School of Economic Sciences

Agribusiness Management

AE02-4: Options in Financing Agribusiness Cooperatives: Research Findings and Conclusions

By Ken D. Duft

Some would argue that agribusiness cooperatives are fundamentally unique entities.  Others would suggest that except for philosophical and financial differences, agribusiness cooperatives are not operationally separable from their investor-owned corporate competitors.  It is not my objective to extend this debate, but rather to focus my research efforts on those financial aspects which do distinguish cooperatives from other organizational forms of business.

In particular, for the past two years my colleague, Dr. Jill McCluskey, my research assistant, Ms. Erica Brueckner, and I have directed our inquiry into those factors which appear to influence cooperative usage of, and dependence upon, patron demand deposit accounts and regional patronage flows for their continued operations.  Initially our research was free of value judgments regarding the wisdom and/or legitimacy of these two practices, but the research results were such that their positive/negative features could not be ignored.  Hence, the research results reported below are no longer neutral, and suggest that cooperative managers and accountants might better serve their member patrons by scrutinizing more fully the financial role fulfilled by these activities.


During the period of agriculture's financial difficulty in the late 1970's and early 1980's, agricultural cooperatives and producers began looking for more efficient methods of financing.  The benefits of reserving patronage-sourced funds as operating capital, with the cost of interest paid to the respective patrons, became widely used in Washington State.  This practice became known as PDDA financing.  Secondly, local cooperatives increasingly began to rely on patronage received from regional cooperatives to support local annual net income. 

This study analyzed these two forms of financing.  Using a survey of agribusiness cooperatives in the State of Washington, we found that nine of the 68 cooperatives carried PDDAs and 63 received annual patronage payments from regional cooperatives.  Fruit cooperatives are most likely to be active in PDDA financing.  Additionally, newer cooperatives and those with a lower investment in other cooperatives are more likely to carry PDDAs.  Of the cooperatives involved with PDDA financing, approximately half have anticipated the possibility of financial failure due to a sudden, large withdrawal of such funds.  These cooperatives have secured operating lines of credit and/or other agreements with their banking institutions to protect their financial position if such an event should occur.  However, the outcome of Reeves v. Ernst and Young, which classifies patron demand notes as securities, indicates that there is sufficient cause for concern for all cooperatives paying interest to their member-patrons-depositors for the use of their funds.

The results from a linear regression model allow us to conclude that supply cooperatives are most likely to be dependent upon regional patronage received.  We also found that the greater the number of years that local cooperatives retain equity correlates with a greater level of investment in other cooperatives.  Results from a ratio of investment in other cooperatives to total assets indicate that some local cooperatives could face insolvency difficulties with this ratio being as high as 0.551.  From their financial data, we noted that seven out of 65 cooperatives relied upon regional patronage payments to show a net income rather than a net loss in 1998.  Given these findings, we conclude that some local cooperatives are becoming too dependent on their investment earnings in other cooperatives for their financial status to be acceptable to their local patrons.

The purpose of a cooperative is to best serve its members.  When regional patronage is not being redeemed to its members (local cooperatives), then local cooperatives are not able to redeem local patronage as efficiently to their members (producers).  Therefore, regional cooperatives are also not serving their membership as effectively as possible. 

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Ken Duft is a professor emreitus of Agribusiness Management, in the School of Economic Sciences, Washington State University, Pullman, WA 99164-6210. If you have further questions he may be reached at


Print reportThe full paper is available in pdf format.


Some would argue that agribusiness cooperatives are fundamentally unique entities.




The purpose of a cooperative is to best serve its members.

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