Rural Business and

Cooperative

Programs

Research

Report 213

Measuring the Performance of

Agricultural Cooperatives

Measuring the Performance of
Abstract Extra value is calculated for 65 agricultural cooperatives by subtracting an interest

charge on equity from net savings and also expressed as a percentage of operating

capital. Cooperative performance is examined by type of agricultural cooperative—

cotton, dairy, farm supply, fruit and vegetable, grain, sugar, and other—for 1992-96

and 2000-04. At least one cooperative of each type (except for sugar cooperatives)

was able to show positive extra value when equity was assigned a charge 10 percent

above the basic rate, while there were cooperatives of each type that showed negative

extra value at the basic charge for member capital. Dairy cooperatives represented

one-half of the top performers, while fruit and vegetable cooperatives represented onehalf of those with negative extra value in both time periods. Results showed that cooperatives of all types can be very able performers but that some cooperatives may not

be fully rewarding members for the use of their equity.

Key words: Extra value, extra-value index, cooperative, cotton, dairy, farm supply, fruit

and vegetable, grain, sugar, performance.

Measuring the Performance of Agricultural Cooperatives

Carolyn Betts Liebrand

USDA Rural Development

Rural Business and Cooperative Programs

Research Report 213

December 2007

Cover illustration from photo by Bruce Campbell
Preface In response to inquiries concerning objective evaluation of the performance of cooperatives and cooperative management, an alternative method for cooperative members

to evaluate cooperative performance was introduced in previous USDA Rural

Development Cooperative Programs' research reports 166 and 212 and applied to

dairy cooperatives. This extra value method was developed because the conventional

measures of financial performance—return on equity, return on assets, return on operating capital, net margins on sales, net margins per unit, and so forth—do not yield

unequivocal results. In addition, whereas the value of a company's stock may be used

as a proxy for the company's performance and market value, cooperatives do not have

stock exchange prices for an evaluation tool.

The previous reports calculated extra value indexes for dairy cooperatives and showed

that this measure is an objective and definitive tool for comparing cooperative performance in creating value for member-producers. Therefore, this report extends the

analysis by calculating the extra value index for agricultural cooperatives of all types.

Only cooperatives that were on Cooperative Programs’ “Top 100” list and for which

there were sufficient data for the years considered were included. Sixty-five agricultural

cooperatives met the criteria. The set of dairy cooperatives included in this study differs somewhat from the set of dairy cooperatives evaluated in Research Reports 166

and 212. Financial data for individual cooperatives are not disclosed.

The author wishes to recognize K. Charles Ling for his assistance in this project.

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Contents Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i

Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv

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

Measuring Extra Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Performance Categories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Rankings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Group Averages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Appendix Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

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Highlights The task of measuring the financial performance of cooperatives is made problematic

by the attributes of the cooperative form of business. Most of the commonly used

financial measures give an incomplete picture of a cooperative's performance.

However, the extra value approach used in this report enables a cooperative's use of

member-supplied funds to be fully measured—whether member capital is earning

more, or less, than it could in alternative investments. The value a cooperative generates over and above its expenses, including an opportunity cost for its equity capital, is

termed “extra value.” A positive extra value indicates that a cooperative has created

value by its operations, while a negative extra value means that a cooperative has

actually diminished the value of members' investment.

Extra value is measured by subtracting an interest charge on equity capital from net

savings. Three different interest rates are used for the charge on equity. The

December average British Banker's Association's London Inter-Bank Offered Rate

(Libor) plus 200 basis points provides the basic reference rate. This Libor + 2 “basic”

rate represents the commonly held opinion that banks in the United States will generally extend loans to a firm with a better-than-average credit rating, at an interest rate of

about 200 basis points above the Libor. Extra value was also calculated at two higher

rates, the basic rate plus 5 percentage points and the basic rate plus 10 percentage

points, to reflect a range of risk premiums because investors consider equity investment riskier than debt.

For comparisons over time and among different types of cooperatives, extra value is

expressed as a percentage of operating capital. This common-sized index is thus

scale- and operating mode-neutral.

Extra value was calculated for 65 cooperatives that had been on USDA's top 100

cooperatives (based on revenue) list for at least 4 years in each of two 5-year time

periods—1992 through 1996 and 2000 through 2004. Looking at these two time periods allows for an examination of how cooperative performance progressed over time.

Additionally, averaging over multiple years should have helped minimize the impact of

extraordinary factors on results.

Performance was categorized into 5 groups according to the cooperatives' return on

equity and extra value generated at the three different interest rates:

I—Negative returns. Cooperatives in this group had a negative average return on

equity for the 5-year period.

II—Positive return on equity, but no extra value generated. These cooperatives

averaged positive return on equity for the 5-year period, but showed a negative extra

value when the basic rate was charged for equity capital.

III—Extra value generated at a basic interest charge for equity. These cooperatives were adding sufficient value through their operations to cover the opportunity

cost of member-supplied capital at a rate similar to what they would have had to pay

for debt capital.

IV—Extra value generated with a moderate risk premium on equity capital.

Cooperatives in this group showed positive average extra value when interest on

equity was charged at a 5-percent premium over the basic rate.

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V—Extra value generated with a higher risk premium charge for equity.

Cooperatives in this category were able to average positive extra value for the 5-year

period when applying a 10-percent risk premium (over the basic rate) to reflect the

historic risk premium for equity investment.

More cooperatives showed positive extra value (category III, IV, or V) in the second

time period (46 cooperatives) than in the first (39 cooperatives). The different types of

cooperatives followed suit, with the exception of the farm supply cooperatives where

there were two fewer cooperatives with positive extra value at any interest charge for

equity in the second time period. For 2000-04, all of the cotton cooperatives showed

positive extra value and over 80 percent of the grain and dairy cooperatives generated

extra value. A majority of the other types of cooperatives generated positive extra

value in the second time period.

Five cooperatives showed consistent and strong performance—generating extra value

with a 10-percent risk premium added to the basic charge for equity capital in both

time periods (category V). Three of these high-performers were dairy cooperatives.

Furthermore, except for farm supply cooperatives, cooperatives of each type were

found in the highest performance categories—IV and V, in 2000-04. This indicates that

a range of agricultural cooperatives is capable of performing admirably, regardless of

the product they may handle.

On the other hand, with the exception of cotton cooperatives, at least one cooperative

of each type failed to generate sufficient value to cover a basic charge for the use of

their members' equity. However, fewer cooperatives of each type (except for farm supply cooperatives) lost value in the second time period as compared to the first. In fact,

farm supply cooperatives were the only type where a majority dropped in performance

category between 1992-96 and 2000-04.

The 65 cooperatives were ranked according to return on equity and by their extra

value index at the three different interest charges. At the basic rate plus 10 percent

rate, four of the 16 dairy cooperatives ranked in the top 10 in 2000-04. Just three cotton cooperatives were represented in the sample, two of which were in the top 10 in

2000-04. At the same time, a dairy cooperative showed the largest drop in rank

between the two time periods among the 65 cooperatives and a cotton cooperative

showed the second largest drop. Just one dairy cooperative was among the bottom 10

in rank—at the basic plus 10 percent rate.

Only two of the 9 farm supply cooperatives showed an improvement in rank between

1992-96 and 2000-04. Two other farm supply cooperatives ranked in the bottom 10,

while none were in the top 10, for 2000-04 at the basic plus 10 percent rate.

The highest ranking and lowest ranking cooperatives were fruit or vegetable co-ops. At

the same time, nearly three times as many fruit and vegetable cooperatives rose in

rank as declined in rank between 1992-96 and 2000-04. In contrast, a majority of the

other types of cooperatives fell in rank.

There was one grain cooperative in the top 10 for 2000-04, with two grain cooperatives

ranking in the bottom 10. Sugar cooperatives were the only type not to have a cooperative in the top 10 in either time period. One of the other cooperatives (diversified, rice,

poultry, or livestock) showed the largest rise in rank of the 65 study cooperatives, landv
ing in the top 10 for Extra Value Index (EVI)—up from the bottom 10 in the first time

period.

The results of this analysis show that at least one of each type of cooperative (with the

exception of sugar cooperatives) in at least one of the two 5-year time periods considered, was able to add value sufficient to reward members for the use of their capital at

a rate akin to the historic return to equity capital. Conversely, there were also cooperatives of every type that could not cover a basic charge for the use of member capital in

at least one time period. Furthermore, for dairy, fruit and vegetable, and grain cooperatives, performances ranged from category I to category V.

The rankings allow cooperative performance to be judged relative to each other's performance. While all the cooperatives operated in the same general economic conditions of each time period, some saw their performance improve, while others’ worsened between the two periods.

Several factors (such as a cooperative’s pricing policies or the value of intangible

cooperative benefits) are elusive to quantify and thus are not reflected in the various

financial performance measures, including the extra value measure.

The exercise of measuring cooperative performance by the extra value method tells us

that cooperatives of all types can be very able performers but that some cooperatives

may not be fully rewarding members for the use of their equity.

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Measuring the Performance of Agricultural

Cooperatives

Carolyn Betts Liebrand

Rural Development

Rural Business-Cooperative Service/USDA

Introduction

The task of measuring the financial performance

of cooperatives is made problematic by the nature of

the cooperative form of business. In particular, many

of the commonly used financial measures (return on

equity, return on assets, net margins on sales, net margins per hundredweight of milk, and so forth) do not

account for the cost of using members' equity in

financing a cooperative's operations. Furthermore,

cooperatives do not have a stock market valuation to

offer a timely reflection of the value of the cooperative

as a proxy for its performance (Ling 2006). As a result,

members' ability to judge their cooperative's performance is incomplete. However, members need to be

able to fully evaluate their cooperative's performance.

The more complete the measure of cooperative performance, the better equipped the board is to guide the

cooperative and to evaluate and reward cooperative

managers.

The relative use of equity versus debt impacts the

common performance measures in different ways.

(This is illustrated in Table 1 where two hypothetical

cooperatives are compared. Cooperatives A and B are

assumed to be alike in every wayÑexcept for the

degree to which they use member equity.) For example, two measuresÑnet margins and return to equityÑ

are impacted in opposite fashion by the relative use of

debt and equity. A given cooperative with relatively

higher use of debt will have higher interest expense

and therefore lower net margins. At the same time, the

relatively lower use of equity would result in a proportionately higher return on equity. In contrast, if the

cooperative were to use relatively less debt and more

equity, the reverse would be true.

Thus, one shortcoming of the financial performance measures frequently used is that equity is considered ÒfreeÓ capital by these ratios. But equity does

indeed have a cost associated with itÑit's just not one

paid out with a line item on the operating statement.

The cost is the potential earnings forgone by not making an alternative investment, known as the Òopportunity costÓ of making one investment over another. If

members' capital was not committed to the cooperative, they could invest it elsewhere. The rate that members could realize in alternative investments is one

way to reflect the cost of the cooperative's use of their

capital.

A measure that takes into account the cost of

member equity was introduced in USDA's Research

Report 166 and further refined and simplified in

Research Report 212. In both reports, this measure of

cooperative performanceÑcalled extra valueÑwas

applied to evaluate dairy cooperative performance.

This report extends the application of this extra value

measure to all types of agricultural cooperatives.

Measuring Extra Value

The extra value approach used in this report follows the concepts embodied by the extra value measure developed by USDA Rural Development

Cooperative Programs staff (Ling 1998 and 2006).

Members can evaluate their cooperatives' use of member-supplied fundsÑwhether their capital is earning

more, or less, than it could in alternative investments.

A positive extra value indicates that a cooperative has

created value by its operations, while a negative extra

value means that a cooperative has actually diminished the value of members' investment.

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For the two cooperatives that hypothetically differ only in their relative use of debt and equity, Table 1

illustrates how they generate equal extra value,

regardless of the way they were financed. While the

common financial measures yield different results for

Cooperatives A and B, the extra value these two cooperatives generate turns out to be identical. Thus these

two cooperativesÕ operations each generated $32,000 in

value above the cost of all their inputs, including a

cost for using member capital.

Alternatively, if the appropriate charge for capital

(both debt and equity) was higher, neither Cooperative

A nor B created enough value to cover their total costs.

Both cooperativesÕ operations decresed value by 

$18, 400.

While the sterile example in Table 1 serves its

purpose in showing the strength of the extra value

measure in theory, in reality, no two cooperatives are

alike. To begin with, agricultural cooperatives vary

dramatically in size and scope. Some market raw commodities, such as grain, while others provide producers supplies for the farming operations, and others

provide both. Some are narrowly focused while others

engage in a variety of enterprises. In addition, some

may perform basic marketing functions while others

engage in further processing, manufacturing, supply2

Table 1—Comparison of two cooperative using a variety of performance measures

Cooperative A Cooperative B Comparison

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

Operating Capital 560,000 560,000 =

—financed by debt 60,000 310,000 A<B

—financed by equity 500,000 250,000 A>B

Sales 5,000,000 5,000,000 =

COGS 4,500,000 4,500,000 =

Gross margin 500,000 500,000 =

Operating Cost 440,000 440,000 =

Operating margin 60,000 60,000 =

Cost of debt 5.0% 5.0% =

Interest on debt 3,000 15,500 A<B

Net savings 57,000 44,500 A>B

Return on equity 11.4% 17.8% A<B

Return on operating capital 10.2% 7.9% A>B

Return on assets 5.7% 4.5% A>B

Net margins on sales 1.1% 0.9% A>B

Charge for equity 5.0% 5.0% =

Interest on equity 25,000 12,500 A>B

__________________________________________________________________________________________________

Extra Value 32,000 32,000 =

Extra value index 5.7% 5.7% =

__________________________________________________________________________________________________

Cost of debt 14.0% 14.0% =

Interest on debt 8,400 43,400 A<B

Net savings 51,600 16,600 A>B

Return on equity 10.3% 6.6% A>B

Return on operating capital 9.2% 3.0% A>B

Return on assets 5.2% 1.7% A>B

Net margins on sales 1.0% 0.3% A>B

Charge for equity 14.0% 14.0% =

Interest on equity 70,000 35,000 A>B

_______________________________________________________________________________________________

Extra Value (18,400) (18,400) =

Extra value index -3.3% -3.3% =

__________________________________________________________________________________________________
ing branded products to retail markets, and so forth. It

goes without saying that the diverse nature of operations will require different levels of capital usage.

One way to neutralize the effect of this diversity

of cooperative structures and operations is to express

extra value as a ratio. Extra value divided by the cooperative's operating capital indicates the rate at which a

cooperative is creating extra value. Operating capital

represents the financial resources available to cooperative management to run the business.

Thus from our example, despite differences in

capital structure (with all other things being equal),

both Cooperative A and B created value at a rate of 5.7

percent when interest on debt and equity is 5.0 percent. However, if the appropriate interest charge for

debt and equity is 14.0 percent, each cooperative's

value is reduced at a rate of 3.3 cents per dollar of

operating capital.

Extra value can be calculated from the information commonly found in cooperatives' financial statements. The only item that won't be found on standard

financial statements is an interest charge for equity.

Thus, the charge for equity capital must be assumed

for calculating extra value. Furthermore, a representative interest rate paid by each cooperative for its debt

capital may be difficult to arrive at due to the wide

range of financing arrangements in and among cooperatives, depending on their particular situation with

each creditor and/or debt instrument. However, for

this extra value calculation, there is no need to determine a rate for the cost of debt capital since the cost of

debt is reflected in operating expenses and subsequently, net savings. In this way, the extra value measure allows a cooperative's particular situation in debt

markets to be preserved. Each cooperative may face a

unique charge for its debt due to the nature of its operations, its past performance, and the particular

arrangements it secures with available creditors,

among other things. This method follows the revised

calculation used by the creators of the value added

measure in subsequent research (Davis 1993).

Additionally, for any interest-bearing equity, the

charge paid out would also be reflected in expenses

and thus this equity would not need to be included in

the extra value calculations as Òmember equity. Ó

The Extra Value calculations are as follows:

Extra Value = Net savings - Interest on Equity

Interest on equity = member equity x interest

rate for equity

Extra Value Index = Extra Value / Operating Capital x 100

Operating capital = fixed assets + net working capital

Fixed assets = non-current assets

Net working capital = current assets minus current liabilities

Data

USDA annually publishes a summary of the

financial performance of the 100 largest (based on

gross sales) agricultural cooperatives. These are not

necessarily the most profitable, just the largest in terms

of sales. Agricultural cooperatives that had financial

information in this USDA database for at least 4 years

in each of the two 5-year time periods: 1992 through

1996 and 2000 through 2004, were included in this

analysis (Table 2). Looking at these two time periods

allows for an examination of how cooperative performance progressed over time. Cooperatives that were

on the Top 100 list, but had data missing for more than

one year in either of the 5-year periods were not

included. Averaging over 5-year time periods (or 4

years in select cases: one cooperative in the first time

period and 12 cooperatives in the second) should have

helped to minimize the impact of extraordinary factors

on results.

Table 3 shows how the study cooperatives in 2004

compared with the top 100 cooperatives of 2004. In

numbers, they represented 65 percent of the top 100

cooperatives. Their combined total assets made up 60

percent of 2004's top 100 cooperatives' assets, while

their net savings only came to 50 percent. Thus, the

study cooperatives as a group had proportionately

smaller total assets and net returns than the 100 top

cooperatives. Furthermore, they appeared to be lower

earners as a group, representing just 46 percent of the

extra value generated by the top 100 in 2004 when a 5-

percent interest charge is made for equity capital.

(Note that the extra values in Table 3 reflect weightedaverages for the two groups of cooperatives.)

The cooperatives were grouped into 7 general

typesÑcotton, dairy, farm supply, fruit and vegetable,

grain, sugar, and ÒotherÓ cooperatives, according to

their main source of revenue. The few diversified

(where both marketing and supply operations generate significant revenues) rice, poultry, and livestock

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4

Table 2—Agricultural cooperatives included in the study

Cotton______ ___3 Fruit and Vegetables________15

Calcot, Ltd. Blue Diamoond Growers

Plains Cotton Cooperative Cherry Central Cooperative

Staple Cotton Cooperative Citrus World, Inc.

Diamond Walnut Growers

Knouse Foods Cooperative

National Grape Cooperative

Dairy_______ __16 Naturipe Berry Growers

Agri-Mark, Inc. Norpac Foods, Inc.

Alto Dairy Cooperative Ocean Spray Cranberry

Associated Milk Producers, Inc. Pacific Coast Producers

Cass-Clay Creamery Saticoy Lemon Association

Dairylea Cooperative Sunkist Growers, Inc.

DARIGOLD/Northwest Dairy Assoc. Sun-Maid Growers

First District Association Sunsweet Growers

Md. & Va. M.P. Tree Top, Inc.

Michigan Milk Producers

O-AT-KA Milk Producers

Prairie Farms Dairy Grain____________________13

St. Albans Cooperative Ag Processing, Inc.

Swiss Valley Farms Aurora Cooperative

Tillamook County Creamery Champaign Landmark

United Dairymen of Arizona Cooperative Elevator

Upstate Milk Cooperative Farmers Cooperative

Farmers Grain Terminal

Frenchman Valley

Farm Supply___ _9 Harvest Land Cooperative

CF Industries, Inc. Heartland Cooperative

Farm Service Cooperative Pendleton Grain

Fruit Growers Supply Ray-Carroll Co.

Growmark, Inc. South Dakota Wheat

Intermountain Farmers West Central Coopertive

MFA Incorporated

MFA Oil Company “Other”____________________6

Tennessee Farmer

Universal Cooperative Alabama Farmers (Diversified)

Equity Cooperative (Livestock)

Farmers’ Rice Cooperative (Rice)

Gold Kist, Inc. (Diversified)

Land O'Lakes, Inc. (Diversified)

Producers Rice Mill (Rice)

Sugar_____________________3

American Crystal

Minn-Dak Farmers

Southern Minnesota Beet Sugar

Total 65
cooperatives in the data set were combined in the

ÒotherÓ category. The fruit and vegetable group contains cooperatives that focus on a specific set of fruits

or of vegetables. Farm supply cooperatives are organized to secure the inputs farmers need in their farming operations; however, many cooperatives whose

main business is marketing a specific commodity also

sell farming inputs to members. In particular, most

grain marketing cooperatives also sell fertilizer, fuel,

and/or offer agronomy services. Some dairy cooperatives, whose main line of business is marketing their

members' milk, also sell dairy feed and other dairy

and farming supplies, but these sales represent only a

small portion of total sales.

The study cooperatives differed somewhat from

the types of cooperatives on the top 100 cooperatives

list in 2004. The study cooperatives had proportionately fewer grain cooperatives than those on the top 100

list (20 percent versus 35 percent), and relatively more

fruit and vegetable cooperatives (23 percent versus 14

percent). Keep in mind that the specific cooperatives

on the top 100 list change from year to year, whereas

the study cooperatives were the same set of cooperatives for all the years studied.

Interest Rates

Key to calculating extra value for each cooperative is the charge that has to be assigned for the use of

member equity in cooperative operations.

Theoretically, a charge equal to the interest rate a cooperative pays for its debt capital would represent an

Òopportunity costÓ for the equity used by that cooper5

Table 3—Extra value estimates for Top 100 cooperatives and study group of cooperatives, 2004

Study

Study cooperatives:

Top 100 cooperatives1 Top 100

Number Share

Cooperatives 100 65 65%

Million dollars

Total assets 25,104 15,143 60%

Operating Capital 15,527 9,480 61%

—financed by debt2 9,982 6,020 60%

—financed by equity 5,545 3,460 62%

Diff.

Net savings 1,155 573 50% (%-age

points)

Return on equity 12.9% 10.4% -2.5

Return on operating capital 7.4% 6.0% -1.4

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Imputed charge for equity 5.0% 5.0%

Extra Value 878 400 46%

Extra value index 5.7% 4.2% -1.4

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Imputed charge for equity 10% 10%

Extra Value 601 227 38%

Extra value index 3.9% 2.4% -1.4

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Imputed charge for equity 15% 15%

Extra Value 323 54 17%

Extra Value Index 2.1% 0.6% -1.5

1 Weighted average

2 Includes minority interest in subsidiaries

SOURCE: Chesnick, USDA
ative (Ling 2006). In other words, if a cooperative

doesnÕt use members' capital, it would have to pay

another entity for capital with which to run the cooperative. Thus, the cost of member equity to the cooperative could be valued at what it would have to pay to

secure the capital from another source.

Therefore, this report uses the same charge for

capital that was used in previous applications of the

extra value measureÑthe ÒLibor + 2.Ó This rate is each

year's December average British Banker's Association's

London Inter-Bank Offered Rate (BBA Libor for U.S.

dollar loans with a 12-month maturity) plus 200 basis

points. Libor + 2 represents the commonly held opinion that 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 (hence it is termed the Òbasic rateÓ in

the following analysis). This rate is applied across all

cooperatives on the member capital they use and is a

consistent and simple way to account for the basic cost

of member equity (see table 4 for the rates used).

But, the real question may be: What is the rate at

which members would be comfortable investing their

capital in the cooperative as opposed to some other

investment? This is the opportunity cost to the member supplying the capital. It is commonly held that

equity is riskier for the investor than debt is for lending institutions. Finance academics have noticed that,

historically, the return to equity capital has averaged

about 9 percent above the rate of return to debt-holders (Davis 1993). Other business analysts noted in the

early 1990s that stockholders have received an average

return that was six percentage points above long-term

government bonds, noting that the rate was higher for

more volatile stocks and lower for more stable stocks

(Tully). Therefore, following the methodology presented in Research Report 212, extra value is calculated in

this analysis at the basic rate, as well as basic rate plus

5 percent and basic rate plus 10 percent to indicate performance for a spectrum of risk levels.

All three rates reflect valid considerations of the

cost of equity capital. The basic rate (LIBOR plus 2 percent) reflects the opportunity cost to the cooperative

for using equity capital as opposed to debt capital. The

ÒBasic + 5Ó and the ÒBasic +10Ó rates reflect two levels

of members' risk premiums.

Results

Individual cooperative data cannot be revealed

by USDA; thus, the results are presented in the form of

performance category and rank among the group of

cooperatives. The cooperative codes, do, however,

reflect the nature of the cooperative operations. The

cooperative codes beginning with ÒCÓ are cotton cooperatives, ÒDÓ = dairy cooperatives, ÒFSÓ = farm supply

cooperatives, ÒFVÓ = fruit and vegetable cooperatives,

6

Table 4—British Banker's Association, London Inter-Bank Offered Rate (Libor), actual over 360-day basis;

study interest charges on equity

Basic Rate Basic Rate

Libor, 12-month maturity, Basic Rate +5% risk + 10 risk

Year December average (=“Libor+2%”) premium premium

1992 4.1298 6.1 11.1 16.1

1993 3.7987 5.8 10.8 15.8

1994 7.5719 9.6 14.6 19.6

1995 5.5045 7.5 12.5 17.5

1996 5.7629 7.8 12.8 17.8

Simple average 7.4 12.4 17.4

2000 6.2374 8.2 13.2 18.2

2001 2.4167 4.4 9.4 14.4

2002 1.5773 3.6 8.6 13.6

2003 1.4960 3.5 8.5 13.5

2004 3.0151 5.0 10.0 15.0

Simple average 4.9 9.9 14.9
ÒGÓ = grain cooperatives, ÒOTHÓ = other types-consisting of diversified, rice, poultry and livestock cooperatives, and ÒSÓ = sugar cooperatives.

Performance categories—As in Research Report

212, performance was categorized into five groups

according to the cooperatives' return on equity and

extra value generated at the three different interest

rates. Table 5 shows the number and types of

cooperatives falling into each category for the two time

periods.

I. Negative returns. Cooperatives in this group had

a negative average return on equity for the 5-year

period. In other words, their net margins averaged below $0, and it follows that the extra value

measures also were negative. Four cooperatives

(two sugar cooperatives, a dairy, and one ÒotherÓ

cooperative) fell into this category during the

first period (1992-96). Five cooperatives (two fruit

or vegetable cooperatives, one farm supply, and

one grain cooperative) showed negative returns

in the second period (2000-04).

II. Positive return on equity, but no extra value generated. In this case, the cooperatives averaged

positive return on equity for the 5-year period.

However, they did not generate value beyond the

cost of the equity capital at the basic rate (LIBOR

+ 2 points), which means they showed a negative

extra value. In theory, if they had borrowed the

capital instead of relying on members to supply

it, their net margins would have been negative.

There were 22 cooperatives in the first time period and 14 in the second whose net margins were

insufficient to cover a basic charge for the use of

their members' capital. Only sugar cooperatives

were not represented in the first time period, and

only cotton cooperatives were not represented in

the second. Farm supply and sugar cooperatives

were the only types to show an increase in the

number of cooperatives in this category from

1992-96 to 2000-04.

III. Extra value generated at a basic interest charge

for equity. These cooperatives averaged positive

extra value over the 5-year period, even after

subtracting a basic charge for the use of member

capital. These cooperatives were adding enough

value through their operations such that they

covered the opportunity cost of member-supplied capital at a rate similar to what they would

have had to pay for debt capital (LIBOR + 2). It

goes without saying that the return on equity for

these cooperatives (and for groups IV and V) was

also positive. There were 19 cooperatives in category III in the first time period; while in 2000-04,

nearly half-again as many, 28 cooperatives, were

in this performance category. All types of cooperatives were represented in this category in each

time period, with the exception of cotton cooperatives in the first period.

IV. Extra value generated with a moderate risk premium on equity capital. Cooperatives in this

group showed positive average extra value when

interest on equity was charged at a 5-percent premium over the basic rate. Members may not view

investment in the cooperative the same as they

would an alternative investment vehicle. Instead,

they may accept a lower return on investment, in

part as a cost of cooperative membership or,

alternatively, as the value of having a cooperative

with which to do business. Yet, since the risk

associated with an equity investment is somewhat higher than a loan made by a lender, some

sort of premium over the basic rate is warranted.

The number of cooperatives in this group was

similar between the two time periodsÑeight in

the first and seven in the second. There weren't

any cotton or ÒotherÓ cooperatives in this group

for either time period. Additionally, farm supply

cooperatives were not represented for 2000-04.

There were three dairy cooperatives, two grain

cooperatives, and one fruit or vegetable cooperative in this category for each time period.

V. Extra value generated with a higher risk premium charge for equity. Cooperatives in this category were able to average positive extra value for

the 5-year period when a 10-percent risk premium was added to the basic interest charge for

equity. This is designed to reflect the opportunity

cost to members for investing their capital in the

cooperative rather than in an alternative investment (where the historic risk premium is thought

to be around 9 percent). Twelve cooperatives

were in this category in the first period, and nearly the same number, 11, in the more recent set of

years. There were five dairy cooperatives, two

cotton cooperatives, two fruit or vegetable cooperatives, one grain cooperative, and one ÒotherÓ

cooperative in this highest performing group for

7
8

Table 5—Performance of agricultural co-ops in the two 5-year periods, 1992-96 and 2000-04, by category

Performance

Category Criteria

__________________________________________________________________

Positive Positive Positive

EVI @ EVI @ EVI @

Negative Positive Basic Basic Basic 1992-96 2000-04

Group ROE ROE Rate +5% +10% average average

0 Cotton 0 Cotton

1 Dairy 1 Dairy

0 F. Supply 1 F. Supply

I X 0 Fruit & Veg 2 Fruit & Veg

0 Grain 1 Grain

1 Other 0 Other

2 Sugar 0 Sugar

4 5

1 Cotton 0 Cotton

4 Dairy 2 Dairy

2 F. Supply 3 F. Supply

II X 9 Fruit & Veg 5 Fruit & Veg

4 Grain 1 Grain

2 Other 2 Other

0 Sugar 1 Sugar

22 14

0 Cotton 1 Cotton

4 Dairy 5 Dairy

4 F. Supply 5 F. Supply

III X X 3 Fruit & Veg 5 Fruit & Veg

5 Grain 8 Grain

2 Other 3 Other

1 Sugar 1 Sugar

19 28

0 Cotton 0 Cotton

3 Dairy 3 Dairy

2 F. Supply 0 F. Supply

IV X X X 1 Fruit & Veg 1 Fruit & Veg

2 Grain 2 Grain

0 Other 0 Other

0 Sugar 1 Sugar

8 7

2 Cotton 2 Cotton

4 Dairy 5 Dairy

1 F. Supply 0 F. Supply

V X X X X 2 Fruit & Veg 2 Fruit & Veg

2 Grain 1 Grain

1 Other 1 Other

0 Sugar 0 Sugar

12 11
2000-04. Dairy cooperatives were the only types

to show an increase in the number of cooperatives in this category between 1992-96 and 2000-

04.

Overall, more cooperatives showed positive extra

value (category III, IV, or V) in the second time period

(46 cooperatives) than in the first (39 cooperatives).

The different types of cooperatives followed suit, with

the exception of the farm supply cooperatives where

there were two fewer cooperatives with positive extra

value at any interest charge for equity in the second

time period. For 2000-04, all of the cotton cooperatives

showed positive extra value, and over 80 percent of

the grain and dairy cooperatives generated extra

value. And, a majority of the other types of cooperatives generated positive extra value in the second time

period as well.

Table 6 shows the performance category of each

cooperative for the two time periods and the change in

performance category from the first period to the second, if any, for each cooperative. Five cooperatives

showed consistent and strong performanceÑgenerating extra value with a 10-percent risk premium

charged for equity capital in both time periods (category V). Three of these high performers were dairy cooperatives (D2, D10, and D11), while the others were a

cotton cooperative (C6) and a fruit or vegetable cooperative (FV1). There were five more high performersÑ

cooperatives that performed at performance level IV or

better in both periods (D7, D9, G13, G15, and FV4).

Additionally, a cotton cooperative (C3) rose from

category II to category V, while another cooperative

(OTH5) rose from category I to category V! A grain

cooperative (G8) improved two categories to category

V for the second time period.

Five cooperatives improved their performance to

category IV in 2000-04Ñthree dairy (D12, D18, D14), a

fruit or vegetable cooperative (FV17), and a sugar

cooperative (S16). A grain cooperative (G15) maintained its performance in category IV for the two time

periods, while another grain cooperative (G13)

dropped from category V.

Thus in 2000-04, cooperatives of a variety of

types were found in the highest performance categories-IV and V, with the exception of farm supply

cooperatives. (However, one farm supply cooperative

performed in category IV and one in category V in

1992-1997.) This indicates that a range of agricultural

cooperatives is capable of performing admirably

regardless of the product they may handle.

Cooperatives of every type were represented in

performance category III for 2000Ñ04, where nearly 40

percent of these were also in category III for 

1992Ñ96. Nearly equal numbers had improved to category III (nine cooperatives) as had declined to category

III (eight cooperatives). There were more cooperatives

in performance category III in 2000Ñ04 than in 

1992Ñ96 for each type, except sugar cooperatives and

ÒotherÓ cooperatives, where there were the same number of cooperatives in both time periods.

Seven cooperatives maintained lackluster performance over the two time periodsÑnot generating any

extra value when a charge is imputed for member

equity (category II). Over one-half of these were fruit

or vegetable cooperatives (FV45, FV29, FV57, and

FV60), while a dairy (D54), grain (G51), and another

(OTH62) cooperative made up the rest. Six cooperatives dropped to category II in 2000Ñ04. One-half of

these were farm supply cooperatives (FS48, FS53, and

FS58) while a dairy cooperative (D50), a fruit or vegetable cooperative (FV36), and another cooperative

(OTH55) declined to category II.

One sugar cooperative improved from category I

to II in 2000Ñ04. The members of S49 may be somewhat encouraged by their cooperative's improvement

from its negative average returns for 1992Ñ96.

Finally, five cooperatives fell to category I for

2000Ñ04. Two fruit or vegetable cooperatives (FV59

and FV65) along with a grain (G63) and farm supply

(FS64) cooperative fell from category II, while a dairy

cooperative (D61) fell from category III.

This shows that, with the exception of cotton

cooperatives, at least one cooperative of each type

failed to generate value sufficient to cover a charge for

the use of their members' equity in either time period.

However, with the exception of farm supply cooperatives, there were fewer cooperatives of each type that

lost value in the second time period compared to the

first.

Furthermore, members of the 12 cooperatives

that either fell to category I in 2000Ñ04 or stayed in

category II for both time periods may be most concerned with their cooperative's performance. One-half

of these lackluster performers were fruit or vegetable

cooperatives (FV45, FV29, FV57, FV60, FV59, FV65),

accompanied by two grain (G51, G63), two dairy (D54,

D61), one farm supply (FS64), and one other cooperative (OTH62).

Rankings—Table 7 groups the cooperatives according

to type and presents the performance categories and

ranks according to EVI at the basic plus 10 percent rate

9
10

Coop Performance Category Change

Code 1992-96 2000-04 Period 1:2

FV1 VV=

D2 V V =

C6 V V =

D10 VV=

D11 V V =

FV4 IV V UP 1

D7 IV V UP 1

D9 IV V UP 1

G8 III V UP 2

C3 II V UP 3

OTH5 I V UP 4

-----------------------------------------------------------------------------

G13 V IV D 1

G15 IV IV =

D12 III IV UP 1

D18 III IV UP 1

D14 II IV UP 2

FV17 II IV UP 2

S16 I IV UP 3

-----------------------------------------------------------------------------

OTH19 V III D 2

FV23 V III D 2

FS26 V III D 2

G41 V III D 2

C52 V III D 2

G28 IV III D 1

FS34 IV III D 1

D37 IV III D 1

OTH20 III III =

FV21 III III =

FS24 III III =

G27 III III =

G32 III III =

FS33 III III =

S35 III III =

G38 III III =

G39 III III =

D42 III III =

FV47 III III =

OTH22 II III UP 1

G30 II III UP 1

FS46 II III UP 1

D25 II III UP 1

FV31 II III UP 1

D43 II III UP 1

FV44 II III UP 1

G56 II III UP 1

D40 I III UP 2

-----------------------------------------------------------------------------

Table 6—Performance categories for individual cooperatives, 1992-96 and 2000-04

Coop Performance Category Change

Code 1992-96 2000-04 Period 1:2

D50 V II D 3

FS48 IV II D 2

FV36 III II D 1

FS53 III II D 1

OTH55 III II D 1

FS58 III II D 1

FV45 II II =

G51 II II =

FV29 II II =

D54 II II =

FV57 II II =

FV60 II II =

OTH62 II II =

S49 I II UP 1

----------------------------------------------------------------------------------

D61 III I D 2

FV59 II I D 1

G63 II I D 1

FS64 II I D 1

FV65 II I D 1
for 2000-04, as well as the changes in these indices

from 1992-96 for each cooperative. (Complete rankings

according to return on equity and extra value at the

different interest charges for both time periods can be

found in appendix Table 1. The top 10 cooperatives

according to EVI at the basic plus 10 percent rate in

2000-04 are also in the top 10 according to return on

equity (ROE) and EVI at the basic plus 5 percent rate.

Just one cooperative, D10, falls out of the top 10 and is

replaced by D11 when ranked according to EVI at the

basic and the basic plus 5 percent rates. Four of these

top 10 cooperativesÑFV1, D2, C6, and D10, as well as

D11, were also in the top 10 rank in 1992-96.)

The rankings allow cooperativesÕ performance to

be judged relative to each other's performance. While

all the cooperatives operated in the same general economic conditions of each time period, some saw their

performance improve, while othersÕ performance

worsened between the two periods. Thus, cooperatives

may want to assess the reasons their performance

improved, or declined, relative to the performance of

other agricultural cooperatives. Only four cooperatives

ranked in the top 10 in both time periods; one-half of

these were dairy cooperatives (D2 and D10). Five

cooperatives ranked in the bottom 10 in both time periodsÑthree of which were fruit or vegetable cooperatives (FV57, FV59, and FV60).

Cotton cooperativesÑJust three cotton cooperatives were represented in the sample, two of which

were in the top 10 in 2000-04. While one cooperative

dropped by just two positions to sixth position, the

other two cooperatives showed wide swings in performanceÑC3 improved 48 positions to rank third, while

C52 fell by 46 positions to rank 52 out of the 65 study

cooperatives. These changes were the second largest

increase and decrease in rank, respectively, among the

65 study cooperatives.

Dairy cooperativesÑFour of the 16 dairy cooperatives ranked in the top 10. D2 was a consistent high

performerÑranking second in 2000-04 and first in

1992-96. Two cooperatives (D7 and D9) improved 10

and nine positions, respectively, to land in the top 10.

D14 showed the largest improvement in rank, improving 36 positions to 14 out of the 65 cooperatives.

Meanwhile, D50 fell 47 positions to 50, the largest drop

between the two time periods among the 65 cooperatives. Just one dairy cooperative, D61, was among the

bottom 10 in rank.

Farm supply cooperativesÑJust two of the nine

farm supply cooperatives showed an improvement in

rank between 1992-96 and 2000-04. FS24 improved 14

positions to 24, the highest rank held by a farm supply

cooperative, and FS46 improved 10 positions to 46.

Two farm supply cooperatives ranked in the bottom 10

(FS58 and FS64). More than three-fourths of the farm

supply cooperatives (78 percent) declined in rankÑthe

highest proportion for any of the types of cooperatives.

FS26 fell out of the top 10Ñfrom seventh in 1992-96 to

26th for 2000-04.

Fruit and vegetable cooperativesÑFruit and

vegetable cooperatives showed the widest range in

performance. FV1 improved one position to rank first

in 2000-04, while FV65 fell 18 positions to last. FV4

improved 15 positions to fourthÑthe only other fruit

or vegetable cooperative in the top 10. Four of the 15

fruit and vegetable cooperatives (27 percent) were in

the bottom 10, where all but last place FV65 had

improved their rank from 1992-96. More of the fruit

and vegetable cooperatives had improved their rank

(73 percent) than had declined in rank (27 percent).

Moreover, proportionately fewer fruit or vegetable

cooperatives declined in rank than among the other

types of cooperatives.

Grain cooperativesÑOne grain cooperative (G8)

improved 25 positions to eighth place while two grain

cooperatives fell in rank to the bottom 10 (G56 and

G63) for 2000-04. More than twice as many grain cooperatives fell in rank (69 percent) as improved in rank

(31 percent) between the two time periods.

Sugar cooperativesÑOne of the three sugar

cooperatives, S16, improved 36 spots to 16Ñthe highest ranking sugar cooperative, while S35 fell nine slots

to 35. The lowest ranking sugar cooperative (S49) had

improved four positions. Sugar cooperatives were the

only type not to have a cooperative in the top 10 in

either time period.

Other cooperativesÑOne of the six other cooperatives (diversified, rice, poultry, and livestock), OTH5,

showed the largest increase in rank of the 65 study

cooperativesÑrising 53 positions to fifth. Meanwhile,

OTH19 dropped out of the top 10 to 19 for 2000-04,

and OTH55 fell 24 positions to 55. OTH 62 remained in

the bottom 10.

Group averagesÑThe simple average of the individual cooperatives' performance is shown in Table 8.

The 65 study cooperatives averaged positive extra

value in both time periods at the basic plus 5 percent

rate, a category IV performance. In other words, on

average, the cooperatives had positive net margins

after subtracting a moderate charge for the opportunity cost of equity. For 2000-04, this group of agricultural

cooperatives created 2.3 cents in extra value for every

dollar of operating capital expended, on average,

11
Performance Category Rank at EVI Basic + 10%

Coop Change Change

Code 2000-04 Period 1:2 2000-04 Period 1:2

C3 V UP 3 3 48

C6 V = 6 -2

C52 III D 2 52 -46

D2 V = 2 -1

D7 V UP 1 7 10

D9 V UP 1 9 9

D10 V = 10 -5

D11 V = 11 -1

D12 IV UP 1 12 10

D14 IV UP 2 14 36

D18 IV UP 1 18 23

D25 III UP 1 25 20

D37 III D 1 37 -22

D40 III UP 2 40 23

D42 III = 42 -17

D43 III UP 1 43 -8

D50 II D 3 50 -47

D54 II = 54 -8

D61 I D 2 61 -19

FS24 III = 24 14

FS26 III D 2 26 -19

FS33 III = 33 -12

FS34 III D 1 34 -14

FS46 III UP 1 46 10

FS48 II D 2 48 -35

FS53 II D 1 53 -25

FS58 II D 1 58 -21

FS64 I D 1 64 -4

FV1 V = 1 1

FV4 V UP 1 4 15

FV17 IV UP 2 17 40

FV21 III = 21 13

FV23 III D 2 23 -12

Performance Category Rank at EVI Basic +10%

Coop Change Change

Code 2000-04 Period 1:2 2000-04 Period 1:2

FV29 II = 29 1

FV31 III UP 1 31 1

FV36 II D 1 36 -12

FV44 III UP 1 44 4

FV45 II = 45 10

FV47 III = 47 -7

FV57 II = 57 2

FV59 I D 1 59 5

FV60 II = 60 5

FV65 I D 1 65 -18

G8 V UP 2 8 25

G13 IV D 1 13 -1

G15 IV = 15 -1

G27 III = 27 16

G28 III D 1 28 -12

G30 III UP 1 30 14

G32 III = 32 -9

G38 III = 38 -2

G39 III = 39 -12

G41 III D 2 41 -32

G51 II = 51 11

G56 III UP 1 56 -7

G63 I D 1 63 -9

OTH5 V UP 4 5 53

OTH19 III D 2 19 -11

OTH20 III = 20 9

OTH22 III UP 1 22 17

OTH55 II D 1 55 -24

OTH62 II = 62 -1

S16 IV UP 3 16 36

S35 III = 35 -9

S49 II UP 1 49 4

Table 7—Cooperative performance category and ranking 2000-04, with changes from 1992-96

when a charge for equity capital with a 5-percent risk

premium over the basic interest rate was applied.

However, if members' risk premium was 10 percent,

the 65 cooperatives fell short of being able to pay

member-producers this premium by $0.01 for each

dollar of operating capital utilized, on average.

Grouping the cooperatives according to the

product (predominantly) handled showed a range of

performance. Again, the results presented are the simple average of the individual cooperatives' performance. Cotton cooperatives outperformed the other

typesÑgenerating positive extra value with a 10-point

risk premium charged for equity (performance category V) in both time periods. Dairy cooperatives performed almost as wellÑbut dropped to performance

category IV for 2000-04, missing members' expectations by an average of just $0.008 per dollar of operating capital when equity was charged a 10-percent risk

premium over the basic rate.

The other five types of cooperatives all performed at category III for 2000-04, averaging positive

extra value when charged a basic rate for their use of

12
13

equity capital. Grain cooperatives generated an average of $0.02 in extra value for each dollar of operating

capital used after accounting for a basic charge for

equity. Along with grain cooperatives, farm supply

cooperatives and other cooperatives performed at the

category III level in both time periods, while fruit and

vegetable and sugar cooperatives had improved their

average performance from category II in 1992-96.

(For the weighted average group results, see

appendix Table 2. Suffice it to say that for the cooperatives in this study, the weighted average was lower

than the simple average in both time periods. This

indicates that for this set of cooperatives, one or more

of the larger cooperatives performed less well than the

group. For 2000-04 this held true within each group

except for the fruit and vegetable cooperatives where

the weighted average was above the simple averageÑ

indicating one or more large cooperatives added relatively more value than the group.)

Conclusions

There are likely a variety of reasons that cooperatives of one type may perform generally better or

worse than another. The most obvious is that the market conditions for one particular commodity may differ from the market circumstances for another. The

market for tree fruit is impacted by different factors

than milk markets. Farm supply operations face different operational challenges than cotton marketing.

Moreover, each agricultural commodity type is subject

to its own unique set of competitive and institutional

factors that may impact a cooperative's ability to create

value. At the same time, even within a commodity

type, the market environment may vary according to

the geographic region or market segment in which the

cooperative operates.

However, the results of this analysis show that at

least one of each type of cooperative (with the exception of sugar cooperatives) in at least one of the two 5-

year time periods considered, was able to add value

sufficient to reward members for the use of their capital at a rate akin to the historic return-to-equity investments. Conversely, there were also cooperatives of

every type that could not cover a basic charge for the

use of member capital. Thus, it appears that the ability

to generate, or lose, value is not exclusive to cooperatives of one type or another. In fact, for every type of

cooperative where there were more than three cooperatives in the group, performances ranged from category I to category V. Furthermore, the range of performance within each group indicated that factors other

than the commodities handled also play a role in how

well a cooperative performs.

That said, among the highest performers, dairy

cooperatives represented one-half of the 10 cooperatives that performed in category IV or V in both time

periods. On the other end of the performance spectrum, fruit and vegetable cooperatives represented

one-half of the 12 cooperatives that performed in category I or II in both time periods. Furthermore, no farm

supply cooperatives performed better than the category III level in 2000-04.

While the performance of fruit and vegetable

cooperatives ranged from the highest-ranked cooperative to the lowest, a majority (73 percent) moved up in

rank relative to the 65 study cooperatives between

1992-96 and 2000-04. In contrast, a majority of the cotton, dairy, farm supply, grain, and ÒotherÓ cooperatives fell in rank. Moreover, farm supply cooperatives

were the only type where a majority (two-thirds, in

fact) of the cooperatives dropped in performance category between 1992-96 and 2000-04.

Beyond the external economic and market factors

impacting cooperative performance, cooperatives'

pricing policiesÑthe prices a cooperative pays members for commodities/charges for farm inputsÑimpact

the various measures of financial performance, including the extra value measure. The prices paid, or

charged, by a cooperative directly impact the level of

the cooperative's net margins. As net margins are

influenced, so is the resulting extra value measure. For

example, a marketing cooperative may pay members

high prices or premiums for their production, which

means their cost of goods sold will be an elevated

amount, lowering net margins and extra value accordingly. On the other hand, some marketing cooperatives

may pay relatively low prices enabling the cooperative

to show larger net margins and extra value (appendix

Table 3). In the same way, a farm supply cooperative's

charges for its products and services may be relatively

lower (or higher), lowering (or raising) the cooperative's income and impacting the cooperative's bottom

line correspondingly. Thus, the relationship between

profits and value to investor-owners (members) of a

cooperative business may not be as clear-cut as for an

investor-owned business. Both the strength of the

cooperative to its members as users (price levels) and

as investor-owners (extra value) must be taken into

account.

To one degree or another, cooperatives offer valuable, and frequently intangible, benefits that cannot be

expressed in terms of dollars and cents. Thus, these
14

Table 8—Performance of study cooperatives, simple averages by type of cooperative, 1992-96 and 2000-04

Extra Value Index

___________________________________

Equity

BASIC BASIC BASIC share of

RATE RATE RATE Performance operating

ROE (LIBOR +2) +5 +10 category Rank capital

_______________________________________________________________________________________

1992-96 Averages

All (65 cooperatives) 11.9% 4.0 0.3 (3.4) IV 74.5%

Cotton (3 cooperatives) 18.3% 10.1 5.7 1.3 V 1 88.0%

Dairy (16 cooperatives) 17.0% 8.9 5.1 1.2 V 2 76.6%

Farm Supply (9 coops) 10.5% 2.4 (1.2) (4.9) III 4 73.2%

Fruit & Veg. (14 coops) 6.2% (1.1) (4.6) (8.1) II 6 69.7%

Grain (13 cooperatives) 10.7% 2.4 (1.6) (5.6) III 5 79.5%

Other (6 coops) 8.3% 0.6 (3.0) (6.5) III 3 70.4%

Sugar (3 cooperatives) 1.9% (2.8) (5.7) (8.6) II 7 58.5%

2000-04 Averages

All (65 cooperatives) 12.2% 5.6 2.3 (1.0) IV 66.7%

Cotton (3 cooperatives) 22.9% 15.5 11.3 7.1 V 1 83.2%

Dairy (16 cooperatives) 12.5% 6.6 2.9 (0.8) IV 2 73.7%

Farm Supply (9 coops) 5.1% 0.1 (3.3) (6.7) III 7 67.9%

Fruit & Veg. (14 coops) 5.6% 0.5 (2.4) (5.3) III 6 58.7%

Grain (13 cooperatives) 8.1% 2.0 (1.5) (5.0) III 5 69.2%

Other (6 cooperatives) 9.3% 2.4 (0.4) (3.2) III 3 56.1%

Sugar (3 cooperatives) 6.2% 0.5 (2.0) (4.6) III 4 50.7%

Change

All (65 cooperatives) 0.3 1.6 2.0 2.4 = (7.8)

Cotton (3 cooperatives) 4.6 5.4 5.6 5.8 = 0 (4.8)

Dairy (16 cooperatives) (4.5) (2.3) (2.2) (2.0) dn 1 0 (2.9)

Farm Supply (9 coops) (5.4) (2.3) (2.1) (1.8) = (3) (5.3)

Fruit & Veg. (14 coops) (0.6) 1.6 2.2 2.8 up 1 0 (11.0)

Grain (13 cooperatives) (2.6) (0.4) 0.1 0.6 = 0 (10.3)

Other (6 coops) (1.0) 1.8 2.6 3.3 = 0 (14.3)

Sugar (3 cooperatives) 4.3 3.3 3.7 4.0 up 1 3 (7.8)

benefits are not reflected in the extra value measure.

These benefits may include such things as: the guarantee of a market for the member's products, a reliable

source of farming inputs, reduced price risk, farm and

marketing services, representation in policy and regulatory matters, enhanced bargaining power, market

coordination, and so forth (see Liebrand).

Cooperatives incur expenses in providing these benefits, but don't generally directly assess members for

them. In addition, some functions that cooperatives

perform serve the broader market, benefiting members

and nonmembers alike. However, only the members

share in the cost of providing these market-wide functions.

Finally, one may wonder about the dozen study

cooperatives that lost value at the basic rate in both

time periods and yet remain ongoing concerns, as well

as the 25 cooperatives that were able to generate extra

value only with a minimal charge for equity in one or

both time periods. Perhaps members of these low performers feel adequately compensated for the use of

their equity capital through relatively higher pay

prices/lower supply and service costs. Possibly, members of these cooperatives place sufficient value on the

intangible benefits of cooperative membershipÑas

well as things like their belief in the cooperative form

of business, traditional loyalty to their cooperative,

and so forthÑthat they accept a lower premium for

the use of their equity. Alternatively, quite possibly the

cooperatives and their members were unaware that

the cost of their equity capital was not being covered.

Several investor-owned companies that began to con-
15

sider their full cost of capital also found they had been

posting negative extra value for years, unbeknownst to

their managers (Tully).

In conclusion, this exercise of measuring cooperative performance by the extra value method tells us

that cooperatives of all types can be very able performers, while some cooperatives may not be fully rewarding members for the use of their equity.

References

Chesnick, David, ÒLargest 100 agricultural co-ops post

strong margins in 2004,Ó Rural Cooperatives,

January/February 2006, USDA Rural Development.

Davis, Evan, Claire Gouzouli, Magnus Spence and

Jonathan Star, Measuring the Performance of Banks,

Business Strategy Review, Autumn 1993.

Liebrand, Carolyn and K. Charles Ling. Value of

Cooperative Benefits to Southern Dairy Farmers. ACS

Research Report No 99, Agricultural Cooperative

Service, USDA, 1991.

Ling, Charles K., Measuring Performance of Dairy

Cooperatives, RBS Research Report 212, Rural

Business-Cooperative Service, USDA, June 2006.

Ling, Charles K. and Carolyn Liebrand, A New

Approach to Measuring Dairy Cooperative

Performance, RBS Research Report 166, Rural

Business-Cooperative Service, USDA, September 1998.

Tully, Shawn, The Real Key to Creating Wealth,

Fortune, September 20, 1993.
16

Appendix table 1—-Performance categories and rank for individual cooperatives, 1992-96 average and 2000-04 average

Rankings—1992-96 Rankings—2000-04

____________________________________________________ ______________________________________________________

Extra Value Index Extra Value Index

_______________________________ ______________________________

LIBOR BASIC BASIC BASIC BASIC

Coop + 2 RATE + 5 RATE + 10 Performance LIBOR +2 RATE + 5 RATE +10 Performance

Code EQ:OC1 ROE2 7.4% 12.4% 17.4% Category EQ:OC1 ROE2 4.9% 9.9% 14.9% Category

C3 18 48 48 49 51 II 27 4 3 3 3 V

C6 1 4 4 4 4 V 9 6 4 6 6 V

C52 20 5 6 6 6 V 4 37 30 47 52 III

D2 2 1 1 1 1 V 3 2 2 2 2 V

D7 43 18 17 17 17 IV 35 7 9 8 7 V

D9 3 17 11 13 18 IV 1 9 7 7 9 V

D10 11 6 5 5 5 V 22 10 11 11 10 V

D11 9 10 8 9 10 V 2 11 8 10 11 V

D12 42 21 23 21 22 III 11 12 12 12 12 IV

D14 52 57 52 52 50 II 49 14 14 14 14 IV

D18 31 39 39 42 41 III 54 19 18 18 18 IV

D25 56 53 51 48 45 II 48 25 23 22 25 III

D37 59 16 18 18 15 IV 51 44 46 41 37 III

D40 36 64 65 65 63 I 18 24 26 33 40 III

D42 24 26 24 25 25 III 25 43 38 42 42 III

D43 51 38 40 39 35 II 31 42 43 46 43 III

D50 26 3 3 3 3 V 36 53 53 53 50 II

D54 16 45 46 47 46 II 13 49 50 52 54 II

D61 27 40 38 40 42 III 17 61 61 61 61 I

FS24 23 32 29 34 38 III 28 18 16 19 24 III

FS26 17 7 7 7 7 V 40 21 20 23 26 III

FS33 62 22 26 22 21 III 46 38 41 35 33 III

FS34 39 19 20 19 20 IV 37 33 35 34 34 III

FS46 32 54 55 56 56 II 23 39 40 45 46 III

FS48 22 13 12 12 13 IV 33 50 48 48 48 IIFS53 53 30 34 29 28 III 29 54 54 55 53 II

FS58 19 27 27 31 37 III 8 51 55 58 58 II

Appendix Tables
17

Appendix table 1 (continued)—Performance categories and rank for individual cooperatives, 1992-96 average and 2000-04 average

Rankings—1992-96 Rankings—2000-04

____________________________________________________ ______________________________________________________

Extra Value Index Extra Value Index

_______________________________ ______________________________

LIBOR BASIC BASIC BASIC BASIC

Coop + 2 RATE + 5 RATE + 10 Performance LIBOR +2 RATE + 5 RATE +10 Performance

Code EQ:OC1 ROE2 7.4% 12.4% 17.4% Category EQ:OC1 ROE2 4.9% 9.9% 14.9% Category

FS64 40 60 60 60 60 II 32 63 64 64 64 I

FV1 10 2 2 2 2 V 14 1 1 1 1 V

FV4 65 20 25 20 19 IV 62 3 6 4 4 V

FV17 38 58 59 59 57 II 42 17 15 16 17 IV

FV21 37 31 32 33 34 III 58 27 36 25 21 III

FV23 61 12 16 15 11 V 50 28 21 21 23 III

FV29 64 46 45 38 30 II 63 55 51 44 29 IIFV31 57 41 41 37 32 II 39 30 34 32 31 III

FV36 60 28 31 27 24 III 55 48 49 43 36 II

FV44 5 43 43 46 48 II 16 36 31 38 44 III

FV45 47 59 57 55 55 II 52 52 52 49 45 IIFV47 28 36 35 36 40 III 12 32 29 40 47 III

FV57 7 50 50 53 59 II 26 58 56 57 57 IIFV59 13 55 61 63 64 II 57 64 63 62 59 I

FV60 12 56 63 64 65 II 7 56 60 59 60 IIFV65 58 61 54 51 47 II 53 65 65 65 65 I

G8 33 33 30 32 33 III 38 8 10 9 8 V

G13 35 11 13 11 12 V 20 13 13 13 13 IV

G15 41 14 15 16 14 IV 65 16 25 17 15 IV

G27 21 37 37 41 43 III 24 22 19 26 27 III

G28 29 15 14 14 16 IV 30 23 22 28 28 III

G30 44 47 47 44 44 II 41 34 32 30 30 IIIG32 30 24 21 23 23 III 34 26 27 29 32 III

G38 34 35 36 35 36 III 44 41 45 39 38 III

G39 6 23 19 24 27 III 19 29 24 31 39 III

G41 45 8 9 8 9 V 21 31 33 36 41 III

G51 8 51 53 62 62 II 15 46 47 50 51 II

G56 4 42 42 45 49 II 5 45 44 51 56 II

G63 14 49 49 50 54 II 10 62 62 63 63 I
18Appendix table 1 (continued)—Performance categories and rank for individual cooperatives, 1992-96 average and 2000-04 average

Rankings—1992-96 Rankings—2000-04

____________________________________________________ ______________________________________________________

Extra Value Index Extra Value Index

_______________________________ ______________________________

LIBOR BASIC BASIC BASIC BASIC

Coop + 2 RATE + 5 RATE + 10 Performance LIBOR +2 RATE + 5 RATE +10 Performance

Code EQ:OC1 ROE2 7.4% 12.4% 17.4% Category EQ:OC1 ROE2 4.9% 9.9% 14.9% Category

OTH5 46 63 62 61 58 I 43 5 5 5 5 V

OTH19 49 9 10 10 8 V 60 20 28 20 19 III

OTH20 15 25 22 26 29 III 64 35 37 24 20 IIIOTH22 54 44 44 43 39 II 61 47 39 27 22 IIIOTH55 48 34 33 30 31 III 47 59 58 56 55 IIOTH62 25 52 56 57 61 II 6 57 59 60 62 II

S16 55 62 58 54 52 I 59 15 17 15 16 IVS35 50 29 28 28 26 III 45 40 42 37 35 IIIS49 63 65 64 58 53 I 56 60 57 54 49 II

1 EQ:OC = Equity:Operating Capital2 ROE = Return on equity
19

Appendix Table 2—Performance of study cooperatives, simple averages by type of cooperative, 1992-96

and 2000-04

Extra Value Index

__________________________________

Equity

BASIC BASIC BASIC share of

RATE RATE RATE Perf. operating

ROE (LIBOR +2) +5 +10 category Rank capital

_________________________________________________________________________________

1992-96 Averages

All (65 cooperatives) 9.6% 1.5 (1.9) (5.3) III 67.9%

Cotton (3 cooperatives) 20.8% 11.4 7.1 2.9 V 1 84.7%

Dairy (16 cooperatives) 11.5% 3.1 (0.6) (4.3) III 4 73.5%

Farm Supply (9 coops) 4.6% (1.9) (5.5) (9.1) II 6 71.6%

Fruit & Veg. (15 coops) 7.7% 0.3 (2.9) (6.0) III 5 63.0%

Grain (13 cooperatives) 16.4% 6.5 2.9 (0.8) IV 2 72.3%

Other (6 cooperatives) 13.2% 3.7 0.5 (2.7) IV 3 63.8%

Sugar (3 cooperatives) -0.2% (4.1) (6.8) (9.6) I 7 55.0%

2000-04 Averages

All (65 cooperatives) 7.4% 1.4 (1.5) (4.4) III 58.2%

Cotton (3 cooperatives) 17.2% 11.0 6.7 2.4 V 1 85.6%

Dairy (16 cooperatives) 12.0% 5.4 1.5 (2.3) IV 2 76.2%

Farm Supply (9 coops) 1.9% (2.1) (5.4) (8.8) II 7 67.5%

Fruit & Veg. (15 coops) 8.7% 2.1 (0.6) (3.3) III 4 54.3%

Grain (13 cooperatives) 7.5% 1.7 (1.7) (5.1) III 5 68.4%

Other (6 cooperatives) 8.4% 1.5 (0.7) (2.9) III 3 44.2%

Sugar (3 cooperatives) 3.6% (0.7) (3.2) (5.6) II 6 49.5%
20

Appendix table 3—Comparison of different cooperative pricing policies

Cooperative pay price level

______________________________________________________________________________________

Premium above Less than

At prevailing prevailing prevailing

market prices market prices market prices

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

Operating capital 560,000 560,000 560,000

—financed by debt 60,000 60,000 60,000

—financed by equity 500,000 500,000 500,000

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

COGS 4,500,000 4,600,000 4,400,000

Gross margin 500,000 400,000 600,000

Operating cost 440,000 440,000 440,000

Operating margin 60,000 (40,000) 160,000

Cost of debt 5.0% 5.0% 5.0%

Interest on debt $ 3,000 $ 3,000 $ 3,000

Net savings 57,000 (43,000) 157,000

Return on equity 11.4% -8.6% 31.4%

Return on operating capital 10.2% -7.7% 28.0%

Return on assets 5.7% -4.3% 15.7%

Net margins on sales 1.1% -0.9% 3.1%

Charge for equity 5.0% 5.0% 5.0%

Interest on equity $ 25,000 $ 25,000 $ 25,000

______________________________________________________________________________________________________

Extra Value $ 32,000 $ (68,000) $ 132,000

Extra value index 5.7% -12.1% 23.6%

______________________________________________________________________________________________________

Producer impact $ 0 $ 100,000 $ (100,000)
USDA Rural Development

Rural Business and Cooperative Programs

Stop 3250

Washington, D.C. 20250-3250

USDA Rural Development 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 Rural Development (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. Rural Development 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, gender, religion, age, disability, political

beliefs, sexual orientation, and marital or family status. (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 USDA, Director, Office

of Civil Rights, Room 326-W, Whitten Building, 14th and

Independence Avenue, SW, Washington, D.C. 20250-9410 or call

(202) 720-5964 (voice or TDD). USDA is an equal opportunity

provider and employer.