University of Wisconsin Center for Cooperatives
Cooperative Equity Retirement:
Some Guidelines and Practices
By Michael L. Cook, Assistant Professor, Department of Agricultural
Economics, Texas A and M University, College Station, Texas
Richard Vilstrup, Professor, Agricultural Economics and Meat
and Animal Science, University of Wisconsin-Madison
Frank Groves, Professor, Agricultural Economics, University
of Wisconsin-Madison. and Chainman, University Center for Cooperatives,
University of Wisconsin-Extension
UWCC Occasional Paper No. 3 - February, 1980
This paper is based on a portion
of Michael Cook's PhD thesis, "An Economic and Legal Analysis of Farmer
Cooperative Equity Capital Redemption Policies," University of Wisconsin-Madison,
1976. Financial support for the research was from Hatch Project No. 1694,
and The Cooperative Foundation through the University Center for Cooperatives.
For years cooperative writers have been recommending that agricultural
cooperatives establish member-patron equity redemption policies and practices.
There are numerous economic and institutional reasons for cooperative management
and boards of directors to become increasingly concerned with this important
area of cooperative management. 1
One example is a recent Report To The Congress 2
by the Comptroller General's Office which reviewed several ways in which
equity redemption policies and practices of farmer cooperatives "could
be improved." The report goes further in recommending:
"...that the Secretary (of Agriculture) direct the Cooperatives
Unit to conduct, jointly with the Extension component of the (USDA's) Science
and Education Administration, a national campaign to motivate cooperatives
to adopt voluntary equity redemption programs that are fair to both current
and former members. We recommend further that if cooperatives are not wliling
to adopt more equitable redemption programs voluntarily, the Secretary
develop a legislative proposal to make it mandatory for cooperatives to:
Other examples include recent state and federal legislative proposals to
require mandatory revolving of equity capital after a certain time period,
the report of the National Commission for Review of Anti- trust Laws and
Procedures, proposals to eliminate the required teaching about cooperatives
in Wisconsin schools and numerous complalots by members about the lack
of any equity retirement policy in many cooperatives.
The legislation should include a clause that cooperatives that do not comply
with the requirements would lose their tax exemption status."3
pay interest or dividends on retained equities
retire retained equities within a certain time, or
pay interest or dividends on retained equities and retire retained equities
within a certain time.
These recommendations are harsh in nature and would have a devastating
impact on the financial structure of many farmer cooperatives. Before proposing
some gutdelines and alternative equity redemption programs, it is appropriate
to examine whether the lack of equity retirement programs in farmer cooperatives
is widespread or not.
In an April 1977 report, 4 the USDA summarized the
frequency and types of equity redemption programs. Using 1974 data from
a survey of 857 U.S. cooperatives, the study found that 71 percent of all
farmer cooperatives in the U.S. have some sort of program for redeeming
equity capital to member users. The remaining 29 percent had no program.
It was also estimated that 32 percent of U.S. farmer cooperatives carried
out systematic programs for retiring retained equities. Thirty-nine
percent of the surveyed cooperatives had equity redemption programs that
function under special circumstances, such as death or retirement.
The question of what percentage of equity capital was owned by inactive
members was a matter of concern in the USDA study. The USDA estimated that
32 percent of the equities retained by cooperatives without equity redemption
programs and 22 percent of the retained equities held by cooperatives that
had systematic or special redemption programs were owned by inactive members.
Table I presents a more detailed summary of the equity redemption programs
used by cooperatives, by membership and function.
In a 1975 study of equity redemption practices in Colorado cooperatives,
a team of researchers found that only 14 percent of the ol firms in their
survey had written equity redemption policies.5 Colorado
cooperatives did retire estates promptly (32 percent) but less than 15
percent of the cooperatives redeemed equity of members who became disabled,
retired, or moved from the area. The Colorado study also indicated that
37 percent of the cooperative members were classified as "inactive." This
37 percent held 23 percent of the member equity.
Table I. Equity redemption programs used by cooperatives, by
membership and function -- 1977
Systematic Special systematic All No All
Type of Co-op only only and special prog. prog. coops
Marketing 39 8 14 6l 39 100
Farm supply 36 20 12 68 32 100
Related service 50 6 13 69 31 100
federated 40 12 13 65 35 100
Marketing 17 30 17 64 36 100
Farm supply 3 54 28 85 15 100
Related service 6 22 ll 39 61 l00
centralized l2 39 20 71 29 100
cooperatives l2 39 20 71 29 100
Source: United States Department of Agriculture, Equity
Redemption Practices of Agricultural Cooperatives, FCS Research
Report 41, April 1977.
The Comptroller General's Office sampled 83 cooperatives in their 1979
study and came to the same general conclusions as the USDA study as to
what is the current situation with respect to equity redemption programs.
Their Report estimated that only 30 percent of U.S. cooperatives had systematic
programs for retiring member equities. The authors of this study expressed
particular concern over the absolute value of equity outstanding and the
age of the equity certificates.
The figures estimated in these three studies indicate that a relatively
small number of cooperatives have developed systematic equity redemption
policies or programs. The need for increased efforts to "motivate cooperatives
to adopt voluntarily' equity redemption programs that are fair to both
current and former members" 6 is certainly appropriate.
The following guidelines are presented as an aid to cooperative association
policy makers in developing farmer cooperative member- patron equity redemption
policies and programs. These guidelines are suggestive in nature only,
but they may assist in developing an orderly approach to equity redemption.
STEP l: A special committee appointed by the board of directors
to study the cooperative's member-patron equity redemption policy is needed.
Possible members of the committee and resource persons for providing information
throughout the study might include: interested members, the general manager,
the chief financial officer, staff people of credit institutions such as
the Bank for Cooperatives, affiliated regional cooperative's fieldmen and
their supporting staff, the state council of cooperative's staff , state
university extension personnel, the cooperative's legal counsel and representatives
of the cooperative's auditing firm. The committee should be expected to
report within a specific time period.
STEP 2: The committee should consider the following four questions
before deliberating on any specific proposals:
STEP 3: An analysis of the equity capital acquisition program presently
employed by the cooperative should be made. The more detail with which
this analysis is made the better. Items such as how equity capital is acquired,
in what quantities, and how successful past equity capitalization methods
have been should be documented.
a) What is the relationship between the member-patron equity redemption
program's objectives and the overall cooperative objectives?
b) What effect will the equity redemption program have upon the financial
structure of the cooperative?
c) What effect will the equity redemption program have upon the cooperative's
existing organizational structure?
d) What is the effect of the equity redemption program on the service to
STEP 4: An analysis of the equity capital redemption program
presently practiced by the cooperative should be made. This analysis should
also be done in as much detail as possible. If this policy has not been
described in writing, it would be a good management practice to do so.
STEP 5: The state statute pertaining to cooperatives should be
studied. When performing this step a written summary of statute sections
related to bylaws, articles of incorporation, general capital reserve limitations,
and member voting and equity retirement will be of most interest.
STEP 6: The cooperative's articles of incorporation and bylaws
should be reviewed with respect to equity acquisition and redemption sections.
It is important to complete steps 5 and 6 before continuing for several
STEP 7: Evaluate the cooperative's long range growth plans -- this
will help determine the amount of equity capital needed to support the
planned growth rate and what amount of funds will be available for equity
redemption. It is important to remember that the equity investments by
a cooperative's member-patrons is its capital foundation. Over the long-run
the association can expand only as fast as its equity base expands. Debt
capital can be used temporarily, but it is a supplement to and not a substitute
for equity capital.
(a) so that no laws are violated,
(b) to determine whether the bylaws need to be changed,
(c) to determine whether the services of an attorney should be employed.
STEP 8: Alternative equity capital acquisition methods should
be studied. Once the cooperative's long-range growth plans are understood,
it is necessary to acquire the equity base to build a strong financial
structure. Building a sound equity base is the most important objective
in tints step; however, it must be remembered that equity does not only
have to be acquired but it also must be serviced. In the cooperative method
of equity financing, retirement of member-patron equity is a necessary
function of servicing tints equity base. Many different capital acquisition
policies might be adopted -- including the cooperative's present method
of capital financing. Located in Appendices
I and II
of this publication are a number of equity capital acquisition and redemption
plans utilized by cooperatives throughout the United States.
In the following steps it is assumed that cooperative management has
decided to consider alternative methods of equity acquisition and retirement.
It is further assumed that whether or not a cooperative is considering
the transfer from the traditional revolving fund method of equity financing
to a more "permanent" type of equity acquisition, it is deemed essential
for the cooperative to initiate a more formalized member-patron equity
redemption policy. The next ll steps suggest some guidelines to follow
in the pursuit of this goal.
STEP 9: Management should develop a member-patron profile. This
is the first requirement in planning an equity redemption program. The
profile may contain various kinds of information, but the most essential
for this program is the age or birth year of the member-patron. Other information
that might be solicited could be: intentions to retire, intentions to liquidate
the farm business, intentions to move from the community, etc.
STEP 10: Establish the amount of total equity capital held by
the cooperative by year.
STEP 11: Analyze the distribution of the data collected in Step
10. Perhaps five percent of the total allocated patronage appears "due"
each year, or perhaps analysis of this equity distribution will show an
irregular distribution of member-patron equity capital.
1930 = $100,000
1931 = 72,000
1932 = 121,000
STEP 12: Develop a member-patron equity redemption program based
on the information obtained from the analysis of the member-patron equity
distribution completed in Step ll. First, the establishment of a priority
rank tor retiring member equity should be made. This priority rank should
be applied in cases where retirement of financial interests of all inactive
members upon demand involves too heavy a burden on the finances of the
In the priority rank, preference should be given to cases where circumstances
are beyond the immediate control of the member. Briscoe, et al. recommend
the following subjective priority ranks: 7
Once the member priority ranking of equity redemption has been set, alternative
member-patron equity redemption programs should be evaluated.
a) Retirement of equities due to death of member.
b) Retirement of equities to members who either move out of the community
or quit farming but stay in the community.
c) Retirement of equities to members who could, but do not' patronize their
STEP 13: A comparison of the financial impact on the capital
structure of the cooperative of each of the member-patron equity redemption
programs considered worthy of further evaluation should be made. This might
be accomplished by use of a number of analytical techniques.
STEP 14: The financial impact on the capital structure of the
cooperative of a possible equity redemption program encouraged by some
regional farm supply and marketing cooperatives should be studied. See
Appendix I of this publication for a review of a number of regional cooperative
equity redemption programs.
STEP 15: A policy for the retirement of voting rights should
be developed along with the member-patron equity redemption policy. By
developing a method of retiring voting rights, legal control of the cooperatives
can be maintained in the hands of the active member-patrons.
STEP 16: A control mechanism built into the equity redemption
policy should be developed so that flexibility remains an important option
for the Board of Directors. This control device might include any of the
STEP 17: Once a financial plan and the legal changes necessary to
implement the new member-patron equity and voting rights redemption plan
is approved by the Board of Directors, the general membership and the cooperative
employees should be informed.
(a) specific evaluation times, such as monthly, semi-monthly, or semi-annually
tor analyzing the progress of the program,
(b) guideline financial ratios to warn of possible future problems to the
financial structure of the cooperative,
(c) an evaluation of alternative member-patron equity redemption programs,
(d) an analysis of the financial impact of the alternative programs,
(e) a report of legal changes or constraints,
(f) the committee's final recommendations.
STEP 18: A membership education and information campaign should
be conducted before members vote on the plan, especially if it is necessary
to make changes in the cooperative's bylaws. A well informed membership
might react in many positive ways (increased interest in the cooperative,
increased patronage, increased participation) which would help facilitate
the transfer to a more complicated member-patron equity redemption program.
STEP 19: The details of the new policy should be written up formally
(perhaps by an attorney) so that copies may be sent to the legal representatives
of deceased member-patrons who may request information about the member-patron's
equity when settlement of estates is at issue.
STEP 20: Management should implement the member-patron equity
Some cooperatives may develop member-patron equity redemption programs
that are designed to shorten the length of the traditional revolving fund.
When equity of extremely old vintage has been retired, the cooperative
may wish to consider adapting a modified revolving fund plan -- sometimes
called a "permanent capital" plan. A few guidelines are offered for the
cooperatives tn this position.
STEP 21: Determine the desired level of capital requirements
of the cooperative association.
STEP 22: Compute the level of equity needed to service debt and
the existing equity capital.
STEP 23: Utilizing equity distribution information obtained from
the member-patron profile discussed in Steps 9 and 10, determine each member's
equity responsibility for the coming year.
STEP 24: Each year the member-patrons' balance and equity responsibility
in this modified revolving fund is updated by the use of some type of moving
There are farmer marketing cooperatives implementing these last four
financing steps, but to the author's knowledge, no farm supply cooperative
has yet introduced this method of member-patron equity financing into its
system. When following or instituting these steps, it is essential to remember
what Manuel said about the member-patron equity redemption problem:
"Paramount in all the deliberations is that a sense of fairness
prevail: Fairness to the retiring member as well as those continuing in
the association." 8
1 Cook, Michael Lee, "Increased Institutional Pressure
for Mandatory Equity Retirement in Farmer Cooperatives," The Cooperative
Accountant, Vol. XXIX, No. 3, Fall 1976.
2 United States General Accounting Office, Report
To The Congress, CED-79-106, July 26, 1979.
3 Ibid. pp. 44-45.
4 United States Department of Agriculture, Farmer
Cooperative Service, Equity Redemption Practices of Agricultural Cooperatives,
Research Report 41, April, 1977.
5 Scofield, Alton, Forrest E. Walters, J. Hugh Winn,
and William Spencer. Retirement of Member/Stockholder Equity Capital
in Marketing and Purchasing Cooperatives, Department of Economics,
Colorado Extension service, Miscellaneous #11, December 1975.
6 United States General Accounting Office 1979,
7 Briscoe, Nellis A., James R. Enix, and Per P.
Anderson, Retirement of Control and Ownership Equities of Inactive Cooperative
Members, Bulletin B-659, Oklahoma Agricultural Experiment Station,
Stillwater, Oklahoma, July 1968, Page 20.
8 Manuel, Milton, Retiring Control and Equities
of Inactive Coop Members, Kansas Agricultural Experiment Station Circular
346, Manhattan, Kansas, March 1947.
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