University of Wisconsin Center for Cooperatives

2000 Invitational
     December 14 - 15, 2000
     Las Vegas, Nevada

Summary: Farmer Cooperatives 2000 Conference

December 14 & 15, 2000

Las Vegas, Nevada

Introduction: The third annual Farmer Cooperatives Conference focused on Building Economic Strength and received high marks from participants for stimulating new ideas applicable to their cooperatives regarding capitalization and equity redemption programs.

The 1998 conference addressed the global and industrial trends in agriculture impacting cooperatives. In 1999 the focus on Excellence in Governance offered innovative debt and equity financing alternatives for cooperatives. From Minneapolis in year one and Kansas City in year two, this year's gathering took place in Las Vegas and was attended by over 115 cooperative leaders who actively participated in discussion of capitalization and equity redemption programs. Highlights from the excellent presentations appear below.

Principles of cooperative financing: Bruce Anderson and Chris Peterson, Professors at Cornell University and Michigan State University, respectively, kicked off the conference with a review of the structure and principles of cooperative financing. First, an examination of financial statements shows cooperatives differ from other corporate business structures. On the asset side of the balance sheet, the accounts receivables are really owned by the members. Cooperatives may have substantial investments in other cooperatives including CoBank and regionals. On the liability side, the accounts payable are also owned by members. Equity is comprised mainly of allocated equity and tax paid retained earnings. Members are demanding greater liquidity and increased value of equity. While members traditionally have provided most of the equity capital, cooperatives are being forced to explore alternatives to equity financing.

Minimum Wall Street rules-of-thumb for a successful business include the following: A business needs (1) a sales growth 2 to 4 times the rate of inflation, (2) annual net income growth of 10 to 15 percent, (3) annual return on equity at least 12 to 15 percent, and (4) a debt to total assets ratio of 40 to 50 percent. How do cooperatives achieve these ideals either internally or externally? Cooperative responses impact the basic cooperative principles. Is there a desire for proportional voting, if members who do more business with a cooperative are expected to provide more of the financing? What will be the role of non-members in equity and debt financing, if they have no vote in the cooperatives?

Historically the good news is that members have more capital together than alone. But the bad news is that members are the only source of equity. The future of cooperatives depends on more capital, not less. Unlike buying stock in a C-corporation, cooperative membership is a joint decision to patronize the cooperative and to invest in the cooperative. Thus, it is critical that returns to the farm operation from doing business with the cooperative plus investment on equity investment in the cooperative exceed potential farm returns if there was no cooperative, and exceed investment returns if there was no cooperative. But the math is rather "fuzzy" when measuring member returns from the cooperative. Cooperatives pay out returns normally as patronage refunds in cash and retained patronage. Dividends on equity are rarely paid. Further, cooperatives face the "free rider" problem. If the cooperative generates a favorable net margin some members are of the opinion that the cooperative is generating these good returns by stealing from the members by charging too much or paying too little.

Publicly-traded firms get up-front capital from any willing investor and across time through retained earnings. Cooperatives get limited up-front capital from direct membership investment, across time through retained patronage with a promise to pay back and across time through unallocated retained earnings. Cooperatives have difficulty in paying back (redeeming) equity to members in a timely fashion. Dollars for equity redemption don’t help cooperative growth. Since redemption is at book value and equity cannot be traded there is little incentive for members to invest in cooperatives.

So where will future capital come from -- members, public investors, business partners? Can cooperatives "unfuzzy" the math and demonstrate good returns to members from equity investments?

Innovations in capital budgeting: Earl Powers, VP Finance and CFO, Agrilink Foods discussed the development and growth of Agrilink Foods. It started in 1962 with Pro-Fac Cooperative and Curtice Burns Foods, a public company. In 1994, Curtis Burns Foods, with bonds used as a means of financing, became a wholly owned subsidiary of Pro-Fac. In 1999, the name Agrilink Foods, Inc. came about. From 1962 to 1994, Pro-Fac was manufacturing driven. Production was not necessarily aligned with business goals. Limited study and analysis of projects was undertaken. Decisions were headquarters-driven with limited buy-in at the operating level. This process changed significantly in 1994, when it was recognized that the cooperative must be competitive with the major food processors, retailers and distributors. Regional businesses were in jeopardy. Non-branded business was under siege. It was recognized that the cooperative must get on the information super highway. The process now is to ensure that capital investments support the cooperative’s business strategy and that projects align with company goals and the strategic plan. There now exists greater accountability of projects and multi-level, cross-functional review of capital allocations. Post-completion audits have been implemented. On-line administration is in place to streamline financial analysis, summaries and status reports.

Trends and innovations in debt financing: The credit environment was spelled out by Mary E. McBride, Senior VP and Manager, Corporate Finance Division, CoBank. It is a decidedly conservative market tone. A recent federal reserve survey shows that 44 percent of domestic banks and 80 percent of foreign banks have tightened credit standards and most banks plan to further tighten credit standards. The high yield bond market is gone. New and large mezzanine funds are being raised to fill the gap in the high-yield market. Bank consolidations are prevalent. Banks are taking lower risk management positions and exercising more differentiation among borrowers. Fewer banks are participating in syndications. Banks are gaining a better understanding of risk and returns. Financing transactions must be profitable on their own. This is being driven by declining credit quality. Rating agencies downgrades are far outpacing upgrades. There are new financial players in the market, but their focus is strictly on returns. They don’t want to be troubled with amendments, waivers and etc. Cyclical transactions are very difficult to finance and this represents agribusinesses. Complex structures and very large transactions (greater than $500 million) are difficult to finance. To manage this credit environment cooperatives need to maintain financial flexibility with lower leverage and more liquidity, and to avoid operating at the margin. Cooperatives need to reduce complexity where possible and to keep lenders informed with frequent communications and full disclosure. Cooperatives need to develop a thorough understanding of the financial market. Cooperatives need to consider alternative funding sources and reward consistent lenders with fee-based services.

Susan Wyka, VP, Cybus Capital discussed trends in junior capital. Junior capital is debt below the senior debt level, and is subordinated debt with warrants, convertible subordinate debt and preferred stock. Subordinate debt is part of the mezzanine markets to finance mergers, acquisitions and business expansions. Cooperatives may consider the LLC model for some projects to get around cooperative governance issues and the 8 percent limit on dividends on capital in order to attract outside investment.

Trends and innovations in equity financing: Jeff Nemanick, Associate with SPP Capital Partners LLC indicated that his firm is a significant international investment firm, completing more than 300 private financing arrangements in the past 11 years. Joint venture networks with Wells Fargo Bank, CoBank and National Cooperative Bank have been used to secure financing. Some of the cooperative projects included the Dakota Growers Pasta, Diamond Walnuts, Ocean Spray, Roundy’s Foods, Wakefern and Cenex Harvest States. A major source of equity financing has been the use of senior notes. These long-term capital sources have back-end amortization with 30 years maturity. Interest is a fixed rate. The notes match long term assets with long term liabilities. There are less restrictive covenants than the bank market and they provide access to a diversified investor base. The institutional investors are structurally subordinate to the cooperative’s bank lenders.

A second innovative approach to equity financing is the use of CROPs Issuance. It provides equity-like capital at an extremely cost-effective basis. Existing shareholders suffer no equity dilution. It further diversifies capital sources. Viewed by senior lenders as well as rating agencies as equity capital, and viewed by investors as "debt hybrids" representing credit risk one or two levels below the cooperative’s senior debt. A trust is setup and wholly owned by the cooperative. The CROPs represent beneficial individual interests in the Trust. The Trust on-lends the proceeds of the shares as a common equity investor back to the cooperative in exchange for a subordinated debenture. The redemption date and preferred dividend rate on the shares match the maturity and coupon rate of the debenture. The debenture will have a maturity of 10 to 20 years and a cumulative provision allowing deferral of interest payments for up to 10 consecutive quarters. The payments (dividends) to the trust are treated as an interest expense for tax purposes, although the debentures on the balance sheet are listed as equity.

Susan Wyka discussed tecTERRA Food Capital Fund used in Iowa. TecTERRA was launched in 1999. $43 million pool of funds for equity investments was provided ($25 million from the state of Iowa and $18 million from private investors who are limited partners). The goal for use of the funds is to keep value-added food/ag processing margins in Iowa, increase returns on Iowa farmers’ inputs and to generate attention of capital markets for Iowa. While zero interest loans are provided on value-added projects, tecTERRA expects to exit the project within 3 to 7 years with capital gains returns from liquidity upon exit of 23 percent. One project was Rudy’s Bakery, to which TecTERRA provided $2.2 million. Rudy’s Bakery will supply branded organic breads nationwide through Whole Foods, Inc. (and others). A second project, SiouxPreme pork products, received $5 million to process and market differentiated pigs.

Gene Carbone, VP, Finance and Corporate Secretary, Calavo Growers of California, along with Attorney Mark Brown of Troy and Gould discussed the recent financial struggles of Calavo. Founded in 1923, Calavo has been experiencing a shrinking market share. Non-member business has been an increasing portion of total business volume. They viewed the existing six-year revolving fund financing program as an unending merry-go-round. There was a short-time horizon of members who were maturing in age and many had only small size acreage. One dollar in every $5 in revolving fund balance was held by former members. So in 1996 Calavo decided to allow members to exchange one dollar of revolving fund for one share of stock. Non-member income would be paid out to shareholders, and members could buy other members’ and former members’ shares. Only members can hold shares. This proposal received 97 percent favorable member approval. Four year’s later market share is increasing due to growth in non-member business. Nevertheless, unfortunately the status of Calavo as a cooperative is threatened. Over 50 percent of the business is now non-member business. Once a cooperatives does more than 50 percent of its business with non-members the Capper Volstead protection is lost. Calavo has decided to propose to its membership a plan to convert to a regular C-Corporation. They expect member approval, which if granted, means non-members and employees will be able to own shares. This action will also require SEC registration and lots of business disclosure.

An entirely different approach was taken by Welch’s Foods, Inc. and the continuation of the cooperative status is assured. Thomas E. Callahan, Senior VP of Finance and CFO described Welch’s financial situation three years ago, when there was a near term need for more capital if Welch’s was going to continue growth. Welch’s created a Capital Formation Committee of the board of directors to evaluate the need for capital, to review the available capital options, and to target a recommended course of action. Welch’s could sell to or merge with an outside party, reduce the company’s size to fit the current financial structure, or add additional capital. The potential to sell the business was very high due to the company’s premium brand and market position in juice, jams and jellies. But such a sale would most likely jeopardize grower value. Meanwhile, CoBank was becoming concerned about Welch’s diminished financial flexibility due to a high debt load that threatened its ability to grow. CoBank strongly encouraged a program that would increase Welch’s equity, the use of trust preferred securities. Credit rating agencies and accounting treat trust preferred securities as equity. IRS treats coupon payments as deductible interest expense. Trust preferred securities provide more permanent capital at a reasonable cost premium over similar debt issue. The general terms are: 15 to 30 years, at a rate approximately 125 to 200 basis points above Treasury, generally subordinate to all debt, able to defer interest for some period, often up to 5 years, and are callable at will with "make whole" provisions. Welch’s decided to use trust preferred securities to raise $25 million of equity, and was issued 30-year fixed rate trust preferred securities with the John Hancock Insurance Company.

Non-traditional equity management strategies: The innovative equity management program of Garden City Co-op, Inc, Garden City, Kansas was presented by Irvine L. Clubine, President and CEO of the cooperative, along with David Barton of Kansas State University. First, David Barton introduced some of the basics of an equity management program. He reminded us that the equity management process includes (1) determination of income generation process and income distribution, (2) determining the desired assets, (3) determining the financial structure as measured by liquidity and solvency, (4) determining the desired equity investment, and (5) determining the desired equity redemption. The criteria for evaluating equity investment and redemption alternatives should focus on co-op performance targets in terms of solvency (ownership) and liquidity (working capital), and on patron performance in terms of proportionality of business use, investment levels, and cash flow back to patrons. Most co-ops fail the proportionality test.

From Irvin Clubine's perspective there are three criteria for equity in the cooperative. (1) Does it relate to the strategic business plan? (2) Does the balance sheet support an equity program? (3) Will the co-op make money? The mission of Garden City Cooperatives is that farmers look to the cooperatives as a preferred partner. The cooperative expanded into non-traditional businesses with non-patronage income opportunities and LLC subsidiaries were formed to handle non-patronage income. Further, the cooperative wanted to change the mindset from patrons as members to patrons as investors. Components and sources of equity capital now include: (1) permanent capital (tax paid retained earnings that require no redemption), (2) semi-permanent capital (only estate redemptions) that include common stock, participating stock "A", and preferred stock "B" (transferred from "A"), and (3) revolving capital that has estate and systematic redemptions and includes preferred stock A (retained patronage). Members can transfer from stock A to preferred stock B. This plan has added value to member’s equity in five ways: (1) increases income and distribution to patron-owners, (2) provides high cash patronage distribution, (3) earns and distribute non-patronage and investment income to preferred stock B holders, (4) uses aggressive and equitable redemption programs, and (5) creates preferred stock that is demanded by investors. The cooperative has been able to increase its retained earnings to finance growth through increased non-patronage earnings. Dividends are paid on preferred stock B based on the non-traditional investment performance. The cooperative also allows trading of preferred stock among members. The new preferred stock A has been issued to finance additional non-traditional businesses. Eligible holders of this stock must either be residents or landowners in specified contiguous counties. One roadblock is the dividend allocation rule that applies to cooperatives. Dividends on preferred stock need to be paid out in the same proportion as net income is earned, that is, in the same proportion as patronage and on-patronage income.

Joint ventures role in cooperative financing: Joint ventures are prevalent among cooperatives. Jeff Roberts, VP of Finance and Treasure at Farmland Industries gave four main reasons for joint ventures: (1) To gain marketing and operational strength through scope and size, (2) Diversification of risk—financial, market or operational, (3) Financial—reduce leverage, and to manage the balance sheet, and (4) Integration of expertise. Financial and accounting issues with joint ventures include the initial capitalization plan, the total commitment and financing alternatives, impact on cash flow and the support for the joint venture by the parties involved. This support area may involve guarantees, letters of credit, marketing agreements, keep well agreements, inventory liquidity agreements, management service agreements, completion guarantees and others. There are disadvantages and risk considerations with joint ventures. There is the risk of loss of control. The maintenance of entities may be higher than planned. Entities may be slow to transition and it can very difficult and expensive to unwind a joint venture. Mr. Roberts offered the following recommendations: (1) form an internal team with appropriate skills in all areas of expertise, (2) identify and communicate financial and operational; objectives, (3) eetermine partner compatibility through extensive communication, (4) challenge operational assumptions, (5) spend more time considering actions relating to pessimistic scenarios, and (6) review legal documents to insure they clearly reflect the intent of partners.

International business financing: Richard Castanias, Professor at theUniversity of California-Davis gave a report on a study of the financing, organization and control of European cooperatives. European cooperatives are experiencing challenges similar to those in the U.S., namely increased competition, the need for permanent long-term at-risk capital, consolidations and making a market for members’ production. Modern European cooperatives get their equity/long-term financing from unallocated equity, allocated retained patronage refunds, members as securitized investors, and nonmember, preferred, and Quasi-Stock, and Securitized Debt investors. Some cooperatives have classes of tradable participating shares. European cooperatives retain substantial quantities of unallocated equity. There is less of a tradition that farmer members be paid in cash or allocated all of the net income. Some cooperatives have converted to for-profit businesses and more are involved in overseas joint ventures and investments with cross border memberships.

Porter Little, VP, Senior Portfolio Manager International Banking Group, CoBank discussed CoBank’s role in international financing. Owned by U.S agricultural cooperatives and their farmers and rural utility entities, CoBank specializes in agricultural and rural utility financing and international banking services. As the international arm of the Farm Credit System, CoBank has nearly two decades of experience financing ag trade transactions. Since 1982, CoBank has financed $30 billion in U.S. ag exports into 50 countries. Risk to exporters from international payments increase from no risk with cash advance payments, to letter of credits, to open accounts as most risky. Letters of credit are a definite understanding on the part of an issuing bank, to pay a specified amount to a beneficiary, provided certain terms and conditions are met. There are different types of letters of credit including commercial letters of credit (intended to be the primary means of payment), irrevocable letter of credit (cannot be cancelled or amended without the agreement of the issuing bank, confirming bank, if any, and beneficiary), and revocable letter of credit (can be amended at any time by the issuing bank and without prior notice to beneficiary). The risk to an exporter centers around the importing country’s ability to make foreign exchange (U.S. dollars) available for payment and the country’s political and social environment. There are also various credit guarantee programs to promote U.S. agricultural exports. The Commodity Credit Corporation of USDA administers one of these programs. The purpose is to promote exports by providing attractive financing terms to importers and their banks. It allows a U.S. bank (exporter’s bank) to make credit available to an importer’s bank at a lower cost and for a longer term. Two other risk mitigation tools are EXIM Bank and private insurance. EXIM Bank provides working capital guarantees, foreign buyer loan guarantees and export credit insurance. There are a number of private insurance carriers that insure accounts receivables, and also insure against political risks.

Risk management to protect financial health: Price risk management tools including hedging in futures and the use of PUT and CALL options may help reduce financial risk to cooperatives reflecting factors such as changing inventory values and in offering advanced inputs sales to members. Cooperatives may also assist members in the use of price risk management tools to protect cash flow and farm profits. Brian Rydlund, Senior Market Analyst with Country Hedging, Inc. discussed their price risk management work with cooperatives and members of cooperatives. Grain cooperatives in particular are exposed to financial risk from fluctuating grain prices. More recently, fluctuating energy prices have created financial problems for cooperatives supplying petroleum and LP gas products. Risk management tools are available to reduce financial problems from changing energy prices. With federal farm policy being more market oriented and commodity prices impacted by international happenings, commodity prices will continue to be uncertain and volatile. The need for price risk management will continue to be important in protecting the financial integrity of both cooperatives and their farmer-members. Cooperatives should work with their members to develop a marketing plan for commodities they produce. A marketing plan will help members control price risk and protect farm profitability.

The role of the audit committee: Mark J. Hanson with Linquist and Vennum, PLLP zeroed in on the extremely important role and responsibility of the audit committee. He cited SEC Chairman Arthur Levitt --"Confidence in our markets begins with quality of the financial information investors use to decide where to invest their hard-earned dollars. Quality information is the lifeblood of strong, vibrant markets....There are two groups to ensure quality information, outside auditors and directors and the audit committee. The audit profession must live up to their history and remain inquisitive, skeptical, and rigorous in their application of the highest standards….A board must understand a company’s operations top to bottom. It must demonstrate both a keen interest in hunting down problems, and a genuine eagerness in finding solutions. A qualified, committed, independent and tough-minded audit committees represent true guardians of the public interest. These are the board members, who in the first instance, oversee a process that collects, verifies, and disseminates information about a public company’s performance to the marketplace." While Mr. Levitt's comments were directed at public companies, we need to understand that co-ops with publicly held debt and equity are large, diversified, corporate entities that are just as complex and sophisticated in the size and scope of their operations as non-co-ops. Regulatory agencies of the government do not lower their expectations just because the reporting entity is a co-op rather than a C-corporation. Boards of co-ops may be held liable for financial difficulties that arise if they do not act with "due care and prudence."

Mr. Hanson made several suggestions as to what boards should do. Boards need to become more knowledgeable about what an auditor does. Boards need to become particularly familiar with the aspects of the co-op’s business that can easily influence earnings if mistakes are made in calculations, and learn how to apply accounting principles to those aspects. For example, seasonal fluctations in inventory and inventory valuation can significantly affect earnings. Boards should become familiar with such items as the calculation of goods sold. The board is responsible for hiring a good outside auditor. In this responsibility the board should not skimp on the price of the audit. Remember, its the board’s own liability that is at risk, which might be a particularly poor decision. You get what you pay for.

Kennth L. Wise, is a partner in the Minneapolis Office of Pricewaterhouse Coopers L.L.P. followed with comments from a Blue Ribbon Committee on improving the effectiveness of corporate audit committees. The committee focused on the erosion in the quality of financial reporting caused by such factors as major business restructuring, misuse of acquisition accounting, and improper revenue recognition. As result, the standards for auditing firms have been raised. Mr. Wise stressed that the co-op’s audit committee’s responsibility is to assist the entire board in fulfilling its oversight role. The list of specific audit committee duties include: evaluate whether management is setting the appropriate tone at the top level; recommend the selection of the independent auditors; review the scope of the audit and the procedures to be utilized; oversee independence of the independent auditors; discuss the extent to which auditors review computer systems and applications, the security of such systems, and the contingency plan for processing financial information in the event of a systems breakdown; review annual and quarterly financial statements with independent auditors, internal auditors and management; review with the independent auditors their letter of management recommendations; review prospective changes in financial accounting standards and their impact; review at least annually the adequacy of the cooperative’s code of conduct, political contribution and political action committee policies and practices; review with the independent auditors any concerns or indications that the cooperative may have been involved in any fraud, illegal activities, or deficiencies in internal control; review legal and regulatory matters that may have a material impact on the financial statements and related cooperative compliance policies; at least semi-annually; review a summary of findings from completed internal audits and management’s responses thereto; review with internal audit the organizational structure, operation and effectiveness of the audit department, including qualifications of personnel and budget matters; at all meetings, provide auditors and management the opportunity to meet privately with the audit committee; review at least annually officers and directors’ travel expenses; annually review and update if necessary the Committee’s charter; maintain minutes of audit committee meetings and report activities and appropriate recommendations to the board on a regular basis; annually, complete a self-assessment and review which would be discussed privately and reported to the full board.

Concluding remarks: Douglas D. Sims, CEO of CoBank reminded everyone that cooperatives that are profitable are having little trouble obtaining necessary equity or debt capital. But too many cooperatives are trying to redesign the past. Cooperatives are economic tools that give farmers a voice in the food system. But today not all members are alike. As a result, cooperatives cannot be all things to all people. Cooperatives must segment their market and treat members equitable and not equal. Profits in the cooperative is not a four letter word, and like any other business cooperatives must show competitive returns on investments. We are dealing with second and third generation members who look at cooperatives differently than do the co-op's founders. Cooperatives need to give the customer-owners what they value. Today’s farmers expect the cooperative to compete with the best and if they do, the farmer-members will give the cooperative the needed equity capital but expect the cooperative to earn a competitive return.

David Swanson, Attorney with Dorsey & Whitney LLP provided some guidelines to consider in financing alternatives from a legal point of view. Legal principles of cooperatives emphasis patronage distribution of profits. Cooperatives have limited immunity from anti-trust laws through the Capper Volstead Act. Most state laws spell out very clearly that boards of directors have fiduciary responsibilities. Boards and management must keep in mind that what is in the best interest of members is in the best interest of the cooperative. It is important that cooperatives develop a good set of decision making evaluation criteria and that long term goals and objectives are established. Many cooperatives have not generated good returns. This lack, and the fact that member equity does not appreciate, has driven some cooperatives to look for sources of equity capital other than from members.

Randall E. Torgerson, Deputy Administrator at USDA's Rural Business-Cooperative Service, presented an overview of the conference, noting that many provocative ideas and issues were raised regarding the financing of farmer cooperatives. He stated that some ideas presented could be deemed unsound, perhaps even leading cooperatives on the slippery slope of loss…loss of farmer control and loss of cooperative members’ responsibility to finance their own organization. It is appropriate that we remind ourselves of just what it is to operate on a cooperative basis. He defined a cooperative as a user-owned and user-controlled business in which benefits are received in proportion to use. We need to keep this definition in mind when considering alternative forms of financing. U.S. farmer cooperatives are financed much more heavily by member equity than their counterparts in other parts of the world, particularly the European Union. A 1997 financial profile study of all U.S. farmer cooperatives showed that equity capital represented 41 percent of the financial structure. A major source of equity has been retained earnings that co-op members reinvest in their cooperatives. Over time, the trend has been towards less net income allocated as patronage refunds and more in unallocated equity and income taxes, inferring that more nonmember business is conducted.

Dr. Torgerson went onto say that some proponents of ideas about cooperative finance are not consistent with operating on a sound cooperative basis. These include the use of outside equity and nonmember business. A basic cooperative operating premise is that control follows investment, and that if farmers want to control their business they must invest in it. Conflicting goals result between maximizing returns to investors and maximizing returns to producers as owner-users when outside equity is used. He questioned the reliance on preferred trust programs as a substitute for retained member earnings. The notion seems to be that this is a method of relieving farmer members of their financial obligations. Is this really equity? What happens when the preferred trust comes due?

Engaging in a large level of nonmember business is another practice requiring scrutiny. It can lead to changing priorities in a cooperative. It can have the effect of shifting management’s attention to maximizing profits from non-member business as the major function of the cooperative rather than enhancing returns to member-users.

While a very positive development has been the emergence of the so-called "new generation" value-added cooperatives, some of the practices of these cooperatives are also questionable. In particular, Torgerson noted the purchase of delivery rights outside of growers’ production territory; use of purchases "off the market" rather than a member’s delivery as a predominant means of fulfilling delivery right obligations; and leasing delivery rights as a means of holding on to appreciated value rather than having the ownership in hands of active producers.

Dr. Torgerson closed with these thoughts. There is no substitute for member equity. While numerous financial instruments are available to cooperatives, selecting those that augment on a cooperative basis requires very careful evaluation. Cooperatives can’t grow faster than the carrying capacity of their members’ equity without deviating from sound cooperative practices. Growth for the sake of growth, without following the basics of cooperative finance, ultimately leads to the conversion of cooperatives to other business forms. It is absolutely essential that each cooperative budget redemption be part of a overall plan for servicing members’ equity. Be very careful about using outside equity, engaging in large levels of nonmember business, and having large levels of tax paid surplus. Finally, there is tremendous public support today for encouraging farmers to use cooperatives as a means of counteracting concentration in markets and as a means of maintaining a vibrant rural sector.

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