University of Wisconsin Center for Cooperatives
UWCC Occasional Paper No. 12
Equity Redemption Practices:
A Study of Wisconsin Cooperatives
Dr. Robert Cropp
Dr. David Trechter
Dr. John Cottingham
Dr. Patrick Berends
UWCC Occasional Paper No. 12 September 1998
Robert Cropp is Director, Center for Cooperatives; Professor, Department of Agricultural and Applied Economics; and Extension Dairy Marketing and Policy Specialist; all at the University of Wisconsin-Madison
David Trechter is Professor, Department of Agricultural Economics Rural Development Institute, University of Wisconsin-River Falls
John Cottingham is Professor, School of Agriculture and Extension Marketing Specialist, University of Wisconsin-Platteville
Patrick Berends is Assistant Professor, School of Agriculture, 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management entails not only the acquisition of capital from members but its return, or redemption, to members who are no longer active in the cooperative.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 note 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.2
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 investments?
Measuring returns on cooperative equity is not easy. Returns on cooperative equity include the following:
- 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.
- 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.
- 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).
- 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.
- 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?"
- 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.
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.
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 the following:
- 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.
- 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.
- 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.
- Net profits from non-member business. Cooperatives may do business with non-members and retain the profits generated for equity capital.
- 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.
Types of Equity Capital
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 boar' 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 disproportionate 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:
- Generate adequate amounts of equity.
- Ensure that a relatively small portion of equity is held by past users.
- Treat members equitably by maintaining member investments in close proportion to their use of the cooperative.
- Provide sufficient cash returns to enable members to pay taxes on allocated patronage.
- Generate adequate returns on equity.
Alternative Equity Redemption Programs
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:
- It is easily understood by members
- It is fairly easy to administer
- It keeps investment proportional to use when revolving period is short
- It requires no cash outlay by members
- Revolvement period may be extended, if more equity is needed or weak financial performance is experienced.
Some disadvantages to a revolving fund plan are:
- Investment levels are not proportional to use if revolvement period is long.
- Members perceive redemption as certain regardless of the cooperative's financial condition
- It is easily manipulated because revolvement period can be easily extended.
2) Base Capital Plan:
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 S 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, hislher 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:
- Equity investment is always in proportion to use
- Equity requirements can be rather easily altered
- A good framework exists to require under-invested members to contribute their share of equity capital.
Disadvantages of the capital base plan are:
- Under-invested members may be the least able to contribute more equity capital
- It is a rather complex plan to explain and administer
3) Percentage of All Equities Plan:
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.
Advantages of the percentage of all equities plan are:
- New members receive some immediate reward.
- It is easy to explain to members.
- It can be readily adjusted to different operating results.
Disadvantages to the percentage of all equities plan are:
- It does little to keep levels of equity investments proportional to use.
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:
- When a member dies, equity is redeemed to his/her estate
- When a member reaches a specified age (e.g. 70) his/her equity is redeemed
- When a member retires from farming
- When a member moves away from the cooperative's trade area
- When a member is facing special hardships (bankruptcy, ill health, etc.)
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.
The advantages of a special situation plan are:
- It is easy for members to understand
- It is easy to administer
- It is flexible and allows the board to address unusual problems facing their members
The special situation plan is faulted because:
- The most common triggers are not under the control of the cooperative
- Redemption is generally triggered by adverse events
- Equity is often held after a patron is an active user of the cooperative.
Equity Redemption Programs In Wisconsin Cooperatives
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 practices3. 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 ofthe 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
|Type of Program
|Revolving Fund Only
- "Equity Redemption and Member Equity Allocation Practices of Agricultural Cooperatives", USDA/ACS Research Report 124, October 1993. Data are 1991.
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 ofthe 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 or 43%
||Co-ops with Combination Plans (24 or 49%
|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)
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 cooperatives4.
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 nontraditional 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 onlyl.5 percent of their equity was generated by these joint ventures. One cooperative created a dosed membership cooperative. About 80 percent of its equity was from the closed membership.
Table 5. Non-traditional methods used to raise equity capital by surveyed
||Number of Co-ops
||Percent of Co-ops
||Percentage 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 shou1d 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 basis.
Based on the findings of this study the following recommendations are offered:
- 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.
- 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.
- 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.
- 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
1 The three fundamental principles of cooperatives are that they are businesses that are user-owned, user controlled, and distribute benefits according to use.
2 Rathbone, Robert, "Managing Your Cooperative's Equity", USDA, Rural Business Cooperative Service, Cooperative Information Report 56, January 1997, p3.
3 The study was funded by the University of Wisconsin Agricultural and Natural Resource Consortium
4 Provided by USDA, RBS, Cooperative Services as unpublished data, July, 1998. A report with this data will be forthcoming