Farmer Cooperatives & Legal Requirements
Risk constantly lurks in the agricultural sector, where farmers and ranchers often are at the mercy of issues outside their control. For example, they may lose money from price fluctuations caused by ebbs and flows in the demand for their commodities. Natural disasters also can cause serious financial damage, even if a farmer has insurance. To mitigate these risks and improve their access to markets, agricultural producers may join cooperatives. These entities might handle marketing and bargaining, offer loans to members, and provide agricultural production inputs and information, among other roles. Cooperative members usually provide most of its financing but receive modest returns on their investments. Net margins are allocated among members in proportion to their use of the cooperative.
Farmer cooperatives tend to be supply or marketing cooperatives, or both. Supply cooperatives provide agricultural production inputs, such as seeds, straw, fertilizers, and pesticides, which they purchase in bulk for discounts and sell to members at reduced prices. Marketing cooperatives often buy the products of members at the prevailing market price, providing them with a guaranteed return. Sometimes a marketing cooperative also will hold the products of its members until the price of the commodity bends in a favorable direction. In less common cases, a farmer cooperative might be a service cooperative, through which its members receive services such as housing or transportation.
Forming and Joining a Farmer Cooperative
To create a cooperative, farmers will need to meet the legal requirements of the formation process. While some states have specific rules for forming farmer cooperatives, other states treat them as standard corporations. Among other steps, the founders of the cooperative will need to file articles of incorporation (or the equivalent) with the state government and adopt bylaws. Members of the cooperative must elect a board of directors, who in turn must choose the manager or CEO of the cooperative.
Once a cooperative has formed, any person or entity can join the cooperative by making an initial investment and meeting any other membership requirements. Each member of a cooperative has voting rights. Some state laws require each member to have one vote, but cooperatives in other states may not use equally weighted voting. For example, members who use a cooperative more than other members or invest more money in it may be entitled to more than one vote. Even if a cooperative does not adhere to the "one member, one vote" rule, state laws often cap the voting power of a member as a percentage of the total number of qualified votes.
Financing a Farmer Cooperative
A farmer typically must make an initial investment to join a cooperative, and some cooperatives may require recurring investments from members. Cooperatives often need additional sources of funding for their operations, though, especially if they do not require recurring investments. Some funding channels may involve simple direct investments, such as selling membership stock or preferred stock in the cooperative. Other sources may consist of patronage income or non-patronage income. Patronage income consists of funds received from anyone who uses the services of the cooperative. Non-patronage income comes from sources other than transactions involving members of the cooperative. This type of income may be less attractive because it is subject to the double taxation associated with corporate income.
To qualify for tax benefits, a cooperative must return a percentage of its net margins to its members each year. This process is often known as a patronage refund, since the cooperative is refunding the investments of its members. The patronage refund for each member depends on how much they have used the services of the cooperative. A member may receive a refund in cash or may reinvest it in the cooperative.
