University of Wisconsin Center for Cooperatives
Equity Redemption Practices:
A Study Of Wisconsin Cooperatives
Bob Cropp, University of Wisconsin-Madison
David Trechter, University of Wisconsin-River Falls
John Cottingham, University of Wisconsin-Platteville
Patrick Berends, University of Wisconsin-Platteville
Equity capital is the investment by owners in a business.
For cooperatives, like other businesses, equity is a portion of the capital
needed to acquire the assets used by the business. Equity is also the amount
of investment that owners of cooperatives have at risk—the amount members
of the cooperative could lose if the business fails. For cooperatives,
equity management is one the most challenging responsibilities for the
board of directors.
Unlike other forms of business, cooperatives are
owned by the people who use them. User-ownership is, in fact, one of the
three fundamental principles of the cooperative form of business.
The User-ownership principle makes equity management one of the most significant
challenges faced by the board of directors of a cooperative. The board
must manage the cooperative’s equity to ensure that the business has an
adequate supply of capital and that the business is truly owned by the
people using it. Thus, equity management entails not only the acquisition
of capital from members but its return, or redemption, to members who are
no longer active in the cooperative. This publication describes the means
by which cooperatives manage the flow of equity through the cooperative.
It will discuss why equity is so important, how cooperatives generate equity
capital, and alternative equity redemption practices. The equity management
practices of Wisconsin’s agricultural cooperatives are described and discussed.
Why Equity Capital Is So Important
One reason equity capital is so important is because,
as noted above, it fulfills that basic cooperative principle of user ownership.
User ownership in a well-managed cooperative means that equity capital
is provided by members in close proportion to the amount they use the cooperative.
Those who use the cooperative more should contribute more equity because
they receive more of the benefits from the cooperative (in form of the
goods and services provided) than do those who use the cooperative less.
Secondly, equity capital opens the door to the other
source of capital for a business, debt capital. Debt is borrowed capital,
and in contrast to equity capital, has a definite repayment period with
an enforceable interest cost. Unless a cooperative has adequate equity
capital, lenders will be unwilling to provide debt capital to the business.
In simple terms, a lender will say, “If the owners of this cooperative
are unwilling to place their own money at risk in this cooperative, why
should I risk mine?” A general rule of thumb is that equity in the cooperative
should be at least 50 percent of the value of total assets, which implies
that the owner-members of the cooperative have provided at least as much
of the capital for the business as have lenders. Based on the latest survey
by USDA’s Rural Business-Cooperative Service (RBCS), the average equity
level for all agricultural cooperatives was only 43 percent.
Finally, equity capital is important because it forms
the foundation for membership involvement in the cooperative. Member involvement
in a cooperative is critical to the success of the cooperative at a number
of levels. First, the business they do with the cooperative creates the
economic rationale for the existence of the cooperative. Second, by approving
bylaws and electing the board of directors they exercise their control
over the business. If the membership does not view the cooperative as their
business and as vital to the success of their farming operations, the diligence
with which they exercise control over the cooperative is lacking. Equity
investment in the cooperative is one means of ensuring their diligence.
A farmer thinking about patronizing a cooperative
has to answer two questions. The first question is whether or not the mix
of products, services and prices meets the needs of the farmer. The second
question is whether or not to join the cooperative and agree to provide
equity capital to the business. The answer to this second question turns
on the following: Is the cooperative’s price plus returns on equity greater
than or equal to the price offered by competitors plus a return on alternative
Measuring returns on cooperative equity is not easy.
Returns on cooperative equity include the following:
1) Dividends paid on equity investments. Most state laws
limit dividends paid by cooperatives to 8 percent or less. Further, few
cooperatives actually pay dividends on equity.
The sum of the above divided by the equity investment
in the cooperative is the member’s return on equity. While coming up with
a dollar value for each of the above factors is not easily done, an attempt
to do so is important. As indicated, members of a cooperative have an obligation
to help finance the cooperative. So, when farmers do business with the
cooperative, they are obligated to provide financing for the cooperative.
In most cases this is handled through retained patronage refunds.
2) Cash patronage refunds. When a cooperative generates
net savings (profits), members share this net income according to how much
they used the cooperative. This is referred to as patronage refunds. Cooperatives
are required by the Internal Revenue Service to pay out at least 20 percent
of patronage refunds allocated to members as cash.
3) Present value of retained patronage. Most cooperatives
do not pay out all of their profits as cash patronage refunds. Rather most
cooperatives retain a portion of these profits as retained patronage to
capitalize the cooperative. Cooperatives can, by law, keep up to 80 percent
of a patronage refund as retained patronage. The goal is to “redeem” these
retained patronage refunds to the members at some future date. Retained
patronage does not appreciate in value during the time it is held by the
cooperative. Therefore, the present value of patronage redeemed in the
futures must be discounted to account for inflation and the loss of use
of that money (a dollar to be paid to me a year from now is worth less
than a dollar available to me today).
4) Service and product differences from alternative sources.
How do the products and services offered by the cooperative differ from
those available from alternative sources? This is, in most respects, a
subjective factor but one on which members and prospective members may
have strong opinions.
5) Existence value of the cooperative. Many cooperatives
were organized because of market failure. That is, markets were not meeting
farmer needs (prices of inputs were artificially high, prices of commodities
being marketed were artificially low, services were not being supplied,
etc.). Once the cooperative was organized and provided competition, the
markets functioned more efficiently and satisfactory. The initial organizers
of the cooperative saw first-hand the benefits of the cooperative but the
next generation often fails to see the benefits since the markets are again
working efficiently. The question, which is difficult to evaluate, is “
How would the market respond if the cooperative were to go out of business
and competition diminished?”
6) Value of risk reduction. A cooperative can reduce risk
in a number of ways (providing an assured market, vertical integration,
diversification, etc.). Placing a value on the reduction in risk provided
by a cooperative may be difficult.
In an investment oriented firm, doing business with
and investing are separate issues. A farmer can do business with the firm
(buy its products or services, or sell commodities produced) but not be
required to invest in the firm (purchase stock). Or a farmer may choose
to invest in the firm but not do business with it. These separate decisions
are based on the competitiveness of prices and services and on the return
on investment (dividends on stock, and expected appreciation value of stock).
Therefore, it is critical that cooperatives illustrate
potential returns on equity to members and prospective members. Farmers
may be able to purchase goods and services from or market their commodities
through an alternative to the cooperative and at competitive prices and
not invest a dollar in that alternative business. As a consequence,
cooperatives and their members both have major capital requirements. Cooperatives
need to demonstrate favorable returns on equity investment as well as timely
redemption of that equity. If cooperatives do not, members and prospective
members are not going to be willing investors in the cooperative.
Sources of Equity Capital
The common ways a cooperative obtains equity are
1) Direct investment. Normally this is a rather small sum, but
many cooperatives have a membership fee or a requirement to purchase one
share of common stock, called membership stock or voting stock. Membership
fees or common stock are normally $100 or less. However, some of the new
value added cooperatives being organized require substantial up-front investments
by members in proportion to the amount they will use the cooperative.
Types of Equity Capital
2) Retained patronage. This is the most common means of obtaining
equity capital. As described above, a portion of the net savings (profit)
from member patronage is retained at the end of the year and a portion
is paid out to members in cash.
3) Per-unit capital retains. This method works best for marketing
cooperatives where a small reduction (percentage or absolute sum) in the
pay price is made per unit of product marketed through the cooperative.
For example, 5 cents per bushel of corn marketed might be deducted.
4) Net profits from non-member business. Cooperatives may do
business with non-members and retain the profits generated for equity capital.
5) Sale of preferred stock to members and/or non-members. Since
preferred stock does not have a specific repayment period or an enforceable
interest or dividend payment, it is equity and not debt capital. Few cooperatives,
however, sell preferred stock.
Another way of categorizing equity is as allocated
or unallocated. Allocated equity is capital that has been allocated to
an individual member and is recorded in their name. Allocated equity includes
the initial investment. Most allocated equity, however, is generated from
retained patronage or from per-unit capita retains. The member pays income
tax on allocated equity that comes from retained patronage refunds.
Unallocated equity is capital not assigned to a specific
member account. Net income that is derived from non-member business or
non-patronage business are sources of unallocated equity. The board of
directors may also decide to retain a portion of member patronage net income
as unallocated equity. Unallocated equity may serve as a shock absorber
for the business. In an event of a loss, for example, unallocated equities
may be drawn upon. Unallocated equities are not paid back to members unless
the cooperative dissolves.
Allocated equity is the focus of this publication.
There is an obligation of the cooperative to redeem allocated equity at
some future date. This is critical if the cooperative principle of ownership
in the hands of users is to be upheld. Without timely redemption of allocated
equity a disportionate share of the equity may be held by former users
of the cooperative, that is retired farmers. It is extremely important
that the board of directors establish policies for a good equity program.
Defining an Effective Equity Program
As part of the financial planning process, the board
of directors needs to establish policies for an effective equity program.
The equity program should define the amount of equity capital needed, the
means of raising this capital, the means of redeeming equity, and the timing
of equity redemption. A good equity program will:
1) Generate adequate amounts of equity.
Alternative Equity Redemption Programs
2) Ensure that a relatively small portion of equity is held by
3) Treat members equitably by maintaining member investments
in close proportion to their use of the cooperative.
4) Provide sufficient cash returns to enable members to pay taxes
on allocated patronage.
5) Generate adequate returns on equity.
Equity redemption plans may be classified as systematic
or unsystematic (often referred to as special programs). With systematic
programs equity is redeemed annually using consistent criteria. Unsystematic
programs only redeem equity when certain defined events occur.
There are three systematic redemption plans used
by cooperatives. Each are discussed here.
1) Revolving Fund Plan:
The revolving fund plan is the most common systematic
equity redemption plan used by cooperatives. In a revolving fund plan,
allocated patronage refunds are held by the cooperative for a fixed number
of years. For example, a patron receiving allocated patronage refunds in
1998 would receive these funds in 2008 if the cooperative had a 10-year
revolving fund program. With a revolving fund plan, equity is redeemed
on a first-in, first-out basis. The ability of the board to stick to the
defined revolvement period is dictated by the profitability of the cooperative.
If inadequate profits cause the board to postpone some or all of scheduled
equity redemption, it may revolve more than one year of equity when profit
levels are more favorable.
Some advantages to a revolving fund plan are:
1) It is easily understood by members
2) It is fairly easy to administer
3) It keeps investment proportional to use when revolving period
4) It requires no cash outlay by members
5) Revolvement period may be extended, if more equity is needed
or weak financial performance is experienced
Some disadvantages to a revolving fund plan are:
2) Base Capital Plan:
1) Investment levels are not proportional to use if revolvement
period is long.
2) Members perceive redemption as certain regardless of the cooperative’s
3) It is easily manipulated because revolvement period can be
A base capital plan is a method of getting more equity
investment up-front from members and keeping the investment proportional
to use. The cooperative determines the amount of capital needed and what
proportion should be equity capital provided by members. The cooperative
then determines each member’s equity obligation based on what share of
the cooperative’s total business is contributed by each member. For example,
if a member accounts for 5 percent of the cooperative’s business, he/she
would be obligated to provide 5 percent of the needed equity capital. Another
approach, used by marketing cooperatives, is to express the equity obligation
in terms of dollars per unit of product to be marketed, for example, $2.50
of equity per hundredweight of milk. If a member markets 1,000,000 pounds
of milk annually through the cooperative, his/her equity obligation would
be $25,000. Some cooperatives use an average of 3 or 5 years of business
done with cooperative in determining the equity obligation of a member.
In a pure capital base plan, since members invest
their equity up-front, they receive 100 percent of their patronage refund
in cash. The cooperative does not need to retain a portion to build equity
capital. Further, when a member ceases doing business with the cooperative
his/her equity investment is paid out (redeemed). But most cooperatives
do not use a pure capital base plan as their only equity plan. Rather,
equity targets are established for each member based on use. Those members
who have not reached their target are referred to as under-invested, and
those who have exceeded their target are over-invested (usually someone
who has reduced their business done with the cooperative or has retired
from farming). Those who are under-invested receive the minimum cash patronage
refund (20 percent) with the remainder retained and applied to their equity
target. Those who are fully invested may receive all of the patronage refund
in cash. Those who over-invested receive all of the patronage refund in
cash plus the amount of investment in excess of that required of them.
Prior to the new generation cooperative movement,
few cooperatives used the base capital plan. New generation cooperatives
share the basic principles of all cooperatives (user-ownership, user-control,
benefits distributed according to use) but have a number of unique features:
large up-front investments, two-way contractual obligations, focus on value-added
activities, limited membership, ownership shares that fluctuate in value
and are tradable under rules established by the cooperative. The new generation
cooperatives that have been organized require equity investment that is
proportional to the use of the cooperative. These are shares or marketing
rights that obligate the member to market a specific quantity through the
cooperative. For example, one share may be 1,000 bushels of corn. The cost
of this share may be $2.00 per bushel or $2,000. These shares or marketing
rights are dissimilar to a base capital plan in that the shares/rights
are allowed to appreciate and are transferable with, perhaps, approval
of the board.
Advantages of the capital base plan are:
1) Equity investment is always in proportion to use
2) Equity requirements can be rather easily altered
3) A good framework exists to require under-invested members
to contribute their share of equity capital.
Disadvantages of the capital base plan are:
Under this plan the cooperative redeems a percentage
of all outstanding equities regardless of issue date. For example, if the
board of directors determine that the cooperative could redeem 10 percent
of the equity held, all members would receive of 10 percent of their equity
investment regardless of the current use of the cooperative or how long
the equity had been invested in the cooperative. If one member had $10,000
invested for 20 years, they would receive back $1,000. Another member who
had $5,000 invested for 2 years would receive back $500. Very few cooperatives
use this plan.
1) Under-invested members may be the least able to contribute
more equity capital
2) It is a rather complex plan to explain and administer
3) Percentage of All Equities Plan:
Advantages of the percentage of all equities plan are:
1) New members receive some immediate reward.
2) It is easy to explain to members.
3) It can be readily adjusted to different operating results.
Disadvantages to the percentage of all equities plan are:
1) It does little to keep levels of equity investments proportional
The most common of all redemption plans is the special
situation plan. The special situation plan is “unsystematic” in the sense
that there is no rule that would guide the annual redemption of equity.
Rather, equity redemption in a special situation plan is triggered by the
occurrence of one or more events. The most common events that trigger equity
redemption under a special situation plan are:
1) When a member dies, equity is redeemed to his/her estate
Many cooperatives use the special situation plan in
conjunction with one of the systematic plans described above. Settling
estates and the age limit are the most common form of triggers used by
cooperatives in a special situation plan.
2) When a member reaches a specified age (e.g. 70) his/her equity
3) When a member retires from farming
4) When a member moves away from the cooperative’s trade area
5) When a member is facing special hardships (bankruptcy, ill
The advantages of a special situation plan are:
Equity Redemption Programs In Wisconsin Cooperatives
1) It is easy for members to understand
2) It is easy to administer
3) It is flexible and allows the board to address unusual problems
facing their members
The special situation plan is faulted because:
1) The most common triggers are not under the control of the cooperative
2) Redemption is generally triggered by adverse events
3) Equity is often held after a patron is an active user of the
A recent study of equity redemption practices in
Wisconsin cooperatives was undertaken to: 1) describe the current status
of equity redemption practices in Wisconsin cooperatives, 2) examine the
differences in equity redemption practices across types of cooperatives,
and 3) analyze relationships between cooperative characteristics and equity
redemption practices . All Wisconsin cooperatives that were borrowers from
the Saint Paul Bank for Cooperatives were surveyed in 1997. Of 78 cooperatives
surveyed there were 50 useable surveys returned. The results of this survey
are presented below.
Description of the study sample:
Major business activity: Each cooperative
was asked to indicate their major business activities. Fifty percent were
primarily farm supply cooperatives and accounted for 81 percent of the
total business volume of the cooperatives surveyed, 19 percent were primarily
marketing with 7 percent of the business volume, and 31 percent were service
type cooperatives with 12 percent of the business volume.
Structural changes: Within the past 5 years
30 percent of the cooperatives had undergone some type of structural change.
There were 16 percent that had entered into some joint venture business
arrangement, 10 percent had merged with another cooperative(s), and 4 percent
were involved in a consolidation.
Equity redemption practices:
Types of redemption programs used: There were 4 percent
of Wisconsin agricultural cooperatives that had no equity plan (Table 1).
Forty-nine percent had a combination of plans, 43 percent had special situations
only and 4 percent had a revolving fund plan only. There were no percentage
of all equities plans or pure base capital plans. These results compared
to the U.S. show Wisconsin cooperatives were more likely to have some sort
of redemption program than cooperatives in the U.S. as a whole. On the
other hand, Wisconsin cooperatives were more likely to rely on a special
situation plan and substantially less likely to use a revolving fund plan
alone than were U.S. cooperatives.
Table 1. Equity Redemption Programs of Wisconsin Cooperatives as Compared
to U.S. Cooperatives
a) “Equity Redemption and Member Equity Allocation Practices
of Agricultural Cooperatives”, USDA/ACS Research Report 124, October 1993.
Data are 1991.
|Type of program
|Revolving Fund Only
Of those cooperatives with a Revolving Fund Plan only,
the average revolvement period was 15 years with a range of 7 years to
23 years. None of the cooperatives had changed the revolvement period within
the past 5 years and only one had changed within the past 10 years. But,
for those who had a Revolving Fund Plan in combination with another plan,
10 or 41 percent had changed the revolvement period within the past 10
years. The change ranged from an additional 4 years to a reduction of 6
years. The average revolvement period for these cooperatives with a combination
plan was 17.5 years. Six of these cooperatives or 25 percent were unable
to revolve at least once during the past 10 years.
These revolvement periods were similar to those found
in the USDA study of agricultural cooperatives referred to in table 1.
The revolvement periods ranged from an average of 8 years for service cooperatives
to 19 years for farm supply cooperatives and an average of 16 years for
all types of cooperatives.
There are several possible reasons for the wide variation
in revolvement periods among cooperatives. The type of cooperative may
be a factor. For example, service cooperatives may have relatively limited
capital needs as compared to marketing or farm supply cooperatives. Profitability
will determine the ability of a cooperative to revolve equity in a timely
manner. Related to profitability is the percentage of patronage refunds
paid out in cash versus retained as allocated equity. Relatively low profitability
limits the amount of patronage that can be paid. Less profitable cooperatives
that choose to pay out more than the required minimum of 20 percent of
patronage refunds in cash will likely have longer revolvement periods.
This practice places a greater priority on returns to current users rather
than past users of the cooperative. Some cooperatives may need to lengthen
the revolvement period to finance major expansions or capital purchases.
Of the 21 cooperatives, 43 percent, that redeemed
equity only under special situations, 17 or 81 percent used age as a criteria
for redemption, all 21 settled estates, and one indicated that it would
redeem equity in situations of disability of the member (Table 2). For
those that had age of the member as a criteria, the average age used was
74 years. Of the twenty four cooperatives with a combination of systematic
and special redemption plans, 17 used age as a criteria for redemption
with an average age of 73 years. All 24 settled estates, 2 or 8 percent
would redeem equity when members retired from farming, and 2 or 8 percent
redeemed when a member ceased doing business with the cooperative because
they left the trade area.
Table 2. Special Equity Redemption Plans of Surveyed Cooperatives
|Type of Special Program
||Co-ops with Special Redemption Only (21
||Co-ops with Combination Plans (24 or
|Age of member
|Retirement of member
|Member leaves trade area
|Disability of member
Satisfactions with equity redemption programs: Managers
of the cooperatives were asked what, in their opinion, was the level of
satisfaction of members with the cooperative’s equity redemption program.
Eighty percent based their opinion from member feed back, 44 percent also
discussed this issue with the board of directors, and 26 percent based
their assessment on their “gut feeling”. There was a very distinct difference
in the level of members’ satisfaction between systematic equity redemption
programs and redemption under special situation. Clearly member satisfaction
is much greater with the systematic programs. Fourteen percent of the managers
with systematic programs indicated members were very satisfied compared
to none of the managers with special situation programs only (Table 3).
Another 57 percent of the managers with systematic programs indicated members
were satisfied, 29 percent were neutral, and none indicated any members
being dissatisfied. Forty-one percent of managers with special programs
indicated that members were satisfied, 6 percent were neutral, but there
were 53 percent who indicated that members were dissatisfied.
Table 3. Member satisfaction with systematic versus special situation
only equity redemption programs, opinions of surveyed cooperative managers
|Assessment of members satisfaction
Special Situation Only
(% of managers)
(% of managers)
Cash patronage refunds and equities redeemed: As
indicated, the IRS requires that if equity is allocated, a minimum of 20
percent of the net margin due to patronage must be paid out in cash and
the remainder may be retained as allocated equity. This 20 percent minimum
is required to compensate partially the member who must report as taxable
income the allocated equity in the year allocated. For the years 1991-95,
the surveyed cooperatives paid on the average only 21.8 percent of the
patronage refunds in cash. (Table 4). The range was from 20.0 percent for
1991, to 23.4 percent for 1993. This percentage appears to be low
as compared to the national average. Preliminary data collected by USDA,
RBS, Cooperative Services show for the fiscal year ending 1997 the cash
portion of equity refunds averaged 34 percent for both grain and farm supply
cooperatives and 40 percent for dairy cooperatives .
Only paying close to the minimum of 20 percent of
the patronage refund in cash may explain the dissatisfaction of members
with some Wisconsin cooperative’s equity programs. These members may not
be satisfied with a cooperative’s equity program that only pays out 20
percent of the patronage refund in cash, a rate less than their income
tax obligation on allocated equity. Further, most Wisconsin cooperative
do not redeem the remainder of the allocated equity for many years.
Table 4. Cash patronage refunds and equity redeemed by surveyed cooperatives.
Percent of net margin paid as cash patronage refunds
Percent of net margin used to redeem past equity
The percent of net margins used to redeem past equity
was higher, averaging 30 percent, than the percentage for cash patronage
refunds, and the percentage was more variable, varying from 28% and 55%.
The variability is understandable because the dollar amount of net margin
varies from year to year. The variability is also caused by special situation
redemptions, which are likely to vary from one year to the next.
Non-traditional methods to obtain equity: Managers
were asked if any non-traditional methods had been used to obtain additional
equity. Five managers, 10 percent indicated that one or more non-traditional
methods had been used, but the percentage of equity raised by these methods
was relatively small. Two of these 5 had sold preferred stock and 3 sold
bonds to investors (Table 5). The average percent of equity generated by
the sale of preferred stock was 2.5 percent and from the sale of bonds,
12.6 percent. Two cooperatives had been involved in a joint venture with
another cooperative. But an average of only1.5 percent of their equity
was generated by these joint ventures. One cooperative created a closed
membership cooperative. About 80 percent of its equity was from the closed
Table 5. Non-traditional methods used to raise equity capital by surveyed
Number of Co-ops
Percent of Co-ops
Percent of Equity Capital Obtained from this method
|Used one or more
|Sale of preferred stock
|Sale of bonds
|Joint venture with another cooperative
|Created a closed membership co-op
Members of a cooperative have an obligation to provide
equity capital. Adequate equity capital is a necessity to the successful
operation of the cooperative. Equity capital is risk capital and represents
members’ commitment to ownership of the cooperative. The board of directors
is the trustee of members’ equity capital. As part of this fiduciary responsibility
the board of directors needs to establish a sound equity program including
policies on equity capital accumulation and equity redemption. These policies
need to keep in mind the basic cooperative finance principle, equity capital
should be provided by members in proportion to use (patronage).
Traditional cooperative principles stressed returns
to members in the form of patronage refunds and not returns as measured
by returns on equity capital. But as capital requirements of cooperatives
have increased, cooperatives will need to address returns on member equity.
These returns include non-monetary returns that are difficult to quantify.
There is an obligation of the cooperative at some
future date to redeem equity allocated to members. There are two types
of equity redemption programs: systematic and unsystematic. Systematic
plans redeem equity annually under consistent criteria. Systematic plans
include revolving fund, the most common used plan, base capital plan, and
percentage of all equities plan. Under unsystematic plans, equity is redeemed
only when specific events occur. Settling estates and age retirements are
the most common events used for the unsystematic plans used.
Of the 50 Wisconsin cooperatives surveyed, 4 percent
had no equity redemption plan. Forty-nine percent had a combination of
systematic and unsystematic plans, and 43 percent had unsystematic only.
There was a clear distinction with the level of membership satisfaction
between systematic redemption and unsystematic redemption plans. Fifty-three
percent of the managers of cooperatives with unsystematic equity redemption
plans indicated that members were dissatisfied with equity redemption compared
to none on the managers with systematic redemption plans indicating member
dissatisfaction. This documents the importance for the board of directors
to establish a sound equity redemption plan that redeems equity on a timely
Based on the findings of this study the following
recommendations are offered:
1) Boards of directors need to review closely the cooperative’s equity
program as to its effectiveness in obtaining necessary equity capital to
maintain and to grow the cooperative. But at the same time, this program
should consider increasing the portion of patronage refund paid as cash
and systematically redeeming the retained allocated equity within no more
than 10 to 15 years. These are necessary parameters in order to maintain
a high level of member satisfaction with the equity program.
2) For future financing, cooperatives should consider innovative or
non-traditional methods to raise some of their equity capital. These may
include the sale of preferred stock, the sale of bonds, strategic alliances
with other cooperatives, base capital plans, or other means. Relying
solely on the traditional revolving fund method may be difficult for some
cooperatives to achieve the necessary equity capital for the cooperative
to grow, and, at the same time, redeem equity in an acceptable time period.
3) Cooperatives need to consider returns to their members from
not only patronage, but also returns as investors. Cooperatives need to
demonstrate to members an adequate return on their equity capital investment.
This return includes both quantitative and qualitative measures.
4) Boards of directors must continually provide strategic direction
and to set policies that enables management to generate profits. Profitability
enables the cooperative to generate both necessary equity and debt capital,
to provide competitive returns on equity capital, and to redeem allocated
equity in an acceptable time period.