Myth Buster: A Cooperative Shouldn’t Make a Profit

By Phil Kenkel
Bill Fitzwater Cooperative Chair
Oklahoma State University

 

One of the most long-standing myths about cooperatives is that a cooperative should not make a profit. The statement typically comes from a member who is unfamiliar with the cooperative business model. However, from time to time, even cooperative managers and board members fall prey to misconceptions about profits. Cooperative firms do have a unique set of objectives and benefits. Members can potentially benefit at both the farm level and the business level. The collective effect of cooperatives can be to keep the market place more competitive. Concern for community is also part of the cooperative principles as compiled by the International Cooperative Alliance.

While profits are not the only benefit of a cooperative, they are critically important at the individual firm level. The service at cost principle means that a cooperative should make all of the profits the marketplace allows and then share those profits with their customers through patronage. Favorable prices force the competition to respond and end up benefiting non-members as much as members. This concept seems obvious but is often violated in subtle ways. A cooperative that had the good planning (or luck) to purchase inventory before a price run up sometimes sells the product below replacement cost. Cooperatives receiving a high amount of profits from regional cooperatives take their eye off the ball of local profits. Perhaps the most common profit failure is to maintain and fail to fix an underperforming department or enterprise that is in effect subsidized by other departments and other patron group.

The worse profit-killing practice is for neighboring cooperatives to beat each other up in the market place. A price war between cooperatives is a blood sport and the only blood being spilled is farmer blood!

Myth: A Cooperative Shouldn’t Make a Profit

Status: Busted!

 

12-8-2011