives vs corporations

Aspect	Corporation	Cooperative
Contract parties	External suppliers, employees, lenders, buyers	Some contracts with owners/members themselves
Control & residual rights	Jointly obtained by shareholders	Held by members who also use/supply the cooperative
Board composition	Can be external experts	Must come from members (limitation noted)
Purpose	Maximize shareholder value	Serve member needs (consumer or producer)

• Don't confuse: cooperatives are still firms with contracts, but the ownership structure and purpose differ from standard corporations.

🧭 Overview

🧠 One-sentence thesis

Corporate governance allocates decision rights between internal parties (shareholders, boards, managers) and external parties (auditors, regulators) to balance decision-making authority with accountability, though this separation of ownership and control creates monitoring challenges that vary by firm type.

📌 Key points (3–5)

• Decision rights allocation: Organizations assign varying levels of authority and tasks across different roles, from clerks with minimal authority to owners with broad decision-making power.
• Decision management vs. decision control: Good governance separates those who propose and choose actions (decision management) from those who monitor and reward performance (decision control) to prevent self-serving choices.
• Separation of ownership and control: Publicly-traded corporations have dispersed ownership by institutional investors who own small stakes, unlike small businesses where owner-managers have direct control.
• Common confusion: Decision management (steps 1–2: seeking proposals and choosing) vs. decision control (steps 3–4: implementing and monitoring)—these must be separated to align incentives with organizational goals.
• Governance evaluation: Organizations are assessed on three dimensions: motivating value-maximizing decisions, protecting assets from unauthorized use, and complying with financial reporting requirements.

🏗️ Job design and decision rights

🏗️ Tasks vs. authority tradeoff

Organizations create jobs that address specific tasks and assign varying levels of decision-making authority to those roles.

• Not the same thing: More tasks does not automatically mean more authority; these are two separate dimensions.
• The excerpt uses a convenience store example to illustrate four points on this spectrum.

Role	Tasks	Authority	Example responsibilities
Point A: Cashier/clerk	Few	Limited	Run cash register only
Point B: Shift leader	More	Limited	Run register, supervise clerk, stock shelves
Point C: Store manager	Many	More	Supervise all employees, inventory control
Point D: Franchise owner	Many	Most	Pricing decisions, subject to franchise contract constraints

📈 Complexity in larger organizations

• As organizations grow, managers become responsible for many employees who themselves have tasks and decision rights.
• Challenge: Achieving the right alignment between tasks and decision rights becomes increasingly difficult.
• Managers must balance their own decision authority with oversight of subordinates' decision rights.

⚠️ Don't confuse

The franchise owner (Point D) has "more authority" but is still constrained—subject to franchise contracts regarding brand selection, services offered, and supplier choice. Authority is not absolute even at the top.

🔀 Decision management vs. decision control

🔀 The four-step decision process

Organizations break down decision authority into a sequence:

1. Seek proposals to use resources (capital, labor) and structure contracts
2. Choose the appropriate proposal
3. Implement the decision
4. Monitor performance and reward accordingly

Decision management: Steps 1 and 2 (proposing and choosing)

Decision control: Steps 3 and 4 (implementing and monitoring)

🛡️ Why separation matters

• Core principle: Good governance practice separates decision management from decision control.
• Risk if not separated: Those making decisions may choose what is best for themselves rather than for the organization.
• Example: A board of directors (decision control) monitors the CEO (decision management) to ensure alignment with organizational interests.

🏛️ Hierarchical structure

• Separation creates a hierarchy: managers have decision management responsibilities in their own jobs AND decision control responsibilities over subordinates below them.
• Subordinates themselves have decision management responsibilities, creating layers of oversight.

🏢 Corporate governance structure

🏢 Three-level authority division

The top-level authority in a corporation is divided among:

1. Shareholders
2. Board of directors
3. Senior management

Each has distinct decision rights and responsibilities.

👥 Shareholder decision authority

Shareholders have the right to:

• Elect directors to the board
• Ratify the choice of independent auditor
• Vote on issues specified in charter/bylaws: mergers, additional stock issuance, changes in legal structure

Key characteristic: Shareholders are residual claimants in the event of dissolution, so voting control is often linked proportionally to ownership interest.

Process: Before annual meetings, shareholders receive information describing proposals requiring their vote; management (subject to board approval) makes recommendations.

🎯 Board of directors' role

The primary legal authority for managing a corporation lies with its board, although it may delegate much to professional managers.

Top-level decision control responsibilities:

• Oversee the corporation and ratify important decisions
• Recruit, interview, hire, evaluate, and compensate the CEO
• Approve large capital expenditures

Structure:

• Corporate boards generally have 9–12 directors
• Usually include several senior management members
• Use committee structure for nominating, compensation, audit, and other issues

Legal protection: Boards have legal indemnification from lawsuits provided they were acting prudently.

👔 CEO responsibilities

The CEO is the senior most individual in the corporation.

Core job: Focus on broad issues affecting the firm and develop, implement, and monitor its strategy.

Authority: The CEO delegates decision rights among senior level managers.

📊 Governance evaluation and challenges

📊 Three evaluation methods

Organizations are evaluated on their governance system through:

1. Motivation of value-maximizing decisions
2. Protection of assets from unauthorized use
3. Financial statements that comply with legal requirements

🔓 Separation of ownership and control

In publicly-traded corporations:

• Much ownership is by institutional investors who own small amounts of stock
• This creates separation of ownership and control

Contrast with small business:

• The manager owns and controls the business
• Has direct incentives to be very efficient with asset use

Implication: Dispersed ownership in public corporations requires stronger governance mechanisms because owners cannot directly monitor management.

💰 Benefits of corporate structure

• Access to equity capital: Through sales of stock to investors
• Lower cost of equity: Investors own diversified portfolios, so the risk premium for uncertainty in cash flows is less
• Contract center: The corporation serves as the center of many contracts with buyers, suppliers, employees, lenders, and other entities
• Specified decision rights: Contracts specify decision rights to each party

📜 Corporate charter and bylaws

The corporate charter includes the articles of incorporation and bylaws, which specify the rights of shareholders.

Articles of incorporation (broader framework):

• Type of organization
• Purpose of the business
• Number of shares (common and preferred stock)
• Number of directors and voting procedures
• Legal definition of membership
• Headquarters location
• Asset disposal upon liquidation

Bylaws (operational rules):

• Define purpose and geographical location
• Define who a member is and associated rights
• Specify member responsibilities and policy-setting role
• Address governance, committee structure, officers
• Cover disputes, membership termination, rule changes
• Specify meeting procedures

Note for cooperatives: Articles are filed with the state; amendments require membership vote and refiling—tedious and expensive, so only basic information is included.

🤝 Cooperatives as closely-held firms

🤝 Monitoring challenges in cooperatives

When there are many owners (as with cooperatives and mutuals), monitoring management actions is difficult.

Mechanisms owners use:

• Ensure outside audits are conducted
• Ensure internal controls are in place
• Attempt to ensure the board is composed of individuals with the best knowledge to monitor management

⚠️ Cooperative-specific limitation

Constraint: Cooperatives are limited in board composition because directors must come from members.

Implication: This restricts the pool of potential directors compared to investor-benefit firms that can recruit any qualified individual.

💬 Costs of collective decision-making

• Costs may be high if owners have differing opinions arising from different needs regarding the cooperative's products and services
• Key factor: The greater these differences, the greater the costs of collective decision-making

🔍 Don't confuse

Publicly-traded corporations vs. closely-held firms (cooperatives, family-owned firms): Both are corporations, but publicly-traded stock creates dispersed ownership and separation of ownership from control, while closely-held firms have concentrated ownership with different governance challenges (e.g., monitoring with many member-owners in cooperatives, or direct owner-manager control in family firms).

🧭 Overview

🧠 One-sentence thesis

Cooperatives are a type of closely-held, mutual-benefit firm where income distribution is tied to members' participation rather than ownership investment, and governance follows one-vote-per-member rather than proportion-of-investment.

📌 Key points (3–5)

• What closely-held means: cooperatives are not publicly traded; they are privately held firms like family-owned businesses or venture-capital-backed companies.
• Three firm types: non-profit (public benefit), mutual-benefit (cooperatives), and investor-benefit (corporations)—each differs in income distribution, governance, and taxation.
• How cooperatives differ from investor-benefit firms: income distribution is tied to use/participation, not ownership investment; owners have one vote per member, not votes proportional to shares.
• Common confusion: cooperatives are still firms with the same structure and property rights as corporations—they are a special case of a corporation, not a fundamentally different entity.
• Governance documents: cooperatives use articles of incorporation (basic, hard to change), bylaws (operating rules, updated periodically), and policies (board-level decisions, most flexible).

🏢 Closely-held firms and cooperatives

🏢 What closely-held means

• The excerpt contrasts publicly-traded investor-benefit firms with closely-held firms whose stock is not publicly traded.
• Examples of closely-held firms include:
  • Family-owned firms (large number in the food economy)
  • Non-family privately-held firms (shareholders are venture capital funds or management)
  • Families controlling governance through different classes of common stock with differing control rights
• Cooperatives fall into this closely-held category—they are not traded on exchanges.

🔗 Cooperatives as a special case of corporations

"Cooperatives are firms with the same structure and property rights as corporations or other types of firms."

• The excerpt emphasizes that cooperatives are not fundamentally different from corporations; they share the same basic structure.
• What makes them "special" is how the two property rights—control and residual claimant on earnings—are organized differently.
• Don't confuse: cooperatives are still firms; understanding why firms exist helps understand why cooperatives exist.

🧩 Three types of firms

🧩 Classification by benefit and governance

The excerpt presents three broad firm types:

Firm type	Who benefits	Income distribution	Governance	Taxation
Non-profit	Public	N/A (not designed to maximize profits)	Volunteer-based; no ownership	Income tax exempt
Mutual-benefit (co-ops & mutuals)	Members/users	Tied to participation/use	One vote per member	Taxed at firm level OR at member level on distributed income
Investor-benefit (C corps, LLCs)	Investors/shareholders	Tied to ownership investment	Governed by investors in proportion to ownership	Taxed at firm level AND at investor level (double taxation)

🎯 Key distinctions for mutual-benefit firms

• Income distribution: tied to members' participation through use of the cooperative, not to how much capital they invested.
• Governance: owners (who are users) generally have one vote per member, regardless of how much they use or invest.
• Taxation: income is taxed either once at the cooperative/mutual level, or the income distributed to members is taxed (not double-taxed like investor-benefit firms).
• Example: if a member uses the cooperative more, they receive a larger share of the income distribution—but they still have only one vote in governance decisions.

📜 Governance documents in cooperatives

📜 Articles of incorporation

• What they contain: the most basic information about the cooperative.
• Where filed: with the state where the cooperative is incorporated.
• How to change: any amendments must be voted on by the membership and refiled with the state.
• Why they're minimal: this process is "tedious and expensive in time and treasure," so only the most essential information is included.

📋 Bylaws

"Bylaws are the rules or policies that explain how any organization, including a cooperative, operates."

• What they define:
  • Purpose of the cooperative and geographical location
  • Who a member is and what rights/responsibilities are associated with membership
  • Role of membership in setting policies
  • Governance structure: voting on board of directors, committee structure, officers
  • Dispute resolution, membership termination, rule changes, meeting procedures
• Key difference from non-cooperative corporations: the nature of the business relationship between members and the cooperative is typically contained in the bylaws (not the case for non-cooperative corporations).
• How they relate to principles: bylaws and articles reflect cooperative principles, and legal statutes in each state reflect these principles.
• Update frequency: bylaws contain information that is "most likely to be updated periodically" (more flexible than articles).

📝 Policies

"A policy is a wise or expedient rule of conduct or management."

• Who creates them: boards of directors (chosen by the membership).
• Who votes on changes: just the board of directors, not the full membership (unlike articles or bylaws).
• Why they're flexible: policies must change with conditions to allow cooperatives to effectively fulfill their essential purposes.
• Where they live: in standard operating procedure documents (e.g., board policy manuals) or in board meeting minutes.
• Requirement: policies should reinforce or at least be compatible with the cooperative definition and principles.
• Don't confuse: policies are the most flexible governance document; bylaws require member vote; articles require member vote and state refiling.

🔍 Why understanding firm structure matters for cooperatives

🔍 Economic purpose and survival

• The excerpt states: "The survival of the cooperative depends upon its ability to achieve an economic purpose."
• Understanding ownership and management is crucial because these are "important aspects of corporate governance."
• Because cooperatives have a different organizational structure regarding control and residual claimant rights, it is especially important to understand these concepts for cooperatives.

🔍 Cooperatives as participatory organizations

• The excerpt introduces the USDA definition (though details are cut off):

  "user-owned and controlled business from which benefits are derived and distributed equitably on the basis of use."

• This implies:
  • Owners are users who are also customers
  • Users are also members and patrons
  • Economic benefits (from patronage—business done as a customer) are distributed proportionately based on that patronage
• The excerpt notes: "This gets complicated!"—highlighting that the dual role of member-owner-customer-patron is a key feature and potential source of confusion.

🧭 Overview

🧠 One-sentence thesis

Cooperative principles—rooted in 19th-century practices like democratic control and patronage-based benefit sharing—guide how cooperatives operate as participatory organizations that serve members' economic, social, and cultural needs while promoting competition through transparency and cost efficiency.

📌 Key points (3–5)

• What principles are: governing laws of conduct or fundamental truths that shape cooperative structure and are often reflected in state incorporation statutes.
• Democratic control variations: "one member, one vote" vs. voting proportional to patronage—both interpretations exist across different state laws and cooperative philosophies.
• Participation in benefits: members share economic benefits through patronage refunds, per unit retains, cost efficiencies, and access to closed supply/marketing channels.
• Common confusion: principles vs. flexibility—cooperatives follow general principles while maintaining substantial flexibility in practices to achieve economic objectives.
• Competitive yardstick role: cooperatives promote competition by being cost-efficient and transparent about costs, supplementing (not displacing) other business forms.

🏛️ Historical foundations

🏛️ Rochdale Equitable Pioneers Society (1844)

The Rochdale Equitable Pioneers Society was a multipurpose consumer cooperative formed in England in 1844 that sold consumer products to its members and sought to improve member welfare through mutual self-help.

Key operating features:

• Sold products (sugar, flour, oatmeal, butter, tallow candles) at market prices on a cash basis
• Limited transactions to members only (anyone could join regardless of political, religious, or other affiliation)
• Paid dividends from net income (surplus) in proportion to patronage business done with each member
• Used democratic voting (one-member, one-vote) for policy decisions
• Required equity capital contributions: initial investment plus weekly contributions until minimum threshold reached
• Started a library for member education
• Allowed women to join as members

Why it matters:

• All modern cooperatives derive their operating principles from these early practices
• Principles have been modified over time to allow proportional voting and use of credit
• Formed the foundation for ICA principles (referenced in the excerpt)

🏛️ Wholesale distribution network

• Other cooperatives formed a wholesale distribution network to supply consumer cooperatives
• Purpose: ensure food safety and prevent adulteration (food fraud was common in mid-19th century before standards and regulations)

🏛️ Fraternal benefit societies context

Historical role (late 19th century):

• First fraternal dates back to 1868; explosive growth in latter half of 19th century
• Organized around ethnicity, location, gender, professions, or combinations
• Around 1900: ~5 million people in ~600 fraternal organizations, providing roughly as much life insurance as commercial providers

Formal purposes:

• Offered life insurance in economically disadvantaged communities
• Provided early social safety net

Informal purposes (lodge system):

• Took collections for members in need
• Helped organized communities of similar people
• Places for recent immigrants to celebrate cultural heritage, find employment, socialize
• Contributed to bonding social capital and group identity development

Today: Thrivent Financial and Knights of Columbus are largest; faith-based bonds most prevalent in surviving societies.

🎯 Core principles and definitions

🎯 What a principle is

A principle is described as a governing law of conduct, a general or fundamental truth, or a comprehensive or fundamental law.

• Many state cooperative incorporation statutes reflect principles
• Laws are based on a state's view of appropriate principles
• Principles are generally applicable to all cooperatives and compatible with the cooperative definition

🎯 Wider cooperative definition

"An autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise."

Key features:

• Wider than U.S. Department of Agriculture definition
• Encapsulates social and cultural purposes (not just economic)
• Emphasizes voluntary association, joint ownership, democratic control

How to think about it:

• Consider how members participate in the cooperative
• Cooperatives and mutuals are participatory organizations

🎯 Democratic control interpretations

Interpretation	What it means	Where it applies
One member, one vote	Equal voting power regardless of patronage level	Some people's views and some state laws
Proportional to patronage	Voting power scales with use/business volume	Other people's views and other state laws

Don't confuse: Both are considered forms of "democratic control"—the principle is widely supported, but its implementation varies by jurisdiction and cooperative philosophy.

💰 Participation in benefits

💰 Expected benefit sharing

Customers who use the cooperative or mutual are expected to share in the economic benefits derived from their business with it.

Types of economic benefits:

1. Cost efficiency and bargaining power

   • Vertical extension of farming operation or household through the cooperative
   • Embedded in business strategies to improve farmer's income by lowering production and transaction costs
   • Improve market power and lower variability of annual net farm income

2. Access to closed channels

   • Opportunity to buy from closed supply channel
   • Opportunity to sell to closed marketing channel
   • Supply/marketing channels are closed because cooperatives supply products/services only to members or market only members' products

3. Competitive market benefits

   • Benefits arising through the cooperative's competitive yardstick role

4. Direct income distributions

   • Most tangible benefit for most consumers and producers
   • Opportunity to share in distributions based on proportional share of business done as a member

💰 Patronage refunds and per unit retains

Patronage refunds or per unit retains: distributions of income from the cooperative based on the proportional share of business done as a member.

• Why customers are called "patrons": they do business on a patronage level
• Doing business on a patronage level implies closed supply/marketing channels

Non-member customers:

• A cooperative may have customers without membership
• Reasons: they don't legally qualify (e.g., government entity) or don't wish to have membership

💰 Value-added strategies

• Move to closer supply chains built on market or production contracts
• Greater differentiation by cooperatives
• Business strategies to add value to farmer's products

🏁 The competitive yardstick concept

🏁 Main tenets

The cooperative as a competitive yardstick is a well-known analogy for justifying why cooperatives are often thought of as promoting competition.

A. Democratic philosophy with informed participation

• Must establish organizations with bottom-up democratic cooperative philosophy
• Requires informed and participating membership
• Difficult to achieve because it involves collective action, but has long-run benefits

B. Integral segment, not replacement

• Cooperatives are an integral segment of existing capitalistic systems
• Designed not to displace other types of businesses but to supplement them as an alternative form

C. Efficiency through transparency

• Help build efficiency of total economic systems or value chains
• Mechanism: transparency regarding costs

D. Minimum market share

• Should control a minimum share of the commodity, supply, or service market segment
• Purpose: achieve economies of size and scale

E. Keeping others competitive

• Help keep other forms of business competitive by being as cost-efficient as possible

F. Preserving individual freedom

• Should preserve individual producer freedom of decision making
• Rationale: the cooperative is a vertical extension of the farming enterprise

G. Organized when needed

• Should be organized only if competitive influence is necessary
• Reasons: the market has failed OR countervailing bargaining power is needed

🏁 Why it promotes competition

• Cooperatives don't displace other businesses; they supplement them
• Transparency about costs helps build efficiency across entire value chains
• Cost efficiency keeps other business forms competitive
• Example: A cooperative's transparent cost structure can reveal inefficiencies in the market, prompting other businesses to improve their operations.

🔄 Flexibility within principles

🔄 Balancing principles and practice

Substantial flexibility exists in following practices that help achieve the objectives of the business while simultaneously remaining compatible with the cooperative definition, principles, and policies, and recognizing the need to achieve an economic purpose.

Key balance:

• Guidelines (cooperative principles) are generally applicable to all cooperatives
• Compatible with the cooperative definition
• Compatible with ability to provide benefits desired by members who are customers
• Must recognize the need to achieve an economic purpose

Don't confuse: Having principles doesn't mean rigid uniformity—cooperatives maintain substantial flexibility in how they implement practices to meet their specific objectives while staying true to core principles.

🔄 Roots and evolution

• Many principles have roots in early cooperatives formed in the United Kingdom in early 19th century
• Principles have been modified over time (e.g., to allow proportional voting and use of credit)
• State laws reflect different interpretations of the same principles

🏥 Example: Health care cooperatives

🏥 Structure and purpose

Health care cooperatives are a lot like mutual insurance firms in that their objective is to pool risk across its members and provide health care with lower fees.

Examples mentioned:

• HealthPartners
• Group Health Cooperative

How they work:

• Pool risk across members (similar to mutual insurance)
• Provide health care with lower fees
• Demonstrate cooperative principles applied to health care sector

🧭 Overview

🧠 One-sentence thesis

Cooperatives provide economic benefits to members primarily through patronage refunds or per unit retains based on the proportional share of business each member does with the cooperative.

📌 Key points (3–5)

• Most tangible benefit: members share in income distributions (patronage refunds or per unit retains) based on their proportional business with the cooperative.
• Why customers are called patrons: the cooperative operates on a patronage level, meaning supply or marketing channels are closed to members only.
• Participation in ownership: members accumulate equity investment, most commonly through retention of patronage refunds or per unit retains rather than direct share purchases.
• Common confusion: not all customers are members—some may not legally qualify (e.g., government entities) or may not wish to join, even though they use the cooperative.
• Broader benefits: include efficiency gains, bargaining power, closed supply/marketing channels, and the competitive yardstick effect on markets.

💰 Economic benefits of cooperative membership

💵 Patronage refunds and per unit retains

Patronage refunds or per unit retains: distributions of income from the cooperative based on the proportional share of business done as a member.

• This is the most tangible economic benefit for most members.
• The distribution is proportional: the more business a member does with the cooperative, the larger their share of the refund.
• Example: A farmer who sells more product through a marketing cooperative receives a larger patronage refund than one who sells less.

🔒 Closed supply and marketing channels

• Cooperatives operate on a patronage level, meaning they supply products/services to only customers using the cooperative or market products/services only from these users.
• This closed-channel structure is why customers are called patrons.
• The closure creates exclusive access for members to the cooperative's supply or marketing infrastructure.

🎯 Other strategic benefits

The excerpt lists several additional benefits embedded in business strategies:

• Efficiency or bargaining power through vertical extension of farming operations or households
• Opportunity to buy from closed supply channels or sell to closed marketing channels
• Competitive yardstick benefits that improve overall market competitiveness
• Strategies designed to improve farmer income by:
  • Lowering production and transaction costs
  • Improving market power
  • Reducing variability of annual net farm income
  • Adding value through product differentiation

👥 Who participates and how

🎫 Members vs non-member customers

Not all customers are members:

Type	Characteristics	Example from excerpt
Members	Legally qualify and choose to join; receive patronage refunds	Farmers in a marketing cooperative
Non-member customers	Use the cooperative but don't have membership	Government entities (don't legally qualify) or customers from other regions who don't wish to join

• Don't confuse: using a cooperative doesn't automatically make someone a member—membership requires legal qualification and voluntary participation.

🏦 Participation in ownership

Equity holders: customers who are members and have ownership in the cooperative through equity investment.

Two main ways members accumulate equity:

1. Direct investment: purchasing equity shares upfront
2. Retained patronage refunds: the most common method—patronage refunds or per unit retains are retained by the cooperative in a given year and may be redeemed in the future

• The board of directors sets policies governing when and how retained equity can be redeemed.
• This retention mechanism means members build ownership gradually through their ongoing business with the cooperative.
• Example: A member receives a patronage refund, but instead of receiving all cash immediately, part is retained as equity investment in the cooperative and redeemed later according to board policy.

🧭 Overview

🧠 One-sentence thesis

Members of a cooperative are expected to own equity in the organization, which they accumulate primarily through retained patronage refunds rather than direct share purchases, and this equity can only be properly valued upon liquidation.

📌 Key points (3–5)

• What ownership means: members hold equity in the cooperative, making them equity holders rather than just customers.
• How equity is accumulated: most members build equity through retention of patronage refunds or per-unit retains over time, not through direct purchase of shares.
• When equity can be valued: equity can only be properly valued upon liquidation, an outcome members do not intend as long as the cooperative serves its purpose.
• Common confusion: stock vs. nonstock cooperatives—stock cooperatives divide capital into shares, while nonstock cooperatives use membership certificates.
• Redemption timing: retained equity may be redeemed in the future according to policies set by the board of directors.

💰 What member ownership means

💰 Equity ownership by members

As members, customers who use the cooperative are expected to have ownership in the cooperative. In economic terms, this means that the equity of the cooperative is owned by the members.

• Members are not just users of services; they are equity holders.
• The cooperative's capital belongs to the people who patronize it.
• This ownership distinguishes cooperatives from investor-owned firms where equity is held by outside shareholders.

🔄 Why customers are called equity holders

• The excerpt explicitly states that "customers are often called equity holders."
• This reflects the dual role: using the cooperative's services and owning a stake in the organization.
• Example: a customer who buys from a food cooperative is simultaneously an owner of that cooperative.

📈 How members accumulate equity

📈 Two paths to equity investment

The excerpt describes two ways members can invest equity:

Method	Description	Prevalence
Direct investment	Purchase of equity shares upfront	"Easiest way to think about" but less common
Retained earnings	Retention of patronage refunds or per-unit retains	"Most members accumulate equity" this way

🔁 Patronage refunds and per-unit retains

• Most common method: members build equity over time through amounts retained from their patronage.
• These retains happen "in a year" and accumulate over multiple years.
• The cooperative holds back a portion of what would otherwise be returned to members, converting it into equity.
• Example: a member does business with the cooperative; instead of receiving the full patronage refund in cash, part is retained as equity in the member's name.

🕐 Redemption policies

• Retained equity "may be redeemed in the future."
• Redemption is "subject to policies set by the board of directors."
• This means members cannot necessarily withdraw their equity on demand; the board controls timing and conditions.

🏦 Equity valuation and liquidation

🏦 When equity can be properly valued

The equity can only be properly valued upon liquidation, an outcome the cooperative members do not intend to have happen as long as the cooperative is achieving its economic purpose and satisfying its customers.

• Key limitation: true equity value is knowable only at liquidation.
• While the cooperative operates, equity value remains uncertain or estimated.
• This differs from publicly traded stock, which has a market price at any moment.

🎯 Members' intentions

• Members do not intend liquidation to happen.
• The condition for avoiding liquidation: the cooperative continues "achieving its economic purpose and satisfying its customers."
• This creates a tension: equity value is clearest precisely when members don't want it to be realized.
• Example: as long as the cooperative serves members well, they prefer it to continue operating, even though this means their equity stake lacks a definitive market value.

🏛️ Stock vs. nonstock cooperatives

🏛️ Stock cooperatives

In a stock cooperative, capital is divided into shares of common stock owned by members, which is specified in the articles of incorporation.

• Capital is structured as shares of common stock.
• Ownership is documented in the articles of incorporation.
• Some stock cooperatives also issue preferred stock and other equity forms like membership certificates.
• These additional equity instruments "may or may not be owned by members."

🔒 Transfer restrictions

• The articles of incorporation "do not allow stock transfer to non-qualifying member-patrons."
• This keeps ownership within the membership base.
• Often "one share of common stock is...a requirement for membership with small par value."
• Example: to become a member, you must buy one share, but that share has a low nominal value and cannot be sold to outsiders.

📜 Nonstock (membership) cooperatives

A nonstock cooperative, called a membership cooperative, uses membership certificates that are given to members upon payment of membership fees.

• Instead of stock shares, these cooperatives issue membership certificates.
• Certificates are obtained by paying membership fees.
• Some nonstock cooperatives created capital certificates that could be "sold directly to members or issued as a patronage refund."
• Don't confuse: capital certificates in a nonstock cooperative serve a similar function to shares in a stock cooperative, but the legal structure differs.

🕰️ Historical context

• Before the Capper-Volstead Act of 1922, cooperatives lacked formal legal recognition.
• Various state statutes created different legal structures "to get around efforts by those who were against the formation of cooperatives."
• The stock vs. nonstock distinction emerged from these early legal workarounds.

🗳️ Participation in control

🗳️ How customers participate in governance

Customers participate in control by setting policies, including the governance structure of the cooperative.

• Members don't just own equity; they also set policies.
• This includes determining "the governance structure of the cooperative."
• Policies are formalized in the bylaws of the organization.

📋 What bylaws include

The excerpt lists three key elements embedded in bylaws:

1. Classes of membership and qualifications: who can be a member and what types of membership exist.
2. Governance system: the role and responsibilities of the board of directors and how they are elected.
3. Rules for certain actions: procedures for annual meetings, bylaw amendments, or dissolution.

🎫 Voting members

• The excerpt mentions "members who are eligible to vote are called voting" (text cuts off).
• This implies not all members may have voting rights; some membership classes might be non-voting.
• Example: a cooperative might have full members who vote and associate members who do not.

🧭 Overview

🧠 One-sentence thesis

Participation in control means that cooperative customers set policies and governance structures through voting mechanisms that differ fundamentally from investor-owned corporations by emphasizing democratic member control rather than equity-based voting.

📌 Key points (3–5)

• What control means: members set policies embedded in bylaws, including membership classes, governance systems, and rules for key actions like annual meetings or dissolution.
• Who participates: voting members who have been accepted by the board of directors; membership implies application and acceptance, not just purchase.
• How it differs from corporations: cooperatives typically use one member, one vote (democratic control), while non-cooperative corporations base voting on investment ownership (share proportion).
• Common confusion: cooperatives vs loyalty programs/buying clubs—loyalty programs provide economic benefits but members do not participate in control or ownership; cooperative membership requires participation in all three roles (user-owner, user-control, user-benefits).
• Director selection difference: cooperative directors must be chosen from among customer-members, often using geographic districts, with individual director votes rather than slate voting.

🗳️ How members exercise control

🗳️ Policy-setting through bylaws

Customers participate in control by setting policies, including the governance structure of the cooperative. These policies are embedded in the bylaws of the organization.

The bylaws specify three key areas:

1. Classes of membership and their qualifications
2. The governance system, including the role and responsibilities of the board of directors and how they are elected
3. Rules for certain actions such as annual meetings, bylaw amendments, or dissolution

• Control is not day-to-day management; it is structural decision-making about how the cooperative operates.
• Members shape the framework within which the cooperative functions.

👥 Voting membership

• Voting members: members who are eligible to vote.
• Membership requires application and acceptance by the board of directors, not just being a customer.
• Different cooperatives have different membership rules, but generally maintain a low threshold on membership qualifications.
• Some customers do business with the cooperative as non-members and do not participate in the three roles (ownership, control, benefits).

🔑 Evidence of control

Control is typically evidenced by:

• Ownership of a share of common stock (in stock cooperatives), or
• A certificate of membership (in membership or non-stock cooperatives)

Members use a voting process to:

• Select directors for the board
• Make changes in articles or bylaws

⚖️ Democratic control vs investor control

⚖️ One member, one vote principle

In many cases, cooperatives use a one member, one vote principle, which is often called democratic control.

Organization type	Voting basis	Principle
Cooperative	One member, one vote	Democratic control—each member has equal say regardless of investment size
Non-cooperative corporation	Investment ownership (share proportion)	Votes linked with share of equity—larger investors have more votes

Don't confuse: The amount of equity a member has accumulated (through patronage refunds or direct investment) does not determine voting power in a cooperative; each member gets one vote.

🎯 Joint participation requirement

The U.S. Department of Agriculture defines three principles of cooperation:

• User-owner: users must own and finance the cooperative
• User-control: users are responsible for the control of the cooperative
• User-benefits: users benefit from their use of the cooperative

Note that these are all joint decisions. That is, becoming a member of a cooperative to participate in the benefits also means participation in ownership and control.

• You cannot participate in benefits without also participating in ownership and control.
• This bundling distinguishes cooperatives from other business models.

🏛️ Director selection in cooperatives

🏛️ Key differences from C corporations

C corporation director selection:

• Any natural person can be selected
• Directors chosen at-large based on skills (accounting, finance, governance, strategy, etc.)
• Shareholders vote based on proportion of shares
• Votes cast for entire slate of directors
• Management members (CEO, senior leaders) often serve on board

Cooperative director selection:

• Directors must be selected from customers who are members (not any natural person)
• Often use geographic districts based on population of members
• Members vote for each director individually, not as a slate
• Some cooperatives use informal policies where directors represent a commodity or line of business
• Smaller cooperatives may elect directors at-large

📍 Geographic representation

• Cooperatives often create districts based on the population of members.
• Nominating committees consider the pool of directors in each geographical district.
• This ensures representation across the membership base, not just skill sets.

Example: A regional agricultural cooperative might divide its service area into five districts, with one director elected from each district to ensure all geographic areas have representation on the board.

🔍 Nominating process

• Some cooperatives use similar tools as corporations to identify suitable candidates.
• However, the pool is limited to member-customers, not external experts.
• Board evaluations and nominating committees help assess needs and identify candidates within the membership.

🚫 What participation in control is NOT

🚫 Not loyalty programs

Cooperatives and mutuals are not the same as loyalty programs because customers or users of the loyalty program do not participate in control or ownership.

Loyalty programs (trading stamps, frequent flier miles, credit card points, hotel rewards):

• Customers receive economic benefits
• Benefits are NOT linked with profitability or earnings of the business
• No participation in control or ownership

🚫 Not buying clubs

Membership clubs (Amazon Prime, Sam's Club, Costco):

• Annual membership fee entitles members to shop or use services
• Members receive economic benefits (free delivery, access to store)
• Benefits are NOT linked with control, ownership, and earnings

Key distinction: In loyalty programs and buying clubs, members receive benefits but do not participate in the same way as cooperative members. Cooperative membership requires participation in all three roles: ownership, control, and benefits.

Example: A Costco member pays an annual fee and gets access to wholesale prices, but cannot vote on board members, does not own equity that accumulates through patronage, and does not share in the cooperative's earnings—they are a customer, not a member-owner.

🧭 Overview

🧠 One-sentence thesis

Cooperatives are participatory organizations where users simultaneously own, control, and benefit from the enterprise, distinguishing them from loyalty programs and enabling collective action to solve economic problems that members cannot address individually.

📌 Key points (3–5)

• Three principles of cooperation: user-owner, user-control, and user-benefits—all three roles are joint and inseparable.
• Democratic control: cooperatives use one member, one vote (not votes based on investment size), and members elect directors individually rather than as a slate.
• Common confusion: cooperatives vs loyalty programs/buying clubs—loyalty programs provide economic benefits but members do not participate in ownership or control.
• Formation rationale: cooperatives form when collective action creates unique benefits for members at lower cost than individual "Make or Buy" decisions.
• Director selection difference: cooperative directors are chosen from the membership (often by geographic district), unlike corporations that select directors at-large based solely on qualifications.

🤝 The three principles of cooperation

👥 User-owner

• Members must own and finance the cooperative.
• Ownership is evidenced by a share of common stock (stock cooperative) or a certificate of membership (non-stock cooperative).
• This is not passive ownership; it is tied to active use of the cooperative.

🗳️ User-control

• Members are responsible for control of the cooperative.
• Democratic control: one member, one vote principle.
• Members vote to select directors and make changes to articles or bylaws.
• Don't confuse: this differs from non-cooperative corporations where votes are proportional to investment ownership (shares held).

💰 User-benefits

• Members benefit from their use of the cooperative.
• Benefits are linked to patronage, not just ownership.
• Joint decision: becoming a member to receive benefits also means participating in ownership and control—you cannot have one without the others.

🚫 Non-members and free riders

• Some customers do business with the cooperative without being members.
• Boards recognize these are "free riders" who benefit from the cooperative's market presence without participating.
• Cooperatives use pricing strategies to discourage non-member business; the percentage of non-member business is typically quite small.

🏛️ Governance and director selection

🗳️ How cooperatives elect directors

Cooperatives follow similar practices to corporations but with one critical difference: directors are selected from the membership.

Aspect	Corporations	Cooperatives
Director pool	Any natural person; at-large selection	Must be members/customers
Geographic consideration	Not typically used	Often use districts based on member population
Voting method	Vote for entire slate of directors	Vote for each director individually
Vote weight	Proportional to shares owned	One member, one vote

📍 Geographic districts

• Many cooperatives create districts based on the population of their members.
• Nominating committees consider the pool of directors within each geographical district.
• Some cooperatives with smaller geographic bases elect directors at-large.
• In cooperatives with broader purposes, boards may informally ensure a director represents a commodity or line of business.

🎯 Director qualifications

• Boards desire core knowledge areas: accounting, finance, governance, human resources, or strategy.
• Diversity considerations include age, gender, and background.
• Some cooperatives have retirement policies (e.g., directors must retire at age 72).
• Board evaluations help assess performance.

🆚 Cooperatives vs loyalty programs and buying clubs

❌ What cooperatives are NOT

Loyalty programs and buying clubs are not cooperatives because customers do not participate in control or ownership.

🎁 Loyalty programs

• What they offer: economic benefits based on volume (trading stamps, frequent flier miles, credit card points, hotel rewards, rebates).
• What they lack: benefits are not linked with profitability, earnings, control, or ownership of the business.
• Examples mentioned: tobacco company trading stamps, General Mills box tops, airline programs, hotel programs, fast food rewards, electronic coupons via apps.

🏪 Buying clubs

• What they offer: membership with an annual fee entitles members to shop or use services (e.g., free delivery).
• What they lack: members do not participate in control, ownership, or earnings.
• Examples mentioned: Amazon Prime, Wal-Mart's Sam's Club, CostCo.

🔑 The key distinction

Members of loyalty programs and clubs receive economic benefits, but these are not linked with control, ownership, and earnings—the three inseparable principles of cooperation.

🌱 Formation and purpose of cooperatives

🤝 Why cooperatives form

• Collective action: individuals come together to solve a common problem.
• Economic rationale: cooperatives work best when collective action creates benefits unique to members, and when assigning ownership rights to users results in the lowest costs for the "Make or Buy" decision.
• Social entrepreneurship: some cooperatives help solve social, cultural, or economic issues.

🎯 Economic and social purposes

• Primary purpose: most cooperatives are formed to address an economic objective.
• Social dimension: there is often a social purpose linked to membership (similar to country clubs or professional associations).
• Social purposes may be based on ethnicity, geography, or religion.
  • Example: rural utility cooperatives formed based on geography.
  • Example: credit unions formed around common bonds (geography, religion, ethnicity).
  • Example: food cooperatives attract members who want to support locally-owned businesses and community involvement.
• Key principle: the social purpose is best met by ensuring the cooperative succeeds in its economic purpose—cooperatives are a means to an end, which is meeting user needs.

📈 Historical context

• Many farm cooperatives were formed by individuals seeking reform in the agrarian economy.
• Associated with movements: Populist, Farm Bureau, Farmers Union, Grange, or Equity.
• Positioning: cooperatives that quickly understand their commonality of purpose (economic) and position themselves accordingly create long-lasting value.

🛠️ Types of cooperatives

🛒 Purchasing/supply cooperatives

• Purpose: obtain economic advantages of purchasing supplies or providing services in bulk; pass volume discounts to members.
• Vertical integration: members are vertically integrated "backwards" through the cooperative.
• Example: farmers forming a cooperative to finance agronomy equipment or purchase crop nutrients at favorable prices because individual volumes are too small.
• Example: consumers purchasing organic or locally-grown food through a food cooperative.
• Example: providing services like electricity or credit more cost-effectively than individuals could obtain on their own.

🏬 Wholesaling cooperatives

• Purpose: independently-owned stores negotiate better prices and purchase larger volumes than they could individually.
• Examples mentioned:
  • Ace Hardware and True Value Hardware (hardware stores)
  • United Foodservice Purchasing Cooperative (Yum! Brands franchise operators)
  • Independent Purchasing Co-operative (Subway franchisees)
  • Associated Wholesale Grocers and Wakefern Foods (independent grocers)

📢 Marketing agency-in-common

A cooperative whose members are other cooperatives who have joined to jointly market the products of all members.

• Rationale: the costs of each co-op individually developing and marketing an industrial or consumer product can be significant.
• Examples: sugar beet co-products, dairy products.

🤝 Bargaining cooperatives

• Purpose: negotiate with processors and other first handlers for a collective price and terms of trade for members.
• Who they represent: contract growers selling to processors, or growers performing production management for corporate integrators.
• Examples mentioned:
  • Many dairy cooperatives bargaining in milk marketing orders
  • California Canning Peach Association
  • Prune Bargaining Association
  • Walnut Bargaining Association
  • Olive Council Growers Council of California
  • California Tomato Growers Association
  • Raisin Bargaining Association

📦 Marketing cooperatives

• Purpose: enable members to market their output and obtain premiums associated with collective marketing.
• Members are vertically integrated "forward" through the cooperative.

🧭 Overview

🧠 One-sentence thesis

Cooperatives are formed through collective action to solve common economic problems by vertically integrating backward or forward, enabling members to obtain volume advantages and manage risks they cannot handle individually.

📌 Key points (3–5)

• Why cooperatives form: to solve common problems through collective action that provides unique benefits only to members, typically when the costs of the Make or Buy decision are lowest if ownership rights are assigned to users.
• Economic vs social purpose: most cooperatives address an economic objective, but often include a social or cultural purpose (ethnicity, geography, religion) that motivates membership.
• Vertical integration logic: members integrate backward (purchasing supplies in bulk) or forward (marketing output collectively) to obtain volume discounts, premiums, and risk management they cannot achieve alone.
• Common confusion: cooperatives are not the same as loyalty programs or buying clubs—members of loyalty programs receive economic benefits but do not participate in control, ownership, or earnings linked to profitability.
• Competitive yardstick role: as members integrate through the cooperative, it becomes a competitive yardstick in the industry, providing bargaining power and market discipline.

🚫 What cooperatives are NOT

🚫 Loyalty programs vs cooperatives

The excerpt emphasizes a key distinction:

Feature	Loyalty programs / Buying clubs	Cooperatives
Economic benefits	Yes (rebates, points, discounts)	Yes (patronage refunds, earnings)
Control participation	No	Yes
Ownership participation	No	Yes
Link to profitability/earnings	No	Yes

• Loyalty programs include trading stamps, frequent flier programs, credit card points, hotel rewards, fast food rewards, and electronic coupons via apps.
• Buying clubs like Amazon Prime, Sam's Club, and Costco charge membership fees for shopping access or services (e.g., free delivery).
• Members of these programs are "not the same as being a member of a cooperative because members do not participate in the same way."
• Example: A customer with a frequent flier program earns points based on volume but has no say in airline decisions and does not share in airline profits—this is fundamentally different from a cooperative member who votes on the board and receives patronage refunds.

🎯 Non-member business

• Some cooperatives allow non-members to do business with them, but this percentage is usually kept small.
• Boards recognize these non-members as "free riders" who benefit from the cooperative's market presence without being members.
• Cooperatives use pricing strategies to discourage producers from remaining non-members.

🌱 Why and how cooperatives form

🌱 Collective action to solve common problems

Cooperatives are formed through collective action by individuals to solve a common problem.

• Cooperatives work best when the solution provides benefits only to members and when these benefits are unique.
• The cooperative is often formed because the costs of the Make or Buy decision are lowest if ownership rights are assigned to those who use the cooperative as a customer.
• Some cooperatives may be examples of social entrepreneurship, helping solve social, cultural, or economic issues.

💼 Economic purpose as primary driver

• Most cooperatives are formed to address an economic objective or purpose.
• The economic purpose is what enables the cooperative to succeed and meet member needs.
• Example: Farmers cannot individually finance agronomy equipment or purchase crop nutrients at favorable prices due to small volumes—forming a cooperative solves this problem through collective purchasing power.

🤝 Social and cultural purposes

• Because cooperatives are composed of members, there is often a social purpose many members desire.
• This is similar to why people join country clubs or professional trade associations.
• Social and cultural purposes are often linked with formation and may include:
  • Ethnicity: fraternal benefit societies often had common bonds of religion or ethnicity
  • Geography: rural utility cooperatives were formed based on geographic location
  • Religion: credit unions and fraternal societies formed around common bonds
  • Community values: food cooperatives often include members who want to patronize locally-owned businesses and be part of their community
• The excerpt emphasizes: "The social purpose of cooperatives can best be met by ensuring that the cooperative understands and succeeds in its economic purpose."

🎯 Commonality of purpose

• Cooperatives that quickly understand their commonality of purpose (based on economic purpose for members) and position themselves on that purpose create long-lasting value.
• Many cooperatives were formed by a desire to improve something—for example, farm cooperatives associated with Populist, Farm Bureau, Farmers Union, Grange, or Equity movements wanted reform in the agrarian economy.

🔗 Vertical integration through cooperatives

⬅️ Backward integration (supply side)

Cooperatives enable members to integrate "backwards" to obtain inputs and services:

• Purchasing supplies in bulk: obtain economic advantages of volume discounts and pass them along to members.
• Services: electricity, credit, internet, recordkeeping, and milk testing are more cost-effective for a cooperative to provide than for individual consumers or producers to obtain on their own.
• Example: Farmers may not be able to finance agronomy equipment for seasonal crop protectant application or purchase crop nutrients at favorable prices individually—a cooperative obtains economic benefits of purchasing size and scale.
• Example: Consumers may wish to purchase organic or locally-grown food products through a food cooperative.
• Electric utility cooperatives were developed in the 1930s to provide electricity to rural areas; in the 21st century many provide internet capability.
• Housing cooperatives own land, facilities, and common areas; members buy shares representing ownership interest in units and pay monthly fees for operating costs and capital investments.

➡️ Forward integration (marketing side)

Cooperatives enable members to integrate "forward" to market output:

• Marketing output: enables obtaining premiums associated with volume.
• Value-added processing: cooperatives can construct storage for feed grain or oilseeds, or process raw materials (e.g., corn-ethanol cooperatives, soybean crushing plants for oil and meal).
• Marketing information: supply variables (bearing age of trees, tree pull-outs and replantings, varietal selection) and adoption rates for mechanization are useful for bargaining.
• Example: A corn-ethanol cooperative allows farmers to market their corn collectively; a soybean crushing plant processes soybeans into oil and meal products.

🤝 Specialized cooperative types

Marketing agency-in-common:

A cooperative whose members are other cooperatives who have joined to jointly market the products of all members.

• Rationale: costs of each co-op individually developing and marketing industrial or consumer products can be significant.
• Examples: sugar beet co-products, dairy products.

Bargaining cooperatives:

Negotiate with processors and other first handlers for a collective price and terms of trade for their members.

• Represent contract growers selling to processors or growers performing production management for corporate integrators.
• Examples: many dairy cooperatives in milk marketing orders, California Canning Peach Association, Prune Bargaining Association, Walnut Bargaining Association, Olive Council Growers Council of California, California Tomato Growers Association, Raisin Bargaining Association.

⚖️ Make-or-Buy Decision clarification

• The excerpt notes that "strictly speaking, members of cooperatives are not vertically integrated through a cooperative because there is no common ownership of the farm or household by the cooperative."
• Nevertheless, there is collective ownership of the cooperative and alignment of the cooperative business model with the consumer or farmer.
• Don't confuse: This is not true vertical integration (no common ownership of member businesses), but it functions similarly through collective ownership and aligned interests.

🛡️ Risk management and competitive advantages

🛡️ Pooling and managing risk

Many agricultural marketing cooperatives were formed to help pool risk from all producers and manage it within the cooperative:

• Marketing year concept: In the northern hemisphere, a marketing year generally starts September 1 or October 1 and finishes 12 months later.
• The crop is harvested in September or October; over the course of the year, the cooperative discovers the crop's value.
• Because many agricultural products are perishable, price is always lowest at the beginning when supplies are greatest and tends to increase as supply decreases and more information (e.g., quality) becomes known.
• The cooperative bears the price and quality risk by purchasing farmers' output at the beginning of the marketing year and paying a competitive price at harvest.
• Members finance the capital needed for storage and processing assets to add value throughout the marketing year.
• Example: Most farmers cannot manage this price risk on their own—they manage it through membership in a cooperative, obtaining additional marketing margin and increased bargaining power.

💪 Bargaining power and countervailing force

• Cooperatives provide increased bargaining power to countervail the bargaining power held by buyers.
• Without a cooperative, buyers could purchase crops at their lowest price at harvest when supplies are greatest.
• The cooperative manages crop inventory throughout the year to obtain more favorable prices.
• As consumers or farmers integrate backwards or forwards, the cooperative becomes the competitive yardstick in an industry.

🎯 Key takeaways for formation

🎯 Means to an end

• Cooperatives are mechanisms to collectively organize for mutual benefit.
• They are a means to an end, which is meeting the needs of users.
• The cooperative should be positioned on its economic purpose to create long-lasting value.

🎯 Volume advantages

In a broad sense, the cooperative is able to:

• Obtain volume discounts and pass those discounts back to members (backward integration), OR
• Obtain volume premiums and market members' products throughout the marketing year to obtain better prices for larger volumes of similar quality (forward integration).

🎯 When cooperatives work best

Cooperatives work best when:

1. The solution created by collective action leads to benefits provided only to members
2. These benefits are unique
3. The costs of the Make or Buy decision are lowest if ownership rights are assigned to users
4. There is a clear commonality of purpose based on economic objectives

🧭 Overview

🧠 One-sentence thesis

Cooperatives implement the "service at cost" principle by competing aggressively in the marketplace to maximize profits and then distributing those profits back to patron-owners through patronage refunds and equity redemptions.

📌 Key points (3–5)

• Service at cost does not mean zero profit: cooperatives should be as profitable as possible in competitive markets, then distribute profits to patrons rather than setting prices to eliminate profit opportunities.
• Members participate through benefits and ownership: these decisions are interrelated and impact both the income statement and balance sheet, requiring integrated management.
• Equity creation and destruction: cooperatives uniquely create equity when paying patronage refunds in common stock and destroy equity when redeeming previously issued equity for cash.
• Member heterogeneity: patron-owners have different interests based on their life cycles (age, business expansion/contraction), so distribution strategies must balance short-run and long-run benefits.
• Common confusion: "service at cost" vs. competitive pricing—cooperatives should price competitively and make profits, not operate at break-even; the "at cost" principle is implemented through profit distribution, not pricing.

💰 The service-at-cost principle

💰 What service at cost actually means

Service or operation at cost: a core principle of the cooperative and mutual business model.

• Not setting prices to eliminate profit opportunity.
• Instead: be competitive, make as much profit as possible, then distribute profits and residual cash to patron-owners.
• The principle is implemented through distribution, not through pricing strategy.

🎯 How it works in practice

• Cooperatives must be competitive like any business and aligned on customer needs.
• They operate in capitalistic and highly competitive market economies.
• Many cooperatives exist to help producers achieve economies of scale and increased bargaining power in purchasing inputs and marketing commodities.
• The same applies to consumer cooperatives and mutual insurance firms.

Example: A farm supply cooperative prices products competitively in the market, generates profit, then returns that profit to farmer-members through patronage refunds—this implements "at cost" without sacrificing competitiveness.

🔄 Distribution mechanisms

Patron-owners receive what is left over through:

• Cash patronage payments (immediate redemption)
• Cash equity redemption payments
• Cash payments of net marketing proceeds

👥 Member participation and life cycles

👥 Heterogeneous member interests

• Members have different interests due to their unique places in business and personal life cycles.
• A member's life cycle encompasses their use as a customer of the cooperative.
• This differs as they age and begin, expand, or contract their business or household.
• Distribution strategies must maximize long-run benefits while accounting for this heterogeneity.

🌾 The agricultural member perspective

Members of agricultural cooperatives are unique:

• They typically seek to remain farmers in their own geography.
• A member will not typically sell their farm and move to a different region to begin farming again.
• Members utilize cooperatives to receive goods and services at lower cost than they could achieve independently.
• Many remain in multi-generational farming families and patronize the cooperative over generations.

Implication: Cooperatives should align on member needs and help make them profitable and cost-efficient so they can achieve the goal of remaining farmers in that geography.

🔗 Cooperative as extension of patron business

A cooperative can be viewed from two perspectives:

1. Extension of patron's business: an extension of the farm or household
2. Independent firm: an entity that attempts to prosper in a market economy

Both perspectives are important for strategy and decision-making.

📊 Balance sheet management

📊 Unique equity dynamics

Cooperatives have a distinctive equity mechanism:

• Create equity: when paying patronage refunds in the form of common stock
• Destroy equity: when redeeming previously issued equity for cash

This requires active balance sheet management when making income distribution and equity redemption decisions.

🛡️ Positioning for sustainability

A cooperative must position and protect the business for short-run and long-run sustainability:

• Adhere to a balance sheet management philosophy that manages both liquidity and solvency.
• Provide adequate risk capital by retaining and managing equity as an element in overall business strategy.
• Pay out residual cash to patron-owners as cash patronage refunds and equity redemptions.

🎲 Integrated decision framework

Framework element	What it covers
Finance	Income distribution and equity management
Strategy	Competitive positioning and member alignment
Risk management	Liquidity, solvency, and capital adequacy

The evaluation and choice of alternative strategies must include:

• The patron-producer or patron-consumer perspective
• The cooperative business perspective

💼 Residual claimant principle

As discussed in earlier chapters:

• Owners, as residual claimants, get what is left over in any business.
• For cooperatives, this means patron-owners receive residual value after ensuring business sustainability.

🌾 Pooling cooperatives (special case)

🌾 What pooling cooperatives do

Many agricultural crops are processed as ingredients or consumer products where the value is not known at harvest:

• Value becomes known over the next 12 months as the crop is processed.
• This 12-month period is the marketing year (typically September 1 or October 1 to August 31 or September 30 in the northern hemisphere).
• The cooperative commits to purchasing 100% of members' crops (or a committed percentage under multi-year marketing agreements).

💵 Delayed pricing mechanism

Payment structure over the marketing year:

1. Advance payment at harvest: a percentage of projected total crop value (often enough to pay the operating loan needed to plant)
2. Second payment: 4–6 months after harvest as value becomes clearer
3. Final payment: at year-end when total crop value is known and the pool is closed

Example: A California almond cooperative pays farmers an advance at harvest, a mid-year payment as almonds are sold, and a final payment when all products are sold and the marketing year closes.

🎲 Risk pooling benefits

• Members pool their risk.
• Provides "a home" for all of the members' products.
• Creates opportunities for greater shared sales revenue and income.
• The cooperative may not know total volume in advance due to growing conditions.

🌦️ Volume uncertainty factors

Climatic factors affecting crop volume:

• Lack of rain, too much rain, frost, or excessive heat can decrease volume.
• Certain orchard crops (apples, pears, stone fruits, table olives) may exhibit alternate bearing tendencies (large volume one year, small volume the next).

Example crops: figs, almonds, peaches, prunes, raisin grapes, oranges, lemons grown in localized California regions.

🏗️ Equity creation in pooling cooperatives

• The cooperative deducts operating expenses needed to process the crop.
• This results in essentially little or no net income at fiscal year-end (typically August 31).
• The board creates equity for asset investments by deducting or withholding a portion of crop value.
• Each member is assessed a per-unit capital retain based on their volume of business, according to the cooperative bylaws.

📈 Income statement structure

📈 Revenue recognition

Gross receipts (also called gross revenues or total sales):

• Farm supply or consumer food cooperative: sum of all products/services sold × respective prices
• Marketing or pooling cooperative: sum of all products bought from members and sold at competitive market price
• Processing cooperative: total sales from processed products and co-products

The term "gross receipts" was traditionally used because it denoted receipt of value from sales done with members; many cooperatives now use more traditional language.

💸 Cost structure

Costs of Goods Sold (or Costs of Sales) are variable costs:

• Farm supply cooperative: costs of buying raw materials (crop nutrients, seed, crop protectants, energy products, corn for animal nutrition) plus technology and labor for associated services
• Electrical utility cooperative: costs of purchasing and supplying electricity
• Consumer food cooperative: costs of purchasing food products and merchandising

The conversion of raw material inputs into products is a production function or technology.

📊 Simplified income statement flow

Line item	Description
Gross Revenues	Total sales value
Less: Cost of Sales	Variable costs
= Gross Margin (Gross Profit Margin)	Difference between revenues and variable costs
Less: Operating Costs	Fixed and other operating expenses
= Operating Income	Core business profitability
Plus: Interest Income, Patron Finance Charges, Patronage Refunds Received	Other income sources
= Patronage Refunds	Amount available for distribution

🎯 Pricing strategy

Virtually all cooperatives develop a pricing strategy based on operating at a fixed margin per unit (text cuts off here, but implies margin-based pricing is common).

🔍 GAAP consistency with cooperative principles

Generally accepted accounting principles (GAAP) and the basic structure of financial statements look the same for cooperatives as for other business entities, but:

• Cooperative principles are embedded in these statements just like in legal statutes.
• They reflect the nature of transactions being done with members.
• Understanding accounting and finance is important to fully understand how a member participates in benefits and ownership.

Don't confuse: Cooperative financial statements follow GAAP structure, but the economic substance reflects cooperative principles—especially in how income is distributed and equity is created/redeemed.

🧭 Overview

🧠 One-sentence thesis

The cooperative income statement reflects the member-centric nature of cooperatives by tracking revenues from member transactions and ending with patronage refunds rather than retained net income, ensuring members receive the value they create through their business with the cooperative.

📌 Key points (3–5)

• Structure mirrors member transactions: gross revenues come from products/services sold to or bought from members, not external customers.
• Gross margin is the key metric: cooperatives operate at a fixed margin per unit as "price takers," so gross margin remains stable regardless of price fluctuations.
• Patronage refunds replace net income: any surplus after all costs is returned to members as patronage refunds (cash or retained equity) rather than kept as corporate profit.
• Common confusion: "net income" terminology—cooperatives use patronage refunds, net savings, net margin, or net surplus, but the correct term is patronage refunds/patronage dividends.
• Minimal year-end net income by design: cooperatives typically have little or no net income at fiscal year-end because surpluses are distributed back to members.

💰 Revenue structure

💰 Gross receipts (gross revenues)

Gross receipts: the sum of all products or services sold by the cooperative multiplied by their respective prices; also called gross revenues or total sales.

• For farm supply or consumer food cooperatives: total value of products/services sold to members.
• For marketing or pooling cooperatives: sum of all products bought from members and sold at competitive market price.
• For processing cooperatives: total sales from processed products (e.g., corn-ethanol and co-products, soybean meal and co-products).
• The term "gross receipts" was traditionally used because it denoted receipt of value from sales done with members.
• Many cooperatives now use more traditional language: "gross revenues" or "total sales."

📦 Cost of goods sold (cost of sales)

These are variable costs subtracted from gross receipts:

Cooperative type	Variable costs include
Farm supply	Raw materials (crop nutrients, seed, crop protectants), energy products (refined fuels, propane), raw inputs (corn for animal nutrition), technology and labor for services
Electrical utility	Purchasing and supplying electricity
Consumer food	Purchasing food products and merchandising to members

• The conversion of raw material inputs into products purchased by producers and consumers is a production function or technology.

📊 Margin and operating structure

📊 Gross margin (gross profit margin)

Gross margin: the difference between gross receipts and variable costs (cost of sales).

• Why it matters: cooperatives develop pricing strategies based on operating at a fixed margin per unit because they are "price takers."
• Key characteristic: gross margin does not change regardless of changes in input or output prices (which do change the value of total sales).
• This is an important measure to understand for cooperative operations.

🏢 Operating costs

These are fixed costs subtracted from gross margin:

• Selling and administrative costs: typically salaried employees with benefits whose wages cannot be attributed directly to the product or technology sold.
• Asset purchases: new equipment and other fixed assets.
• These costs are fixed in nature, unlike the variable costs of goods sold.

💼 Operating income

Operating income: the difference between gross margin and operating expenses.

Operating income includes:

• Interest income received by the cooperative
• Patron finance charges: finance charges from operating loans made to members
• Any other expenses or revenues received by the cooperative
• Patronage refunds received: cooperatives often do business with other cooperatives and receive patronage refunds as income

🔄 Patronage refunds and net surplus

🔄 What patronage refunds are

Patronage refunds (also called patronage dividends): amounts paid to patrons from the net income of the cooperative on the basis of quantity or value of business done with these members.

• The difference between operating income (plus additional items) and all costs.
• Alternative terminology: net savings, net margin, net proceeds, or net surplus—all denote income left over after the cooperative has received all revenues and paid all costs in that year.
• Correct terminology: patronage refunds or patronage dividends.
• Don't confuse with: traditional corporate "net income"—cooperatives return this surplus to members rather than retaining it as profit.

💵 How refunds are distributed

• Cash: paid directly to members
• Retained as equity: kept in the cooperative as member equity
• The board creates equity for asset investments by deducting or withholding a portion of the value and assessing each member a per-unit capital retain based on the member's volume of business, according to the cooperative bylaws.

🎯 Year-end result

• Cooperatives essentially have little or no net income at the end of the fiscal year (typically August 31 for many cooperatives).
• This is by design: the cooperative returns value to members rather than accumulating corporate profit.
• Example: A marketing cooperative processes crops, deducts operating expenses needed to process the crop, and distributes the remaining value to producer-members through multiple payments over the marketing year (an initial payment, another payment 4–6 months after harvest, and a final payment when the total value is known and the year's pool is closed).

📋 Complete income statement structure

The simplified cooperative income statement follows this sequence:

Line item	Description
Gross Revenues	Total sales from member transactions
Less: Cost of Sales	Variable costs
= Gross Margin	Key operating metric
Less: Operating Costs	Fixed costs (selling, administrative, assets)
= Operating Income	Before additional items
Plus: Interest Income	Interest received
Plus: Patron Finance Charges	Finance charges from member loans
Plus: Patronage Refunds Received	Income from other cooperatives
= Patronage Refunds	Amount distributed to members

• This structure reflects the cooperative principle that members participate in benefits based on their business volume with the cooperative.
• Understanding this statement is important for understanding how a member participates in benefits and ownership through their economic transactions with the cooperative.

🧭 Overview

🧠 One-sentence thesis

A cooperative's balance sheet differs from a non-cooperative corporation's primarily in how it accounts for investments in other cooperatives and how it structures members' equity through allocated and unallocated categories based on patronage.

📌 Key points (3–5)

• Balance sheet identity: assets must equal the sum of liabilities and owners' equity, just like any corporation.
• Unique cooperative asset: "Investments in Other Cooperatives" reflects equity a cooperative holds in another cooperative (e.g., from retained patronage refunds).
• Members' equity structure: divided into Common Stock/Membership Fees, Allocated Equity (patronage-based), and Unallocated Equity (non-patronage income or reserves).
• Common confusion: Allocated vs Unallocated Equity—allocated is tied to member patronage and may be redeemed; unallocated is permanent capital similar to retained earnings in non-cooperatives.
• Why it matters: the balance sheet reflects how cooperatives distribute value back to members and maintain capital for operations.

📋 Balance sheet structure

📋 The accounting identity

Balance sheet: summarizes the book value of assets, liabilities (debts to be repaid), and member or owners' equity (net worth).

• The fundamental rule: Assets = Liabilities + Owners' Equity.
• This identity holds for both cooperatives and non-cooperative corporations.
• The balance sheet is a snapshot of what the cooperative owns, owes, and the members' stake.

🏢 Assets side

Cooperative assets look similar to non-cooperative corporations with one key difference:

Asset category	Description
Current Assets	Short-term assets (not detailed in excerpt)
Fixed Assets	Long-term physical assets (not detailed in excerpt)
Investments in Other Cooperatives	Equity held in another cooperative (unique to cooperatives)

Example: A cooperative borrows from CoBank (a cooperative lender). CoBank retains some patronage refunds as equity. This retained amount appears as "Investments in Other Cooperatives" on the borrowing cooperative's balance sheet and as equity on CoBank's balance sheet.

💳 Liabilities side

Liability category	Description
Current Liabilities	Short-term debts (not detailed in excerpt)
Patronage Refunds Payable	Cash portion of patronage refunds owed to members (equivalent to "Dividends Payable" in non-cooperatives)
Term Debt	Long-term debt obligations

• Patronage Refunds Payable is a cooperative-specific liability documenting the cash portion of refunds being paid to members.

🤝 Members' equity: the biggest difference

🤝 Three components of cooperative equity

The members' equity section uses different terminology than non-cooperative corporations:

Equity type	Also called	What it represents
Common Stock or Membership Fees	—	Value of membership fee or purchased common stock (stock cooperative) or membership certificates (non-stock cooperative)
Allocated Equity	Patronage Ledger Credits, Retained Refunds, Capital Retains, Revolving Capital	Patronage refunds retained by the cooperative as equity; allocated to members based on their patronage
Unallocated Equity	Unallocated Retained Earnings, Unallocated Reserves or Surplus, Collective Account (worker coops)	Equity not allocated based on patronage; typically non-patronage income or income on which the cooperative paid corporate tax

• In a non-cooperative corporation, all of this would simply be called Retained Earnings.
• Some cooperatives issue Preferred Stock (purchased stock), but this is uncommon.

🔄 Allocated Equity explained

• The word "allocated" means this equity has been assigned to individual members based on how much business they did with the cooperative (their patronage).
• This is the retained portion of patronage refunds—money the cooperative keeps as equity rather than paying out immediately in cash.
• Key distinction: Allocated Equity may be redeemed (paid back to members) at the board's discretion.

🏦 Unallocated Equity explained

Unallocated Equity: sometimes referred to as permanent capital; similar to retained earnings in a non-cooperative corporation because it remains on the balance sheet as equity until the corporation is dissolved.

• This equity is not tied to individual member patronage.
• Sources include:
  • Non-patronage income (e.g., sales to non-members at a cooperative-owned convenience store).
  • Income on which the cooperative has already paid corporate income tax.
• Permanent nature: will never be subject to redemption by the board; it stays as equity indefinitely.
• Don't confuse with Allocated Equity: Allocated Equity can be redeemed and returned to members; Unallocated Equity is permanent capital.
• Trend: the excerpt notes that unallocated equity as a percentage of total equity has been increasing in most cooperatives in recent years.

💰 Income distribution context

💰 Patronage vs non-patronage income

The excerpt briefly explains how income sources affect equity:

• Non-patronage income (e.g., purchases by non-members at a cooperative convenience store):

  • Taxed as corporate income, just like a non-cooperative corporation.
  • Typically retained as Unallocated Equity rather than distributed as dividends (to avoid double taxation).
  • If distributed as dividends, it would be taxed twice: once as corporate income, once as individual income.

• Patronage income (business done with members):

  • Distributed as Patronage Refunds (also called patronage dividends).
  • Allocated to members in proportion to the value or quantity of their patronage.
  • Implements the "service at cost" principle—members participate in the benefits from the cooperative.
  • Can be distributed as cash or retained as Allocated Equity.

💰 Board decisions

• The board of directors, with input from management and an auditing firm, decides how to distribute both types of income.
• The allocation decision determines how much patronage income is paid in cash versus retained as equity.
• The excerpt notes that some organizations (e.g., school districts, government entities, or non-farmers in agricultural cooperatives) may not be eligible for membership but can still receive patronage refunds based on their patronage levels (common in cooperatives with energy business units).

🧭 Overview

🧠 One-sentence thesis

Cooperative boards must decide how to distribute two types of income—patronage-sourced (from member business) and non-patronage-sourced (from non-member business)—with the goal of maximizing after-tax income available as patronage refunds to members.

📌 Key points (3–5)

• Two income types: patronage-sourced income (from business with members) and non-patronage-sourced income (from business with non-members) are treated differently for tax and distribution purposes.
• Non-patronage income treatment: typically retained as unallocated equity after paying corporate taxes, similar to a non-cooperative corporation's retained earnings.
• Patronage income goal: implement the "service at cost" principle by allocating income to members as patronage refunds in proportion to their patronage.
• Multiple patronage pools: cooperatives with diverse business units (different products, costs, margins) create separate patronage pools to treat each member equitably.
• Common confusion: allocated vs. unallocated equity—allocated equity is assigned to members based on patronage; unallocated equity is not allocated to members and includes non-patronage income or income on which the cooperative paid corporate tax.

💰 Two types of income and their treatment

💵 Non-patronage-sourced income

Non-patronage income: income derived from business that was not done on a patronage basis with members.

• Example: A cooperative owns a convenience store where both members and non-members buy fuel or in-store items; purchases by non-members generate non-patronage income.
• Tax treatment: The cooperative pays corporate income tax on this income, just like a non-cooperative corporation.
• Distribution choice: The board could distribute this income as dividends (resulting in double taxation—corporate and individual), but common practice is to retain it as unallocated equity.
• Why retain: Boards typically do not allocate non-member income and keep it as permanent capital on the balance sheet.

🤝 Patronage-sourced income

Patronage-sourced income: income derived from business done with members on a patronage basis.

• Goal: Implement the "service at cost" principle so members participate in the cooperative's benefits.
• Distribution method: Allocated to members as patronage refunds in proportion to the value or quantity of their patronage.
• Board decision: The board must decide how to allocate this income, often referred to as the "allocation decision."
• Why it matters: Allocating patronage income as patronage refunds is especially compelling because it reflects the cooperative's purpose of serving members.

🏗️ Creating patronage pools for different business units

🥛 Single-line business example

• Scenario: A dairy cooperative buys milk from members and manufactures it into liquid milk, butter, or cheese.
• Pooling approach: All income from different end products is pooled into one patronage pool.
• Why equitable: Processing costs are similar across products, so each member participates equally.
• Measurement: Patronage refunds are linked to the physical unit (pounds of milk) each member sold to the cooperative.

🌾 Multiple-line business example

• Scenario: A farm supply cooperative offers crop nutrients, crop protectants, animal nutrition, refined fuels, energy products, and various services.
• Challenge: Each product/service has different costs, net margins, risk profiles, and physical units (tons, gallons, bushels).
• Solution: Create multiple patronage pools—one for each line of business—to be equitable with each member.
• Measurement variations:
  • Crop nutrients: measured in tons
  • Crop protectants and fuels: measured in gallons or liters
  • Grain and oilseeds: measured in bushels or tons
  • Services without physical units (e.g., farm equipment tires, credit): patronage pool based on total value, allocated by member's proportion of total value.

⚖️ Why multiple pools matter

• Not every member uses all products: Members purchase different combinations of products and services.
• Different costs and margins: Each product line has unique economics.
• Shared costs: Variable costs (labor) and fixed costs (management) are shared across products, making it difficult to determine each member's participation in benefits.
• Equity principle: Multiple pools ensure that income from each line of business is allocated fairly to the members who patronized that line.

🔀 Board choices on income distribution

🎯 Summary of distribution options

Income type	Common board choice	Tax treatment	Equity classification
Non-patronage-sourced	Retain as equity	Pay corporate taxes	Unallocated equity
Patronage-sourced	Distribute as patronage refunds	Deductible (if qualified)	Allocated equity (if retained)
Patronage-sourced (alternative)	Retain as unallocated equity	Pay corporate taxes	Unallocated equity

📋 Board decision process

• Input: The board receives information from an auditing firm about the dollar value of patronage-sourced and non-patronage-sourced income.
• Operational practice: Boards typically retain non-patronage income as unallocated equity (after paying corporate taxes) and distribute patronage-sourced income as patronage refunds.
• Guiding principle: The board should maximize after-tax income available as patronage refunds, which is in the best interest of members.

🔄 Alternative choice for patronage income

• Option: The board may elect to allocate some patronage-sourced income into unallocated equity.
• Consequence: The cooperative must pay corporate taxes on that income.
• When used: Not common, but may be chosen if the board decides it needs that equity on the balance sheet for financial stability.

🏦 Equity terminology and distinctions

📊 Allocated vs. Unallocated equity

Allocated Equity (also called Patronage Ledger Credits, Retained Refunds, Capital Retains, or Revolving Capital): the value of patronage refunds retained by the cooperative as equity, allocated to members based on patronage.

Unallocated Equity (also called Unallocated Retained Earnings, Unallocated Reserves, or Surplus): equity not allocated to members based on patronage; includes non-patronage income or income on which the cooperative paid corporate income tax.

• Key difference: "Allocated" means assigned to a specific member based on their patronage; "unallocated" means not assigned to any member.
• Worker cooperatives: Unallocated equity is called the "Collective Account."
• Non-cooperative equivalent: Both types are similar to "Retained Earnings" in a non-cooperative corporation.

🔒 Permanent capital concept

• Unallocated equity as permanent capital: It remains on the balance sheet as equity until the corporation is dissolved.
• Never redeemed: Unlike allocated equity (which may be redeemed by the board), unallocated equity will never be subject to redemption.
• Trend: The percentage of unallocated equity relative to total equity has been increasing in most cooperatives recently.
• Reasons for increase: Cooperative lenders, due to financial regulations, require additional permanent capital and are requiring the same of their borrowing cooperatives.

🧩 Other equity components

• Common Stock or Membership Fees: The value of the membership fee paid by each member (purchased common stock in a stock cooperative or membership certificates in a non-stock cooperative).
• Preferred Stock: Some food and farm supply cooperatives issue purchased preferred stock, but this is uncommon.
• Investments in Other Cooperatives: Equity a cooperative has in another cooperative (e.g., patronage refunds retained by a cooperative lender like CoBank as equity).

⚠️ Don't confuse

• Patron Refunds Payable (cooperative term) vs. Dividends Payable (non-cooperative term): Both are liabilities documenting the cash portion of distributions being paid, but patron refunds are based on patronage, while dividends are based on stock ownership.
• Allocated equity vs. dividends: Allocated equity is assigned based on patronage and may be retained; dividends are paid on stock ownership and result in double taxation if distributed from non-patronage income.

🧭 Overview

🧠 One-sentence thesis

Cooperative boards must decide how to distribute patronage-sourced income to members in proportion to their use while balancing equity considerations across different business lines and tax treatment choices.

📌 Key points (3–5)

• Core principle: Patronage Refunds allocate net income to members in proportion to the value or quantity of their patronage, implementing the "service at cost" principle.
• Business unit complexity: Single-line cooperatives can pool all income into one patronage pool, but multi-line cooperatives need multiple pools to treat members equitably when products have different costs, margins, and risk profiles.
• Tax treatment choices: Qualified patronage refunds are deductible for the cooperative (single taxation at member level), while nonqualified refunds are taxed at the cooperative level first (member taxed only upon cash receipt).
• Common confusion: Don't confuse patronage-sourced income (from member business) with non-patronage sourced income (from non-members)—the latter is typically retained as unallocated equity after paying corporate taxes.
• Allocation vs retention: Boards can distribute patronage income as cash or retained patronage refunds (allocated equity), or retain it as unallocated equity (permanent capital), though the latter requires paying corporate taxes.

🎯 Patronage Refunds and the service-at-cost principle

🎯 What Patronage Refunds are

Patronage Refunds: allocated distributions of net income to members in proportion to the value or quantity of their patronage.

• The distribution process is called the "allocation decision."
• This mechanism implements the service-at-cost principle—members participate in benefits from the cooperative based on their use.
• Allocating income as patronage refunds is especially compelling for income arising from patronage business with members.

🔑 Why patronage-based distribution matters

• Members benefit from the cooperative in proportion to how much they use it, not based on investment shares.
• The board must decide how to allocate patronage-sourced income in the form of Patronage Refunds.
• This differs from non-cooperative corporations where dividends are distributed based on ownership/investment.

🏭 Business unit structures and pooling decisions

🥛 Single-line business example

The excerpt describes a dairy cooperative scenario:

• Business: buying milk from members and manufacturing it into liquid milk, butter, or cheese products.
• Vertical alignment: members are aligned through one raw material (milk from their cows).
• Pooling rationale: reasonable to pool all income from different products into one patronage pool because:
  • Similar costs of processing the raw material into different end uses
  • Equitable from members' perspective—each member participates equally
  • Easy to measure: physical unit is pounds of milk
• Distribution: patronage refund linked to the quantity of milk each member sold to the cooperative.

Example: Even though Member A's milk becomes cheese and Member B's milk becomes liquid milk, both share equally in the pooled income because processing costs are similar.

🌾 Multi-line business complexity

Many cooperatives, particularly farm supply businesses, have multiple lines:

• Crop nutrients, crop protectants, animal nutrition, refined fuels, energy products
• Various services (agronomy, grain and oilseeds, energy)

Why multiple patronage pools are needed:

• Different costs and net margins per product
• Different risk profiles for each product
• Not every member needs or purchases all products/services
• Different physical units: tons (nutrients), gallons/liters (fuels, protectants), bushels/tons (grain)
• Services often bundled with products (e.g., nitrogen fertilizer + application vs. fertilizer alone)
• Sharing of variable costs (labor) and fixed costs (management) makes benefit participation difficult to determine

📊 Value-based vs. unit-based allocation

Measurement basis	When used	Example
Physical units	Products with clear units	Pounds of milk, tons of nutrients, gallons of fuel
Total value	Products without physical units or bundled services	Farm equipment tires, credit (financial services)

• For value-based pools: patronage allocated to members based on their proportion of total value of these products.
• Don't confuse: the same cooperative may use both methods for different business lines.

💰 Income sources and equity types

💼 Patronage-sourced vs. non-patronage sourced income

Income type	Source	Typical board treatment
Patronage-sourced	Business with members	Distributed as patronage refunds
Non-patronage sourced	Business with non-members	Retained as unallocated equity after paying corporate taxes

• Virtually all cooperatives pay corporate taxes on non-patronage sourced income and retain it as unallocated equity.
• The board should maximize after-tax income available as patronage refunds (in members' best interest).

🏦 Unallocated equity

Unallocated equity: sometimes referred to as permanent capital; similar to retained earnings in a non-cooperative corporation because it is permanently on the balance sheet as equity until the corporation is dissolved.

Key characteristics:

• Equity that will never be subject to redemption by the board of directors
• Allocated equity, in contrast, may be redeemed
• Has been increasing as a percentage of total equity in most cooperatives recently

Reasons for increase:

• Advice from cooperative lenders
• Financial regulations requiring additional permanent capital
• Lenders requiring the same of their members

📋 Board's allocation choice for patronage income

The board can divide patronage-sourced income into:

1. Corporate taxes (if retained as unallocated equity)
2. Patronage refunds (distributed to members)
3. Unallocated equity (retained permanently)

• The board may elect to allocate some patronage-derived income into unallocated equity, but must pay corporate taxes on that income.
• This choice is not common but may be used if the board needs that equity on its balance sheet.

🧾 Tax treatment of patronage refunds

✅ Qualified patronage refunds

Qualified patronage refunds: patronage refunds properly made in accordance with U.S. Internal Revenue Service tax regulations; they are deductible for corporate income tax purposes.

• Cooperatives do not pay corporate taxes on qualified patronage refunds.
• This avoids the double taxation that non-cooperative corporations face (taxed at both corporate and individual level upon distribution of dividends).
• The majority of boards choose to allocate patronage-sourced income as a qualified distribution.

❌ Nonqualified patronage refunds

• The reverse of qualified distributions
• The cooperative pays the corporate income tax on nonqualified patronage refunds
• The member does not pay income tax until the refund is received in cash from the cooperative
• Single taxation continues to exist with nonqualified refunds

Don't confuse: both qualified and nonqualified maintain single taxation, but the timing and party responsible differ.

🔄 Retained patronage refunds

Retained patronage refunds: the noncash portion of qualified or nonqualified patronage refunds; patronage-sourced income not paid in cash.

• Placed on the balance sheet as allocated equity
• Members are notified in writing of the value
• This is different from unallocated equity because it can be redeemed later

🏛️ Single taxation rationale

🏛️ Why cooperatives have single taxation

The excerpt explains the conceptual basis:

• Marketing and purchasing cooperatives are not required to pay U.S. income tax on net income distributed as patronage refunds
• Based on the concept that members are extensions of the members' business through the cooperative (as shown in the Make or Buy decision)

The principle of single-taxation:

• Ensures a cooperative's net savings are taxed at the cooperative level OR the patron level, but not at both
• Contrasts with non-cooperative corporations: double-taxation (taxed at corporate level as corporate income AND upon distribution to shareholders as corporate dividends)

⚖️ Treatment of non-member business

• Business done with nonmembers is treated the same as non-cooperative businesses
• Taxed by the cooperative (not passed through to members)
• This taxation is defined in subchapter T of the Internal Revenue Code
• Reflects cooperatives' distinct way of distributing net margins to patrons based on use, rather than to investors based on ownership

Example: If a cooperative sells products to both members and non-members, the income from member sales can be distributed as patronage refunds (single taxation), while income from non-member sales is taxed at the cooperative level like any other business.

🧭 Overview

🧠 One-sentence thesis

Cooperatives can choose whether patronage refunds are qualified (deductible for corporate tax, taxed to members immediately) or nonqualified (taxed at the corporate level, taxed to members only when received in cash), but both maintain single taxation unlike non-cooperative corporations.

📌 Key points (3–5)

• Qualified vs nonqualified patronage refunds: qualified refunds are deductible for the cooperative and taxed to members immediately; nonqualified refunds are taxed at the cooperative level and taxed to members only when received in cash.
• Single taxation principle: cooperatives are taxed only once (either at the cooperative or member level), unlike non-cooperative corporations which face double taxation (corporate income tax plus dividend tax).
• Retained patronage refunds: the noncash portion of patronage refunds becomes allocated equity on the balance sheet, representing reinvestment in cooperative assets.
• Common confusion: both qualified and nonqualified refunds maintain single taxation, just at different points—the key difference is when and who pays the tax, not whether double taxation occurs.
• Equity redemption policies: boards must decide when to redeem retained patronage refunds, typically prioritizing former members and redeeming the oldest equity first for active members.

💰 Tax treatment of patronage refunds

💰 Qualified patronage refunds

Qualified patronage refunds: patronage refunds made in accordance with U.S. Internal Revenue Service tax regulations that are deductible for corporate income tax purposes.

• The cooperative does not pay corporate income tax on these refunds.
• The member does pay income tax on the refund in the year allocated, even if not received in cash.
• This is the majority choice by boards of directors.
• Example: A cooperative allocates $1,000 as a qualified refund to a member; the cooperative deducts this from taxable income, and the member reports it as income on their personal tax return that year.

💰 Nonqualified patronage refunds

• The cooperative pays corporate income tax on these refunds.
• The member does not pay income tax until the refund is received in cash from the cooperative.
• This is the reverse of qualified distributions.
• Single taxation still exists—the income is taxed once, but at the cooperative level first.
• Example: A cooperative allocates $1,000 as a nonqualified refund; the cooperative pays corporate tax on it, and the member only reports income when the cash is eventually distributed years later.

🔄 Comparison table

Feature	Qualified refunds	Nonqualified refunds
Corporate tax paid by cooperative?	No (deductible)	Yes
Member taxed when allocated?	Yes	No
Member taxed when received in cash?	Already taxed	Yes, at that time
Single taxation maintained?	Yes	Yes
Board preference	Majority choice	Less common

⚠️ Don't confuse with non-cooperative taxation

• Non-cooperative corporations face double taxation: net income is taxed at the corporate level, then dividends are taxed again at the individual shareholder level.
• Cooperatives maintain single taxation regardless of whether refunds are qualified or nonqualified—the income is taxed only once, just at different points in time or by different parties.

🏦 Retained patronage refunds and allocated equity

🏦 What retained patronage refunds are

Retained patronage refunds: the noncash portion of qualified or nonqualified patronage refunds.

• These are placed on the balance sheet as allocated equity.
• Members are notified in writing of the value allocated but not paid in cash.
• They represent investments in new assets or reinvestment in existing assets to maintain them.
• Example: A member receives a $1,000 patronage refund, but only $200 is paid in cash; the remaining $800 becomes retained patronage refund and is recorded as allocated equity.

🏦 Relationship to the balance sheet

• The accounting identity: equity = assets - liabilities.
• Retained patronage refunds represent how the cooperative finances assets without taking on debt.
• Total equity = allocated equity + unallocated equity.
• Historically, boards preferred as much allocated equity as possible, though recently boards have chosen to increase unallocated equity.

🏦 Why boards retain patronage refunds

• To invest in new assets.
• To reinvest in existing assets to maintain them in good condition.
• To provide the products and services desired by members.
• The board decides how much to retain based on the cooperative's capital needs.

🔄 Equity redemption policies

🔄 Two situations requiring redemption policies

1. When a member stops being a member: cooperatives universally operate on the philosophy that retained patronage refunds should be redeemed when membership ends.
2. When the cooperative has excess allocated equity: if the cooperative continues creating allocated equity each year but doesn't need it for asset investment, the board may redeem some equity.

🔄 Redemption for former members

• Consumers: no longer members if they move geographically or stop patronizing the cooperative for some period.
• Farmers: no longer members if they retire or exit their farming operation.
• Death: members are no longer members when they die.
• Typical practice: boards redeem allocated equity for deceased members monthly or annually.
• For living former members: boards commonly redeem a portion of allocated equity over a period of time (e.g., four or five years).

🔄 Redemption for active members

• Universal practice: redeem allocated equity based on the birth year of the patronage refund, with the oldest equity redeemed first.
• This is fair because no dividend is paid on allocated equity.
• Boards try to manage member expectations by redeeming in a timely manner with a pattern of behavior.
• Redemption periods vary:
  • Pooling cooperatives with significant per capita retains: perhaps five to ten years.
  • Cooperatives with lower retained patronage refunds: may be longer.
  • Electrical utility cooperatives: may have redemption periods of decades.
• Boards try to redeem as quickly as possible without compromising the balance sheet.

⚠️ Don't confuse with age-based redemption

• Some farm supply and grain marketing cooperatives in the early 1960s redeemed retained patronage refunds when a member turned 65 years of age.
• This created problems: cash flow issues when many farmers reached 65 simultaneously, and young farmers disliked waiting decades for redemption.
• In multigenerational families, the oldest member had an incentive to purchase everything in their name to get faster redemption, resulting in younger members being under-invested.
• The majority of cooperatives have transitioned off these programs to a revolving fund where the oldest equity is redeemed first, regardless of member age.

📜 Single taxation rationale

📜 Why cooperatives have single taxation

The principle of single-taxation ensures that a cooperative's net savings are taxed at the cooperative level or the patron level, but not at both.

• Marketing and purchasing cooperatives are not required to pay U.S. income tax on net income distributed as patronage refunds.
• The concept: members are extensions of the members' business through the cooperative (as shown in the Make or Buy decision).
• Patronage refunds are either:
  • Rebates to patrons of part of the price initially paid on purchases, or
  • Additional cost paid by a marketing cooperative to patrons for products sold to the cooperative.

📜 Legal framework

• Defined in Subchapter T of the Internal Revenue Code.
• Applies to "any corporation operating on a cooperative basis" except:
  • Mutual savings banks
  • Mutual insurance companies
  • Cooperatives furnishing electric energy or telephone service to rural areas
• Cooperatives can exclude from taxable income certain distributions of net income or allocations paid to patrons.

📜 Contrast with non-cooperative corporations

• Non-cooperative corporations: double taxation (corporate income tax + dividend tax to shareholders).
• Cooperatives: single taxation reflects their distinct way of distributing net margins to patrons based on use, rather than to investors based on investment.
• Business done with nonmembers is treated the same as non-cooperative businesses and taxed by the cooperative.

🎯 Board decision-making on income distribution

🎯 Income sources and typical choices

• Non-patronage sourced income: virtually all cooperatives choose to pay corporate taxes on this and retain it as unallocated equity.
• Patronage-sourced income: the board decides how many patronage pools to operate and how to distribute income from those pools to members.

🎯 Three-way division of income

The board divides income into:

1. Corporate taxes
2. Patronage refunds
3. Retention as unallocated equity

The board should maximize the after-tax income available as patronage refunds, which is in the best interest of the member.

🎯 Operational practice

• Boards tend to retain non-patronage sourced income as unallocated equity by paying corporate taxes on it.
• Boards tend to distribute patronage-sourced income as patronage refunds.

🎯 Unallocated equity option

• The board may elect to allocate some income derived from members' patronage into unallocated equity.
• In doing so, the cooperative must pay corporate taxes on that income.
• This choice is not common, but may be used if the board decides it needs that equity on its balance sheet.

🧭 Overview

🧠 One-sentence thesis

A cooperative board's choice of equity redemption program determines how allocated equity is created through retained patronage refunds and later destroyed through redemption, directly affecting the cooperative's balance sheet and member expectations.

📌 Key points

• What retained patronage refunds are: the noncash portion of patronage refunds that becomes allocated equity on the balance sheet, representing reinvestment in cooperative assets.
• Two situations requiring redemption policies: when a member stops being a member (death, retirement, relocation) and when the cooperative determines it has excess allocated equity.
• Universal redemption principle: oldest equity (by birth year of the patronage refund) is redeemed first, ensuring fairness since no dividend is paid on allocated equity.
• Common confusion: redemption by patron birth year vs. redemption by patronage refund birth year—the universal practice redeems based on when the refund was created, not the member's age, though some cooperatives historically used member age triggers.
• Balance sheet impact: creating allocated equity through retention and destroying it through redemption must be managed without disrupting loan covenants or asset expenditures.

💰 Understanding retained patronage refunds and allocated equity

💰 What retained patronage refunds represent

Retained patronage refund: the noncash portion of qualified or nonqualified patronage refunds that is not paid in cash to members.

• When a board retains patronage refunds instead of distributing them as cash, these amounts are placed on the balance sheet as allocated equity.
• Members receive written notification of the value allocated to them, even though they don't receive cash immediately.
• The accounting identity (equity = assets - liabilities) means these retained refunds represent investments in new assets or reinvestment in existing assets to maintain cooperative operations.

🔄 Creation and destruction of allocated equity

• Creation: Allocated equity is created when the board retains patronage refunds rather than distributing them as cash.
• Destruction: Redemption of retained patronage refunds "destroys" allocated equity by converting it back to cash paid to members.
• This cycle has direct implications for the cooperative's balance sheet—the board must balance equity needs against member expectations for timely redemption.

📊 Allocated vs. unallocated equity

Equity type	Description	Historical board preference
Allocated equity	Created from retained patronage refunds; attributed to specific members	Historically preferred to be as large as possible
Unallocated equity	Not attributed to specific members	Recently, boards have chosen to increase this portion
Total equity	Sum of allocated and unallocated equity	Must be sufficient for cooperative operations

🚪 When members exit: mandatory redemption situations

🚪 Philosophy for departing members

• Cooperatives universally operate on the principle: if a member stops being a member, any equity in the form of retained patronage refunds should be redeemed.
• This reflects the cooperative's commitment to return member investments when the member-cooperative relationship ends.

👥 Different types of member exits

Consumer cooperatives:

• Geographic relocation from the community
• Ceasing to patronize the cooperative for some period of time
• Death

Agricultural cooperatives:

• Retirement from farming
• Exiting the farming operation
• Death

⚖️ Board policies for exit redemptions

• Death of a member: The board typically redeems the allocated equity immediately (monthly or annually).
• Living member who exits: The board creates a policy to redeem equity over time—commonly over four or five years in the future.
• The board must first determine it has the ability to redeem without disrupting loan covenants or asset expenditures.

📅 Redemption for active members: managing excess equity

📅 When redemption becomes necessary

• If a cooperative continues creating allocated equity each year by retaining patronage refunds, it may accumulate excess allocated equity not needed for asset investment or replacement.
• The board must determine whether additional equity is needed before establishing a redemption program.

🎂 Universal practice: birth year of patronage refund

• The universal practice redeems allocated equity based on the birth year of the patronage refund (when it was created), with the oldest equity redeemed first.
• This practice is considered fair because no dividend is paid on allocated equity—members with older retained refunds have had their money tied up longer without earning returns.
• Example: If the cooperative retained patronage refunds in 2010, 2015, and 2020, the 2010 refunds would be redeemed first when the board decides to return excess equity.

⏱️ Redemption timing varies by cooperative type

Cooperative type	Typical redemption period	Reason
Pooling-basis cooperatives	5–10 years (rapid)	Per capita retains may be significant
Low-retention cooperatives	Longer periods	Retained patronage refunds are smaller
Electrical utility cooperatives	Decades	Members use electricity for their lifetime

• No fixed trigger exists to redeem equity, but boards try to manage member expectations through consistent patterns of behavior.
• Boards aim to redeem retained patronage refunds as quickly as possible without compromising the balance sheet.

⚠️ Historical mistake: redemption by patron birth year

⚠️ The flawed age-trigger approach

• In the early 1960s, many U.S. farm supply and grain marketing cooperatives chose to redeem retained patronage refunds when a member turned 65 years old (assuming retirement from farming).
• This seemed advantageous initially because few farmers were that old, helping cash flow.

🚨 Why this approach failed

Cash flow crisis:

• Many farmers were of similar age, creating a major problem when large cohorts reached 65 simultaneously.

Young farmer dissatisfaction:

• Young farmers disliked having patronage refunds retained for decades until redemption.

Multigenerational gaming:

• In multigenerational farming families, the oldest member had an incentive to purchase all products and services in their name to have equity redeemed faster.
• This resulted in younger members being under-invested in the cooperative, creating unfairness across generations.

✅ Transition to revolving fund

• The majority of cooperatives practicing member-age-based redemption have transitioned to a revolving fund system.
• In a revolving fund, the oldest equity (by patronage refund birth year) is redeemed first, regardless of member age.
• Don't confuse: "birth year" in the universal practice refers to when the patronage refund was created, not the member's birth year.

🔗 Connection to cooperative taxation and member participation

🔗 Why retained refunds exist: single taxation principle

• Cooperatives have single taxation (not double taxation like non-cooperative corporations) on patronage-sourced income.
• Qualified patronage refunds are tax-deductible for the cooperative; members pay income tax on both cash and noncash portions in the year allocated.
• Nonqualified patronage refunds are taxed at the cooperative level; members pay income tax only when cash is received.
• Retained patronage refunds (the noncash portion) allow cooperatives to reinvest in assets while maintaining single taxation.

🔗 Member participation through ownership

• Retained patronage refunds represent one of the ways members participate in the cooperative: through physical ownership (equity).
• The other way mentioned is through benefits received (economic transactions).
• Members participate in control by electing directors who make decisions on ownership and benefits on their behalf.
• Understanding equity redemption policies helps members fully understand their membership role and impact on board and management decisions.

🧭 Overview

🧠 One-sentence thesis

Cooperatives receive a limited exemption from antitrust laws to allow farmers—who are individual businesses—to collectively market and set prices without being prosecuted for illegal price fixing, provided they meet specific conditions and do not engage in predatory practices.

📌 Key points (3–5)

• Why the exemption exists: Without it, farmers forming a cooperative to collectively set prices would be considered illegal price fixing.
• What cooperatives can do under the exemption: collectively market and bargain, set prices, cooperate with other cooperatives, create contracts, and limit membership.
• Conditions for the exemption: members must be agricultural producers; cooperatives cannot engage in predatory pricing or attempt to monopolize supply.
• Common confusion: This exemption is unique to cooperatives (and a few other industries like baseball); it is not a blanket immunity but a limited protection tied to specific practices.
• Legal foundation: Legislation such as the Capper-Volstead Act in the U.S. created this framework.

⚖️ The antitrust problem cooperatives solve

⚖️ Why farmers need an exemption

• Market economies typically have laws prohibiting restraints on trade, monopolization, and price fixing to ensure fair business practices.
• The core problem: Farmers are individual businesses. When they form a cooperative to collectively set a price for selling their agricultural products, this would normally be considered price fixing—an illegal practice.
• Example: If several independent farmers agree on a common selling price through a cooperative, that collective price-setting would violate antitrust laws without an exemption.

📜 Legislative solution

• Legislation such as the Capper-Volstead Act in the U.S. was created specifically to enable cooperatives to engage in practices that would otherwise be illegal.
• The exemption is limited, not absolute—it applies only under certain conditions and for specific activities.

🔓 What the exemption allows

🔓 Permitted activities

Cooperatives with this exemption can:

• Collectively market and bargain: pool members' products and negotiate as a group.
• Set prices: agree on prices at which the cooperative will sell members' agricultural products.
• Cooperate with other cooperatives: work together across cooperative organizations.
• Create contracts: establish agreements with buyers and suppliers.
• Limit membership: restrict who can join the cooperative.

🚫 Don't confuse with unlimited freedom

• The exemption does not allow cooperatives to do anything they want.
• It is tied to specific practices and comes with strict conditions (see next section).

🛡️ Conditions and limits

🛡️ Who qualifies

Limited exemption applies only if members are agricultural producers.

• The cooperative must be composed of farmers or agricultural producers.
• This is not available to all types of cooperatives or businesses.

🚨 Prohibited practices

Even with the exemption, cooperatives cannot:

• Engage in predatory pricing: setting prices unfairly low to drive competitors out of business.
• Attempt to create a vertical supply curve by limiting supply: manipulating the market by restricting the availability of members' products to artificially inflate prices or monopolize trade.

⚠️ Common confusion: exemption vs. monopoly

• The exemption allows collective action but not monopolization.
• Cooperatives can set prices together, but they cannot use practices that would create a monopoly or unfairly restrain commerce.
• Example: A cooperative can negotiate a common selling price for members' wheat, but it cannot conspire to withhold wheat from the market to drive up prices artificially.

🌐 Context and uniqueness

🌐 How unique is this exemption?

Entity	Exemption status
Agricultural cooperatives	Limited exemption under laws like Capper-Volstead
Baseball	Has a limited exemption from antitrust
Other industries	Some have legal protections for manufacturer-imposed dealings or requirements contracts

• The excerpt emphasizes that these laws are unique to cooperatives (and a few other specific cases).
• Most businesses do not have this protection and would face prosecution for collective price-setting.

🧩 Why this matters for members

• Members need to understand this exemption to fully grasp their role in the cooperative.
• The exemption shapes what the board of directors and management can legally decide regarding pricing and marketing.
• It is embedded in legal statutes and affects how cooperatives operate within the broader market economy.

🧭 Overview

🧠 One-sentence thesis

International development programs widely promote the cooperative business structure in agriculture and rural development because its democratic principles and collective decision-making appeal to grassroots economic development.

📌 Key points (3–5)

• Why cooperatives are promoted: their foundations in democracy and collective decision-making make them attractive for grassroots economic development.
• Where they are used: widely adopted to create food marketing cooperatives in Africa, Southeast Asia, Oceania, and Latin America.
• What products: cocoa, coffee, dairy, and certain types of vegetables.
• Government support: many countries have adopted favorable practices including public investments in applied research, technical assistance, and economic impact studies.

🌍 Rationale for cooperative promotion in development

🏛️ Democratic foundations

The cooperative structure is appealing to economic development at a grassroots level because of its foundations in principles associated with democracy and collective decision-making.

• International development programs operating in agriculture and rural development promote cooperatives specifically for this reason.
• The structure is not chosen for purely economic efficiency but for its alignment with participatory governance.
• Example: A development program working with smallholder farmers might choose cooperatives over other business forms because farmers can collectively make decisions rather than being directed by outside investors.

🤝 Grassroots economic development

• The excerpt emphasizes "grassroots level" development, meaning bottom-up rather than top-down.
• Collective decision-making allows local producers to have direct control over their economic activities.
• Don't confuse: this is about empowering local producers, not about creating large centralized organizations.

🌾 Applications in food marketing

🌾 Product types

The excerpt identifies specific agricultural products where cooperatives have been widely used:

• Cocoa
• Coffee
• Dairy
• Certain types of vegetables

These are food marketing cooperatives, meaning they help producers collectively market and sell their products.

🗺️ Geographic scope

Cooperatives have been widely used in:

• African countries
• Southeast Asian countries
• Oceania
• Latin American countries

The excerpt emphasizes this is a global phenomenon across multiple developing regions.

🏗️ Government and institutional support

🏗️ Favorable practices

Many countries have adopted practices to encourage cooperative development:

Support type	What it includes
Public investments	Applied research funding
Technical assistance	Direct support for cooperative formation and operation
Studies	Economic impact research on cooperatives and mutual insurance firms

💡 Why governments invest

• The excerpt does not explicitly state why governments provide this support, but it follows from the rationale that cooperatives serve grassroots economic development goals.
• These investments suggest that cooperatives are seen as serving public policy objectives beyond private profit.
• Example: A government might fund research on how dairy cooperatives affect smallholder income, or provide technical assistance to help coffee farmers form a marketing cooperative.

🧭 Overview

🧠 One-sentence thesis

The "service at cost" principle, when interpreted literally as zero profits or uniform pricing for all members, fails to sustain cooperatives economically, whereas equal margin pricing recognizes cost differences and ensures both survival and equity.

📌 Key points (3–5)

• Two common misinterpretations: some members think "service at cost" means zero patronage refunds (non-profit operation); others believe it requires uniform pricing regardless of member size or volume.
• Why literal interpretations fail: zero-profit operation leaves no funds to reinvest in assets; uniform pricing ignores real cost differences in serving different members.
• Equal margin pricing as the solution: charges the same margin per member while allowing volume discounts or premiums, recognizing that service costs vary.
• Common confusion: "service at cost" sounds like it means "same price for everyone," but equitable pricing actually means "same margin for everyone," not same absolute price.
• Context of early cooperatives: when first formed, members are often homogeneous (similar farm size and social purpose), which can mask the need for differentiated pricing strategies.

💡 The "service at cost" principle and its problems

💡 What "service at cost" originally meant

The cooperative principle of "service at cost": a widely used idea of how cooperatives should operate.

• The excerpt does not define the principle positively, but explains it through common interpretations.
• It "sounds reasonable" on the surface, suggesting it appeals to fairness or member benefit.
• However, the excerpt emphasizes that literal application as a management strategy creates serious problems.

❌ Two problematic interpretations

Interpretation 1: Zero or near-zero patronage refunds

• Some members believe "service at cost" means the cooperative should operate as a non-profit.
• This would mean returning zero or close to zero patronage refunds each year.
• Why it fails: there will never be any income to reinvest in the cooperative's assets.
• Without reinvestment, the cooperative cannot maintain or grow its infrastructure, equipment, or capacity.

Interpretation 2: Uniform pricing for all members

• Others see it as a requirement to follow an average cost or uniform pricing strategy.
• This means setting the same price for all members, regardless of their size or volume.
• Why it fails: the excerpt states there is "a better and more equitable pricing strategy" (see next section).
• Don't confuse: "equitable" does not mean "identical price"; it means fair treatment that accounts for real differences.

🎯 Equal margin pricing as the solution

🎯 What equal margin pricing is

• Equal margin pricing: the cooperative charges the same margin per member, but the total price can vary.
• It recognizes that there are differences in providing a product or service to different members.
• As long as the cooperative charges the same margin per member, volume discounts or premiums are justifiable.

🔍 Why it is more equitable

• It treats members fairly by acknowledging that serving a large-volume member may cost less per unit than serving a small-volume member.
• Example: if Member A orders 1,000 units and Member B orders 100 units, the per-unit handling cost for A is lower; equal margin pricing allows A to pay a lower per-unit price while both A and B contribute the same margin per unit to the cooperative.
• This approach supports both economic purpose (the cooperative can survive and reinvest) and equity (members are charged fairly based on actual cost differences).

🌱 Context: homogeneity in early cooperatives

🌱 Why uniform pricing seems appealing at first

• When cooperatives are first formed, members are often considered homogeneous:
  • Farms are of similar size or scale.
  • Members share a similar social purpose.
• In this context, uniform pricing may seem fair because members appear similar.

⚠️ Why this assumption breaks down

• The excerpt states that neither zero-profit operation nor uniform pricing will lead to a cooperative achieving an economic purpose and surviving.
• As cooperatives grow or as member diversity increases, the homogeneity assumption no longer holds.
• Sticking to uniform pricing ignores real cost differences and can lead to inequity (small members subsidizing large members or vice versa) and financial unsustainability.

📊 Summary: achieving economic purpose and survival

Interpretation of "service at cost"	What it means	Why it fails	Better approach
Zero patronage refunds	Operate as non-profit	No income to reinvest in assets	Retain some earnings for reinvestment
Uniform pricing	Same price for all members	Ignores cost differences; less equitable	Equal margin pricing
Equal margin pricing	Same margin per member, variable price	Recognizes cost differences; justifies volume discounts/premiums	Supports survival and equity

📊 Key takeaway

• "Service at cost" should not be taken literally as zero profit or identical pricing.
• Equal margin pricing balances fairness (same margin) with economic reality (different costs) and ensures the cooperative can reinvest and survive.

🧭 Overview

🧠 One-sentence thesis

The decline in agricultural cooperative numbers worldwide is primarily driven by mergers and consolidation between cooperatives, though the decline is slower than the decline in the number of agricultural producers themselves.

📌 Key points (3–5)

• The decline is real but relative: cooperative numbers are falling, but agricultural producer numbers are falling even faster.
• Main cause: mergers or unifications between cooperatives account for most of the numerical decline.
• Common confusion: the decline does not necessarily mean cooperatives are failing—consolidation is a strategic response and is expected to continue.
• Geographic scope: the trend is especially documented in the U.S. and Western Europe.
• Context matters: when measured as a proportion of total producers, cooperatives may actually be holding steady or declining more slowly.

📉 The scale and nature of the decline

📉 Absolute vs. relative decline

• The excerpt notes that "much has been written" about declining cooperative numbers and membership, particularly in the U.S. and Western Europe.
• However, the number of agricultural producers has declined more rapidly than the number of cooperatives.
• This means:
  • In absolute terms, there are fewer cooperatives.
  • In relative terms (cooperatives per producer), the decline is less severe or may not exist at all.
• Don't confuse: a falling number does not automatically mean cooperatives are losing relevance—the entire agricultural sector is shrinking.

🔍 What the data show

• Public data on U.S. cooperatives suggest the trend is measurable and documented.
• The excerpt emphasizes comparing cooperative numbers to producer numbers, not looking at cooperative numbers in isolation.
• Example: If producer numbers fall by 50% and cooperative numbers fall by 30%, cooperatives are actually becoming more concentrated per producer.

🔗 Why cooperatives are declining in number

🔗 Mergers and unifications

The most common reason for the decline in numbers is mergers or unifications between cooperatives.

• This is by far the dominant cause according to public data.
• Mergers mean two or more cooperatives combine into one entity, reducing the total count but not necessarily reducing capacity or membership.
• The excerpt states this consolidation "is expected to continue," indicating it is an ongoing strategic trend rather than a temporary phenomenon.

🏗️ Consolidation as a structural trend

• The excerpt does not frame consolidation as a failure or crisis.
• Instead, it presents consolidation as a predictable response to changing conditions.
• Don't confuse: fewer cooperatives does not mean fewer services or weaker cooperatives—merged entities may be larger and more efficient.
• Example: Two small regional cooperatives merge into one larger cooperative serving both regions, reducing the count by one but potentially increasing total volume and member benefits.

🌍 Geographic and sectoral context

🌍 Where the decline is documented

• The excerpt specifically mentions:
  • U.S.: public data available and widely analyzed.
  • Western Europe: similar trends observed.
• The excerpt does not claim the trend is universal worldwide, but the chapter title suggests it is a global question.
• Other regions (African, Southeast Asian, Oceania, Latin American countries) are mentioned earlier in the excerpt as places where cooperatives are being promoted in development programs, suggesting the trend may vary by region.

🌾 Agricultural cooperatives specifically

• The decline discussion focuses on agricultural cooperatives, not cooperatives in general.
• This is important because agriculture itself is undergoing structural change (fewer, larger farms).
• The cooperative decline mirrors the broader agricultural consolidation trend.

🧩 Implications and interpretation

🧩 What the decline does and does not mean

What it means	What it does NOT necessarily mean
Fewer separate cooperative entities	Fewer members served
More consolidation and mergers	Weaker cooperative sector
Larger average cooperative size	Loss of cooperative principles
Ongoing structural change	Failure of the cooperative model

🔮 Future expectations

• The excerpt states consolidation "is expected to continue."
• This suggests:
  • The trend is structural, not cyclical.
  • Policymakers and cooperative leaders anticipate ongoing mergers.
  • The cooperative sector is adapting to changing agricultural landscapes.
• No specific timeline or endpoint is given in the excerpt.

🧭 Overview

🧠 One-sentence thesis

Cooperatives can organize their governance through centralized, federated, or hybrid structures, and the choice should align with the cooperative's economic purpose and how members participate in governance, benefits, and ownership.

📌 Key points (3–5)

• Three membership structures: centralized (individual members), federated (cooperative members), or a combination of both—no single "right" structure exists.
• Pricing confusion: "service at cost" is often misunderstood as zero profits or uniform pricing, but equal margin pricing (same margin per member, allowing volume differences) is more equitable.
• Common confusion: uniform pricing vs. equal margin pricing—uniform pricing ignores cost differences in serving members, while equal margin pricing charges the same margin but allows volume discounts or premiums.
• Three participation dimensions: governance (qualified directors), benefits (customer transactions and cash flow), and ownership (equity proportional to use).
• Hybrid and "new generation" forms: some cooperatives allow outside investors while retaining member control, and "new generation" cooperatives link membership explicitly to contractual delivery rights and processing capacity.

🏛️ Membership structures

🏛️ Centralized structure

A centralized structure is one in which members are individuals.

• Works well when members are geographically close to the cooperative.
• Advantages:
  • Easier communication about the cooperative's purpose.
  • Operates as a true democratic governance system.
• Directors are elected from the membership based on geographical districts or chosen at large.
• Example: Some wholesaling cooperatives have merged all individual cooperative members into one cooperative, fully centralizing the structure.

🏛️ Federated structure

In federated cooperatives, each member is a cooperative.

• Resembles a republican form of government (the excerpt compares it to the U.S. and its 50 states).
• Directors are chosen from among the members of the cooperative, which can include managers, farmers, or consumers.
• Often reflects proportional voting based on business volume.
• Example: A wholesaling cooperative where each member is itself a cooperative.

🏛️ Combination structure

• Some wholesaling cooperatives use a combination of centralized and federated structures.
• The excerpt emphasizes there is no right or wrong answer.

🎯 Choosing the right structure

Members should choose the structure that:

• Best fits and communicates the cooperative's economic purpose.
• Considers its impact on three ways members participate:

Participation dimension	Key question
Governance	Which structure provides the best qualified directors?
Benefits	Which structure creates the best customer transaction and after-tax cash flow to members?
Ownership	Which structure creates the best equity structure that accounts for the member's life cycle and ensures investment proportional to use?

💰 Pricing strategies

💰 The "service at cost" principle

The cooperative principle of "service at cost" was widely used as an idea of how cooperatives should operate.

• While it sounds reasonable, its literal application as a management strategy has problems.

🚫 Two common misinterpretations

1. Zero-profit interpretation: Some members interpret "service at cost" to mean cooperatives should operate as non-profits, with zero or close to zero patronage refunds each year.

   • Problem: There will never be any income to reinvest in the cooperative's assets.

2. Uniform pricing interpretation: Others see it as a requirement to follow an average cost or uniform pricing strategy and set the same price for all members, regardless of size or volume.

   • Problem: This is not the most equitable pricing strategy.

✅ Equal margin pricing

• A better and more equitable pricing strategy.
• How it works: The cooperative charges the same margin per member, but recognizes that there are differences in providing a product or service.
• Key principle: As long as the cooperative charges the same margin per member, volume discounts or premiums are justifiable.
• Don't confuse: Equal margin pricing is not the same as uniform pricing—equal margin allows for volume differences while maintaining fairness through consistent margins.

🌾 Context: homogeneous members

• When cooperatives are first formed, members are often considered homogeneous (farms of similar size or scale and with a similar social purpose).
• However, neither zero-profit nor uniform pricing practices will lead to a cooperative achieving an economic purpose and surviving.

🔄 Hybrid and alternative forms

🔄 Hybrid cooperative organizational forms

Some cooperatives have organized themselves into so-called hybrids by retaining their cooperative governance as much as possible but allowing outside investors to invest in the cooperative.

• In the U.S., these blend elements of mutual-benefit companies and investor-benefit firms, especially limited liability companies.
• These are rare in the U.S. relative to traditional cooperatives.

Key governance rules:

• Members control the board of directors with a supermajority.
• Members retain the board chairmanship.
• Non-members are allowed on the board of directors.
• In certain European Union countries, legislation states that members of employee unions or management may be on the board of directors.

🌽 "New generation" cooperatives

The so-called "new generation cooperatives" began occurring in the U.S. in the late 1990s, with producers vertically integrating into processing cooperatives.

Industries: corn-ethanol, durum wheat for pasta, sugar beets for sugar and co-products, and other commodities.

🌽 Why "new generation"?

They differed from previous types of cooperative formation:

• The membership was defined and linked explicitly through contractual marketing agreements with the capacity of the processing plant.
• Delivery rights were linked with physical units.

🌽 How it works: corn-ethanol example

The excerpt provides a detailed example:

Element	Details
Plant capacity	50 million gallon corn-ethanol plant requiring 18 million bushels of corn
Delivery rights	Cooperative sells 18 million delivery rights linked with physical units (bushels)
Member commitment	Members commit to physically deliver 18 million bushels of corn
Minimum investment	10,000 bushels per member
Maximum membership	No more than 1,800 members (18 million ÷ 10,000)
Total plant cost	$35 million
Member equity requirement	Up to 70% of total cost = $24.5 million
Upfront cost per bushel	$1.36 per bushel ($24.5 million ÷ 18 million bushels)
Minimum investment per member	$13,611 ($1.36 × 10,000 bushels)

🌽 Member benefits

• A member would be entitled to a patronage refund obtained from the processing of corn into ethanol and its co-products.
• This patronage refund would be expressed in dollars per bushel.
• It represents the value obtained above and beyond the market price of corn received when the cooperative purchased the corn from the member.

🌽 Key characteristics

A new generation cooperative had:

• A defined membership.
• Defined responsibilities of each member, including:
  • A contractual delivery right.
  • Corresponding share in control through participation in governance.

🌽 Scale

Data from the U.S. Department of Agriculture suggests that more than 200 [the excerpt cuts off here].

📉 Declining numbers of cooperatives

📉 The trend

Much has been written about the declining number of cooperatives and membership in cooperatives, especially in agricultural cooperatives in the U.S. and Western Europe.

📉 Context: comparing to producers

• When compared to the number of agricultural producers, data suggest that the number of producers has declined more rapidly than the number of cooperatives.
• This provides important context for understanding the decline.

📉 Main reason for decline

Public data on cooperatives in the U.S. suggests that by far the most common reason for the decline in numbers is mergers or unifications between cooperatives.

• This consolidation is expected to continue.
• Don't confuse: The decline is not primarily due to cooperatives failing or closing, but rather merging with each other.

🧭 Overview

🧠 One-sentence thesis

Hybrid cooperatives blend traditional cooperative governance with outside investment, allowing non-member investors while members retain supermajority control of the board and chairmanship.

📌 Key points (3–5)

• What hybrids are: cooperatives that retain cooperative governance but allow outside investors to invest.
• How control is preserved: members control the board with a supermajority and retain the board chairmanship; non-members may serve as directors but not dominate.
• What they blend: elements of mutual-benefit companies and investor-benefit firms (especially limited liability companies in the U.S.).
• Common confusion: hybrids vs traditional cooperatives—hybrids open ownership to non-members while traditional cooperatives restrict ownership to member-users only.
• Rarity and variation: these structures are rare in the U.S. relative to traditional cooperatives; some European Union countries mandate employee union or management representation on boards.

🏗️ Structure and governance

🏗️ Retaining cooperative control

• Hybrids organize by keeping cooperative governance as much as possible while opening the door to outside capital.
• Members must control the board of directors with a supermajority (more than a simple majority, ensuring members cannot be outvoted by investors).
• Members also retain the board chairmanship, giving them leadership authority even when non-members sit on the board.

👥 Non-member participation

• Non-members are allowed on the board of directors, but they do not control it.
• This allows outside investors to have a voice and oversight without shifting decision-making power away from the member-users.
• Example: An organization might have seven board seats; members hold five (supermajority) and appoint the chair, while two seats go to outside investors.

🌍 Regional variations

• In certain European Union countries, legislation requires that employee union representatives or management may serve on the board of directors.
• This adds another layer of stakeholder representation beyond just member-users and outside investors.

💼 What hybrids blend

💼 Mutual-benefit vs investor-benefit elements

Hybrids blend elements of mutual-benefit companies and investor-benefit firms, especially limited liability companies.

Element	Mutual-benefit (cooperative)	Investor-benefit (LLC)	Hybrid approach
Governance	Members vote, one member one vote or proportional to use	Investors vote, proportional to shares	Members retain supermajority control
Ownership	Restricted to member-users	Open to any investor	Open to outside investors, but members dominate board
Purpose	Service at cost, patronage refunds	Profit maximization for investors	Cooperative purpose preserved, outside capital allowed

• The hybrid structure tries to access outside capital (investor-benefit feature) without losing the member-controlled, service-oriented mission (mutual-benefit feature).
• Don't confuse: a hybrid is still a cooperative in governance; it is not an investor-owned firm that happens to have some member input.

🔍 Context and prevalence

🔍 Rarity in the U.S.

• These hybrid forms are rare in the U.S. relative to traditional cooperatives.
• The excerpt does not explain why they are rare, but it emphasizes that the traditional cooperative model remains dominant.

🔍 Why hybrids exist

• The excerpt does not state explicit reasons, but the structure suggests hybrids address a need for capital that members alone cannot or will not provide.
• By allowing outside investors, the cooperative can fund growth or new projects without requiring all capital from members.
• Example: A cooperative needs to build a new processing facility but members cannot afford the full investment; outside investors provide funds in exchange for board seats and a return, while members keep control.

🧭 Overview

🧠 One-sentence thesis

"New generation cooperatives" emerged in the late 1990s as a distinct model that explicitly linked membership, contractual delivery obligations, and upfront investment to the physical capacity of processing plants, though most have since converted to other forms or demutualized.

📌 Key points (3–5)

• What made them "new generation": membership was defined and linked explicitly through contractual marketing agreements tied to processing plant capacity, unlike previous cooperative formation types.
• How membership worked: delivery rights were sold as physical units (e.g., bushels), requiring minimum investment and contractual commitment to deliver, creating a defined membership with defined responsibilities.
• Economic structure: members invested upfront capital (often around 70% of total plant cost) and received patronage refunds above market price for their delivered commodities.
• Common confusion: not all conversions are demutualization—some processing cooperatives converted to limited liability partnerships due to tax issues but remained member-held, which differs from true demutualization (selling to non-cooperative corporations or converting to publicly-held companies).
• Outcome: of more than 200 business plans written, fewer than 75 plants were built, and by 2017 fewer than 30 maintained "new generation" cooperative status.

🏭 What defined "new generation" cooperatives

🆕 Why they were called "new generation"

• They differed from previous types of cooperative formation in fundamental ways.
• The key innovation: membership was explicitly linked through contractual marketing agreements with processing plant capacity.
• Producers vertically integrated into processing cooperatives for commodities like corn-ethanol, durum wheat for pasta, sugar beets, and others.
• Timeline: began occurring in the late 1990s in the United States.

🔗 The capacity-linked membership model

Membership was defined and linked explicitly through contractual marketing agreements with the capacity of the processing plant.

• The cooperative would sell delivery rights linked with physical units (e.g., bushels).
• Members committed to physically deliver specific quantities matching plant capacity.
• Example: A 50 million gallon corn-ethanol plant requiring 18 million bushels of corn would sell 18 million delivery rights.
• This created a defined membership with defined responsibilities, including contractual delivery rights and corresponding share in control through governance participation.

💰 Financial structure and member obligations

💵 Upfront investment requirements

The total cost was determined through a business plan, with members required to invest a significant portion upfront (often around 70% of total cost).

Example calculation (corn-ethanol plant):

• Plant cost: $35 million
• Required member investment (70%): $24.5 million
• Plant capacity: 18 million bushels
• Cost per bushel: $1.36 ($24.5 million ÷ 18 million bushels)
• Minimum investment unit: 10,000 bushels
• Minimum member investment: $13,611 ($1.36 × 10,000 bushels)
• Maximum membership: 1,800 members (18 million ÷ 10,000 bushels)

📊 Patronage refund system

• Members were entitled to patronage refunds from processing their commodity.
• The refund was expressed in dollars per bushel.
• It represented the value obtained above and beyond the market price received when the cooperative purchased the commodity from the member.
• Example: If the cooperative bought corn at market price and processed it into ethanol and co-products, the additional profit per bushel would be distributed as patronage refunds.

📉 Historical outcomes and conversions

📈 Formation and survival rates

Stage	Number
Business plans written	More than 200
Conducted membership drives for investment	Less than half (~100)
Actually built processing plants	Perhaps 75
Maintained "new generation" status by 2017	Less than 30

🏛️ Government support factors

• Sugar beet processing and corn-ethanol plants benefited from government policies.
• These policies helped their formation and economic viability.

🔄 What happened to the others

Successful but demutualized:

• U.S. Premium Beef and Dakota Growers Pasta had great success but demutualized and were acquired by outside investors.

Converted to other forms:

• South Dakota Soybean Processors and a number of corn-ethanol cooperatives converted to different forms of closely held organizations.
• Some processing cooperatives formed in late 1990s and early 2000s converted from cooperatives to limited liability partnerships because of tax issues.

Don't confuse: Conversion to limited liability partnerships due to tax issues is not demutualization since they are still held by members.

🔀 Understanding demutualization

🔀 What demutualization means

Demutualization: when members of a cooperative or mutual insurance company decide to sell their cooperative or convert to a publicly-held company.

• It gets a lot of attention despite being very rare.
• Historically, less than 0.01% of cooperatives tracked by the U.S. Department of Agriculture voted to be acquired by a non-cooperative corporation or to demutualize.

📋 Examples of different outcomes

Acquired by non-cooperative firms:

• Birds Eye Foods
• U.S. Premium Beef
• Dakota Growers Pasta

True demutualization:

• Diamond Walnut Growers
• California Avocado Cooperative
• FCStone
• Goldkist

Converted but still member-held (not demutualization):

• Processing cooperatives that converted to limited liability partnerships for tax reasons

⚠️ Common sources of internal conflict

The excerpt lists reasons why cooperatives may experience internal conflict among membership:

• Free ridership
• Differing time horizons among members regarding investments in long-term assets
• Differing tolerance for risk among asset investments
• Issues in control regarding information between management and members
• Influence costs as complexity grows in an organization with more lines of business units

Note: These problems are more likely as a cooperative becomes larger and more complex, yet cooperatives have generally flourished despite these issues.

🧭 Overview

🧠 One-sentence thesis

Demutualization—when a cooperative converts to a publicly-held company or is acquired by outside investors—receives significant attention despite being extremely rare, occurring in less than 0.01% of U.S. cooperatives tracked over time.

📌 Key points (3–5)

• How rare demutualization is: less than 0.01% of U.S. cooperatives tracked by the USDA have demutualized or been acquired by non-cooperative corporations.
• What demutualization means: members vote to sell their cooperative or convert it to a publicly-held company.
• Common confusion: converting from a cooperative to a limited liability partnership held by members is not demutualization, since members still own it.
• Why internal conflict arises: free ridership, differing time horizons for investments, varying risk tolerance, control/information issues between management and members, and influence costs as organizations grow more complex.
• Why it remains rare: multi-generational farming families in U.S. agricultural cooperatives likely contribute to very few bankruptcies or demutualizations.

📋 What demutualization means

📋 Definition and scope

Demutualization: when members of a cooperative or mutual insurance company decide to sell their cooperative or convert to a publicly-held company.

• The excerpt emphasizes this applies to both cooperatives and mutual insurance companies.
• It involves a member vote to change ownership structure fundamentally.
• The event "gets a lot of attention" despite being historically very rare.

🔢 How rare it actually is

• Less than 0.01% of cooperatives tracked over time by the U.S. Department of Agriculture have demutualized or been acquired.
• This statistic covers cooperatives that either:
  • Voted to be acquired by a non-cooperative corporation, or
  • Voted to demutualize (convert to publicly-held).
• Example: Birds Eye Foods, U.S. Premium Beef, and Dakota Growers Pasta were acquired by other firms.
• Example: Diamond Walnut Growers, California Avocado Cooperative, FCStone, and Goldkist demutualized.

⚠️ What is not demutualization

• A number of processing cooperatives formed in the late 1990s and early 2000s converted to limited liability partnerships because of tax issues.
• Don't confuse: these conversions are not demutualizations because the organizations are still held by members.
• The key distinction: ownership remains with members vs. ownership transfers to outside investors or public shareholders.

🧩 Why internal conflict leads to demutualization

🧩 Sources of member conflict

The excerpt lists five common reasons why cooperatives may experience internal conflict:

Source of conflict	What it means
Free ridership	Some members benefit without contributing proportionally
Differing time horizons	Members disagree on investments in long-term assets
Differing risk tolerance	Members have varying comfort levels with asset investment risks
Control and information issues	Problems between management and members regarding information flow
Influence costs	Complexity grows as the organization adds more business units

• These problems become more likely as a cooperative becomes larger and more complex.
• The excerpt notes that "the very few that have happened can trace the reasons to one or more of the issues above."
• Many demutualizations involved wholesaling-type cooperatives.

🛡️ Why most cooperatives avoid demutualization

• Despite the internal conflict issues, cooperatives have flourished in the U.S. and worldwide.
• The excerpt suggests that most cooperative members come from multi-generational farming families.
• This multi-generational character is "likely a reason why there are so few bankruptcies or demutualizations in U.S. agricultural cooperatives."
• Implication: long-term family commitment to the cooperative model helps members work through conflicts rather than exit through demutualization.

🌾 Context: New generation cooperatives

🌾 What new generation cooperatives were

The excerpt provides context by describing "new generation cooperatives" that began in the U.S. in the late 1990s:

• Producers vertically integrated into processing cooperatives (corn-ethanol, durum wheat for pasta, sugar beets, etc.).
• Called "new-generation" because they differed from previous cooperative formation types.
• Membership was defined and linked explicitly through contractual marketing agreements tied to processing plant capacity.

📊 How they were structured

Example: a 50 million gallon corn-ethanol plant requiring 18 million bushels of corn:

• The cooperative would sell 18 million delivery rights linked with physical units (bushels).
• Members committed to physically deliver 18 million bushels of corn.
• Delivery rights might require a minimum investment (e.g., 10,000 bushels).
• Maximum membership would be 1,800 members (18 million ÷ 10,000).
• Members required to invest up to a certain amount (e.g., 70% of total cost).
• If the plant cost $35 million, $24.5 million required upfront.
• Upfront cost per producer: $1.36 per bushel, or minimum $13,611.
• Members entitled to patronage refund from processing, expressed in dollars per bushel above market price.

📉 What happened to them

• More than 200 business plans were written for investments in processing assets.
• Less than half actually conducted membership drives for investment.
• Perhaps 75 actually built a processing plant.
• Sugar beet processing and corn-ethanol plants had government policies that helped their formation and viability.
• Several had great success (U.S. Premium Beef, Dakota Growers Pasta) but demutualized and were acquired by outside investors.
• Others (South Dakota Soybean Processors, several corn-ethanol cooperatives) converted to different forms of closely held organizations.
• By 2017, estimated to be less than 30 cooperatives maintaining "new generation" cooperative status.

This context shows that even among a specific wave of cooperatives designed with defined membership and contractual obligations, demutualization and conversion occurred but remained a minority outcome.

🧭 Overview

🧠 One-sentence thesis

Farm supply and grain marketing cooperatives in the U.S. have invested billions of dollars in assets since 2004—the biggest change since their formation—driven by increased crop volumes, changing cropping patterns, and logistical strain from faster planting and harvesting.

📌 Key points (3–5)

• What is happening: Multi-purpose farm supply and grain/oilseed marketing cooperatives are undergoing major restructuring through massive asset investments since 2004.
• Why it's happening: Three drivers—higher crop yields increasing volumes, new seed varieties enabling corn/soybeans in regions that historically grew only wheat/barley, and faster planting/harvesting times straining logistics.
• Scale of change: This is the biggest transformation in this cooperative sector since these cooperatives were first formed.
• Common confusion: Don't confuse this restructuring with demutualization—the excerpt discusses asset investment and operational changes, not conversion to non-cooperative forms.

🌾 What is being restructured

🌾 The cooperative type

'Mixed' or multi-purpose farm supply and grain/oilseed marketing cooperatives: cooperatives that handle both farm input supplies and grain/oilseed marketing activities.

• These are not single-purpose organizations; they serve multiple functions for farmers.
• The excerpt calls them "mixed" or "multi-purpose," indicating they combine supply and marketing roles.

💰 The scale of investment

• Billions of dollars in asset investments have been made since 2004.
• The excerpt emphasizes this is "the biggest change in this particular cooperative sector since these cooperatives were first formed."
• This indicates a fundamental transformation, not incremental adjustment.

🚜 Three drivers of restructuring

📈 Increased crop volumes

• Crop yields in corn and soybeans have increased.
• How: Improvements in seed varieties and planting technologies.
• Specific technology: Narrower rows resulting in increased seed densities per acre.
• Example: If a farm previously planted X seeds per acre with wide rows, narrower rows allow more seeds per acre, increasing total production volume that cooperatives must handle.

🌍 Changed cropping patterns

• Geographic expansion of corn and soybeans into new regions.
• What changed: Corn and soybean seed varieties have been developed for regions that historically could produce only small grains such as wheat and barley.
• This means cooperatives in those regions now handle different crops with different storage, handling, and marketing requirements.

⏱️ Logistical strain from faster operations

• Average planting and harvesting times have almost been halved.
• How: Greater horsepower being used by farmers.
• Result: This has "placed a strain on logistics."
• Example: If harvest previously took 4 weeks and now takes 2 weeks, cooperatives must receive, process, and store the same volume in half the time, requiring different infrastructure and capacity.

🔗 Context: Broader cooperative trends

🔄 Demutualization is rare

• The excerpt provides context by noting demutualization (conversion to publicly-held companies) is very rare—less than 0.01% of tracked cooperatives.
• Don't confuse: The restructuring of farm supply/grain marketing cooperatives through asset investment is different from demutualization; these cooperatives are investing to remain cooperatives, not converting away from the cooperative form.

🏭 New generation cooperatives

• The excerpt mentions that in the late 1990s and early 2000s, many "new generation" cooperatives were formed for processing.
• Some converted to limited liability partnerships "because of tax issues"—these are not demutualizations since they are still member-held.
• This shows that organizational form changes can happen for operational/tax reasons while maintaining member ownership.

📊 Why this restructuring matters

Aspect	What's changing	Implication
Volume capacity	More grain/oilseeds to handle	Need bigger storage and processing assets
Crop diversity	New crops in new regions	Need different handling equipment and expertise
Time compression	Harvest happens in half the time	Need faster receiving and logistics systems
Investment scale	Billions of dollars since 2004	Fundamental transformation of cooperative infrastructure

💡 Historical significance

• The excerpt emphasizes this is "the biggest change in this particular cooperative sector since these cooperatives were first formed."
• This framing suggests decades or even a century of relatively stable operations before 2004.
• The restructuring represents a response to technological change in farming (better seeds, bigger equipment) rather than a change in cooperative philosophy or member needs.

🧭 Overview

🧠 One-sentence thesis

Collective farming movements involve communal ownership of agricultural land with varying degrees of member participation in governance, ranging from democratic cooperatives like kibbutzim to non-voluntary collectives without member control.

📌 Key points (3–5)

• What collective farming is: communal ownership of agricultural land that exists in different places worldwide.
• Key examples: kibbutzim in Israel (cooperative-style governance), Hutterite colonies in North America (excluding women from governance), and Eastern European/Soviet collectives (no member participation in governance).
• Common confusion: not all communal land ownership is cooperative—some structures lack democratic control and voluntary membership, which are hallmarks of true cooperatives.
• Voluntary vs. forced: true cooperatives involve voluntary participation, while some collective structures (e.g., Soviet collectives) were not voluntary.
• Governance differences: strategic decisions like planting choices and machinery purchases may or may not be made democratically by members depending on the structure.

🌾 Types of collective farming structures

🇮🇱 Kibbutzim in Israel

Kibbutzim: communal agricultural land ownership in Israel, governed much like a cooperative.

• Members collectively own the agricultural land.
• Governance follows cooperative principles, meaning members participate in decision-making.
• Example: strategic decisions about farming operations are made through democratic processes similar to cooperative boards.

🏘️ Hutterite colonies in North America

• Follow a similar communal ownership process to kibbutzim.
• Key difference: women have no role in governance.
• Still involves collective ownership but with restricted participation in decision-making.

🚩 Eastern European and Soviet collectives

Collectives and communes: communal land ownership structures in Eastern Europe and the former Soviet Union.

• Members did not participate in governance.
• Strategic decisions (what to plant, what machinery to purchase) were not made by a board with democratic control.
• Critical distinction: development was not voluntary.
• Don't confuse with cooperatives: lack of voluntary participation and democratic control means these do not meet cooperative principles.

🔍 Distinguishing true cooperatives from other collective structures

⚖️ Key criteria for cooperative status

Feature	True cooperatives (e.g., kibbutzim)	Non-cooperative collectives (e.g., Soviet)
Voluntary membership	Yes—members choose to join	No—development was not voluntary
Democratic governance	Yes—members participate in strategic decisions	No—members did not participate in governance
Decision-making	Board makes decisions in a manner associated with democratic control	Strategic decisions made without member input

🚫 What doesn't qualify as cooperative

• Simply having communal ownership is not enough.
• Without voluntary participation and democratic control, the structure is a collective but not a cooperative.
• Example: if an organization decides what to plant and what machinery to purchase without member board participation, it lacks the democratic control characteristic of cooperatives.

🌍 Geographic spread and historical context

🗺️ Where collective farming exists

• Different places around the world have experimented with communal agricultural land ownership.
• Well-known examples are concentrated in:
  • Israel (kibbutzim)
  • North America (Hutterite colonies)
  • Eastern Europe and former Soviet Union (collectives and communes)

📅 20th century experiments

• Other countries with communist or socialist governments experimented with similar structures during the 20th century.
• These experiments varied in their adherence to cooperative principles.
• The excerpt does not provide details on specific countries or outcomes beyond the examples mentioned.

🧭 Overview

🧠 One-sentence thesis

Cooperatives and mutuals play a substantial and measurable role in the U.S. economy, with nearly 30,000 cooperatives operating at 73,000 locations, holding more than $3 trillion in assets and generating over $500 billion in revenues as of 2013.

📌 Key points (3–5)

• Scale of economic impact: Nearly 30,000 U.S. cooperatives operated at 73,000 business locations with more than $3 trillion in assets and over $500 billion in gross revenues (2013 data).
• Membership reach: Almost 340 million consumer co-op memberships and another 10 million agricultural cooperative memberships were documented.
• Research foundation: The University of Wisconsin at Madison conducted multi-year research that documented the economic impact and increased understanding of cooperatives' role in the U.S. economy.
• Common confusion: Cooperatives and mutuals are sometimes perceived as outdated or having "lost their way," but measurable evidence clearly shows they continue to thrive and play an important role in the global economy.
• Why it matters: This extensive, well-documented research provides concrete evidence of the significant economic footprint of cooperative and mutual organizations in the national economy.

📊 Scale and scope of cooperative economic activity

📊 Operational footprint

The University of Wisconsin at Madison research documented the following for 2013:

Metric	Value
Number of U.S. cooperatives	Nearly 30,000
Places of business	73,000
Total assets	More than $3 trillion
Gross revenues	Over $500 billion

• These figures represent the physical and financial presence of cooperatives throughout the country.
• The fact that 30,000 cooperatives operate at 73,000 locations indicates that many cooperatives maintain multiple business sites.
• Example: A regional agricultural cooperative might operate grain elevators, supply stores, and processing facilities across multiple counties, counting as one cooperative but several places of business.

👥 Membership participation

• Consumer co-op memberships: Almost 340 million
• Agricultural cooperative memberships: Another 10 million

Don't confuse: These membership numbers represent memberships, not unique individuals—one person may hold memberships in multiple cooperatives (e.g., a credit union, a grocery co-op, and an insurance mutual).

🔬 Research methodology and significance

🔬 The Wisconsin research project

The University of Wisconsin at Madison conducted a multi-year research project to document the economic impact of cooperatives, including mutuals, in the U.S. economy.

• The research was described as "extensive and well-done," indicating rigorous methodology.
• It was a multi-year effort, suggesting comprehensive data collection and analysis rather than a snapshot study.
• The scope included both cooperatives and mutuals across different sectors.

📈 Impact on understanding

• The research "resulted in greater understanding of the role cooperatives play in the U.S. economy."
• Before this research, the economic footprint of cooperatives was apparently less well-documented or understood.
• The measurable evidence provided by this research counters periodic concerns that cooperatives are outdated.

🌍 Global context and ongoing relevance

🌍 Thriving globally

• The excerpt states that "cooperatives and mutual continue to thrive globally."
• This thriving occurs despite periodic concerns from academics and practitioners about cooperatives being outdated or having lost their way.

🔍 Evidence vs. perception

Common confusion: Some observers worry that cooperatives and mutuals are outdated organizational forms.

Reality: "The measurable evidence is quite clear that this is not the case."

• The documented economic impact (trillions in assets, billions in revenues, hundreds of millions of memberships) provides concrete evidence of continued vitality.
• Legal business forms change over time in response to policy, legislation, and tax treatment, but mutual benefit organizational forms continue to play an important role.

🎯 Not a universal solution

• The excerpt acknowledges that cooperatives and mutuals "are not the solution to every economic or social problem."
• Changes in how various forms of collective action utilize these models "is to be expected."
• This realistic assessment strengthens the credibility of the positive economic impact findings—the research doesn't overstate the role of cooperatives.

🔄 Evolution and adaptation

🔄 Purpose transition

• Cooperatives that move from strictly a social purpose to an economic purpose "tend to succeed over time."
• However, it is important to maintain some social purpose to help members understand their membership roles and responsibilities.

Don't confuse: Economic purpose vs. social purpose is not either/or—successful cooperatives balance both, with economic viability supporting long-term sustainability while social purpose maintains member engagement.

⚖️ Organizational form flexibility

• Legal business forms change over time as policy and legislation change, often in response to tax treatment of income.
• Despite these changes in the broader business environment, mutual benefit organizational forms continue to adapt and remain relevant.
• Example: An organization might adjust its legal structure in response to new tax laws while maintaining its cooperative principles and member-ownership model.

🧭 Overview

🧠 One-sentence thesis

Despite cooperatives' principle of religious neutrality in membership, faith-based organizations have played key roles in developing cooperatives and mutuals in several countries.

📌 Key points (3–5)

• Core tension: Cooperative principles require religious neutrality for membership, yet faith organizations have been instrumental in cooperative development.
• Historical examples: Catholic and Lutheran organizations helped establish worker cooperatives, consumer cooperatives, and mutual insurance organizations in different regions.
• Types of involvement: Faith groups contributed to manufacturing cooperatives, retail businesses, and community volunteer efforts.
• Evolution over time: Some faith-based mutuals have broadened membership beyond their original religious restrictions while maintaining community service missions.

⚖️ The neutrality principle vs. faith involvement

⚖️ Religious neutrality as a cooperative hallmark

Religious neutrality has been a hallmark of cooperative principles regarding membership.

• This means cooperatives are supposed to be open to members regardless of religious affiliation.
• The principle ensures inclusivity and prevents discrimination based on faith.
• Don't confuse: Neutrality in membership does not prevent faith organizations from founding or supporting cooperatives.

🤝 How faith organizations contributed despite neutrality

• Faith-based groups acted as organizers and supporters, not gatekeepers of membership.
• They provided the social infrastructure and volunteer networks needed to launch cooperative enterprises.
• The excerpt shows this happened "in several countries," indicating a widespread pattern.

🌍 Examples of faith-based cooperative development

⛪ Catholic Worker Movement contributions

Region	Type of cooperative	What was formed
Mondragón, Spain	Worker cooperatives	Manufacturing enterprises
Emilia-Romagna, Italy	Consumer cooperatives	Various retail businesses

• The Catholic Worker Movement helped form these cooperatives, providing organizational support.
• Both examples resulted in "broad collections" of businesses, not isolated ventures.
• Example: In one region, the movement helped workers collectively own manufacturing facilities; in another, it helped consumers collectively own retail operations.

🛡️ Knights of Columbus

• Based in Catholic parishes.
• Provides "a strong set of community-based volunteer efforts."
• The excerpt emphasizes the community foundation—parishes served as the organizational base.

🏦 Thrivent Financial evolution

• Original form: Fraternal benefit mutual insurance with membership limited to Lutherans.
• Current form: Broadened membership to "a broader set of Christians."
• Ongoing activity: Active in community volunteerism, especially Habitat for Humanity.
• This example shows how faith-based mutuals can evolve: starting with strict religious membership requirements, then expanding while maintaining service missions.
• Don't confuse: Broadening membership does not mean abandoning faith connections—Thrivent still serves Christians and engages in faith-aligned volunteer work.

🔄 Pattern and implications

🔄 The development pattern

• Faith organizations provided the initial organizing capacity for cooperatives.
• They leveraged existing community networks (parishes, congregations) to build trust and participation.
• The cooperatives themselves maintained religious neutrality in membership, even when founded by faith groups.

🎯 Why this matters

• Shows that cooperative principles (neutrality) and faith-based organizing are not contradictory.
• Faith communities can serve as effective incubators for cooperative enterprises.
• The excerpt presents this as a historical fact across multiple countries and denominations, suggesting it is a significant pathway for cooperative development.
• Example: A faith organization might gather community members to form a cooperative, but once formed, the cooperative accepts members regardless of their religious beliefs.

🧭 Overview

🧠 One-sentence thesis

Cooperatives and mutuals are viable business firms whose success depends on economic transactions in a market economy, and they remain globally relevant despite periodic concerns about their relevance.

📌 Key points (3–5)

• Core identity: Cooperatives and mutuals are firms where the Make-or-Buy decision leads to vertical integration owned by consumers, producers, suppliers, or workers—not investors.
• Three-way participation: Members participate in economic benefits, ownership, and control based on patronage (business volume), not just capital investment.
• Ownership structure matters: Large collective ownership creates equity that helps the firm survive business shocks and cycles, especially when full value is not known immediately (e.g., agricultural marketing years).
• Common confusion: Social reasons may motivate formation, but ultimate success is determined by economic transactions with customers in a market economy.
• Evidence of viability: No evidence suggests the cooperative/mutual model is outdated; many successful examples exist globally, though firms must adapt strategy to changing industry conditions.

🏢 What cooperatives and mutuals are

🏢 Firms, not just social organizations

• Cooperatives and mutuals are firms—business entities that must succeed economically.
• The choice of this organizational form is based on:
  • Economic costs of the Make-or-Buy decision
  • Desired ownership structure (consumers, producers, suppliers, workers)
• Social reasons may underlie the decision to form them, but in a market economy, customer economic transactions determine success.

🔧 The Make-or-Buy decision

Make-or-Buy decision: a decision by a producer or consumer to vertically integrate through membership in a cooperative to produce a product, or simply buy it from the market.

• Cooperation and mutualism are based on the desire to Make something owned by consumers, producers, suppliers, and workers—not by investors.
• These owners have chosen to vertically integrate their business or household through a cooperative or mutual.
• Example: An agricultural producer joins a cooperative to process and market their crop rather than selling it directly to a third-party processor.

🚫 Who is excluded from ownership

• Investors are not owners in cooperatives and mutuals.
• This distinguishes them from investor-benefit businesses, where ownership is based on capital contribution rather than patronage.

🤝 How members participate

🤝 Three dimensions of participation

Members participate in three ways:

Dimension	What it means
Economic benefits	Share in profits based on volume of business transacted (patronage)
Ownership	Hold equity in the firm, often through allocated equity based on patronage
Control	Elect directors and participate in governance decisions

• This is different from investor-benefit businesses, which do not require participation as a customer.
• Don't confuse: Participation is based on patronage (business volume), not on the amount of capital invested.

🗳️ Control and governance

Governance: a system of processes by which a company is directed and controlled; in cooperatives, it involves balancing member interests with business goals.

• Members elect directors who monitor their ownership.
• Members participate directly in certain activities as defined in articles of incorporation and bylaws.
• Control may be accomplished through:
  • Democratic voting (one-member-one-vote)
  • Proportional voting based on business volume
  • A combination of both

📚 Education as a key function

• Because members participate in benefits, ownership, and control, education is an important function.
• Education includes:
  • Knowledge of the three ways of participation
  • Roles and responsibilities of membership
  • Financial decisions (often hardest to understand due to economic and social issues)

💰 Why ownership structure matters

💰 Large collective ownership creates resilience

• Cooperatives and mutuals are collectively owned by a large group of consumers, producers, suppliers, and workers.
• Large ownership structure helps create an equity structure on the balance sheet that enables the firm to survive business shocks and cycles.

🌾 Example: Agricultural cooperatives and marketing years

Marketing year: For many agricultural crops processed as ingredients or consumer products, the value of the crop is not known at harvest but becomes known over the next 12 months as supply is processed and before new harvest occurs (typically September 1 or October 1 to August 31 or September 30).

• An agricultural cooperative with highly perishable perennial crops must build an ownership structure that:
  • Helps owners survive each year
  • Adds value to their agricultural commodities over the coming marketing year
  • Functions even when full value is not known until 12 months after harvest
• Example: A farmer harvests a crop in October, but the cooperative processes and sells it over the next 12 months; the farmer's full payment depends on the cooperative's success throughout that period.

🛡️ Example: Mutual insurance firms

• A mutual insurance firm must have an ownership structure that:
  • Enables it to insure the risk profile of its members
  • Functions even when risk is not fully understood
  • Allows it to offer competitive premiums

🔗 Closed buying or supply channel

• Cooperatives function best when the majority of their business is done with members.
• This closed channel ensures that benefits flow to those who participate.

✅ Evidence of continued viability

✅ No evidence of obsolescence

• There is no evidence to suggest that the cooperative or mutual form of business is no longer viable.
• Many examples of successful cooperatives and mutuals exist globally.

🔄 Adaptation is necessary

• Industry conditions may change.
• If a cooperative or mutual does not change its strategy to reflect changing industry conditions, economic viability may be called into question.
• Example: An organization that fails to update its business model when market conditions shift may struggle, but this is a strategy issue, not a model issue.

⚠️ When things go wrong: demutualization

Property right: a legally enforced right to select the uses of an economic good produced by a firm.

• If issues of property rights are not clarified, members may become dissatisfied.
• Members may seek to demutualize (convert to investor ownership).
• Such incidences are rare but widely studied by academics.
• Don't confuse: Demutualization is not evidence that the model is flawed; it is evidence that property rights and member expectations must be managed carefully.

🎓 Academic recognition

• A number of thought leaders, including Nobel Prize Laureates, have been recognized for contributions to understanding the Make-or-Buy decision.
• Named laureates include: Ronald Coase, Oliver Hart, Bengt Holmström, Douglass North, Elinor Ostrom, and Oliver Williamson.