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Unit 1. The Cooperative Form of Business. What is a Cooperative?. A special type of business (usually corporate) owned and controlled by its member patrons . This is in contrast to ordinary corporations that are investor-owned firms (IOFs). Basic Philosophy of Cooperatives.

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unit 1

Unit 1.

The Cooperative Form of Business

what is a cooperative
What is a Cooperative?
  • A special type of business (usually corporate) owned and controlled by its member patrons. This is in contrast to ordinary corporations that are investor-owned firms (IOFs).
basic philosophy of cooperatives
Basic Philosophy of Cooperatives
  • Through joint effort and collective action (cooperation) on the part of individuals with mutual interests, these individuals will be better off.
requirements for being a member owner of an ag co op
Requirements for Being a Member Owner of an Ag Co-op
  • Be an agricultural producer or other co-op
  • Provide equity capital (equity => from owners)
  • Be a customer (active)
member responsibilities obligations
Member Responsibilities/Obligations
  • Patronize Co-op
  • Provide Equity Capital
  • Keep Informed
  • Accept Risks of Being a Member


User of the business

(buyer of inputs


seller of products)

NOTE: Co-op patrons not always ‘members’.


$ amount or

$ volume of business done with a cooperative

co op versus coop
Co-op Versus Coop
  • Co-op = abbreviation for cooperative
  • Coop = place for chickens
business firm interest groups
Business Firm Interest Groups
  • Users (customers)
  • Owners (investors)
  • Controllers (decision makers)
  • Employees
concerns and or characteristics of corporations
Concerns and/or Characteristics of Corporations
  • Survival/Perpetual Life
  • Customer Needs (purpose)
  • Efficiency
  • Profitability
  • Limited Liability
  • Interest Groups/Stakeholders
dual objectives of co ops
Dual Objectives of Co-ops

= Serving Dual Interests of Owners as:

  • Investors (return on investment)
  • Patrons (services and return on use)
types of co ops
Types of Co-ops
  • Based on Function Performed
  • Marketing
  • Supply
  • Service
types of co ops1
Types of Co-ops
  • Based on Area Served
  • Local – local community to multiple counties
  • Regional – multiple states
  • National
  • International
types of co ops2
Types of Co-ops
  • Based on Organizational Features
  • Interregional
    • - mbrs = other regionals
  • Federated
    • Farmers = mbrs of locals
    • Locals = mbrs of regionals
  • Centralized
    • Farmers = mbrs of regional
    • Local businesses run by regional
steps in starting a co op
Steps in Starting a Co-op
  • Deter. Preliminary Mbr. Interest
  • Further Research/Analysis
    • Producer survey
    • Feasibility study (mkt, cost, …)
  • Organization
    • Reconfirm mbr interest
    • Get mbrs to commit/agree
    • Legal documents
    • Staffing (directors, mgmt)
    • Acquire facilities and financing
recommendations in starting a co op
Recommendations in Starting a Co-op
  • Use Specialists
    • Attorneys
    • University staff
    • USDA staff
    • Financial Experts
  • Consider Alternatives to Starting a Co-op
  • Easier to Later Expand than Contract
  • Be Conservative in Projections
  • Require Producer Commitment
  • Make sure good management is available and that members are willing to pay for it.
co op justification
Co-op Justification?
  • Economic NEED
  • Economic NEED
  • Economic NEED
economic need
Economic NEED?
  • Better Price (level or risk) by –
    • Increasing competition (or offsetting mkt power)
    • Developing own product (or capturing other-level profits)
    • Taking advantage of economies of size
  • More Dependable Market (for outputs or inputs)
  • Better Services
the rochdale society
The ROCHDALE Society
  • A co-op retail store (i.e. consumer co-op) that sold food, clothing, and other household items to its patrons. The co-op was founded in 1844 in Rochdale, Lancaster, England by 28 craftsmen known as the Rochdale pioneers. This co-op has been recognized as the first such business organization which has served as a prototype for other co-ops.
why study co op principles
Why Study Co-op Principles?
  • To understand unique or fundamental aspects of co-ops.
  • To guide the operation of a co-op.
  • To understand the basis for many co-op laws.
cooperative principles
Cooperative Principles
  • User Ownership
  • User Control
  • User Benefits
user ownership
User Ownership =
  • Users own (at least partially) the co-op
  • Users provide equity capital (invest $)
  • (Creditors provide debt capital)
user control
User Control =
  • The ability to influence co-op decisions
  • May or may not mean active involvement in the decision making process; instead, it implies the opportunity to do so if desired
  • Users normally exert their influence thru an elected group of representatives known as the board of directors
forms of user control
Forms of USER Control
  • One Member, One Vote
  • Voting in Proportion to Patronage
other observations on control
Other Observations on ‘Control’
  • User Control ≠ investor control although both are ‘democratic’ forms of control
  • Form of investor control is one share of stock, one vote
  • Co-op member voting in proportion to patronage is:
    • Illegal for co-ops with headquarters in Iowa
    • Used more often by regional co-ops than by local co-ops
operation at cost
Operation at Cost =>
  • Cooperative earnings

(savings, surplus, profits)

are to be returned to the member


Operation at cost


the return or distribution of earnings to
The Return or Distribution of Earnings to:
  • Customers in proportion to the amount of patronage done with the business (i.e. return on USE)


2. Investors in proportion to the amount of money invested in stock in the business (i.e. return on INVESTMENT) = DIVIDENDS

limits on co op earnings distribution
Limits on Co-op Earnings Distribution
  • Patronage refunds
    • No limit
    • Usually ≥ 20% cash (for tax reasons)
  • Dividends
    • - ≤ 8%
patronage refund example
Patronage Refund Example
  • CO-OP

Sales: $200,000

Expenses: $180,000

Earnings: $ 20,000


Purchases: $ 8,000

% of total for co-op 4%

(8,000/200,000 = 4%)

Patronage Refund: $ 800

(4% x 20,000 = 800)

patronage refund
Patronage Refund
  • Total: $800
    • Cash (> or = 20%) $160
    • Noncash $640

The noncash patronage refund is also called a retained or deferred patronage refund.

why co ops may have earnings
Why Co-ops May Have Earnings
  • Overcharges or underpayments because costs are unknown initially.
  • Co-ops charge going market prices which are above costs:
    • To avoid price wars
    • To avoid passing savings on to nonmembers
evaluation of co ops as a marketing alternative
Evaluation of Co-ops as a Marketing Alternative:
  • Level of prices initially paid (or charged)
  • Patronage refund
    • Level
    • % cash
    • When noncash will be paid
  • Price and quality of services
  • Dependability as a market outlet (or input supplier)
  • Economic effects without the co-op (competitive yardstick)
  • Value of owning your own business