TEXAS AGRICULTURAL EXPERIIWENT‘ STATION
A. B. CONNER, Director
College Station, Texas

BULLETIN NO. 649 MAY 1944

SIGNIFICANCE OF THE PATRONAGE
DIVIDEND AS APPLIED BY COOPERATIVE
COTTON GIN ASSOCIATIONS

W,  PAULSON and R, T. BAGGE'I"I'

Division 0f Farm and Ranch Economics

LIBRARY
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AGRICULTURAL AND MECHANICAL COLLEGE OF TEXAS
F. C. BOLTON, Acting President

D-18-544-5500

[Blank Page in Original Bulletin]

This Bulletin seeks to serve two main purpuz-Jes: (i) to dem-
onstrate the manner in which the patronage dividend of a co-
operative gin may be computed to insure equitable distribution of
the profits among members; (2) to explain the advantages of co-
operative gins operating as competitive agencies.

The various physical measures of patronage are examined
to determine the main features of a patronage dividend satisfac-
tory to all members. A patronage dividend is equitable to a mem-
ber provided he shares proportionately in the profits of all de-
partments of the gin business in accordance with his contributions
to those departments.

A cooperative gin can pay a patronage dividend only as
profits are realized on business operations. Hence a discussion of
patronage dividends involves the question whether or not a co-
operative should charge the going rate for ginning service or a
rate just sufficient to cover the cost of ginning. Experiences of
many years have demonstrated the advisability of cooperatives
charging the going rate or price for services offered or goods
bought or sold. Under such circumstances a cooperative may as-
sume its role as a competing agency in an economy of free en-
terprise. Such savings as are effected on volume of business and
cost efficiency belong to the members as patrons. The payment
of patronage dividends as a means of distributing profits has a
pronounced stimulating effect on members. The patronage divi-
dend was first devised by the Rochdale Pioneers 100 years ago.
This feature of a cooperative program constituted one of their
greatest and most far-reaching contributions to the development
and maintenance of business democracy.

i
1

 

CONTENTS g _ a
Disposal of Gin Profits ..... .._ ................................................................................... .. 
Problems of Patronage Dividends as Applied to Gin Associations ............ .. i 
Ginning Profits ...................................................................... ..: .......................  i
Bagging and Tie Profits .............................................................................. .., 
Cottonseed Profits .......................................................................  .................. .. If p‘
Adoption of Dividends Other than According to the Running Bale .... .. j
' Kinds of Dividends Paid .............................................................................. 
Dividend Analysis of Three Associations .................................................. 
Reasons for Differences in Patronage Dividends ............................ ..
Allocating Losses on Cotton Bought .......  .....  ............ “i i ....... ._ 
Objectives of Patronage Dividend ..................................................................... "i.
Minimum Essentials of an Equitable Patronage Dividend .................. -.
Profit or Non-Profit Aspects of Gin Business ................................................ ..4
Cooperatives Operating at Cost ............................................................... .. a
Collection of Gin Charges at Time of Ginning ................................... _. I
Gin Charges at Cost in Short Crop Seasons ............................................ 
Operations at Cost and Financing Program ..................................... .. a
_ Status of Cooperative Gins in Texas Gin Industry ........................ .; ..... ..
i , Avoiding Over-Duplication of Ginning Facilities ................................... 
Advantages of Operating Competitively .................................................. 
Summary .................................................................................................................... 
Exhibit A--Development of Departmental Dividend and of  “
Forms for Reporting the Dividend .......................................................... .._-v i
Exhibit B-—Various Forms for Reporting the Patronage i i‘
Dividend to Members .............................................................................. .. 
1. Corpus Christi Farmers Gin Company ..............  .......................... .. f
i2. Haskell Cooperative Gin Company .................................................. .. _ i’
3. Howard Co-Op Gin Company ............................................................ ..  I
4. McKinney Co-Operative Gin Association .............................................   ;
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SIGNIFICANCE OF THE PATRONAGE DIVIDEND AS
APPLIED BY COOPERATIVE COTTON
GIN ASSOCIATIONS

by

W. E. Paulson
and
R. T. Baggett‘

Every cooperative cotton gin association organized in Texas has had as
one of its objectives the earning of a profit on business operations. As co-
operative gins have established themselves, no particularleffort has been
exercised to lower the charges made for ginning service or to narrow the
margins realized on bagging and ties and cottonseed. These gins usually
are governed by the local competitive situation. No cooperative gin in
Texas has ever offered ginning service to members at a charge based on
the cost of the service.

During the past ten years the cooperative gins of Texas have had an
average volume of ginning more than twice as large as the average of all
ginners. As a chief result of this favorable circumstance the cooperatives
realize ginning costs decidely lower than those of the private gins. This
general cost advantage together with gin incomes based on the going rate
yields the cooperative sizable profits.

DISPOSAL OF GIN PROFITS

A vast majority of the Texas cooperative gins have used the profits
of the early years to pay for the gin plants. As the indebtedness is
cleared away profits become available for cash dividends. Whether mem-
bers be assigned equities in the assets of the association or paid cash
dividends, the management faces the problem of allocating dividends ac-
cording to some acceptable measure of patronage.

Farmer gins established in Texas during the 35-year period 1886 to
1921, with but few exceptions, were organized as farmer stock associa-
tions. Profits were considered as a lump sum with no regard to the
source from the various branches of the gin business. These profits be-
longed to members as stockholders. The guide followed in assigning divi-
dends to a member was the number of shares of stock owned. Patronage
was ignored in the dividend distribution.

Widespread failures of farmer stock gins compelled a reorganization
of structure and program. Naturally the early cooperative gins varied as
little as possible from the farmer stock organizations. The same view was
taken of total profits. The vital change pertained to the claim and distri-
bution of profits. In cooperatives profits belong to the members as pa-
trons, not as stockholders. The problem facing the cooperatives was to
find a unit for measuring the patronage to substitute for the stock unit

used by the older organizations. Quite logically the first conclusion crys-

 

1Senior Agricultural Economist, Federal Crop Insurance Corporation, United States De-
partment of Agriculture. Former Technical Assistant, Division of Farm and Ranch Eco-
nomics, Texas Agricultural Experiment Station.

\

6 BULLETIN NO. 649, TEXAS AGRICULTURAL EXPERIMENT STATION

tallized was that a member’s significance as a patron is proportionate to
the number of bales he gins. Thus the running bale dividend came into
being. According to the information available this type of patronage divi-
dend was used exclusively by Texas gin cooperatives as late as 1924. The
running bale dividend is simple to calculate and easy to explain to mem-
bers. All members seem to be treated equitably. Experience, however, has
demonstrated several serious shortcomings in the running bale as an
equitable measure of patronage.

PROBLEMS OF PATRONAGE DIVIDEND AS APPLIED
TO GIN ASSOCIATIONS

Cooperatives may gauge patronage in terms of physical units of prod-
ucts handled as bushels of grain, crates of fruits and vegetables, pounds of
butter and cheese, or tons of coal and feed. In such instances the patron-
age dividend is derived as a rate on the physical unit. Cooperatives may
define patronage in terms of dollars of business done. Cooperatives han-
dling either commodities of a wide variety making impractical the allocat-
ing of costs to each item or commodities having no common physical unit
are most likely to measure patronage in dollars. Under such circumstances
the patronage dividend rate is expressed as a percentage on the dollars’
worth of business furnished by members.

The nature of the gin business accounts, in large part, for the prob-
lems encountered in devising a dividend equitable to all patrons. In the
first place the running bale is not the only physical unit of patronage.
Members deliver seed cotton to the gin. The weight of seed cotton ginned
by the various members is an aspect of patronage. Members obtain lint
bales as one of the marketable products from the ginning process. The
weight of lint ginned by the various members is another phase of patron-
age. Members purchase bagging and ties according to the number of run-
ning bales ginned. This is a feature of patronage. Members may leave
all their cottonseed with the gin, or a part of the seed, or none at all.
The weight of cottonseed left with the gin by the various members is a
most significant element of patronage.

In the second place, the gin business operates three distinct depart-
ments. These may be designated as the gin, the bagging and ties, and
the cottonseed departments. If the gin buys the lint cotton of patrons a
fourth department is added. Each of these departments has its own dis-
tinctive characteristics in the yielding of profits, or losses.

Ginning Profits

Ginning profit, or loss, is the difference between the gin toll and the
cost of operating the gin plant. The profit of the gin department is ex-
ceedingly sensitive to the volume of ginning, the relative cost efficiency,
and the gin toll per bale. At most gin points in Texas patrons pay for
ginning service according to the weight of seed cotton ginned. In many
instances the average Weight of seed cotton per bale varies greatly among
the different members. These variations are caused by the varieties of
cotton grown, the weight of the lint bale ginned, and the type of harvest-

SIGNIFICANCE OF PATRONAGE DIVIDEND APPLIED BY GIN ASSOCIATIONS 7

ing whether the cotton be picked or snapped. A member contributes to
this department according to the weight of seed cotton ginned and not
according to the number of bales ginned.

Bagging and Tie Profits

The price per unit which a ginner must pay for bagging and ties has.

no significant relation to the number of units bought. Hence the volume of
ginning has no important bearing on the profit per unit. Over the years
ginners have followed a well established practice of charging customers a
price above the cost assuring a margin of profit. Obviously a member con-
tributes to the profit of this department in accordance with the number of
bales ginned.

Cottonseed Profits

The custom is Well established among ginners of paying patrons a
price for their cottonseed somewhat lower than the oil mill price. The
margin per ton is quite independent of the volume of seed handled. Total
profit possibilities of this department are governed by the volume of gin-
ning, the pounds of seed per bale left with the gin and the margin. A
member contributes to this department in proportion to the amount of
seed left with his gin association.

Adoption of Dividends Other than According to the Running Bale

Many members and leaders among cooperative gins have been shocked
at the first" suggestion that dividends be allocated on some other basis
than the running bale. In extreme cases dividends other than the running
bale have been considered almost dishonest. The Childress Farmers’ Co-
operative Society holds the distinction of being the first gin association in
Texas to break away from the straight running bale dividend. This co-
operative paid its first cash dividend in the season of 1925-26. Dividends
from profits realized on ginning and bagging and ties were allocated ac-
cording to the running bale. But dividends realized on cottonseed were
shared not according to the totalibales ginned but according to the num-

ber of bales 0n which the members left the seed with their association-

The Danevang Farmers’ Cooperative Society holds the distinction of
being the first cooperative gin in Texas to distribute cottonseed dividends
on the basis of the pounds of seed left with the gin. Dividends on ginning
and bagging and tie profits were distributed according to the running
bale. A dividend allocating profits from ginning and bagging and ties ac-
cording to the running bale and from cottonseed according to the weight
of seed left with the gin may be designated for the sake of convenience
as semi-departmental. Danevang was thus employing the semi-depart-
mental dividend.

At a meeting of the Danevang board of directors considering the
patronage dividend to be paid for the season 1931, Peter Harton made a
motion that the dividend of a member be governed by the amount of seed
for cottonseed profits, by the running bale for bagging and tie profits, and
by the gin tolls paid for ginning profits. The motion was seconded to
permit discussion. One favorable vote was cast for the motion. A year
later this plan of dividend was adopted. A dividend based on contributions

8 BULLETIN NO. 649, TEXAS AGRICULTURAL EXPERIMENT STATION

a member makes to the three departments may be designated for the sake i

of convenience as departmental. Thus the Danevang association was the
first in Texas to adopt a departmental dividend.

Kinds of ‘Dividends Paid—Seasons, 1933, 1934, 1935, and 1943

Gin associations insisting on a single unit patronage dividend have a!
choice of distributing total profits according to the running bale, the seed ;
cotton weight, or the lint Weight. Gin associations insisting on calculating ‘
cottonseed dividends on the basis of the weight of cottonseed have a choice l

between the semi-departmental and the departmental dividends. The kinds of

dividends actually in use by Texas gin associations should be of interest. 
Information on this point was obtained on all cooperative gins operating 
during the seasons 1933, 1934, and 1935, and on about 40 per cent of the A

gins operating during the season 1943.

The relative importance of various kinds of patronage dividends is in-
dicated in Table 1. It should be noted that the number of gins using the

Table 1. Cooperative Gin Associations Grouped According
to the Kind of Patronage Dividend Used

Percentage of Total Gins
Kind of Dividend Season

1933 1934 1935 1943
Running Bale 65.2 52.3 48.1 43.3
Lint Weight 26.0 29.1 27.8 29.7
Seed Cotton Weight 1.5 4.7 5.3 1.4
Semi-Departmental 5.8 10.4 10.5 11.0
Departmental 1.5 3.5 8.3 14.6
Total 100.0 100.0 100.0 100.0
Total Number of Associations 69 86 133 145

running bale dividend dropped from about two-thirds in 1933-34 to about
three-sevenths in 1943-44. No marked change occurred in the use of the
lint weight bale. For the four seasons the running bale and lint weight
dividends were used by 91, 81, 76, and 73 per cent of all associations. The
seed cotton weight dividend was lacking in popularity. As between the
seasons 1933-34 and 1943-44, the semi-departmental and departmental divi-
dends gained nearly all the ground lost by the running bale dividend.

Of considerable interest was the increased use made of the depart-

‘ mental dividend in 1935-36. During that season Lamar Folda as manager

of the Corpus Christi Farmers Gin Company and J. A. Bynum as manager
of the Haskell Cooperative Gin Company, without any knowledge of the
application of the departmental dividend elsewhere and without knowledge
of the activity of the other, struck upon the departmental plan in assign-
ing equities to members on profits left in the business. (See Exhibit A.)

Lamar Folda devised a comprehensive form for reporting the dividend -
to each member. (See Exhibit B.) The Houston Bank for Cooperatives
was most favorably impressed with this departmental method for calculat-
ing the dividend and with the form used in explaining the dividend. On

 

SIGNIFICANCE OF PATRONAGE DIVIDEND APPLIED BY GIN ASSOCIATIONS 9

March 6, 1936, John B. Jones, Secretary-Treasurer of the Houston Bank for
Cooperatives sent a statement together with a copy of the dividend form
to all gin association borrowers of the Bank. J. A. Bynum of the Haskell
Cooperative not only prorated dividends according to departments but he
‘also allocated losses sustained on lint cotton purchased from members at
prices above the market. On May 29, 1936, Sterling C. Evans, President
of the Houston Bank for Cooperatives, mailed a statement together with a
copy of the Haskell form to all gin association borrowers of the Bank.

Most of the other six gin associations which adopted the departmental
dividend in 1935-36 were newly organized cooperatives financed by the
Houston Bank. It seems that these associations were influenced by the ex-
amples set by the Corpus Christi and Haskell gins. The Tahoka Coopera-
tive Gin Company not only adopted the departmental dividend but also al-
located losses on cotton purchased.

Dividend Analysis of Three Associations

As a practical approach to the technique of calculating the patronage
dividend, data were obtained on actual dividends paid by three gin associa-
tions. From these data an analysis could be made of the dividends re-
ceived by each member. Furthermore details on each member’s deliveries
to his association were such as to make possible the computation of vari-
ous types of patronage dividends. Thus a comparative study could be made
from the standpoint of individual members of various kinds 'of dividend
payments.

The associations analyzed were chosen with a view of obtaining con-
trasting situations both as to amounts of profits available for dividend
payments and as to sources of profits. Association A is located in the
Blackland Area. The members of this gin are operating as a One-Variety
Community. The cottonseed produced is sold as planting seed. All the
seed cotton is picked. Association B is one of the oldest and most suc-
cessful cooperative gins in Texas. It is located in the Low Plains Area.
This association has been paying a semi-departmental dividend for nearly
20 years. Association C is also located in the Low Plains Area. The data
obtained are 0n dividends paid the first season of operations. As members
made deliveries they did not know that they would receive departmental
dividends. They were told, however, that the dividend would not be accord-
ing to the running bale.

The dividends each member would have received according to the five
kinds of patronage measures were determined. In comparing the relative
equitableness of each dividend a standard is required. The departmental divi-
dend was selected since this dividend is calculated according to actual contri-
butions of members to the different departments. Percentage relations of the
other dividends to the departmental were computed and distinctions made
whether those dividends were the same, higher, or lower, than the depart-
mental. These percentage variations are reflected in Table 2. Members
of Association A receiving 60 per cent of the semi-departmental dividend
would have received like amounts under the departmental; members of
the same association receiving 3.3 per cent of the seed cotton weight divi-

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SIGNIFICANCE 0F‘ PATRONAGE DIVIDEND APPLIED BY GiN AssooiATioNs i3

Over- and under-payments of I various dividends as compared with
the departmental were computed in dollars as shown in Table 3. Over- and
under-payments for Association A were $5, $56, and $70 for the semi-de-
partmental, running bale, and seed cotton dividends. Over- and under-pay-
ments for Association C were $194, $415, $316, and $565 for the semi-
departmental, running bale, seed cotton weight and lint Weight dividends.
Maladjustments of over- and under-payments of variations greater than
21 per cent were rather extreme for the lint dividend of Association C.

Table 2 may be somewhat misleading in suggesting greater maladjust-
ments in the various types of dividends than those actually obtaining. A
member, for instance, with a running bale dividend 10 per cent below the
departmental, receives a dividend of which 90 per cent corresponds with
the departmental. Dividend payments varying from the departmental were
analyzed as to the percentage correspondence with and divergence from
the departmental as reported in Table 4. If Association C had used a lint
weight dividend 90.5 per cent of the total would have agreed With the de-
partmental; if Association A had used a semi-departmental dividend 99.6
per cent of the total would have agreed with the departmental.

From 93 to 96 per cent of the running bale dividends coincided with
the departmental. This means that only 3.5 per cent of the dividend was
under-paid in the one instance and only 2.0 per cent in the other. The
point may be made that this is close enough to the ideal for practical pur-
poses. Thus the simplicity of the running bale dividend could be employed
rather than the greater complexity of the semi-departmental or depart-
mental dividend. The fact must not be overlooked, however, that two of
these associations used the departmental dividend and the other the semi-

Table 5. Average Pounds of Seed Cotton and Cottonseed per Bale
as Delivered by Members
Associations A, B, and C

       

Seed cotton Cottonseed
Percentage of total Percentage of total
Pounds bales ginned bales ginned Pounds
per bale . per bale
A B C A B C
a I I

1200-1299 0.8 I I 0.6 100-199

15100-1399 10.9 I I 0.4 0.8 0.9 200-299

14011-1499 111.9 I I 0.3 1.2 3.1 300-399

1500-1599 14.9 I 0.2 I 0.6 I 2.4 5.7 400-499

1600-1699 I 2.5 I 1.4 0.2 5.6 12.8 500-599

1700-1799 I I 11.8 7.6 6.4 49.7 26.5 600-699

1800-1899 I 36.0 9.0 12.7 38.1 30.2 700-799

1900-1999 I 34.2 44.1 73.0 2.2 18.2 800-899

2000-2099 | 13.7 22.1 7.7 0.0 2.0 900-999

2100-2199 I 1.3 9.7

2200-2299 | 1.4 3.3

2300-2399 I I 0.0 0.5

2400-2499 I I 0.8

2500-111) 1|  I 1.6
Average Average
pounds 1455 1902 1983 836 671 672 pounds
per bale per bale
Standard Standard
deviation +75 +94 +153 +67 +82 +140 deviation
in pounds _" '_' _ _ ' '_ — in pounds

14 BULLETIN NO. 649, TEXAS AGRICULTURAL EXPERIMENT STATION

departmental. If these associations had used the running bale dividend
over a period of years chances are that deviations from the departmental
would have become more pronounced.

Reasons for Differences in Patronage Dividends

One explanation for the lack of uniformity in the behavior of divi—
dends of the different’ associations is t0 be found in the variability in
weights of seed cotton and cottonseed per bale of members. Table '5 shows
the distribution of average weights of seed cotton and cottonseed per bale
of the deliveries of members. About two-thirds of the seed cotton bales
delivered by members of Association A were within a range of 75 pounds
of the average Weight; about two-thirds of the seed cotton bales delivered
by members of Association C were within a range of 153 pounds of the
average weight. About two-thirds of the bales delivered by members of
Association A had weights of cottonseed within a range of 67 pounds of
the average; about two-thirds of the bales delivered by members of Asso-
ciation C had Weights of cottonseed within a range of 140 pounds of the
average.

The rate of the dividend of the different departments is a second
factor influencing the behavior of the patronage dividend. Table 6 shows

Table 6. Rates According to Type of Patronage Dividend
Associations A, B, and C

Type of dividend Assoclatlons
A1 B2 C1

Departmental :

Bagging and ties 33¢ 37¢ 40¢

Seed cotton per 100 lbs. 1.59¢ 4.63¢ 15¢

Cottonseed per 100 lbs. 13.90,‘ 15¢ 23¢
Semi-Departmental :

Running bale $0.561 $1.25 $3.374

Cottonseed per 100 lbs. 13.9¢ 15¢ 23¢
Running bale:

Per bale $1.723 $2.256 $4.919
Seed cotton:

Per 100 lbs. ll.84¢ 11.86¢ 24.81¢
Lint:

Per 100 lbs. <44.49¢ 98.35¢

Type of patronage dividend actually paid:
lDepartmental.
gSemi-Departmental.

the equivalent rates according to physical units of various dividends of
the three associations. The dividend rate on the seed cotton under the de-
partmental dividend of Association A was but 1.59 cents per 100 pounds.
A. change of 63 pounds in seed cotton Weight was required to change the
dividend by one cent. The dividend rate on the seed cotton under the de-
partmental dividend of Association C was 15 cents per 100 pounds. A
change of but 6% pounds in seed cotton weight brought about a change of
one cent in the dividend. Dividend rates on cottonseed were such that a

. change of 7.2 pounds for Association A made a change of one cent in the

SIGNHITCANCE 0F PATRONAGE DTVTDEND APPLIED BY GIN AssociATioNs 15

dividend and a change of 4.4 pounds for Association C made a change of
one cent in the dividend. These variations in weights and rates explain the
fact that 91.2 per cent of the running bale dividends of Association A was
within the limits of 8 per cent above and below the departmental dividends
while but 62.2 per cent of the running bale dividends of Association C was
within these limits of the departmental dividends.

Allocating Losses on Cotton Bought

Association C bought 2,331 bales of cotton from its members of the
2,410 bales ginned. The average cotton loss suffered was $1.84 per bale on
the bales bought and $1.78 per bale on the bales ginned. The loss per 100
pounds of lint bought was 37 cents. If losses had been written off as a
lump sum against total profits, members would have shared losses on the
basis of a straight running bale. Losses could have been written off as a
running bale on the bales bought. Association C, however, allocated cotton
losses at the rate of 37 cents per 100 pounds of lint bought. Thus the
average dividend credit of this association was not $4.92 per bale but
$3.14.

One factor having a bearing on assessing fairly, losses on lint bought
was the weight of the lint bales ginned. A second factor was whether or
not members sold all their cotton to the association. Relative dividends of
members according to the methods of assessing losses on cotton bought
are shown in Table 7. It is clear that the small lint bale members would

Table 7. Relative Patronage Dividends According to the Method
Used in Allocating Losses on Cotton Bought
Association C

Method of assessing
Lint cotton losses
weight Lint Running Straight
per bale weight bale running
bought bought bale
l
-449 100 89 91
450-499 100 98 100
500-549 100 102 104
550-599 100 107 109
2
440 100 97 90

‘Members sold 100 per cent of their ginnings to the Associa-
tion.
2Members sold 402 bales of 481 ginned.

have suffered losses under the running bale bought and straight running
bale methods while the large lint bale members would have profited. Since
the members who did not sell all their cotton to the association sold an
average of 84 per cent, their relative losses under the running bale
methods were moderate. One member, however, sold but 2 bales of the 10
he ginned. As against the dividend he received under losses assessed on
lint bought, his dividends would have been but '73 and 71 per cent as large
under the running bale bought and straight running bale methods of allo-
cating cotton losses. ~

16 BULLETIN NO. 649, TEXAS AGRICULTURAL EXPERIMENT STATION

The greater the differences in the percentages of bale sold by mem-
bers to their association at a loss, the greater the need of allocating losses
on the actual bales or lint Weight bought. The chief gain to Association C
in allocating cotton losses on the lint weight bought was demonstrating to
members that such losses cannot be hidden. This method of writing off
these losses is virtually treating these cotton losses as prepaid patronage
dividends.

OBJECTIVES OF PATRONAGE DIVIDEND

A chief objective of the patronage dividend is to assure an equitable
share to all members of such profits or savings as may be designated for
dividend distribution. The secret of a fair dividend lies in the choice of
units which measure equitably the overall patronage of each member.
The problem facing the management of a cooperative gin is making the
best choice of one of some five distinct types of dividends.

Percentages of total dividends yielded by the different departments
may serve as an index on the type of dividend which should be adopted.
Table 8- reveals the relative importance of different departments for the

Table 8. Contributions of the Various Departments to
the Average Departmental Dividend.
Associations A, B, and C

Percentage of

Department total dividend
A B C
Bagging and ties 19.2 16.4 8.1
Ginning "‘ 13.4 44.6 60.5
Cottonseed 67.4 39.0 31.4
Total 100.0 100.0 100.0

three associations. Under the semi-departmental dividend 86.6 per cent of
the dividend of Association A would be identical with the departmental
dividend. Under the same type of dividend but 39.5 per cent of the total
dividend of Association C would be identical with the departmental divi-
dend.

The running; bale measures accurately the dividend on bagging and tie
profits. This department, however, usually yields less than 20 per cent of
the total dividend. The amount of cottonseed per bale left with the gin

has no bearing on this dividend. A running bale dividend places a premium _

on the ginning of small bales. A member by inflating his bale count gains
an increasing share of both ginning and cottonseed profits. Objections to
the running bale dividend are intensified by the fact that usually more
than 80 per cent of the dividend is subject to the vagaries of the size of
bale ginned by members.

Lint weight fails as a measure of a member’s contribution to any of
the three departments. To the degree that the turnouts of the members’
ginnings vary, the lint weight is not an equitable measure of gin tolls paid
on the basis of seed cotton Weight. To the extent that lint weights of
members’ bales vary from the average lint weight is not a fair measure of
profits on bagging and ties. Differences in the pounds of cottonseed per

SIGNIFICANCE OF PATRONAGE DIVIDEND APPLIED BY GIN ASSOCIATIONS 17

bale left with the gin by members are wholly disregarded. The lint weight
dividend, however, does put a stop to a raid on ginning and cottonseed
profits through the ginning of small bales.

The seed cotton weight dividend has gained little favor with Texas
cooperative gins as revealed in Table 1. Seed cotton weight measures
accurately the contributions to ginning profits provided gin charges are
based on the Weight of seed cotton ginned. But the ginning profit is usual-
ly considerably below 50 per cent of the total profit. Four cooperative gins
of Texas with volumes much above the average and with gin tolls consid-

I erably above rates in later years had ginning profits averaging 46 per

cent of total profits over periods of from 7 to 15 years. The greater the
weight of seed cotton per bale, the higher the ginning rate, and the
greater the volume of ginning, the greater becomes the relative importance
of ginning profits to total profits. To the degree that seed cotton Weights
of members’ bales vary from the average the seed cotton weight is not an
equitable measure of profits on bagging and ties. Variations in contri-
butions of members to cottonseed profits areof no influence with this type
of dividend. In calculating the seed cotton dividend much of the work has
to be done that is needed in computing the departmental dividend.

Regarding members who deliver relatively light seed cotton bales, this
point should be noted: One group of these members may gin small lint
bales; the other group may gin lint bales of standard weight. Whether
deliberate or not, the former group is inflating its count of running bales.
The second group makes a proper adjustment to a high turnout.

Minimum Essentials of an Equitable Patronage Dividend

Perhaps the most positive statement which may be made regarding re-
quirements of an equitable patronage dividend of a cooperative gin is that
cottonseed profits should be allocated in terms of weights of seed, mem-
bers sell to their association. This rules out the single unit dividends ac-
cording to the running bale, the lint weight, and the seed cotton weight.
Thus desirable dividends are limited to the departmental and semi-depart-
mental.

Departmental and semi-departmental dividends agree on the method of
allocating cottonseed dividends. As for dividends on bagging and ties, the
logical unit for the latter dividend is the running bale. This measure is
the fairest and the easiest to calculate. Thus the two dividends agree on
the distribution of profits on bagging and ties. The real difference arises
as to the allocation of ginning profits. With the departmental dividend
these profits are distributed according to the weight of seed cotton ginned
or the gin tolls paid. With the semi-departmental dividend the logical unit
for distributing ginning profits is according to the running bale.

The basis of choice between departmental and semi-departmental divi-
dends is a matter of attaining the highest possible degree of equity in al-
locating ginning profits according to seed cotton weight as against the
greater simplicity of the running bale. According to Table 2 differences
between the two dividends of Association A were only $5 over- and under-
payments of the semi-departmental as against the departmental dividend.
It seems clear in this instance that all the extra work of computing the
departmental dividend was not worthwhile practically. On the other hand

18 BULLETIN NO. 649, TEXAS AGRICULTURAL EXPERIMENT STATION

differences in the case of Association C were great enough to warrant the
use of the departmental dividend. Association B seems to lie between the
extremes of the other two associations.

Obviously no hard and fast rule can be stated as to the better choice
between departmental and semi-departmental dividends under all circum-
stances. No doubt if the one dividend had to be chosen for permanent
adoption the departmental would be the better selection. In general, how-
ever, situations indicative of a preference for the semi-departmental divi-
dend are:

1. Ginning dividends less than 50 per cent of total dividends.

2. Ginning dividend rate of 5 cents or less per 100 pounds of seed

cotton.

3. One-half or more of the volume of ginning with seed cotton bales

weighing within 75 pounds of the average weight.

4. Variations in weights of seed cotton per bale reflecting differences

in turnout with fairly uniform lint weights per bale.

PROFIT OR NON-PROFIT ASPECTS OF GIN BUSINESS

A discussion of technical aspects of the patronage dividend assumes
that the gin business is conducted at a profit. It seems fitting that the
question be raised whether or not a cooperative like a gin association
should exact a charge for services either high enough to yield a margin of
profit or just sufficient to cover the cost of service with no profit.

The question of profit or non-profit operations of a cooperative gin
association has two main phases: (1) The practical dealing with such mat-
ters as the collection of charges for gin service; the relative importance of
fixed and variable costs; and the problem of estimating costs at the open-
ing of the ginning season. (2) The philosophical dealing with the proper
role of cooperatives in the national economy. This raises the issue whether
cooperatives should operate as competitive agencies in an economy of free
enterprise or as non-competitive agencies in a Utopian retreat.

Cooperatives Operating at Cost

The nature of the business of a cooperative has an important bearing
on whether or not profit or non-profit operations are feasible. If costs are
principally variable, or operating, non-profit business is practicable and
perhaps preferable. In the livestock shipping association costs are primari-
ly a per unit charge either on the individual head or on the shipping unit.
In the cheese factories of Wisconsin producing foreign types of cheese the
main cost is the percentage commission on cheese sales paid the cheese-
maker for his services. In such instances the cost or charge can be col-
lected currently through deductions from receipts due the members. Thus
members do not receive service on credit. In such instances no particular
period or season is involved. The volume of business for the year does not
influence the per unit cost of operations.

In a processing plant with heavy fixed investments non-profit opera-
tions would introduce many complications. The ginning business is char-
acterized by heavy fixed costs. This explains the marked influence of vol-
ume of ginning upon costs.

SIGNIFICANCE OF PATRONAGE DIVIDEND APPLIED BY GIN ASSOCIATIONS 19

Whether or not costs need to be estimated at the opening of the gin-
ning season is largely a question of the most feasible time to collect
charges for ginning service. If collections may be delayed until the end of
the season actual cost can be determined and the charge for service gov-
erned accordingly. This procedure would introduce two problems: the fi-
nancing of current operations; and‘ the collection of charges after mem-
bers had disposed of their cotton and cottonseed. If gin charges were
not collected until the end of the season, arrangements would have to be
made to finance all out-of-pocket expenses incurred during the ginning
season. Operating a ginning business on credit is not practicable. Collec-
tions would be exceedingly difficult to make and losses on such accounts
would be heavy. To the extent that these charges were not collected the
business would be operated at a loss.

‘Collection of Gin Charges at Time of Ginning

The successful operation of a ginning business makes imperative the
collection of charges at the time patrons receive the service. If a coopera-
tive gin were to operate on a cost basis this would require an estimation
of the cost of ginning at the opening of the season. In estimating the cost
several uncertainties arise. At the opening of the season the volume of
ginning cannot be estimated with the precision needed in making accurate
estimated costs. The volume depends both upon the size of the crop and
on deliveries by patrons. The influence of volume on cost is such that a
relatively small deviation, especially with a low volume, may change costs
considerably. The relative cost efficiency for the year ahead is rather un-
predictable. Unforeseen factors may arise during the season as marked in-
creases in labor costs because of a scarcity of gin labor; and slow and
costly ginning resulting from a general unfavorable state of the weather.
Furthermore, few managers and board members are in position to make an
accurate estimate of costs at the opening of the season even if all the
more important variables be known.

To the extent that estimated costs differ from the actual, adjustments
would need to be made at the end of the season. If the estimated costs
proved too low the gin association would face the unpleasant task of col-
lecting the shortages from members. Many members, no doubt, would con-
tend that they had paid for the service in full through the charge paid at
ginning time. If estimated costs were too high the association would have
to refund over-charges to members.

Gin Charges at Cost in Short Crop Seasons

Attempts to base the charge for ginning service on the cost of the
service would be particularly troublesome in short crop seasons when regu-
lar charges do not cover the cost. To charge members a rate for service
less than the going rate would but increase losses for the season; to
charge the going rate would be to confess that the cost plan had t0 be
abandoned at times; to charge the full cost would mean members would
be paying more for ginning service at their cooperative than the going
rate at competing gins, »

Whether or not a cooperative gin will obtain a normal volume of
business though charging a rate above the competitive level depends en-

 

20" BULLETIN NO. 649, TEXAS AGRICULTURAL EXPERIMENT STATION

tirely upon the general attitude of the members. Experience on this point‘;
is lacking in consistency. Cases may be cited of cooperatives suffering.’
heavy reductions in volume whenever they charge above the going rate;
other cases may be cited of cooperatives enjoying a most satisfactory vol-i
ume even though charging 5 or 1O cents per hundred pounds of seed cotton
above the competitive rate. If a large percentage of the members are in
the mood to shop for the lowest charges available at ginning time, a charge:
according to the high cost of a short crop season may prove quite disas-i
trous.

 

Operations at Cost and Financing Program

Operations of a cooperative gin plant at a profit or at cost have im-
plications other than the question whether or not patronage dividends may
be paid. The whole program of financing may be involved. With very fewi
exceptions cooperative gin associations of Texas have financed their in-i

. , _.,......_..s.n_

l

vestments from profits of the business. In operations at cost, profit financ-
ing would be impossible. Under this circumstance members would have to;
assume their share of the financing as an outright investment. The other!
alternative would be to exact a retain, or deduction, of a stipulatedl
amount per bale as the source of necessary funds.

Under cost operations the accumulation of a surplus and of various re- l
serves would also involve retains. Members would more than likely view
the retains as costs of ginning added to the cost charge. As the amounts .
of funds vary from year to year the retains would vary adding to the un-
certainties of charges exacted from members. Quite frequently the total*
of the retains and the cost charge would be greater than the going rate at;
the gin point. To the extent that growers look for the lowest possible I
cost of gin service at the time of ginning, patronage at the cooperative
would suffer.

The financing of the investment in the gin plant andthe accumula-
tions of necessary reserves and surpluses are comparatively simple for gins c
operating under the profit plan. The funds used in financing come from
profits and cannot be viewed as costs in such circumstances. The retain
system may be more desirable in financing the fixed assets of an associa- l
tion than profit financing. But in the gin operating at a profit the patron- ~
age dividend available may more than offset retain deductions. But before
the general run of cooperative members in Texas will accept the retain ‘
system as a substitute for profit financing much educational work will .
need to be done.

The shortcomings of deferring the collection of ginning charges to
the end of the season and the difficulties of the necessary estimation of
ginning costs if charges are to be collected currently emphasize the im-
practicability and undesirability of attempts to operate cooperative gin as-
sociations at cost.’ If gin charges are to be other than at cost the most
logical basis seems to be at the going rate in the gin point.

' .4...» )-

zBurgess and Weaver in their discussion, Possibilities of Pooling, express approval of opera-
tions at cost. See Bul. 41, Expenses, Income and Dividends of Oklahoma and Texas Co-
operative Gotton Gins. Farm Credit Administration. 1940. pp. 56-62.

SIGNIFICANCE OF PATRONAGE DIVIDEND APPLIED BY GIN ASSOCIATIONS 21

Status of Cooperative Gins in Texas Gin Industry

The question of profit or non-profit operations raises the fundamental
issue of relations of the Texas cooperative gins to the gin industry of the
state and to the cotton growers outside the cooperative movement. If
members and leaders of cooperatives accept the status of competition, op-
erations of gins at a profit seem valid and desirable. If members and
leaders wish to retreat from the competitive into a non-competitive world,
operations at cost seem logical and consistent.

Members of cooperative gin associations and private ginners have
many interests in common. Certainly the cooperative groups cannot be en-
tirely indifferent and oblivious as to what happens to the private ginners.
Anyone at all acquainted with the cooperative gin movement in Texas must
realize that a very considerable percentage of cotton growers do not wish
to belong to a cooperative gin association. This fact is being demonstrated
in the patronage of one of the most successful cooperative gin associations
of Texas from the standpoint of profits earned and patronage dividends
distributed. Members joining this association are not required to make any
contribution to the capital needed in operating the business. The only
charge exacted is a one dollar membership fee required of all members
old as well as new. This membership fee need not be paid in cash but
may be collected as a deduction from such patronage dividends as may
accrue to the credit of the member later. The gaining of a membership
in this association involves nothing more than the delivery of a bale of
seed cotton to the gin. The total number of patrons over an 18-year period
in terms of the average number of patrons per season indicates six turn-
overs in the membership. That is, the average membership lasts but for
three years. Fifty per cent of the members patronized the cooperative for
only one season. In the most favorable season not more than 40 per cent
of the cotton growers ginning in the county delivered to this cooperative
gin. It should be evident that a very large percentage of the cotton grow-
ers ginning in this county either choose,not to become members of the co-
operative gin, or to become members for but a brief period. In light of
past experience about 70 per cent of the cotton ginned in the county will
be taken care of by private ginners.

If cooperative gins of Texas operated at cost the charges exacted
would represent price-cutting of service charges as viewed by private gin-
ners. To the extent that private ginners would follow the lead of the co-
operatives the amount of the cut in charges would depend upon the volume
and costs of the cooperatives. The least disturbance would occur at points
with cooperative gins of low volume and relatively high costs and the
most drastic adjustments at points with cooperatives of large volume and
relatively low costs.

Avoiding Over-Duplication of Ginning Facilities
The outstanding weakness of the gin industry as it has developed in
Texas is that of over-expansion of ginning facilities. Texas ginners have
been too optimistic. Capacity has been gauged to furnish ample ginning
service during the bumper crop seasons. Furthermore ginners have ex-
pressed a willingness to accept very modest returns on their gin invest-

22 BULLETIN NO. 649, TEXAS AGRICULTURAL EXPERIMENT STATION

ments by the Way they have stayed in the business. Cooperative gin asso-
ciations of Texas by obtaining a volume of ginning more than twice as
large as that of private ginners, on an average, are eliminating much of
the disadvantage of too many gins in the state so far as the cooperative“,
members are concerned. A

  
  

An average gin with a volume of about 900 bales and a gin income of»
about $6 a bale breaks even. The cooperative associations with an average-
volume of about 2,250 bales and a gin income of about $6 a bale are ef-
fecting a saving of about $2 a bale. Thus the average cost of about $6 a
bale for the private ginners is reduced to about $4 a bale for the coopera-
tive groups. This lower cost of the cooperatives is not the result of sufi
perior cost efficiency but rather is the result of the favorable circumstance
of larger volume. *

The apparent advantage of a large patronage dividend has its basis in
psychological considerations rather than in economic. If the minds of co-
operative gin members could be focused on the cost of the gin service
rather than on the patronage dividend a different outlook would open up.

Suppose the cooperative gin associations took the initiative in drop-
ping the gin income to $5 a bale. Private ginners, undoubtedly, would fol-
low suit in dropping their charges. At a gin income of $5 a bale the vol-
ume needed to break even is about 1,200 bales. Thus about 25 per cent
of the private gins would be forced out of business. Assuming that the
cooperative gins would get their proportionate share of the increased vol-_
ume because of the reduction in the number of gins, the average volume
would be 2,800 bales. At this volume the cost of ginning would drop to
about $3.60 a bale. In lowering gin charges to $5 a bale, the cooperatives
would not suffer a reduction in patronage dividends to $1 a bale but to“
$1.40 a bale.

The significance of the changed situation is this: in the first place,
members would pay $1 a bale less for service at ginning time; in the sec-
ond place, members would receive ginning service at a cost less by 40
cents a bale, a saving of 10 per cent.

Advantages of Operating Competitively

Experiences of cooperative associations over a period of 100 years
have amply demonstrated the advantages of charging the going rate. Nor-
mally a cooperative gin with an economic volume of ginning, efficient cost
operations, and the going rate of gin income will realize profits which be-
come available for the payment of cash dividends distributed on the pat-
ronage basis. The patronage dividend was one of the most profound and
far-reaching contributions of the Rochdale Pioneers to the cooperative
movement. Holyoake in his famous HISTORY OF THE ROCHDALE A
PIONEERS put the matter rather succinctly: “Mr. William Chambers, in a
his paper on cooperation, says, with true insight, ‘Without the principle of A
accumulating profits, cooperation remains a very insignificant affair.’ The
long years of store experience which preceded the commencement of the -
Rochdale Store of 1844, were the ‘insignificant’ days of cooperation. There c
was no alluring accumulations then.” (Tenth Edition, p. 150.)

SIGNIFICANCE OF PATRONAGE DIVIDEND APPLIED BY GIN ASSOCIATIONS 23

SUMMARY

Business operations at a profit is one of the objectives of all coopera-
tive gin associations. The purpose of the patronage dividend is to effect
the distribution of these profits among the members.

The problem encountered in devising an equitable patronage dividend
is largely the result of the nature of the gin business. A gin operates three
distinct branches of ginning, bagging and ties, and cottonseed; each de-
partment has its distinctive characteristics as to profit or loss.

The problem facing the early cooperative gin was to find a unit to
measure the patronage to be substituted for the share of stock used as the
unit by farmer stock gins. The first unit selected as the basis for pat-
ronage dividends was the running bale. Experience has demonstrated sev-
eral weaknesses in the running bale as an equitable measure of overall
patronage of members.

The running bale is only one of several physical measures of patron-
age in a cooperative gin. The weight of seed cotton delivered; the weight
of lint ginned; the number of patterns purchased; and the weight of cot-
tonseed left with the gin are other units to be considered as physical
measures.

The Childress Farmers’ Cooperative Society was the first association
to break away from the running bale dividend; the Danevang Farmers’
Cooperative Society was the first association to adopt the departmental
type of dividend.

For the seasons 1933-34 and 1943-44, the percentages of all coopera-
tives using the various types of dividends were: running bale, 65.2 and
43.3; lint weight, 26.0 and 29.7; seed cotton weight, 1.5 and 1.4; semi-de-
partmental, 5.8 and 11.0; and departmental, 1.5 and 14.5.

A comparison of the various types of dividends of three associations
with the departmental as the standard shows that:

1. The percentages of total dividends received which would‘. have been
the same varied from 3.3 of the seed cotton dividend of Association
A to 60.1 of the semi-departmental dividends of Association A.

2. The percentages of total dividends within the limits of 4 per cent
above and below the departmental varied from 32.0 for the lint divi-
dend of Association C to 100.0 for the semi-departmental of Associa-
tion A.

3. The over- and under-payments in dollars varied from $5 for the
semi-departmental dividend of Association A to $565 for the lint
dividend of Association C.

4. The percentages of total dividend payments coinciding with the ale-
partmental varied from 90.5 for the lint dividend of Association C to
99.6 for the semi-departmental dividend of Association A. ‘

The lack of uniformity in the behavior of different kinds of dividends
of various associations resulted from the variability in the weights of
seed cotton and cottonseed per bale and in the rates of the dividend of
the various departments.

Association C allocated cotton losses at the actual loss of 37 cents per
100 pounds of lint bought. The greatest gain in this procedure was that

24 BULLETIN NO. 649, TEXAS AGRICULTURAL EXPERIMENT STATION

Y
1a., L4 uaaibll.‘ mnhhlaa-aarm

of demonstrating to members that these losses cannot be hidden. This-é
manner of handling cotton losses has the effect of treating these losses?
as prepaid patronage dividends. ‘

A chief objective of the patronage dividend is to assure an equitable?
share to all members of the profits of the business. The secret of a fair}
dividend lies in the choice of units to measure the patronage. l

Single unit dividends according to the running bale, the lint weight, or -

the seed cotton weight disregard differences in the pounds of cottonseed‘

per bale left with the gin by the various members.

The running bale dividend places a premium on the ginning of small A

bales. As a member purposely gins smaller bales he obtains a propor-
tionately larger share of ginning and cottonseed profits. The lint weight
dividend curbs the attempt to obtain an advantage through the ginning of
small bales.

A first essential of an equitable patronage dividend is that profits on
cottonseed be distributed according to the amount of seed each member

leaves with his association. This requirement rules out the single unit-

dividends.

The two desirable dividends are the semi-departmental and the de- _
partmental. Both agree in the distribution of profits on cottonseed and 1

bagging and ties. The departmental dividend distributes ginning profits

l

according to the weight of seed cotton ginned or gin tolls paid: the semi-__

departmental according to the running bale.

The semi-departmental dividend is preferable provided differences in i,

l

the ginning dividend according to the two methods of calculation are too é

small to be of any consequence. In the main circumstances favoring the
semi-departmental dividend are: ginning profits less than 50 per cent of
total profits; ginning dividend of 5 cents or less per 100 pounds of seed
cotton; 5O per cent or more 0f the bales ginned with seed cotton weights
within 75 pounds of the average weight; and variations in seed cotton
weights a matter of differences in turnout rather than the result of at-
tempts to increase the number of bales through the ginning of small lint
bales.

The question of profit or non-profit operations of a cooperative gin

association has two main aspects: (1) The practical dealing with such mat- ’
ters as the collection of gin charges; the relative importance of fixed and ‘

variable costs; and the problem of estimating costs at the opening of the

ginning season. (2) The philosophical dealing with the fundamental issue "
of the status of the cooperative gins within the gin industry and with re- A

spect to the cotton growers outside the cooperatives.

Cooperatives whose costs are primarily variable, or operating, may
operate at cost. Cooperatives with relatively heavy investments and con-

sequent heavy fixed costs face a much more complicated situation if op- c

erations are at cost.
A cooperative gin operating at cost might delay the collection of

charges to the end of the season when costs could be ascertained accu- I
rately. But such collections after members have disposed of their cotton ‘

and cottonseed would be most difficult to make. The other alternative

l
a

 

SIGNIFICANCE OF PATRONAGE DIVIDEND APPLIED BY GIN ASSOCIATIONS 25

would be to collect the charge when the service is furnished. The latter
procedure would require that costs be estimated at the‘ opening of the gin-
ning season. Because of uncertainties as to volume of ginning and relative
efficiency for the season ahead accurate cost estimates are exceedingly
difficult to make.

Operations at cost would prevent profit financing. Members would
have either to furnish capital as an outright investment or to adopt some
form of retain on the volume handled.

The question of profit or non-profit operations raises the fundamental
issue of the relation of the cooperative gins to the gin industry and to the
cotton growers outside the cooperatives. If the status of competition be
accepted, operations at a profit seem valid and desirable; if the non-com-
petitive ideal be entertained, operations at cost seem logical and consist-
ent.

If cooperative gins should operate at cost, the charges exacted would
represent price-cutting of service charges as viewed by private ginners.
To the extent that competing gins would meet these reduced charges they
would suffer financial loss; growers outside the cooperatives would obtain
ginning service at the same cost as members of cooperatives but without
the responsibilities attached to cooperative membership.

It seems evident that the best interests of both the cooperative gins
and their private competitors are furthered and preserved by maintaining
gin charges at competitive levels.

Experiences over a period of 100 years have amply demonstrated the
advantages of operating at a profit with such profits distributed through
a patronage dividend. One of the most profound and far-reaching con-
tributions of the Rochdale Pioneers was that of the patronage dividend.

14“, Jarmlmu

26 BULLETIN NO. 649, TEXAS AGRICULTURAL EXPERIMENT STATION

EXHIBIT A

Development of Departmental Dividend and of Forms for
Reporting the Dividend

Statement from personal letter, October 2, 1943, of Lamar Folda, former manager, Corpus
Christi Farmers Gin Company: "

“In explanation of the manner in which I arrived at this form of dividend crediting, I
wish to go back to a meeting at Dallas of the Texas AgriculturalAssociation, in the spring
of 1934. At this meeting Daddy Cole gave a talk, also a man from Quanah. Each of them
stated what their dividend had been, in dollars per bale. This was my first attendance at such
a meeting, and I was absorbing cooperative information and spirit thru every pore. I gave
the subject a great deal of thought during the next few months. Then as we were nearing
the end of our first ginning season, in October of 1935, the inequity of such dividend pay-
ments in equal dollars per bale bothered me, for this reason: One of our members had taken
about 97% of his seed home. He would sell it in the winter to the oil mill, and receive
three or four dollars per bale more for his seed than the rest of our members who sold their
seed to the gin. Under a system of paying dividends in flat dollars per bale he would obtain
a certain amount of seed profit from the other members who sold their seed to the gin, and
on which seed the gin made their regular merchandising profit. Then he would receive this
merchandising profit of about three dollars per bale on all his seed which he hauled home.
Suddenly the thought struck me, just separate the ginning cost and ginning income from
seed handling cost and income. So it was really very simple."

Statement from personal letter, October 4, 1943, of J. A. Bynum, former manager,
Haskell Cooperative Gin Company:

“I shall relate some of the events that prompted me to work out an equitable basis for
computing the dividends from our organization. During the very short cotton season of 1934
I began talking with the gin customers about organization. They all thought it would re-
quire cash to put it over, consequently there was very little interest. The following spring
we had a meeting with Mr. J. E. Montgomery there to explain the Houston Bank proposition
to the few present. A better crop prospect was in sight and the farmers were all busy. _
They were interested, but too busy to help much in the organization work or even attend the
meetings. It was up to me to get the stock subscriptions, with some aid later by some who i
were up with their farm work. In this subscription work I found many who were opposed
and bitter toward farmer-owned gins. Several stock company and society gins had just re-
cently ‘gone broke’ and many of those I approached had paid off heavy notes as a result.
Naturally they were in no mood to sign a note for more cooperative gin stock. They also '
had not liked the way profits were divided, nor the way the books were kept. They com- =
plained that the members never knew how much profit was made or how dividends were
computed and that the big man got all the profit from the stock companies. It was then
that I began working out our departmental plan and I explained it to the subscribers as I
sold them the stock. We also assured these subscribers that the books would be audited an-
nually and that an individual statement would be furnished showing dividend calculations.
At the end of our first season which was the 1935-36 season we could easily make up these
individual statements because we had from the beginning kept an individual customer's;
ledger sheet. These sheets not only kept the customer's account with the gin but showed the
number of pounds of seed cotton, cottonseed, lint sold the gin, patterns bagging ties bought
and other commodities bought. It seems to have been a coincidence that Folda of Corpus
Christi and I were working on a similar plan at the same time. I do remember getting one _
of his statement forms (individual) and I might have used some part of this form in ours.
However, the departmental idea had been worked out long before I knew of his plan. The
Houston Bank also asked me to send them one of my forms. I later learned that they -
mimeographed a. quantity of them and mailed them out to cooperative associations. My first
thought in this work was for our own organization to overcome weak spots in former asso-
ciations and not for credit. I was influenced by the revised Texas Cooperative Marketing
Laws which say that patronage dividends shall be distributed to both members and non-
members on an equal prorata basis regardless of the amount of stock owned. This law can-
not be ‘followed on any other basis. I give this lengthy explanation to show that the organi-
zation work is not always easily accomplished; to show how we restored confidence in
farmer-owned gins in this vicinity or at least among our members and not to gain credit or _
publicity. I never thought of it attracting attention outside of Haskell, but since the letter _
sent out by the Houston Bank, representatives from several gins have visited me for further
information."

 ...i .._;.~..__._._ __ a f“

 

SIGNIFICANCE OF PATRONAGE DIVIDEND APPLIED BY GIN ASSOCIATIONS 27

EXHIBIT B
Various Forms for Reporting the Patronage Dividend to Members

1. Patronage Statement of December 31, 1935, to A. Customer

Your note, payable to the Corpus Christi Farmers Gin Company, for $125.00 has been re-
ceived, evidencing a subscription for an equal value of the common stock of the company at
par of $25 per share. Net profits for the year's operations, after deduction of all expenses
and depreciation, leave an amount sufficient to declare a patronage dividend, according to the
charter and by-laws. This entire distribution will be credited on your note above mentioned,
as a payment on principal. It has been agreed by the directors, that for this year there will
be no dividend on stock, and that no interest shall be charged on your note held by the
company. In effect, the dividend on the stock ‘would exactly balance the interest on your
note, because for this year, each member would owe interest on exactly the same sum of
money on which he would be entitled to receive dividends from stock owned.

The Manner of Calculating Patronage Distribution follows:
You sold 21,750 pounds of seed to the gin, distribution

is 22 cents for each hundred pounds of seed sold . . . . . . . . . . . . . . . . . . . . . . . .$ 47.85
You paid $153.20 for ginning at 35 cents per hundred
pounds, distribution is one fourth of ginning paid . . . . . . . . . . . . . . . . . . . . .. 38.30

You bought 30 patterns of bagging and ties, and after
deducting from this profit the cost of hauling your cotton

to the compress, distribution at 32 cents per bale is . . . . . . . . . . . . . . . . . . .. 9.60
Your Total Patronage Distribution . . . . . . . . . . . . . . . . . . ..$ 95.75

If one fourth of this distribution is due to a land owner,

other than yourself, his rental share is . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 23.94

Three fourths of the entire distribution due to you amounts to . . . . . . . . ..$ 71.81

Note

The original amount of your stock note was . . . . . . . . . . . . . . . . . . . . . . . . ..$125.00

Net distribution credited on principal . . . . . . . . . . . . . . . . . . . . ..$

Other credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .______

Total credits . . . . . . . . . . . . . . . . . . . . 71.81

Balance of principal still owing on note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53.19

Amount of stock now outstanding and credited to your account . . . . . . . . . . . . . . . . “$123.00

This statement shows exactly what your share in the financial income of the company
amounts to for 1935. Dividends are not distributed primarily to stockholders only, according
to stock owned in the company, but are being distributed on an equal prorata patronage
basis, based upon the amount of business you brought to the gin. You are the sole contribu-
tor of, and the chief factor determining the amount of distribution which this company pays
to you. It is your gin. The gin crew has worked consistently and faithfully to operate the
plant efficiently and economically. The cotton producers have cooperated exceptionally well
during our first ginning season. The board of directors have given generously of their
time, effort, and experience, without pay, to advance the best interests of the gin company.

I, the undersigned, an owner of common stock in the Corpus Christi Farmers Gin Company,
hereby agree to waive my rights to a dividend on said stock for the year 1935, for the fol-
lowing consideration: First-—In consideration of the agreement by the gin company, duly
authorized by the board of directors, and by the membership, to waive all interest for the
year 1935 on the note which I owe the company for stock purchase price, and, Second—In
consideration of the patronage refund by the gin company to me for 1935, which shall be

‘ credited on the principal of my note above described, it being distinctly understood that

this agreement is binding only for the year 1935 and none other.

Appreciatively yours,
Corpus Christi Farmers Gin Co., Member'stbckh°lder
By Lamar Folda, Manager.

28 BULLETIN NO. 649, TEXAS AGRICULTURAL EXPERIMENT STATION

2. Patronage Statement of Haskell Cooperative Gin Company for Season Ending March 31, t

1936

To: John Doe Landowner: John Doe Share: 1A

The purpose of this statement is to show you the basis upon which your distributions were,

calculated and to show your exact interest in the financial income from your first year’s
operations. After deducting from this income all expenses, depreciation, and reserves, there
is a dividend surplus for distribution. According to the charter and by-laws, distributions are
made on stock not to exceed eight per cent. The remaining dividend surplus is distributed on
an equal pro rata patronage basis, regardless of stock owned or membership. This year your
entire distribution will be credited on your stock purchase note as a. payment on principal.
If your distribution is more than the amount of your note, the difference will be paid in ad-
ditional shares of the common stock.

Stock Distribution

Since your stock dividend would exactly equal the interest on your stock note, it has been
agreed by the directors that for this year no stock dividend will be paid and no interest will
be charged on your note. All distributions will be on a patronage basis.

Patronage Distribution

Profits, or losses, are made at a gin from such departments of the business as ginning seed
cotton, bagging and ties sale, cotton seed sales, lint cotton trading ,and other commodities.
Therefore, your distribution from a department is determined by the amount of business you
do with that particular department. On this basis, the calculation of your patronage distri-
bution follows:

You ginned 55,600 Lbs. of seed cotton at 40¢ per 100 Lbs.,

distribution is 15¢ for each 100 Lbs. ginned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..$ 83.40
You sold 19,100 Lbs. of cotton seed to the gin, seed

distribution is 23¢ per 100 Lbs. sold to gin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 43.95
You bought 28 patterns of bagging and ties, bagging

and ties distribution is 40¢ per pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 11.20
Other commodities Distribution
Your total patronage distribution from above department is . . . . . . . . . . . . . . . . $138.55
You sold the gin 14,030 Lbs. of lint cotton on which

there was a loss from handling of 37 points per pound. Deduction is . . . . . . .. 51.91

Your total net patronage distribution is . . . . . . . . . . . . . . .. 86.64

If one-fourth of this distribution is due to a landowner other
than yourself, his rental share is . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 21.66

Threeqfourths of the entire distribution due to you is . . . . . . . . . . . . . . . . . . . . .. 64.98

4

Stock Note

The original amount of your note, payable to the Haskell Cooperative
Gin Co., for subscription to_20 shares of common stock at par of $5

per share was...... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..$l00.00

Net distribution credited on principal . . . . . . . . . . . . . . . . . . . . . . . . ..$_________

Other credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ._______

Total credits . . . . . . . . . . . . . . . . . . . . . . . . 64.98

Balance of principal still owing on note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 35.02

Your credit balance toward additional shares of Common Stock is . . . . . . . . . . . . . . . . . ..$

Amount of stock now- outstanding and credited to your account . . . . . . . . . . . . . . . . . . . . . $100.00

The success of our first year’s operations is the strongest evidence of the splendid coopera-
tion and loyalty of the members and patrons. The directors have given generously of ‘their
time and experience for the advancement of your interest. The crew has worked faithfully
to give you the best service and operate your gin economically.

I, the undersigned, an_ owner of common stock in the Haskell Cooperative Gin Co., hereby
agree to waive my rights to a dividend on said stock for the year 1935, for the following
consideration: First: In consideration of the agreement by the gin company, duly authorized
by the board of directors, and by the membership, to waive all interest for the year 1935 on
the note which I owe the company for stock purchase price, and, Second: In consideration of

n,‘  

SIGNIFICANCE OF PATRONAGE DIVIDEND APPLIED BY GIN ASSOCIATIONS 29

the patronage refund by the gin company to me for 1935, which shall be credited on the
principal of my note above described, it being distinctly understood that this agreement is
binding only for the year 1935 and none other.

Haskell Cooperative Gin Company ‘
By J. A. Bynum, Manager Member-Stockholder

3. Patronage Statement of Howard Co-Op Gin Co. for S Pfldifl" 194-__
To : Landowner : Share:

The purpose of this statement is to show you the basis upon which your distributions were
calculated and to show your exact interest in the financial income from your year's opera-
tions. After deducting from this income all expenses, depreciation, and reserves, there is a
dividend surplus for distribution. According to the charter and by-laws, distributions are
made on stock not to exceed____per cent. The remaining dividend surplus is distributed
on an equal pro rata patronage basis, regardless of stock owned or membership. This year
your entire distribution will be credited on your stock purchase note as a payment on princi-
pal and interest. If distribution is more than the amount on your note, the difference will
be paid in additional shares of your stock.

Stock Distribution
The directors declared a Stock Dividend of______per cent to all Stockholders as of record
, 194i.
Patronage Distribution

Profits, or losses, are made at a gin from such departments of the business as ginning seed
cotton, bagging and ties sales, cotton seed sales, and bale cotton. Therefore, your distribution
is determined by the amount of business you" do with that particular department, and below
your patronage distribution is calculated as set out:

You ginned___.___Lbs. of seed cotton at.______.per 100 Lbs.

Distribution iLiint for each 100 Lbs. seed cotton ginned . . . . . . . . . . . . . . . . ..$

You left___.___Lbs. of cotton seed at the gin, seed distribution

is $_____.___per ton on seed left atthegin..... . . . .  - - . . . . . . ..$.__.______
You bought_______.patterns of bagging and ties, bagging and ties

distribution isilper 
Other Commodities Distribution $

Your total net patronage distribution from above department is. . . . . . . . . . . . . . . . $

Your Stock Dividends at the rate of_.___per cent amount to . . . . . . . . . . . . . . $.___.____.

YOUR TOTAL PATRONAGE AND STOCK DIVIDEND AMOUNT TO. . . . . . . . - -$______.
If one-fourth of this distribution is due to a landowner other

 

than yourself, his rental share 
Three-fourth of the entire distribution due to you is. . . . . . . . . . . . . . . . .$._______
Stock Note

The original amount of your note, payable to the Howard
Co-Op Gin Company, for subscription to

Common and preferred stock was . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$

Interest on your note_.._..________.._.._..194_._.,

amounted to . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$.._____.___

Total amount of note and interest.... . . . .  
Less: Your net patronage and stock distribution...............................$_________

Balance of principal still owing on note....... 
Amount of stock herewith issued to 

Your credit balance toward additional shares of

Common-Preferred Stock is........ . . . .  . . . . 

The success of our year's operation is the strongest evidence of the splendid cooperation and
loyalty of the members and patrons. The directors have given generously of their time with-
out pay, and experience for the advancement of your interest and they have served you un-
selfishly and given much of their valuable time so that each and every patron would re-
ceive fair and just treatment. The manager and crew have worked faithfully to give you the
best service and operate your gin economically.

l

-_ a._:.{.l4l4_-_§~“

30 BULLETIN NO. 649, TEXAS AGRICULTURAL EXPERIMENT STATION 

It has been a pleasure for us to serve you as your Board of Directors this past year andl
the spirit of cooperation that has existed is indeed indication of the willingness of the mem-i
bers to further the interest of the Company for each one’s financial, as well as moral ad-
vancement. It is necessary that each one cooperate in the future as in the past year to
make this organization one of real benefit to the farmers of this community.

Board of Dirctors of
HOWARD CO-OP GIN COMPANY

By

W. R. Woods, Secretary-Treas.

4. McKinney Co-Operative Gin Association for 1940 Season

To

Your gin has completed its third year of operations. This has been a very good year as you
will observe from the statement. Your Board of Directors and Management have endeavored
to handle your business in a careful and economical manner. Your loyalty to your organiza-
tion has made this a successful year.

A total of 2,075 bales, or 3,082,788 pounds of seed cotton, have been ginned, and 1,330,495
pounds of cotton seed have been handled for all patrons. Out of the Net Earnings for the
year, your Board of Directors has declared a dividend to each patron in proportion to the
amount of business furnished the gin by him.

The Cash has been used to pay on the Indebtedness, so no cash Dividend is being made, but
a Dividend and Stock Ledger has been set up and your account in this Ledger has been
credited with your portion of this Dividend.

Below is shown the amount of business furnished the gin by you and how your Dividend is
figured:

You Ginned.________pounds of seed cotton and your
dividend at 4¢ per each hundred is. ..  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$____.____
You sold to Gin___i_pounds of cotton seed and your

dividend at 25¢ per hundred  . . . . .  . . . .  . . . . . . . . . 
Your Total Dividend  . . . . 

Since the amount of your Dividend each year is governed, in a large measure, by the volume
of business, we ask that you talk to your neighbors and friends and tell them of our or-
ganization and solicit their patronage.

Sincerely yours,
Board of Directors of

McKINNEY CO-OPERATIVE GIN ASSOCIATION,
By E, H. Bush, Manager