United States

Department of

Agriculture

RBS Research

Report 212

Measuring Performance

of Dairy Cooperatives
A b s t r a c t This report revises and simplifies the extra-value approach (developed previously in

Research Report 166) for member-producers to evaluate their cooperative's performance. Extra value is defined as net savings after subtracting an interest charge on

equity. For comparisons over time and among cooperatives, extra value is expressed

as a percentage of operating capital to generate a scale-neutral and mode-neutral,

extra-value index for each cooperative or group of cooperatives. The extra-value

approach is also used to examine the performance of the surviving cooperatives following mergers and consolidations. The influence of cooperative size on performance

is also examined.

Key words: Extra value, extra-value index, cooperative, dairy, performance, merger,

size.

Measuring Performance of Dairy Cooperatives

K. Charles Ling

Agricultural Economist

R e s e a rch Report 212

June 2006
P r e f a c e In response to inquiries concerning evaluation of the performance of cooperatives and

cooperative management, a measurement method called the extra-value approach

was proposed in Research Report 166 (published in 1998). This new evaluation

method was developed because the conventional measures of performance--return on

equity, return on assets, return on operating capital, net margins on sales, net margins

per hundredweight of milk, etc.--do not yield an unequivocal answer to the performance question. Furthermore, cooperatives do not have stock-exchange prices to

gauge their performance and market value.

This report revises the approach developed in 1998 to make it clearer and simpler to

understand and use extra value as an objective measure to evaluate cooperative performance. The extra-value index is an objective and definitive tool for comparing cooperatives' performance in creating value for member-producers.

For ease of presentation, cooperative codes (#1 through #21) are arbitrarily assigned

according to the order a cooperative appears in table 5. Indexes and ratios about

cooperative performance are presented after aggregation, and no single cooperative's

proprietary data is shown in the report. 

i
C o n t e n t s Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

The Extra-Value Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Sources of Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Financial data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Performance of Dairy Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Performance categories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Changes in performance indexes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Performance rankings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Evaluating the performance of dairy cooperatives . . . . . . . . . . . . . . . . . . . . .10

Merger and Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Did Size Matter? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Weighted averages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Simple averages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

So, did size matter? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Conclusion--No Substitute for Board and Member Vigilance . . . . . . . . . . . . . . . . . .14

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

List of Tables

Table 1-- Comparison of two cooperatives using various measures

of performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Table 2-- Dairy cooperatives included in the study . . . . . . . . . . . . . . . . . . . . . . .5

Table 3-- British Bankers' Association, London Inter-Bank Offered

Rate (Libor), actual over 360-day basis, and the interest rates used in

this study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Table 4-- Categories of dairy cooperative performance in the two

5-year periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Table 5-- Comparisons of dairy cooperative performance between two

5-year periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Table 6-- Comparisons of dairy cooperative rankings between two

5-year periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Table 7-- A composite portrait for evaluating performance of dairy

cooperatives, the 2000-04 period compared with the 1992-96 period . . . . . . .11

ii
Table 8-- Performance of 21 dairy cooperatives as a group, annual weighted

averages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Table 9-- Performance of 21 dairy cooperatives as a group, annual simple

averages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

iii
H i g h l i g h t s Without stock market valuation of a cooperative's performance, member-producers often

are not sure how well their cooperative performs and whether the cooperative has created or destroyed the value of the cooperative in its operations. They are also perplexed at

how the management should be objectively evaluated and rewarded. This is unlike a

publicly traded corporation, where the stock price is a timely reflection of the performance and the value of the firm.

Conventional financial ratios--such as return on equity, return on assets, return on operating capital, net margins on sales, net margins per hundredweight of milk, etc.--do not

account for the cost of using members' equity in financing a cooperative's operations.

The performance of one cooperative may be rated better than that of a second cooperative by some of these measures but worse off by other measures, even if the two cooperatives are exactly the same in every aspect except the way the operations are financed:

more by debt and less by equity capital, or vice versa. A definitive measure of cooperative performance called “extra value” was proposed in a previous research report and is

further refined and simplified in this study and applied to a set of time-series data to show

its usefulness.

The extra-value approach accounts for the total cost of operations, including the cost of

using equity, and measures performance in terms of earnings generated above this total

operating cost (thus extra value). The cost of using equity is the opportunity cost of equity capital. It is an interest charge on the equity used in the operation at a rate equivalent

to the amount the money could earn elsewhere. A positive extra-value figure indicates a

cooperative's management has created value for members in its operations; negative

extra value means the value of members' investment in the cooperative is diminished.

For the extra-value approach to be an objective performance measure for comparing

cooperative operations, extra value can be made neutral to scale and to mode of operations (relative mix of bargaining and/or processing operations) by an index that expresses extra value as a percentage of operating capital. The index shows the rate of creating

extra value from using operating capital, which is the financial resource available to the

management of a cooperative for operations.

Extra value is defined as net savings after subtracting interest on equity, and operating

capital is the sum of fixed (non-current) assets and net working capital.

The analysis used data from dairy cooperatives in USDA's database. The time series

were from 1992 through 1996 and from 2000 through 2004. Eleven of the original 28

cooperatives in the 1992-96 period merged or consolidated into four “surviving” cooperatives between 1997 and 1999. For the 1992-96 period, the data of the 11 “predecessor”

cooperatives were summed together by assuming that they had already been consolidated into the surviving 4 cooperatives. Therefore, the total number of dairy cooperatives

included in this study is 21.

The interest rate used to calculate the cost of using equity was based on the respective

year's December average Libor for U.S. dollar loans with a 12-month maturity. Banks in

the United States generally will extend loans to a firm with a better-than-average credit

rating, at an interest rate of about 200 basis points above the Libor. So 'Libor+2” was the

basic rate used to calculate interest on equity.

iv
Equity capital is considered by investors to be riskier than debt. To show the effects of

such risk consideration, sensitivity analysis was made using 5 percentage points and 10

percentage points as the risk premium.

The performance of dairy cooperatives is portrayed in three ways to form a composite

picture for evaluation: performance categories, changes in performance indexes, and

performance rankings.

Cooperatives were placed into five categories according to their performance indexes:

I. Cooperatives that had negative return on equity (one cooperative in the first period; one in the second).

II. Cooperatives that had positive return on equity, but did not generate extra value

beyond the cost of using equity capital at basic interest rate (six cooperatives in

the first period; one in the second).

III. Cooperatives that generated extra value beyond the cost of using equity capital at

basic interest rate but short of reaching 5-percent risk premium (five cooperatives

in the first period; 10 in the second).

IV. Cooperatives that generated extra value beyond the cost of using equity capital at

basic interest rate plus 5-percent risk premium but short of reaching 10-percent

risk premium (three cooperatives in the first period; two in the second).

V. Cooperatives that generated extra values beyond the cost of using equity capital

at basic interest rate plus 10-percent risk premium (six cooperatives in the first

period; seven in the second).

Most of the cooperatives, 14 (out of 21) in the first period and 19 in the second, generated extra values beyond the cost of using equity capital at basic interest rates (Category

III and higher). And six cooperatives in the first period and seven in the second period

attained the highest performance, Category V.

The performance indexes of 10 cooperatives showed improvement from the first period

(1992-1996) to second period (2000-2004). All performance indexes for each of these

cooperatives were more positive, changed from negative to positive, or became less

negative in the second period as compared to the first period.

The performance indexes for another three cooperatives were positive in both time periods. However, their respective values declined from the first period to the second period. So they performed less well in the second period as compared to the first.

Likewise, the performance indexes of another six cooperatives all showed declines.

Their performance indexes were less positive, changed from positive to negative, or

became more negative in the second period. The performance indexes of the remaining

two cooperatives showed mixed results.

Cooperatives may be ranked according to four criteria. For constructing the composite

picture of cooperative performance, the performance ranking was based on the extravalue index that was calculated using the basic interest rate plus 10-percent risk premium-the most demanding criterion.

v
A cooperative may be evaluated relative to other cooperatives from the perspective of

where it fits in the resulting composite picture.

The composite picture was used to evaluate the impacts on performance by the mergers and consolidations in the late 1990s. Three out of the four surviving cooperatives

actually performed better than the sum of their respective predecessor counterparts.

They either stayed in the same performance category or climbed to a higher performance category. Their performance indexes showed improvements between the two

time periods. And their rankings were all better in the second period.

An interesting question is whether cooperative size affects performance. This may be

answered by evaluating the cooperatives as a group--by comparing the weighted-average and simple-average performance indexes.

The weighted-average performance indexes of cooperatives are calculated by adding

the financial data across all cooperatives and calculating the performance indexes as if

they had been one single organization. Because of the weighting process, larger cooperatives (defined as cooperatives with larger amounts of operating capital, but not necessarily cooperatives with larger volumes of milk or larger numbers of producers) carry

more weight and tend to dominate the results.

The simple-average performance indexes treat every cooperative equally, by calculating the performance indexes of each of the 21 cooperatives and then averaging the

indexes. The simple averages give an equal weight to each cooperative regardless of

size, and no one cooperative has more weight than another to influence the results.

Furthermore, 21 is a large enough number of cooperatives, so one or a few cooperatives' performance can not overwhelm the rest.

Comparisons between weighted-average performance indexes and simple averages

highlight the performance of larger cooperatives relative to the rest. All weighted-average performance indexes were lower than the corresponding simple averages, suggesting that some of the larger cooperatives did not perform as well as the rest of the

cooperatives in either period.

Some of the larger cooperatives also relied less and less on equity and more and more

on debt than smaller ones to finance their operations as shown by the differences

between the weighted-average equity shares of operating capital and the simple averages. This distorted the comparison based on returns on equity.

In terms of operating efficiency, while the weighted-average extra-value indexes show

that the cooperatives as a group did not perform as well in the second period as in the

first period, the simple-average extra-value indexes indicate that the performance of

the cooperatives on average barely changed between the two periods. This implies

that some of the larger cooperatives did not perform as well in the second period when

compared to the first period, but the rest of the cooperatives, on average, maintained

their level of efficiency in using operating capital.

Member-producers may evaluate their cooperative based on how much extra value the

cooperative has created. For comparison over time or with other cooperatives, the

extra-value index is an objective and definitive tool and is scale-neutral and mode-neutral.

vi
However, a cooperative is a membership organization as well as a business entity. It

has to achieve its business goals, but also has to provide various services to members.

The costs and returns of providing such services may not be fully measurable and thus

may not be fully reflected in the financial statements and in the extra-value calculation.

Furthermore, in a dairy coopeative, the distinction between milk pay prices and premiums on the one hand and profits on the other is not clear-cut. The board and members

should consider all these factors when evaluating performance. They are also in the

best position to judge the most representative opportunity cost of the cooperative’s equity.

The extra -value approach is a worthwhile tool that furnishes some objectivity in evaluating cooperative performance. In the end, what really counts is how satisfied the member-producers are with the cooperative. There is no substitute for a well-informed membership and a vigilant board that understands the complexity of operating a cooperative,

both as a business and as a membership organization, to adequately oversee and evaluate its operations.

vii
Measuring Performance of Dairy Cooperatives

K. Charles Ling

Rural Development

Rural Business-Cooperative Service

S TOP 3252, 1400 Independence Ave., S.W.

Washington, DC 2 0 2 5 0 - 3 2 5 2

I n t r o d u c t i o n

Without stock market valuation of a cooperative's

performance, member- p roducers often wonder how

well their cooperative performs and whether it performs at par with or better than other cooperatives.

Conventional financial ratios are usually used to provide measures of performance. These include re t u r n

on equity, return on assets, return on operating capital,

net margins on sales, net margins per hundre d w e i g h t

of milk, etc. In the context of cooperatives, however,

these performance measures do not account for the

cost of using members' equity in financing a cooperative's operations. (This leads some people to characterize equity as free capital-but certainly it is not fre e ,

because it has an opportunity cost.) As a result, members cannot be sure whether the cooperative has cre a ted or destroyed the value of the cooperative in its

operations, and are perplexed at how the management

should be objectively evaluated and re w a rded. This is

unlike a publicly traded corporation, where the stock

price can be a timely reflection of the value of the firm.

The ambiguity of measuring cooperative performance is illustrated in table 1 using two hypothetical

dairy cooperatives. Cooperative A and Cooperative B

market exactly the same volume of milk and have the

same amount of assets, operating capital, sales, cost of

goods sold, operating cost, and operating margin. The

only diff e rence is the way the operations are financed.

Cooperative A's operating capital is financed by

$60,000 of debt and $500,000 of member equity, while

Cooperative B's operating capital is financed by

$310,000 of debt and $250,000 of member equity.

The two cooperatives generate the same operating margin ($60,000), from which interest on debt is

subtracted to arrive at net savings. If the interest rate

on debts is 5 percent, Cooperative A's net savings is

$57,000, or 23 cents per hundredweight of milk, comp a red to Cooperative B's net savings of $44,500, or 18

cents per hundredweight. Cooperative A can claim to

have outperformed Cooperative B by all conventional

m e a s u res of performance (including return on assets,

return on operating capital, and net margins on sales).

The exception was return on equity-a widely used

y a rdstick of a firm's pro f i t a b i l i t y, which is 11.4 perc e n t

for Cooperative A vs. Cooperative B's 17.8 perc e n t .

This example shows that by treating equity as

f ree capital, the conventional performance measure s

subject the cooperatives' operating results to open

i n t e r p retation. A definitive measure of cooperative

performance--called “extra value,” which includes in

its calculation the cost of using equity capital--was

p roposed in USDA RBS Research Report No. 166. It is

further refined and simplified in this study to make it

easy to understand and use. (See Box, page 4).

The Extra-Value Approach

The extra-value approach accounts for the total

cost of operations, including the cost of using equity,

and measures performance in terms of earnings generated above this total operating cost (thus, the extra

value generated). The cost of using equity is the

opportunity cost of equity capital. It is an intere s t

c h a rge on the equity used in the operation at a rate

equivalent to the amount the money could earn else1
w h e re. (Economists would call the extra value so cre a ted “economic rent,” “surplus,” or “economic value

added.” The term “extra value” is more straightforw a rd . )

A positive extra value indicates a cooperative's

management has created value for members thro u g h

the cooperative's operations. If a cooperative's operations cannot fully compensate the opportunity cost of

using equity capital, thus generating a negative extra

value, then the value of members' investment in the

cooperative is diminished. Thus, the extra value could

be a useful yardstick to measure the performance of

the cooperative's management.

Continuing the example in table 1, we will

assume the cost of using equity is the same as the 5-

p e rcent interest rate on debt. Cooperative A's extra

value is calculated to be $32,000, after subtracting a

$25,000 interest charge on equity from the $57,000 net

savings. Extra value for Cooperative B is also $32,000

after the same calculation by subtracting a $12,500-

i n t e rest charge on equity from the $44,500 net savings.

Each cooperative increases members' value by $32,000.

When the interest rate is 11 percent, neither cooperative can recover all its total cost (including the costs

of using equity capital); each cooperative generates a

2

Table 1—Comparison of two cooperatives using various measures of performance

Cooperative A Cooperative B

Milk volume handled (cwt) 250,000 250,000

Total assets $1,000,000 $1,000,000

Operating capital 560,000 560,000

-financed by Debt 60,000 310,000

-financed by Equity 500,000 250,000

Sales $5,000,000 $5,000,000

Cost of goods sold 4,500,000 4,500,000

Gross margin 500,000 500,000

Operating cost 440,000 440,000

Operating margin 60,000 60,000

Interest on debt @5 percent $3,000 $15,500

Net savings 57,000 44,500

Net savings per cwt 0.23 0.18

Return on equity 11.4% 17.8%

Return on assets 5.7% 4.5%

Return on operating capital 10.2% 7.9%

Net margins on sales 1.1% 0.9%

Interest on debt @5 percent $3,000 $15,500

Net savings 57,000 44,500

Net savings per cwt 0.23 0.18

Interest on equity @5 percent 25,000 12,500

Extra value 32,000 32,000

Extra value index 5.7% 5.7%

Interest on debt @11 percent $6,600 $34,100

Net savings 53,400 25,900

Net savings per cwt 0.21 0.10

Interest on equity @11 percent 55,000 27,500

Extra value (1,600) (1,600)

Extra value index (0.3%) (0.3%)
3

negative extra value of $1,600. Nevertheless, the performance of the two cooperatives is equal-both diminish members' value by $1,600.

This example shows how extra value is a definitive measure of performance. Both Cooperative A and

Cooperative B have increased or decreased their members' values by the same amounts and there f o re have

performed equally well, or poorly, in their re s p e c t i v e

operations. This is as it should be, because of the

assumption that, except for the diff e rences in the proportion of debt and equity financing, every aspect of

the cooperatives' operations is the same.

In real life, no two cooperatives are alike. Their

sizes and operations may be vastly diff e rent. Some

dairy cooperatives may have more bargaining operations than processing and marketing. Their margins on

sales may be slim, but they do not employ much operating capital in the operation. Other cooperatives may

engage more in further processing that uses more

operating capital but probably returns higher marg i n s

on sales. Still others may have farm supplies and other

businesses besides marketing milk (in which case,

return per hundredweight of milk would paint a distorted picture of pro f i t a b i l i t y ) .

For the extra-value approach to be an objective

performance measure for comparing cooperative operations, extra value can be made neutral to scale and

mode of operations by an index that expresses extra

value as a percentage of operating capital. The index

shows the rate of creating extra value from using operating capital, which is the financial re s o u rce available

to the management of a cooperative for operations.

The extra-value index for the two cooperatives in

the example is 5.7; that is, 5.7 cents of extra value is

generated for every dollar of operating capital

employed in the business when the interest rate on

equity is 5 percent (table 1). When the interest rate is 11

p e rcent, the extra-value index is minus 0.3; for every

dollar of operating capital used in the operations, both

cooperatives lost 3-tenths of a cent.

Extra value can be calculated using the information commonly found on any firm's financial statements (except for interest rate on equity, which has to

be imputed):

Extra value = net savings minus interest on

e q u i t y, w h e re interest on equity = members'

( n o n - i n t e rest-bearing) equity x interest rate.

The extra-value index is a percentage of operating capital:

Extra-value index = extra value / operating capital x 100, w h e re operating capital = fixed (nonc u r rent) assets + net working capital, while net

working capital = current assets minus curre n t

l i a b i l i t i e s .

In summary, the extra-value approach has the following characteristics:

● Extra value measures how well a co-op uses its

operating capital in operations--whether it covers

the opportunity cost of using the operating capital. A cooperative is creating value for its members if its extra value is positive. If its extra value

is negative, the cooperative is not fully re c o v e r

ing its total input cost, including the opportunity

cost of its members' equity capital, and is re d u cing the cooperative's value.

● An extra-value index can be created by dividing

extra value by operating capital. The extra-value

index is scale-neutral and can be used to compare

performance of cooperatives of diff e rent sizes.

● Operating capital is the financial re s o u rce at the

disposal of management for the cooperative's

operations. Use of operating capital as the

denominator in calculating the extra-value index

puts various types of cooperatives on an equal

footing re g a rdless of their mode of operations,

which range from bargaining cooperatives to the

most sophisticated processing and marketing

c o o p e r a t i v e s .

T h e re f o re, extra value and extra-value index meas u re the efficiency with which the management of a

cooperative uses operating capital to create value for

its member- p roducers. Operational performance of

cooperatives can be compared by using extra-value

i n d e x e s .
Sources of Data

Financial data--Dairy cooperatives that have

complete and continual financial information in the

USDA database for its annual top-100 cooperative

financial analysis are included in this study (table 2).

The time series are from 1992 through 1996 and fro m

2000 through 2004. Using the data from the two 5-year

periods makes it possible to show how the performances of the cooperatives pro g ressed over time.

(Please note that the database has 1 year of missing

data for two cooperatives and 2 years of missing data

for another two cooperatives. Considering the amount

of information available, the missing data is a minor

i m p e r f e c t i o n . )

Eleven of the original 28 cooperatives in the

1992-96 period merged or consolidated into four “surviving” cooperatives between 1997 and 1999. For the

1992-96 period, the data of the 11 “predecessor” cooperatives were added as if they had already been consolidated into the surviving four cooperatives.

T h e re f o re, the total number of dairy cooperatives

included in this study is 21. This is necessary for comparing performances over time. The comparisons

based on such grouping may not be perfect, but pro bably are reasonable. (From 1992 to 2004, many smaller

cooperatives also merged into the cooperatives

included in this study. However, no complete historical financial data for them are available. In any case,

their inclusion in this study probably would not have

material impacts on the re s u l t s . )

Interest rates- - I d e a l l y, the interest rate used to

calculate the cost of using equity should have been

the interest rate on a cooperative's debt (the opportunity-cost concept). However, it was difficult to derive

a re p resentative rate from a cooperative's various

financing activities. An alternative was to use a rate

that was based on the respective year's December

average British Bankers' Association's London InterBank Off e red Rate (BBA Libor for U.S. dollar loans

with a 12-month maturity (table 3). Banks in the

United States generally will extend loans to a firm

with a better-than-average credit rating, at an intere s t

rate of about 200 basis points above the Libor. So

'Libor+2” was the basic rate used to calculate intere s t

on equity (with the implicit assumption that all

included cooperatives had better-than-average cre d i t

r a t i n g s ) .

Equity capital is considered by investors to be

riskier than debt, and they would argue that the

imputed interest on equity should be higher than

4

How this report varies

from RR 166

For simplicity and clarity in presenting the

extra-value approach to cooperative performance

analysis, this report uses net savings as the basis

(starting point) for calculating extra value. To

m e m b e r- p roducers, net savings is their cooperative's “bottom line,” and is a number that is most

easily understood by them and concerns them the

most. The definition of operating capital is simply

the same as total assets net of current liabilities.

The calculations are thus diff e rent fro m

R e s e a rch Report 166. Because extra value measure s

the efficiency of using operating capital in cre a t i n g

value for members, the previous report opted to

use net operating margin (before taxes) as the basis

for calculating extra value. (Net operating marg i n

is operating margin plus interest and other income

and minus interest and other expenses.)

R e s e a rch Report 166 also excluded investment

in other firms from operating capital, with the

notion that extra value should capture the cooperative's operating performance but not the performance of other firms in which the cooperative

invests. There f o re, investment in other firms was

removed from the cooperative's assets and the corresponding amount was subtracted from members'

e q u i t y. Patronage or investment income re c e i v e d

was also excluded from the net operating marg i n

because these are not the result of the cooperative's

own operations and thus should not play a part in

measuring operating performance.

The current report measures the performance of

a cooperative's overall operations, while Researc h

Report 166 focused on the performance of the business activities that are under a cooperative's dire c t

operating control. The two measurements, howeve r, are only marginally diff e re n t .

The upshot is that the extra-value appro a c h

may have some variations depending on what

emphasis is put on the variables for the calculation

of the extra value and the extra-value index. The

important thing is that the resulting extra value

should be calculated after subtracting the opportunity cost of using equity capital.
5

i n t e rest on debt to compensate for the risk of investing in the business. Sensitivity analysis could show

the effects of such risk consideration by using various

rates for the risk premium. This report assumes such

risk premiums were 5 and 10 percentage points for

the analysis. (The 10 percentage-point premium was

chosen because some re s e a rchers reported that the

historical risk premium of equity was about 9 percent. See Davis et al., page 2.) So “basic intere s t

rate+5” and “basic interest rate+10” were also used in

the calculations of extra values and extra-value indexe s .

In a nutshell: three interest rates were used in

the calculation of extra value and extra-value indexes:

basic interest rate, which is Libor plus 2 percent; basic

i n t e rest rate plus 5 percent; and basic interest rate

plus 10 percent (table 3). In addition, the conventional

returns on equity were calculated for re f e rence purp o s e s .

Performance of Dairy Cooperatives

USDA cannot present each cooperative's pro p r ietary data, so the performance of dairy cooperatives is

Table 2—Dairy cooperatives included in the study

Names of cooperatives, 1992-96 Names of cooperatives, 2000-04

Agri-Mark, Inc. Agri-Mark, Inc.

Alto Dairy Cooperative Alto Dairy Cooperative

Bongards' Creameries Bongards' Creameries

Cass-Clay Creamery, Inc. Cass-Clay Creamery, Inc.

Dairylea Cooperative, Inc. Dairylea Cooperative, Inc.

First District Association First District Association

Foremost Farms USA Foremost Farms USA

Md. & Va. Milk Producers Cooperative Assn Md. & Va. Milk Producers Cooperative Assn

Michigan Milk Producers Association Michigan Milk Producers Association

Northwest Dairy Assn. (Darigold Farms) Northwest Dairy Assn. (WestFarm Foods)

O-AT-KA Milk Products Cooperative, Inc. O-AT-KA Milk Products Cooperative, Inc.

Prairie Farms Dairy, Inc. Prairie Farms Dairy, Inc.

St. Albans Cooperative Creamery, Inc. St. Albans Cooperative Creamery, Inc.

Swiss Valley Farms Company Swiss Valley Farms Company

Tillamook County Creamery Association Tillamook County Creamery Association

United Dairymen of Arizona United Dairymen of Arizona

Upstate Milk Cooperatives, Inc. Upstate Farms Cooperatives, Inc.

Predecessor cooperative(s) Surviving cooperative

_____________________________________________________________________________________________________

Associated Milk Producers Inc. (All regions) Associated Milk Producers Inc. (North Central) (1998)1

Land O'Lakes, Inc. Land O'Lakes, Inc.

Atlantic Dairy Cooperative (1997)

Dairyman's Co-op Creamery Association (1998)

Mid-America Dairymen, Inc. Dairy Farmers of America (1998)

Western Dairymen Cooperative, Inc. (1998)

Milk Marketing, Inc. (1998)

Associated Milk Producers Inc. (all regions) (1998)

California Gold Dairy Products (1999)

California Milk Producers Association California Dairies, Inc. (1999)

Danish Creamery (1999)

San Joaquin Valley Dairymen (1999)

1The number in parenthese indicates the year when a merger or consolidation took place.
portrayed in three ways to form a composite picture

for evaluation: performance categories, changes in performance indexes, and performance rankings.

Performance categories--Cooperatives were

placed into five categories according to their performance indexes (table 4):

I . Cooperatives that had negative return on

equity (one cooperative in the first period;

one in the second).

I I . Cooperatives that had positive return on

e q u i t y, but did not generate extra values

beyond the cost of using equity capital at

basic interest rate (six cooperatives in the

first period; one in the second).

6

Table 3—British Bankers' Association, London Inter-Bank Offered Rate (Libor), actual over 360-day basis,

and the interest rates used in this study

Libor, 12-month

maturity, Basic

December Basic rate Basic rate+5% rate+10% risk

Year average (%) (Libor+2) risk premium premium

1992 4.12984 6.13 11.13 16.13

1993 3.79874 5.80 10.80 15.80

1994 7.57188 9.57 14.57 19.57

1995 5.50452 7.50 12.50 17.50

1996 5.76289 7.76 12.76 17.76

2000 6.23740 8.24 13.24 18.24

2001 2.41674 4.42 9.42 14.42

2002 1.57735 3.58 8.58 13.58

2003 1.49595 3.50 8.50 13.50

2004 3.01515 5.02 10.02 15.02

Table 4—Categories of dairy cooperative performance in the two 5-year periods

Performance category First period average Second period average

(1992-96) (2000-04)

–––––––––––Co-op code––––––––––––

I. Cooperatives that had negative return on equity 7 21

II. Cooperatives that had positive return on equity, 4, 8, 9, 10, 11, 12 11

but did not generate extra values beyond the cost of

using equity capital at basic interest rate

III. Cooperatives that generated extra values 5, 6, 19, 20, 21 6, 7, 8, 9, 10, 12, ,17,

beyond the cost of using equity capital at basic 18, 19, 20

interest rate

IV. Cooperatives that generated extra values 2, 3, 18 5, 16

beyond the cost of using equity capital at basic

interest rate plus 5-percent risk premium

V. Cooperatives that generated extra values 1, 13, 14, 15, 16, 17 1, 2, 3, 4, 13, 14, 15

beyond the cost of using equity capital at basic

interest rate plus 10-percent risk premium
I I I . Cooperatives that generated extra values

beyond the cost of using equity capital at

basic interest rate but short of reaching 5-percent risk premium (5 cooperatives in the first

period; 10 in the second).

I V. Cooperatives that generated extra values

beyond the cost of using equity capital at

basic interest rate plus 5-percent risk pre m ium but short of reaching 10-percent risk premium (three cooperatives in the first period;

two in the second).

V. Cooperatives that generated extra values

beyond the cost of using equity capital at

basic interest rate plus 10-percent risk premium (six cooperatives in the first period;

seven in the second).

Most of the cooperatives, 14 (out of 21) in the first

period and 19 in the second, generated extra values

beyond the cost of using equity capital at basic intere s t

rates (Category III and higher). And six cooperatives

in the first period and seven in the second period

attained the highest performance Category V.

Nine cooperatives (Nos. 2, 3, 4, 5, 7, 8, 9, 10, and

12) moved to a category of better performance in the

second period. Cooperative No. 4 improved the most,

moving from Category II to Category V.

Meanwhile, four cooperatives (Nos. 16, 17, 18,

and 21) moved to a lower performance category.

Four cooperatives (Nos. 1, 13, 14, and 15) maintained the top performing position (Category V)

t h roughout the two 5-year periods. Three other cooperatives (Nos. 6, 19, and 20) remained in Category III

and one cooperative (No. 11) in Category II in both

p e r i o d s .

Changes in performance indexes--Changes in

the performance indexes of the 21 cooperatives are

summarized in table 5. All performance indexes for

Cooperative No. 1 were positive in the first period

(1992-96) and improved (“+” in the change column) in

the second period (2000-04). The cooperative was able

to generate net savings that more than covered the

opportunity cost of using equity capital that was calculated at the basic interest rate plus 10 percent risk premium. (The extra-value index, or EVI, calculated at

basic interest rate +10 percent was positive.)

The net savings of Cooperative No. 2 in the first

period was enough to cover the cost of using equity

capital at the basic interest rate plus 5 percent risk premium. In the second period, it improved and was able

to cover the cost at the basic interest rate plus 10 percent risk premium. All performance indexes showed

i m p rovement in the second period for Cooperative

No. 2.

In the similar manner, Cooperative No. 3 thro u g h

Cooperative No. 10 improved their performance

between the two time periods, as shown by all positive

(“+”) signs in the change column. All performance

indexes for each of these cooperatives were more positive, changed from negative to positive, or became less

negative in the second period as compared to the first

p e r i o d .

All three extra-value indexes for Cooperative

No. 11 improved (became less negative) over time.

H o w e v e r, the return on equity eroded. For

Cooperative No. 12, the EVI using the basic intere s t

rate became positive, the EVI using the basic intere s t

rate plus 5-percent became less negative, while the

EVI using the basic interest rate plus 10 percent and

its return on equity became more negative.

All performance indexes for Cooperative No. 13

t h rough Cooperative No. 15 were positive in both

time periods. However, their respective values

declined from the first period to the second period (“-

” in the change column). So they performed less well

in the second period as compared to the first period.

Likewise, Cooperative No. 16 through Cooperative

No. 21 all showed negative (“-“) signs in the change

column: Their performance indexes were less positive, changed from positive to negative, or became

m o re negative in the second period. By all measure s ,

Cooperative No. 21 was in the doldrums during the

recent 5-year period.

Performance rankings--Cooperatives were

ranked according to four criteria (return on equity

and the three EVIs using respective interest rates) for

both the 1992-96 and the 2000-04 periods (table 6). In

the first period, rankings of 13 cooperatives varied

somewhat depending on the criterion used. For

example, Cooperative No. 2 was ranked 8th according to return on equity, while ranked 7th or 9th

a c c o rding to EVIs.

Similar ranking variations applied to 15 cooperatives in the second period.

Cooperative No. 13 was the top performer in

both the first and second periods. Cooperative No. 16

was ranked second in the first period, but slipped to

9th place in the second period, while Cooperative No.

1 improved its standing from third to second place.

Some cooperatives, such as Cooperatives No. 4

and No. 7, showed the most improvement in their

rankings, while others saw remarkable declines in

their rankings.

7
8

Table 5—Comparisons of dairy cooperative performance between two 5-year periods

Co-op code Performance index 1992-96 average 2000-04 average Change

1 EVI, using basic interest rate + + +

EVI, using basic interest rate+5% + + +

EVI, using basic interest rate+10% + + +

Return on equity + + +

2 EVI, using basic interest rate + + +

EVI, using basic interest rate+5% + + +

EVI, using basic interest rate+10% - + +

Return on equity + + +

3 EVI, using basic interest rate + + +

EVI, using basic interest rate+5% + + +

EVI, using basic interest rate+10% - + +

Return on equity + + +

4 EVI, using basic interest rate - + +

EVI, using basic interest rate+5% - + +

EVI, using basic interest rate+10% - + +

Return on equity + + +

5 EVI, using basic interest rate + + +

EVI, using basic interest rate+5% - + +

EVI, using basic interest rate+10% - - +

Return on equity + + +

6 EVI, using basic interest rate + + +

EVI, using basic interest rate+5% - - +

EVI, using basic interest rate+10% - - +

Return on equity + + +

7 EVI, using basic interest rate - + +

EVI, using basic interest rate+5% - - +

EVI, using basic interest rate+10% - - +

Return on equity - + +

8 EVI, using basic interest rate - + +

EVI, using basic interest rate+5% - - +

EVI, using basic interest rate+10% - - +

Return on equity + + +

9 EVI, using basic interest rate - + +

EVI, using basic interest rate+5% - - +

EVI, using basic interest rate+10% - - +

Return on equity + + +

10 EVI, using basic interest rate - + +

EVI, using basic interest rate+5% - - +

EVI, using basic interest rate+10% - - +

Return on equity + + +

11 EVI, using basic interest rate - - +

EVI, using basic interest rate+5% - - +

EVI, using basic interest rate+10% - - +

Return on equity + + -
9

Table 5—Comparisons of dairy cooperative performance between two 5-year periods (Continued)

Co-op code Performance index 1992-96 average 2000-04 average Change

12 EVI, using basic interest rate - + +

EVI, using basic interest rate+5% - - +

EVI, using basic interest rate+10% - - -

Return on equity + + -

13 EVI, using basic interest rate + + -

EVI, using basic interest rate+5% + + -

EVI, using basic interest rate+10% + + -

Return on equity + + -

14 EVI, using basic interest rate + + -

EVI, using basic interest rate+5% + + -

EVI, using basic interest rate+10% + + -

Return on equity + + -

15 EVI, using basic interest rate + + -

EVI, using basic interest rate+5% + + -

EVI, using basic interest rate+10% + + -

Return on equity + + -

16 EVI, using basic interest rate + + -

EVI, using basic interest rate+5% + + -

EVI, using basic interest rate+10% + - -

Return on equity + + -

17 EVI, using basic interest rate + + -

EVI, using basic interest rate+5% + - -

EVI, using basic interest rate+10% + - -

Return on equity + + -

18 EVI, using basic interest rate + + -

EVI, using basic interest rate+5% + - -

EVI, using basic interest rate+10% - - -

Return on equity + + -

19 EVI, using basic interest rate + + -

EVI, using basic interest rate+5% - - -

EVI, using basic interest rate+10% - - -

Return on equity + + -

20 EVI, using basic interest rate + + -

EVI, using basic interest rate+5% - - -

EVI, using basic interest rate+10% - - -

Return on equity + + -

21 EVI, using basic interest rate + - -

EVI, using basic interest rate+5% - - -

EVI, using basic interest rate+10% - - -

Return on equity + - -
Evaluating the performance of dairy cooperat i v e s - -The composite picture of cooperative performance emerging from examining cooperatives' performance categories, changes in performance

indexes, and performance ranking are presented in

table 7.

The 2000-04 period saw 7 cooperatives in performance Category V, 2 in Category IV, 10 in

Category III, and 1 each in Categories II and I. This

resulted from seven cooperatives moving up one

level from the 1992-96 period, one moving up two

levels, and another one moving up three levels. On

the other hand, two cooperatives moved down one

level and another two moved down two levels. Eight

cooperatives stayed in their same respective categories throughout the two time periods.

Eleven cooperatives showed improvement in

their extra-value indexes, nine showed deterioration,

and one had mixed results. Eleven cooperatives also

moved higher in the performance ranking, nine

moved lower and the top-ranked cooperative stayed

put. (In these two instances, the number of cooperatives appears to be the same, but they are not necessarily the same cooperatives.) The performance ranking was based on the EVI that was calculated using

basic interest rate plus 10 percent risk pre m i u m - t h e

most demanding criterion.

A cooperative may be evaluated relative to other

cooperatives from the perspective of where it fits in

the picture. For example, among the seven top performing cooperatives (performance Category V) in the

2000-04 period, members of Cooperative No. 13 pro bably would be satisfied that their cooperative re t a i n e d

the top rank. But they may also notice that ranking

alone does not tell the whole story. They may wonder

what had transpired during the past 5 years that their

cooperative's performance indexes weakened, while

Cooperatives Nos. 1, 3, and 2 were catching up.

Members of Cooperative No. 14 may also be left

wondering, because the cooperative's performance

indexes also declined, although its ranking moved up.

Members of Cooperative No. 15 will certainly be puz10

Table 6—Comparisons of dairy cooperative rankings between two 5-year periods

1992-96 average 2000-04 average

__________________________________________________________________ _____________________________________________

EVI, using EVI, using EVI, using EVI, using EVI, using EVI, using

Return basic interest basic basic Return basic interest basic basic

Co-op on rate interest interest on rate interest interest

code equity (Libor+2) rate+ 5% rate+ 10% equity (Libor+2) rate+ 5% rate+ 10%

__________________________________________________________________ _____________________________________________

1 3 3 3 3 2 2 2 2

2 8 7 7 (9) 4 3 3 4

3 9 8 8 (8) 3 5 4 3

4 20 (20) (20) (18) 7 8 8 7

5 10 10 (10) (10) 8 7 7 (8)

6 15 14 (15) (14) 15 13 (12) (13)

7 (21) (21) (21) (21) 10 10 (10) (14)

8 18 (18) (16) (16) 14 15 (14) (11)

9 16 (16) (19) (20) 11 11 (15) (17)

10 19 (19) (18) (17) 13 12 (11) (10)

11 17 (17) (17) (19) 20 (20) (20) (20)

12 13 (15) (13) (13) 19 19 (19) (19)

13 1 1 1 1 1 1 1 1

14 6 5 5 6 6 4 5 5

15 4 4 4 4 5 6 6 6

16 2 2 2 2 9 9 9 (9)

17 5 6 6 5 12 14 (13) (12)

18 7 9 9 (7) 17 18 (18) (16)

19 12 12 (12) (12) 16 16 (16) (15)

20 11 11 (11) (11) 18 17 (17) (18)

21 14 13 (14) (15) (21) (21) (21) (21)

*Parentheses indicate the cooperative had negative return (loss) for the particular entry.
zled, because their cooperative managed to remain in

the top performing group, even though both performance indexes and ranking sagged.

On the other hand, members of Cooperative No.

4 probably would be elated that their cooperative's

performance improved re m a r k a b l y, climbing thre e

levels from Category II to reach Category V, where it

ranked 7th.

In conducting the performance evaluation, each

cooperative will have to ask a host of questions: What

happened? What worked? What did not? What

i m p rovements need to be made? How to achieve the

goals? And so on.

The answers to these questions are certainly

going to vary, depending on a cooperative's particular

situation. If a cooperative did not turn in a stellar performance during the past 5 years, however, it pro b ably should not be blamed on “market conditions,”

which, after all, were faced by all dairy cooperatives.

But not every cooperative experienced the same ill

e ffects. There was an almost even split in the number

of cooperatives that performed better or worse (11 to

9, judged either by performance indexes or by performance ranking) than in the 1992-96 period.

Merger and Consolidation

In the interim years between the first and second

periods, 11 cooperatives merged or consolidated to

form 4 surviving cooperatives (table 2). An intere s t i n g

question: did the merger and consolidation impro v e

the performance of the cooperatives?

11

Table 7—A composite portrait for evaluating performance of dairy cooperatives, the 2000-04 period

compared with the 1992-96 period

Performance Change in Changes in 2000-24 ranking based

Co-op category performance performance on EVI using basic

code 2000-04 category indices (EVIs)1 interest rate+10%2

13 V same - 1st (+/-)

1 V same + 2nd (+)

3 V up 1 level + 3rd (+)

2 V up 1 level + 4th (+)

14 V same - 5th (+)

15 V same - 6th (-)

4 V up 3 levels + 7th (+)

5 IV up 1 level + 8th (+)

16 IV down 1 level - 9th (-)

10 III up 1 level + 10th (+)

8 III up 1 level + 11th (+)

17 III down 2 levels - 12th (-)

6 III same + 13th (+)

7 II up 2 levels + 14th (+)

19 III same - 15th (-)

18 III down 1 level - 16th (-)

9 III up 1 level + 17th (+)

20 III same - 18th (-)

12 III up 1 level mixed 19th (-)

11 II same + 20th (-)

21 I down 2 levels - 21st (-)

1“+” means a cooperative's EVIs were more positive, changed from negative to positive, or became less negative in the 2000-04 period as

compared to 1992-96 period. “-” means the opposite.

2Next to the rank, (+) means the cooperative's ranking improved from the 1992-96 period to the 2000-04 period, while (-) means the ranking

dropped. (+/-) means no change.
The performance of the four surviving cooperatives was compared to that of the corre s p o n d i n g

g roupings of the predecessor cooperatives. Three out

of the four surviving cooperatives actually did perform better than the sum of their respective pre d e c e ssor counterparts. They either stayed in the same performance category or climbed to a higher

performance category. Their performance indexes

showed improvements between the two time periods.

And their rankings were all better in the second perio d .

Did Size Matter?

One way to answer the question of whether

cooperative size affected performance is by evaluating the cooperatives as a group--by comparing the

weighted-average and simple-average performance

i n d e x e s .

The weighted-average performance indexes of

cooperatives are calculated by adding the financial

data across all cooperatives and calculating the performance indexes as if they had been one single org a n ization. Because of the weighting process, larger cooperatives (defined as cooperatives with larger amounts

of operating capital, but not necessarily cooperatives

with larger volumes of milk or larger numbers of producers) carry more weights and tend to dominate the

re s u l t s .

The simple-average performance indexes tre a t

every cooperative equally, by calculating the performance indexes of each of the 21 cooperatives and then

averaging the indexes. The simple averages give an

equal weight to each cooperative re g a rdless of size.

No one cooperative has more weight than another to

influence the results. Furthermore, 21 is a larg e

enough pool of cooperatives that one, or even a few,

cooperatives' performance cannot overwhelm the re s t .

If the weighted-average performance indexes

show that the cooperatives as a group performed better than indicated by the simple averages, it may be

i n f e r red that larger cooperatives used operating capital better than smaller ones, and vice-versa.

Weighted averages--Combining the 21 dairy

cooperatives as if one single entity, the return on equity would be 10 percent in 1992 (annual weighted average, ). The returns on equity for the other years were

all in double digits, except in 2004, when the re t u r n

was 9.6 perc e n t .

The average return on equity during the first

period (1992-96) was 13.1 percent, while it was 10.9

p e rcent for the second period (2000-04).

The net savings of the group was able to pay for

the opportunity cost of using equity capital at the

basic interest rate. This savings generated an extra

value that was 2.4 percent of the combined net operating capital in 1992 (EVI was 2.4 percent, table 8). All

EVIs using the basic interest rates as the opportunity

costs were positive during the 10 years of this study,

with the first period having an average EVI of 4.9

p e rcent and the second period, 2.7 perc e n t .

If the opportunity cost of using equity capital

had a risk premium of 5 percent above the basic rate,

then the group was not able to cover the cost of using

the equity capital in 1992 (when EVI was -0.7 perc e n t )

or in 2004 (when EVI was -0.5). EVI was positive for

the other 8 years. The average EVI for the first period

was 1.4 percent and 0 for the second period.

The combined net savings of the cooperatives

was not able to cover the opportunity cost of using

equity capital plus the 10 percent risk premium during

any of the 10 years. EVIs were all negative. The 5-year

average EVI for the first period was -2 percent, while

the second period average was -2.7 perc e n t .

Judged as if one single group, the 21 cooperatives

did not perform as well in the second period as in the

first period. The return on equity decreased 2.2 percentage points from 1992-96 to 2000-04, and the thre e

EVIs also declined, re s p e c t i v e l y, by 2.1, 1.4 and 0.7 percentage points (table 8). This occurred as the equity

s h a re of operating capital was reduced by 14 perc e n tage points and the cooperatives as a group relied proportionately more on debts to finance their operations.

Simple averages--By averaging the individual

performance of the 21 dairy cooperatives, the 5-year

average return on equity was 16.8 percent during the

first period (1992-96) and decreased to 14.3 perc e n t

during the second period (2000-04).

The average EVI at the basic interest rate was 7.3

p e rcent in 1992 (table 9). All average EVIs at the basic

i n t e rest rates were positive during the 10 years, averaging 8.3 percent for the first period and 8.1 perc e n t

for the second.

If the opportunity cost of using equity capital

had a risk premium of 5 percent above the basic rate,

average EVIs were still positive for all 10 years. The

average EVIs, re s p e c t i v e l y, for the two 5-year periods,

w e re 4.5 percent and 4.4 perc e n t .

H o w e v e r, if the risk premium was 10 perc e n t

above the basic interest rate, the results were mixed.

12
The EVIs were positive for some years, but negative

for others. The 5-year average EVI was 0.8 percent for

both periods.

The three average EVIs that were calculated at

the respective interest rates changed very little fro m

the first 5-year period to the most recent (table 9),

suggesting that the performance of the cooperatives

b a rely changed. So, while the average return on equity declined in recent years, the extra-value indexes

show that the efficiency in using operating capital

remained largely unchanged.

The average equity share of operating capital

also changed little between the two periods, decre a sing by only 3 percentage points (table 9). The dairy

cooperatives on average seemed to maintain their

equity close to a level that is proportional to the

re q u i rement of operating capital.

So, did size matter? Comparisons between

weighted-average performance indexes and simple

averages highlight the performance of larger cooperatives relative to the rest. All weighted-average performance indexes were lower than the corre s p o n d i n g

simple averages, suggesting that some of the larg e r

cooperatives did not perform as well as the rest of the

cooperatives in either period (tables 8 and 9). Some of

the larger cooperatives also relied less on equity and

m o re on debt than smaller ones to finance their operations--as shown by the diff e rences between the

weighted-average equity shares of operating capital

and the simple averages.

The returns on equity, either weighted average or

simple average, dipped by similar proportions fro m

the first period to the second. This seems to indicate

that the profitability of larger and smaller cooperatives

declined by about the same proportion. But notice that

the weighted-average equity share of operating capital

declined 14 percentage points between the two periods, while the simple average decreased only 3 percentage points. Appare n t l y, some of the larger cooperatives relied far more heavily on debt and less on

equity to finance their operations in the second period

and thus enhanced the return on equity. Otherwise, the

weighted-average return on equity would have shown

steeper decline than the simple average in the second

period. (This is another example of why return on

equity is not a reliable performance measure . )

In terms of operating eff i c i e n c y, while the weighted-average EVIs show that the cooperatives as a gro u p

did not perform as well in the second period as in the

first period, the simple-average EVIs indicate that the

13

Table 8—Performance of 21 dairy cooperatives as a group, annual weighted averages

Equity share

Return on EVI EVI EVI of operating

Year equity (i=basic) (i=basic+5%) (i=basic+10%) capital

Percent

1992 10.0 2.4 (0.7) (3.8) 62

1993 12.7 4.8 1.2 (2.3) 71

1994 15.1 4.8 1.2 (2.3) 71

1995 12.8 6.2 2.8 (0.6) 69

1996 14.8 6.1 2.6 (0.8) 69

___ ___ ___ ____ __

Average1 13.1 4.9 1.4 (2.0) 68

2000 11.8 3.5 0.5 (2.5) 60

2001 11.2 2.7 0.1 (2.5) 52

2002 11.1 2.8 0.0 (2.7) 55

2003 10.8 2.6 0.0 (2.5) 51

2004 9.6 2.1 (0.5) (3.1) 52

___ ___ ___ ____ __

Average1 10.9 2.7 0.0 (2.7) 54

Change (2.2) (2.1) (1.4) (0.7) (14)

1Five-year simple average.
average performance barely changed between the two

periods. This implies that some of the larger cooperatives did not perform as well in the second period as in

the first period. But the rest of the cooperatives, on

average, maintained their level of efficiency in using

operating capital.

The comparisons in this section offer some interesting general observations. But without pre s e n t i n g

individual cooperatives' data, it is difficult to make a

definitive conclusion about cooperative size and performance. Suffice it to say that some of the larg e r

cooperatives did not perform as well as other cooperatives, that the performance of some of the larg e r

cooperatives (not necessarily the same ones) slipped

over time, and that some of the larger cooperatives

relied proportionately less and less on member equity

for financing operations.

Conclusion: No Substitute for Board and

Member Vi g i l a n c e

The extra-value approach is a useful tool for

m e m b e r- p roducers to evaluate the performance of

their cooperative:

● Extra value measures whether and by how

much the cooperative's net savings exceeds the

opportunity cost of member equity.

● Extra-value index measures the rate at which

the extra value is generated given the operating

capital used in the cooperative's operations.

● Being scale-neutral and mode-neutral, the extravalue index is an objective and definitive tool

for comparing performance over time and

among cooperatives.

H o w e v e r, a cooperative is a membership org a n ization as well as a business entity. It has to achieve its

business goals, but also has to satisfy its members'

objectives. Besides expecting good returns by marketing milk through the cooperative as an assured market, dairy farmers also look to the cooperative to provide field and other services (e.g., assist with

p roduction problems, assist with inspection pro blems, sell milking supplies and equipment, pro v i d e

information on price and availability of hay and

heifer replacements, provide marketing and outlook

information, provide insurance programs (life,

health, disaster), provide re t i rement programs, negotiate hauling rates, collect and ensure payment fro m

buyers, check weights and tests, re p resent members'

i n t e rests in government, regulatory and public

a ffairs, and so on). The returns of providing such

member services may not be fully measurable and

thus may not be fully reflected in the financial statements. The extra-value index, like any other financial

14

Table 9—Performance of 21 dairy cooperatives as a group, annual simple averages

Equity share

Return on EVI EVI EVI of operating

Year equity (i=basic) (i=basic+5%) (i=basic+10%) capital

----------------------------------------------------Percent----------------------------------------------------

1992 13.7 7.3 3.5 (0.3) 75

1993 17.4 10.4 6.6 2.7 77

1994 16.7 6.5 2.7 (1.2) 76

1995 16.9 8.2 4.5 0.8 76

1996 19.2 9.3 5.5 1.7 76

___ ___ ___ ___ __

Average1 16.8 8.3 4.5 0.8 76

2000 15.5 6.8 3.0 (0.7) 75

2001 15.8 9.5 5.9 2.2 73

2002 14.2 9.4 5.8 2.2 72

2003 11.0 6.3 2.7 (0.9) 72

2004 14.8 8.4 4.8 1.2 72

___ ___ ___ ___ __

Average1 14.3 8.1 4.4 0.8 73

Change (2.5) (0.3) (0.1) 0.0 (3)

1Five-year simple average.
ratios, does not capture the value of member benefits

that are not quantified. The board and members

should be cognizant of the value of such benefits in

addition to financial returns, when evaluating their

cooperative's performance.

In a dairy cooperative, the distinction between

milk pay prices and premiums on the one hand and

p rofits on the other is not clear-cut. If a dairy cooperative pays members high prices and premiums for

milk, it may report low margins, or even incur losses.

On the other hand, a cooperative may pay lower milk

prices and report hefty margins. The two cooperatives

may perform equally well, although their financial

results show otherwise. However, if milk pro c u rement is competitive, this consideration may have only

minimal, or no, effect. The board and members

should take their cooperative's pricing policies into

consideration in evaluating its performance.

The opportunity cost (including risk pre m i u m )

of equity capital is specific to each individual cooperative, which most likely is diff e rent from the intere s t

rates used in this report. Also, each member's financial situation may be diff e rent and their opportunity

cost of capital may vary from one to another. The

b o a rdand the members are in the best position to

judge the most re p resentative interest rates to use in

the extra-value calculation.

The extra-value approach is a worthwhile tool

that furnishes some objectivity in evaluating cooperative performance. In the end, what really counts is

how satisfied the member- p roducers are with the

cooperative. There is no substitute for a wellinformed membership and a vigilant board that

understands the complexity of operating a cooperative, both as a business and as a membership org a n ization, to adequately oversee and evaluate its operat i o n s .

This report applies the extra-value approach to

dairy cooperatives as an example. The appro a c h

should be equally applicable to cooperatives marketing other commodities. For comparing the performance of cooperatives across commodities, however,

c a re should be taken to consider the characteristics of

the various commodity sectors. (For example, the

amount of operating capital re q u i red to market a unit

of one commodity may be very diff e rent from that

re q u i red for another commodity, and the margins on

sales also may be diff e rent.) Although the extra-value

index is scale-neutral and mode-neutral, it may, or

may not, be commodity-neutral because of the characteristics of the respective sectors.

R e f e r e n c e s

Davis, Evan, C. Gouzouli, M. Spence, and J. Star.

“Measuring the Performance of Banks,” B u s i n e s s

Strategy Review, Autumn 1993, Vol. 4, No. 3.

Ling, K. Charles and Carolyn Liebrand. A New

A p p roach to Measuring Dairy Cooperative

P e r f o r m a n c e, Research Report 166, Rural BusinessCooperative Service, U.S. Department of Agriculture ,

September 1998.

The British Bankers' Association. Historic Libor Rates,

h t t p : / / w w w. b b a . o rg . u k / p u b l i c / l i b o r / .

15
U.S. Department of Agriculture

Rural Business–Cooperative Service

Stop 3250

Washington, D.C. 20250-3250

Rural Business–Cooperative Service (RBS) provides research,

management, and educational assistance to cooperatives to

strengthen the economic position of farmers and other rural

residents. It works directly with cooperative leaders and

Federal and State agencies to improve organization,

leadership, and operation of cooperatives and to give guidance

to further development.

The cooperative segment of RBS (1) helps farmers and other

rural residents develop cooperatives to obtain supplies and

services at lower cost and to get better prices for products they

sell; (2) advises rural residents on developing existing

resources through cooperative action to enhance rural living;

(3) helps cooperatives improve services and operating

efficiency; (4) informs members, directors, employees, and the

public on how cooperatives work and benefit their members

and their communities; and (5) encourages international

cooperative programs. RBS also publishes research and

educational materials and issues Rural Cooperatives magazine.

The U.S. Department of Agriculture (USDA) prohibits

discrimination in all its programs and activities on the basis of

race, color, national origin, age, disability, and where

applicable, sex, marital status, familial status, parental status,

religion, sexual orientation, genetic information, political

beliefs, reprisal, or because all or a part of an individual's

income is derived from any public assistance program. (Not all

prohibited bases apply to all programs.) Persons with

disabilities who require alternative means for communication

of program information (Braille, large print, audiotape, etc.)

should contact USDA's TARGET Center at (202) 720-2600

(voice and TDD). 

To file a complaint of discrimination write to USDA, Director,

Office of Civil Rights, 1400 Independence Avenue, S.W.,

Washington, D.C. 20250-9410 or call (800) 795-3272 (voice) or

(202) 720-6382 (TDD). USDA is an equal opportunity provider

and employer.