Accounting for Farming Cooperatives (#364)
/Farming Cooperatives
Farmers use cooperatives to get a better deal. They can engage in bulk purchasing through a co-op to buy supplies at a lower price, and they band together to sell their crops through one at the highest possible price. Which can make a lot of sense.
There are two types of cooperatives. There’s the supply and service cooperative, which buys goods and materials on behalf of their members at the lowest possible price. And there’s also the marketing cooperative, which act as sales outlets for their members.
So, there are two types of farmers that interact with a cooperative. One is called a patron, and this is any party with which it does business on a co-operative basis. The other type is a member; this is both an owner and a patron and gets to vote at the co-op’s meetings. And, yes, that means there are no equity investors.
Now, a cooperative distributes its earnings back to patrons based on their proportional patronage of the cooperative, though it will need to retain some of the profits to maintain its own operations. We’ll get back to this part in a minute.
Accounting for a Farming Cooperative
What is the accounting for a cooperative? That begins with valuing the inventory that it receives from patrons. The co-op can value it at its estimated market price or its net realizable value, which are going to be pretty much the same thing. In either case, its cost of goods sold is going to be pretty close to whatever it eventually sells the products for, which results in not much of a profit passthrough to patrons. This is actually okay, since the patrons are simply getting the bulk of their profits up front, when they transfer their inventory to the cooperative.
A cooperative is divided up into profit centers, where the supply and service side of the business develops its own profit figures, and the marketing side calculates its profits. This might mean that one side of the operation has a loss. How does the cooperative deal with this loss? There are a couple of options. One is to offset the profits and losses from the profit centers against each other. Another option is to charge the loss against the co-op’s unallocated capital. Or, it can recover the loss from the patrons of the profit center that lost money.
And yes, that means that patrons don’t just receive profit distributions. Sometimes, they have to pay in more money.
So, how does a marketing cooperative pay its patrons? Let’s say a farmer brings in a load of grain for the cooperative to sell. The co-op assigns a price to the patron that’s about the market price, and recognizes a liability for it. This is an amount payable to the patron. Payment is made to patrons based on whatever accounting policy the co-op has, so perhaps the actual payment occurs one or two weeks later. If the co-op ends up earning more revenue than it paid out to its patrons, then it eventually pays them a share of these earnings.
How the distribution of earnings to patrons occurs can vary a bit. A cooperative can elect to retain part of that distribution, and put it in the capital accounts of its patrons. Doing so leaves cash in the business, and is essentially a form of free financing. These retentions are eventually paid out, though it may take a few years to do so, which means that they’re classified as liabilities of the co-op.
Accounting by the Patrons of Farming Cooperatives
Now, let’s turn this around and look at the accounting from the perspective of the patron. Farmers tend to do most of their business with just one or two local cooperatives, so they can concentrate their accounting transactions with just a couple of entities – which makes it easier to manage the books.
Let’s say that a farmer delivers a load of wheat to a marketing cooperative, which means that the co-op is going to sell the wheat on behalf of the farmer. The co-op will probably assign a price to the farmer that’s close to the current market price. The farmer records this as an unbilled receivable, and eventually receives a payment that could differ somewhat from the initially assigned price. If so, the farmer records an adjustment to his original revenue figure, and closes out the sale.
Another variation on the concept is when the co-op issues an advance to the farmer. This is a payment in advance of the final settlement, so it’s treated by the farmer as a reduction of the unbilled receivable. It’s not recognized as a sale.
For example, a farmer delivers a load of wheat to the local cooperative, and the co-op assigns it a price of $10,000. The farmer records this as an unbilled receivable, and as revenue. A week later, the co-op sends him an advance of $6,000, which the farmer deducts from the $10,000 receivable, leaving $4,000 unpaid. A couple of weeks after that, the co-op sends him a final payment of $4,200 which includes an adjustment of $200. The farmer records an additional $200 of revenue, and deducts the remainder from the outstanding receivable.
What about a case in which the farmer delivers products to the cooperative, but where title doesn’t pass to the cooperative? In this case, the farmer continues to record the inventory on his books, since he still owns it. Only when the cooperative sells the inventory does the farmer record a sale.
And what about patronage payments? Essentially a pass-through of a cooperative’s earnings? The farmer can recognize these payments as soon as he’s notified by the cooperative, or when the amount of the payment can be reasonably estimated. In most cases, it’s just easier to wait for the formal notification.