Levridge Lingo #2 – What is Equity and Patronage?

Before we dive into the Levridge modules in Microsoft Dynamics 365 Finance and Operations and the Equity app, it’s important to understand some terms and their meanings first. In this blog, we are going to explore two more common agriculture industry terms.

Two terms you often hear when working with commodity processors and ag retailers are equity and patronage. So what exactly do these terms mean?

How is Equity Defined in Agriculture?

Equity in the agriculture industry or in a cooperative refers to the value of the assets owned by the organization or its members after all the liabilities or debts are subtracted. In other words, equity represents the net worth or residual value of the organization or its members.

Equity Generation and Use

In a cooperative, equity is often generated through the members’ investments or patronage, which may include the purchase of shares, the use of the cooperative’s services, or the contribution of products or labor.

The equity may be retained by the cooperative to fund its operations, pay off its debts, invest in new projects, or it may be distributed to members in the form of patronage refunds or dividends.

Equity as a Measure of Financial Health

Equity is an important measure of the financial health and stability of a cooperative or an agricultural organization. It represents the long-term value and potential for growth and expansion of the organization or its members. A higher equity level may indicate a stronger and more resilient organization, while a lower equity level may indicate financial risks or limitations.

What is Patronage?

Patronage refers to the practice of returning profits or benefits to the members of a cooperative or mutual organization, such as a farmers’ cooperative, in proportion to their use of the organization’s services or products. These payments are called Revolvements, which we will explore in the next Levridge Lingo blog post.

Overall, patronage is a fundamental principle of the cooperative business model, and it helps to create a sense of shared ownership and community among the members of the cooperative.

Patronage Refunds

When a cooperative earns profits or has excess funds, it may distribute these funds to its members in the form of patronage refunds. The amount of the refund is typically proportional to the member’s use of the cooperative’s services or products during the year. For example, a farmer who sells more grain through a cooperative may receive a larger patronage refund than a farmer who sells less.

Patronage refunds can provide several benefits to cooperative members, such as reducing the cost of using the cooperative’s services, providing a source of income, and reinforcing the cooperative’s values of mutual assistance and collaboration.

Hopefully, this blog leaves you with a better understanding of how equity and patronage work in the agriculture industry. Check out additional Levridge Lingo blogs below.

More Levridge Lingo Blogs:

• Levridge Lingo #1 – What is a Co-op?