Agricultural cooperative definition

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What is an Agricultural Cooperative?

An agricultural cooperative is a business association into which farmers pool their resources. By doing so, farmers can increase their revenues, reduce costs or share risks, depending on the type of cooperative.

There are two types of farmers that interact with a cooperative. They are as follows:

  • A patron is any person or other entity with which a cooperative does business on a cooperative basis.

  • A member is an owner-patron, who can vote at its corporate meetings.

Types of Agricultural Cooperatives

There are three types of agricultural cooperative, which are as follows:

  • Supply and service cooperative. This entity produces or buys goods and materials for its members. The prices charged are typically at market rates, but cooperatives may distribute patronage refunds to their members, thereby reducing member costs.

  • Marketing cooperative. This entity provides sales outlets for the products supplied to them by their members and patrons.

  • Federated cooperative. This entity is an association of cooperatives within a region.

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Characteristics of an Agricultural Cooperative

A cooperative has the following characteristics:

  • Earnings distribution. Its earnings are usually distributed to its patrons based on their proportional patronage of the cooperative, though some profits may be retained in the organization. In essence, all amounts received in excess of costs are returned to patrons.

  • Control characteristics. Cooperative members control the organization due to their roles as patrons; there are no equity investors.

  • Membership limitations. Membership in the cooperative is limited to patrons.

  • Patronage level. At least half of the cooperative’s business is performed on a patronage basis.

  • Limited return. There is a limited return paid out on capital investment.

  • Tax effects. Earnings allocated back to patrons are treated as a tax deduction; earnings not allocated are taxed at the corporate income tax rate.

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