Cooperative-Level Profits

Author: Chris Peterson, Michigan State University,

Historically, cooperatives were thought of as “nonprofit” or “not-for-profit” organizations. These terms confuse the original notion of the operation-at-cost principle with profit-generating ability. Like all businesses, cooperatives need to generate profit to survive and prosper. They are never in business merely to break even.

Like all businesses, cooperatives create revenues through sales and have expenses. The difference between revenues and expenses is profit or net income just like any standard business would have. Because of the operation-at-cost principle, cooperatives have historically used a variety of other terms for profit or net income, including net patronage income, net savings, etc. So do not be fooled by these other terms. If the label means revenues minus expenses, then the amount represents profit whatever the words used.

Again, like all businesses, a cooperative’s income statement provides the numbers related to its operating profit. Net income allocated and distributed to members on the basis of patronage is called a patronage refund. Patronage refunds are shown on the income statement mostly near the very bottom of the statement after all other costs and revenues have been reported. If any dividends are declared on capital, they too will be shown on the income statement, but remember most cooperatives do not pay dividends to common equity capital.

One type of marketing cooperative does not have a traditional “bottom line” for net income—a pooling cooperative. Pooling cooperatives, in effect, pool all the revenues from selling members’ crops and then deduct costs from the total pool. The result represents the payment for the members’ crops and thus traditional net income (revenues minus costs) allows equals zero. This is the ultimate implementation of the operation-at-cost principle. But even pooling cooperatives must raise equity across time. For investment purposes, they retain a form of equity capital often called a “capital retain” to raise equity. Capital retains will show up on the income statement as net income even though it is a planned amount rather than a true residual of revenue minus expenses. Not all marketing cooperatives operate as pools in this way. It is most common in fruit and vegetable cooperatives.