WORDS : ERIC FRUITS , PH.D.
Eric Fruits, Ph.D. is chief economist and president at Economics International Corp. and an adjunct professor at Portland State University.
Sales and business with the co-op’s own members. Often the most significant source of income for an agricultural cooperative.
Sales and business to nonmembers of the co-op.
Annual accounting determines the co-op’s revenue, expenses, and deductions, resulting in the net margin. The portion of the net margin associated with patronage income is then distributed proportionally to each member’s patronage of the co-op.
PATRONAGE REFUND or PATRONAGE DIVIDEND
The net margin generated by the members’ use of their business is refunded to the members. This income returned or refunded is called a patronage refund or patronage dividend.
Equity refers to the member’s ownership interest in a business. Equity is the sum of an owner’s capital contributions when added to subsequent profits (or subtracted when a loss). Many cooperative members/owners contribute increasing capital every year to the business through retains. If a cooperative’s total outstanding retains exceed total owner equity then members should pay close attention.
The amount of a member’s crop payment retained (kept back) by the co-op is called a retain. Patronage refunds, or a portion of a farmer’s crop payment, can be retained by the co-op and add to the member’s equity ownership in the co-op as a capital contribution. Many co-ops have a schedule to redeem or pay back retains (the grower’s investment), calling them “equity dividends,” over a years-long schedule. Schedules are typically three to five years, but some can be extended by the board to 10 years or longer. For example, with a three-year schedule, patronage income earned by members and retained by the co-op in 2015 would be paid back to the grower in cash in 2018 if the co-op has the cash on-hand. Co-op boards are typically given great powers to decide if and when capital contributions would be repaid.