Patronage: A Cooperative Benefit
What is patronage and how is it determined at AgSouth? Chief Executive Officer Pat Calhoun answers these questions and more.
In this article you'll find:
- Cooperative definition
- What is patronage and why it's beneficial
- How we determine patronage
- How we calculate patronage
Patronage: A Cooperative Benefit
AgSouth is part of the national Farm Credit System, a group of individual cooperatives that has been providing loans and supporting services to rural communities and agriculture for more than a century.
If you’re already a member of a cooperative in your community - such as an energy, telephone, food, or artist’s cooperative - then you probably already know of all the great benefits that come with being a part of one! But what does being part of an organization with this kind of structure really mean?
The Cooperative Difference
There are a handful of things that set a cooperative apart from other business structures. First, a cooperative serves a common purpose. So, when you become a member of a cooperative, you’re aligning your business with other cooperative members with similar interests and business needs.
“A cooperative is structured in such a way that its individual patrons, sometimes called members, can achieve something collectively at a more advantageous means than they could achieve it individually,” Pat Calhoun, AgSouth CEO, says.
As a member of a cooperative, you also become a shareholder of the organization. This means that you have the ability to influence who sets the policies and who is in charge of the overall operations of the organization by electing the individuals who sit on the Board of Directors. To read more about the benefits of a cooperative, read Seven Principles of a Cooperative.
Chief Financial Benefit
One of the chief financial benefits of doing business with a cooperative is that, as a member, you share in the cooperative’s profits. At AgSouth, we call this profit sharing program “patronage.” And the profits distributed through our patronage program are significant.
“Through our patronage program at AgSouth, we return a portion of our profits to our members, and our profits are derived primarily from the interest that our customers accrue on their loans,” Calhoun explains. Other income that factors into AgSouth’s profits comes from fees from our supporting services like crop insurance, secondary market home loans, and leasing. When our members use these additional services, they are helping increase our profits, and, thus, helping increase their own patronage.
How Patronage is Determined
Each year AgSouth’s Board of Directors reviews the association’s financials and determines the percentage of profit AgSouth will distribute based on the capital adequacy and safety and soundness of the cooperative. Therefore, each year’s patronage distribution is different. But whether an AgSouth member has a small loan or a larger one, that member receives the same relative portion of distributions as all of the other shareholders.
Although patronage is not guaranteed, we have consistently returned an average of nearly 30 percent of our profits to our members for more than 30 years. We are extremely proud of the benefit that our patronage program gives to members of our cooperative.
The Patronage Difference
A cooperative benefits all members, and patronage can really make a huge difference to AgSouth’s members. For example, a member with a $100,000 loan would receive the same proportionate share of profits as a member with a $1,000,000 dollar loan. The patronage distribution will be larger for the member who is paying more interest, but the share ratio is the same.
For simplicity’s sake, let’s say that each member in the example below1 has a 20-year loan at a fixed rate of 6 percent. If we use a distribution of 25 percent of our profits, Member 1 and Member 2 would see the following total distribution during Year 1 of the loan:
Our patronage distribution formula issues 30 percent in cash each year to our members. The remaining 70 percent is retained in an allocated surplus account in the borrower’s name and is returned to our members at a later date, determined by the board, typically around every 5 years. This way of sharing our profits ensures that our members benefit financially by doing business with our cooperative and helps keep the association financially sound so that we can continue serving our members and communities.
To see how much estimated patronage you could receive as a member of our cooperative, go to our Patronage Calculator. For more information on patronage, including FAQ, visit our website or get in touch with your local loan officer!
1 Example is for illustrative and educational purposes only. It does not take into account the time value of money or any potential tax implications arising from interest deductions, patronage tax status, etc.. The effective interest rate is illustrative and in no way a guarantee of rate reduction.