New article on pooling in cooperatives from KDC

From a February 2015 post on the Keystone Development Center “Developers Corner” series:

By: Cathy A. Smith, PhD, Keystone Development Center

KDC has recently had multiple inquiries about the use of pools in the cooperative structure. Pools are sub-enterprises within the cooperative business and are a practice distinctive to cooperative-structured businesses. Pooling is a business agreement among a subset of cooperative members and allows for subgroups of members to work more efficiently together.

Normally each pool has a separate accounting system and a member’s patronage is based on the pool or pools in which a member participates. The member’s share of the pool proceeds is determined by the volume of product or service contributed and can be adjusted to reflect a premium or discount to account for quality differences. Losses (or profits) accrue to the pool members though the cooperative organization does ultimately remain liable for debts.

Although pool accounting can become quite complex, it basically requires that a separate account be established for each pool the cooperative operates. Records are kept on the amount of produce or service each member delivers to the pool. Direct and indirect costs associated with operating the pool are allocated to that pool.

Usually the cooperative enterprise would keep a percent of gross revenue from each pool for cooperative expenses. Successful pooling operations require considerable coordination between the cooperative and pool participants. This comes with expenses and the amount retained by the cooperative has to cover costs for the business to be sustainable.

Farm marketing cooperatives historically are the most common type of cooperative to use pools. Within the cooperative, farmer members with the same commodity pool their crops together and the cooperative markets the aggregated product. All the farmers in the pool would usually receive the same price (usually the average price) for their product. This type pool would probably have an expiration date, i.e. each season would be a different pool. For example, a marketing cooperative might have one pool for cranberry growers and one for blueberry producers. A vibrant example of pooling is the CROPP Cooperative who operates the Organic Valley and Organic Prairie brands. Check out or go to this page and look at their pools: They have a Beef, Broiler, Dairy, Egg, Grower, Pork, Produce, and Soy Pool.

KDC is seeing the pooling concept being considered by other cooperative businesses. One example is a geographically dispersed set of farms who are organizing to establish local routes for food waste hauling to fuel their composting enterprises. The cooperative organizers are considering using a pool for each geographic cluster of routes. The co-op members receiving waste product would participate in the pool closest to their location. The pool member would receive the average “tipping” fee associated with his or her pool.

Another example of cooperative pools is a renewable-energy community-investment cooperative that wants to develop a variety of projects. The cooperative would allow members to join a particular investment pool covering a specific project. For example one pool might be funding a solar installation on a local church and another pool a wind-turbine installation. Pool members would be investing in the project associated with their pool. Gains or losses from the pool would be allocated to the pool members. This allows an advantage in member recruitment and fund raising by providing a defined project and expected outcome.

Pools are also used in the health-insurance cooperative area. This can occur where members of the cooperative, usually businesses, can combine with other similar business to form a single competitive purchasing pool for health benefits. Pooling is also used where the volatility of claim costs are managed by putting similar risk groups into pools.

To bylaw or not bylaw

A cooperative’s pooling policy should be detailed in the association’s governing documents – either through the bylaws or by Board policy. In either case, the Board of Directors is usually given the authority to establish the pooling specifics. Pooling arrangements can be adopted by a cooperative without a particular bylaw provision. Cooperative Boards can just develop and adopt a general board policy on the subject. However, if the startup cooperative is just establishing its bylaws and pooling is of interest, adding a bylaw addressing the pooling is prudent. The bylaw would normally give the Board the authority to create pools.

For additional background here are two USDA resources that address pooling:

USDA Cooperative Pooling Operations, RBS Research Report 166

 Sample Legal Documents for Cooperatives, Cooperative Information Report 40, USDA

This article was published by Keystone Development Center. Click here to see it in its original context.