Abstract

Equity Redemption and Member Equity Allocation Practices

of Agricultural Cooperatives

Robert C. Rathbone and Roger A. Wissman

Agricultural Economists

Agricultural Cooperative Service

U.S. Department of Agriculture

It has been nearly 20 years since a comprehensive study of agricultural cooperatives’ equity redemption practices was conducted. This report, based on 1991

survey data, provides an in-depth analysis of this unique cooperative practice.

The study evaluates the importance of cooperative principles in carrying out

equity redemption programs and discusses the frequency of use and characteristics of systematic and special equity redemption programs. The primary

emphasis is on centralized cooperatives, although federated and mixed membership cooperatives practices are also evaluated.

Key Words: Cooperatives, equity redemption, patronage allocation, per-unit

capital retains, base capital plans, revolving equity plans.

ACS Research Report No. 124

October 1993
Preface

This publication reports the results of a survey of farmer cooperatives conducted in 1991 and 1992 on current equity redemption practices of agricultural

cooperatives, including how equity is distributed between allocated and unallocated accounts.

The information was obtained from a series of questions incorporated in

the Agricultural Cooperative Service’s (ACS) survey of fiscal 1991 financial

results of agricultural cooperatives in the United States. This current information

on equity redemption practices is needed because the last comprehensive

study was conducted nearly 20 years ago. Many changes have occurred in the

intervening years in the financial, operational, and structural makeup of agricultural cooperatives.

The study explores the entire range of equity accumulation and redemption issues for different categories of cooperatives (commodity type, size, geographical region, and structure). It also draws comparisons, where appropriate,

to the 1974 study.

Equity redemption practices are at the center of all financial considerations

with which a cooperative must deal. Cooperatives are very diverse in how equity redemption issues are addressed. ACS hopes the results from this study will

guide cooperatives considering changes or refinements to their equity programs

and serve as a reference tool to professional advisors.

Throughout the 18 months it took to gather and analyze data for this report

the authors acknowledge the considerable support and assistance from ACS’

Statistical and Technical Services staff -Charles Kraenzle, Ralph Richardson,

Celestine Adams, Jacqueline Penn, Katherine DeVille, John St&man, and

John Wells.
Contents

...

Highlights .......................................................................................................... III

Cooperative Principles and Equity Redemption ..............................................

.l

Equity Redemption and Allocation Practices .................................................... 2

Study Methodology ................................................................................... 2

Comparison with 1974 Study ..................................................................

.3

Equity Redemption Features .................................................................... 4

Equity Not Subject to Redemption ........................................................... 5

Practices by Organizational Structure.. ...................................................

.5

Cash Patronage Allocation ....................................................................... 6

Practices of Centralized Cooperatives .............................................................. 6

Practices by Commodity Type.. ...............................................................

.8

Systematic Programs ............................................................................... 9

Revolving Fund Method ................................................................. .lO

Performance by Size of Cooperative ....................................... 10

Performance by Commodity Type ........................................... 11

Performance by Geographic Region ....................................... 11

Equity/Asset Ratio and Revolving Fund Length.. ................... .13

Base Capital Plan Method ............................................................. .14

Percent-of-All-Equities Program .................................................... .15

Special Equity Redemption Programs .................................................... 15

Patrons’ Estates .............................................................................. 16

Redemption to Estates Only .................................................... 16

Patron’s Age ................................................................................... 17

Retirement from Farming ................................................................ 18

Moves Out of Trade Territory.. ........................................................ 18

Hardship Situations ......................................................................... 18

Other Special Redemption Programs ............................................. 19

No Equity Redemption Program ............................................................. 19

Practices of Federated and Mixed Membership Cooperatives.. ....................

.20

By Commodity Type ............................................................................... 21

Systematic Programs ............................................................................

.22

Summary of Findings.. .................................................................................... 22

Issues and Challenges .................................................................................... 23

Member Equity Investment Levels ......................................................... 23

Grain and Farm Supply Cooperatives.. .................................................

.24

References.. .................................................................................................... 25

ii
Highlights

Eighty-six percent of agricultural cooperatives reported their equity was

subject to redemption for fiscal 1991. Those whose equity was not subject to

redemption were primarily small, low-equity cooperatives that had little if any

net income available to allocate.

Of those with equity subject to redemption, 89 percent had some type of

active systematic or special redemption program. Of more significance, they

represented 96 percent of all member equity subject to redemption.

Since the last comprehensive equity redemption study, conducted using

1974 data, use of systematic programs has significantly increased.

Larger cooperatives, with more than $10 million in total assets, reported

much greater use of systematic programs than smaller cooperatives. Revolving

fund programs were most predominant, being used by 92 percent of cooperatives with systematic programs alone or in combination with special programs.

The average revolving fund period was 16 years, but improved to 14 years

when a weighted average was used based on total equity used.

Grain and farm supply cooperatives were heavily dependent on special

programs to redeem equity. Ninety-five percent of cooperatives using special

redemption programs redeemed to estates.

Three constant themes dominated this study in relation to equity redemption performance:

(1) financial strength did not necessarily indicate superior equity

redemption performance;

(2) smaller cooperatives were more reluctant to redeem members’

equity regardless of financial condition; and

(3) throughout the whole spectrum of size and financial condition,

grain and farm supply cooperatives demonstrated the poorest equity

redemption performance.

While improvements were noted in some aspects of equity redemption,

more should be done to keep ownership and control of cooperatives in the

hands of current users. More use of systematic programs is needed along with

aggressive application of special programs.

. . . 111
Equity Redemption and Member Equity Allocation Practices

of Agricultural Cooperatives

Robert C. Rathbone and Roger A. Wissman

Agricultural Economists

Equity redemption and net income allocation

practices are activities unique to cooperatives.

Practices vary among cooperatives, but the underlying strategy is designed to achieve the same

result, namely to function as a mechanism for

obtaining equity capital to finance operations and

to distribute or allocate net income to memberusers.

The most common method used is to issue

patronage refunds. A patronage refund is the net

income of a cooperative allocated to a patron in

proportion to the value or quantity of business the

patron does with the cooperative. Usually some

portion of the patronage refunds is distributed in

cash, but the majority is normally retained by the

cooperative as retained patronage refunds.

The equity redemption and equity allocation

process begins with the retention of patronage

refunds. It culminates when the retained patronage

refunds are paid to members in the practice called

equity redemption. It is defined as the payment in

cash or other property for previously issued equities [l]. 1

Equity redemption and allocation practices

are not just unique financial characteristics of cooperatives. They are the embodiment of cooperative

principles and practices. Adherence to cooperative

principles in the administration of an equity

redemption program is also important when evaluating performance.

* Numbers in brackets refer to publications cited in references section.

COOPERATIVE

REDEMPTION

PRINCIPLES AND EQUITY

Today’s cooperative principles are derived

from the original principles and practices of the

Rochdale Society [2]. References to them are found

in various Federal and State statutes, and provide a

general legal basis for establishing guidelines governing equal treatment of members for income allocation and equity redemption.

No statute legislates specific requirements for

equity redemption, but application of cooperative

principles and equity redemption are related. Some

State laws do specify that certain percentages of net

income be placed in unallocated reserves, so the

net income allocation process may be partially controlled.

The cooperative’s bylaws govern its allocation

and redemption activities. This document generally

specifies circumstances under which members are

required to provide capital~and describes the

process used for acquiring and redeeming equity.

The authority and responsibility for administering

the cooperative’s capital program belong to the

board of directors. The board must be aware of the

important role cooperative principles play in allocation and redemption practices.

Adherence to cooperative principles can be

challenging when contemplating equity redemption and member equity allocation alternatives. It is

important to discuss these principles and how they

apply to equity redemption and allocation practices. Cooperative principles will be discussed from

the perspective of the contemporary set that

Agricultural Cooperative Service (ACS) advocates:

1
1. The Owner-User Principle-People who

own and finance the cooperative are those

who use it.

2. The User-Control Principle-People who

control the cooperative are those who use it.

3. The User-Benefits Principle-The cooperative’s sole purpose is to provide and distribute benefits on the basis of use.

There are equity redemption and equity allocation elements contained in each of these three

principles. With the owner-user principle, the key

element is that ownership financing should be provided by the current users of the cooperative.

Compliance with this principle necessitates that a

cooperative have an active method to keep members’ equity investment aligned with their use of

the cooperative. Equity redemption plans have an

important role in this process.

Such a plan also promotes adherence to the

user-control principle because a program that fosters investment by current users usually means that

voting control is vested in those current members.

The importance of member equity allocation is

manifested in the user-benefits principle. This

means that a cooperative’s net income is distributed or allocated to members on the basis of current usage. This allocation may be made as cash,

kept in the business for a period of time as a

retained patronage refund, or a combination of

both. Although cash refunds provide an immediate

benefit to the member, retaining the majority of

patronage allocations in the business benefits the

cooperative in two ways. It provides additional

financial strength and supplies funds to retire older

equities. This shifts investment to the hands of current users. It’s important that current users receive

the allocation benefit of any net income their

patronage has created. Only then can the “service

at cost” standard fundamental to cooperative operations be satisfied.

In reality, however, remaining faithful to the

principles while contemplating equity redemption

decisions can be a significant challenge for a cooperative. An overriding consideration may be the

need to retain sufficient capital to maintain the

cooperative’s viability or finance growth through

capital improvements or acquisition. At times, the

capital needs of the cooperative and the allocation

and redemption expectations of the membership

may conflict. The board of directors faces one of its

most challenging responsibilities in such situations.

EQUITY REDEMPTION AND ALLOCATION

PRACTICES

Study Methodology

Questions on equity redemption practices,

cash patronage distribution, per-unit retains, and

equity allocation were included in the ACS annual

statistical survey of cooperatives which covered

results for fiscal 1991 [3]. Forms used to survey

equity redemption questions were sent to all cooperatives except grain and farm supply cooperatives

with sales under $15 million. Sampling procedures

were used because the number of cooperatives in

these two groups was so large. Complete responses

were obtained from 2,008 cooperatives. This information was expanded to represent the entire population.

The study covers essentially the same population as ACS’ annual survey with minor differences.

The equity redemption study covered 4,353 cooperatives, compared with 4,494 for the fiscal 1991 survey.

Size of the survey groups was different

because three groups were excluded from the equity redemption study. Excluded were cooperatives

currently being reorganized, groups of livestock

associations because only consolidated information

was available, and sugar beet bargaining associations. There were insufficient responses to represent the group. The livestock and bargaining cooperatives had small amounts of assets and net worth.

For 1991, the ACS annual survey of farmer

cooperatives reported total cooperative assets of

$31.3 billion and net worth of $14 billion. Although

the equity redemption population was 3 percent

smaller than the ACS survey, the dollar amount of

the assets and net worth of the cooperatives

excluded from the study was minimal. The value of

total assets and net worth for the equity redemption study population was very similar to the

agency survey.

2
Several modifications were made to the commodity classifications in this study compared with

the classifications used in the ACS survey. Cotton

ginning and marketing cooperatives were combined. Rice, sugar, tobacco, and miscellaneous marketing cooperatives were combined into an “other

marketing” category. Nut marketing cooperatives

were included with fruit and vegetable marketing

cooperatives, and livestock, poultry, and wool marketing cooperatives were combined.

Figure 1 shows the number of cooperatives,

total assets, and total net worth for each commodity group. The farm supply group had the largest

number of cooperatives and the largest amount of

assets and net worth. This group contained both

small cooperatives providing supplies to localized

areas and large ones that manufactured and/or distributed supplies over large geographical areas.

These small and large cooperatives were organized

together in expansive integrated systems.

Grain cooperatives constituted the next largest

group. Their organizational structures were similar

to the farm supply group. Many grain cooperatives

also handled farm supplies. Farm supply and grain

cooperatives represented more than two-thirds of

all cooperatives and the two groups had a similar

percentage of total assets and net worth. In contrast, dairy and the fruit, vegetable, and nut groups

represented only 13 percent of the total number of

cooperatives, but had 30 percent of total assets and

23 percent of the net worth.

Comparison with 1974 Study

An initial objective of the 1991 study was to

provide a current equity redemption benchmark

for use in comparing results with the 1974 survey

by Brown and Volkin [4] (Table 1). The 1974 study

identified cooperatives with and without equity

redemption programs. The 1991 study went a step

further, breaking down the “no active program”

cooperatives into two categories-those whose

equity was subject to redemption but did not

redeem, and those whose equity was not subject to

Figure I- Number of Cooperatives, Total Assets, and Total Net Worth

Number

2400

Billion dollars

12

2000

1600

800

Number of Co-ops

8

VTotal Net Worth

Cotton &

cotton gins

Dairy Fruit, veg. Grain Livestock, Other Farm Service

8. nuts poultry, & wool marketing supply

3
redemption. In both studies, equity redemption

programs were divided into two categories-systematic and special.

There are three types of systematic equity

redemption programs:

Revolving Fund Plan

Base Capital Plan

Percent-of-All-Equities

Special equity redemption programs are activated by events that happen to individual members

such as when they die, retire from farming, or reach

a prescribed age.

The 1991 study indicated 76 percent of all

cooperatives had some type of active equity

redemption program versus 71 percent in 1974.

Within these totals there have been two important

shifts in types of programs. Most significant was

the one-third increase, from 32 percent in 1974 to 42

percent in 1991, of those cooperatives employing

Table I- Comparison of equity redemption practices,

1974 and 1991

1974 ’ 1991

Systematic programs only

Special programs only

Systematic and special

programs

Subtotal

No equity redemption

programs

Not subject to equity

redemption

Total

Percent

12 16

39 34

20 26

71 76

29 1 0

(‘) 14

100 100

1 Equity Redemption Practices of Agricultural Cooperatives, FCS

Research Report 41, USDA, FCS, Washington, DC (April 1977)

2 This data was not collected separately in the 1974 research. For

comparison, the 29 percent of cooperatives reporting no equity

redemption programs in 1974, is similar to the 24 percent shown in

1991 for cooperatives having no program or whose equity was not

subject to redemption.

some type of systematic program either alone or in

combination with one or more special programs.

Also noteworthy was the 5-percentage-point

decrease, from 39 percent in 1974 to 34 percent in

1991, of those cooperatives who redeem equity

using only special programs. This improved use of

systematic programs is encouraging because it supports the hope that more cooperatives recognize

the importance of keeping ownership investment in

the hands of current users.

The redemption comparisons were based on

the number of cooperatives in each category. A

comparison was also made on the proportion of

cooperative members whose equity was or wasn’t

redeemed under some type of program. Results

showed the same 5- percentage-point improvement

in active equity redemption programs:

1974 1991

Active No Active No

program program program program

Number of

cooperatives 71 29 76 24

Number of

members 74 26 79 21

Equity Redemption Features

The critical question posed in the survey was

whether a cooperative’s equity was subject to

redemption. The response determined the rest of

the equity redemption questions that applied.

Eighty-six percent of cooperatives (Table 1) indicated that their equity was subject to redemption in

1991. There were two categories among those

whose equity was subject to redemption: those

with active systematic and/or special programs

and those that had not redeemed equity in recent

years for a variety of reasons. The remaining 14

percent indicated their equity was not subject to

redemption.

4
Equity Not Subject to Redemption

For cooperatives whose equity was not subject

to redemption, the decision to operate this way was

based on organizational and operational factors

and not on weak financial condition. On the surface, operating this way appeared to conflict with

cooperative principles, particularly the owner-user

and owner-benefits tenets. Closer examination,

however, revealed that many do operate in accordance with cooperative principles to the extent possible, given their organizational and operational

framework. Based on the organizational and operational characteristics (Table 2), it was logical for

cooperatives to operate in this fashion and still

advocate the cooperative way of doing business.

This group of cooperatives was primarily lowor no-equity organizations who either paid all net

income in cash, or generated such small amounts of

net income from large membership bases that allocation was impractical. In most cases their asset

base was small with nominal amounts of allocated

equity both on the basis of average investment per

member (centralized cooperatives) and as a percent

of total net worth.

The large concentration of these types of cooperatives in the Northeast is due primarily to the

presence of many small livestock auction operations and wool poolers with little or no assets or

equity.

Practices by Organizational Structure

Although centralized, federated, and mixed

membership cooperatives were surveyed for this

study, the primary focus is to identify the equity

redemption practices of centralized cooperatives.

This focus was chosen because equity redemption

by centralized cooperatives flows directly to the

farmer member.

Federated and mixed membership cooperatives hold a significant part of all equity, but the

redemption flow to their member cooperatives, for

the most part, is one level removed from the farmer

members. The ultimate decision to redeem equity

to the individual farmer member rests with the

local cooperative, but these decisions are greatly

influenced by the redemption decisions of the federated because most locals have considerable equity tied up by investments in their federated cooperatives.

See Table 3 to compare the differences in practices between these three structural types.

Although the total percent of cooperatives who regTable 2- Characteristics of cooperatives whose

equity was not subject to redemption

Size characteristics 89 percent with assets less

than $1 million

Table 3- Comparison of equity redemption programs

by organizational structure

Centralized Federated and

mixed membership

Net worth as a percent

of total assets

Average allocated equity

(centralized only)

Allocated equity as a percent

of net worth

Sales to total assets

(centralized only)

Geographical concentration

Principal commodity types

17 percent

$43 per member

22 percent

9.4 to 1

Northeast region (36

percent)

Livestock, poultry, and

wool (28 percent)

Farm supply (23 percent)

Systematic programs only 15

Special programs only 35

Systematic and special

programs 26

Subtotal 76

No active equity

redemption programs 10

Not subject to equity

redemption 14

Total 100

Total number of cooperatives 4,211

Percent

51

10

13

74

13

13

100

142

5
ularly redeemed equity was very similar between

centralized and federated and mixed cooperatives,

varied types of programs were used.

Federated and mixed cooperatives rely more

heavily on systematic programs, while centralized

cooperatives depend more on special programs.

When centralized cooperatives do operate a systematic program, it is usually in combination with

one or more special programs.

There is no notable difference between centralized and federated cooperatives whose equity is

subject to redemption, but have no active program.

Likewise, there is little variation between those

whose equity is not subject to redemption.

Cash Patronage Allocation

The cash portion of a current fiscal year’s allocated net income is an integral part of the allocation and equity redemption process. A minimum of

20 percent of allocated net income must be paid in

cash to qualify for the special income tax treatment

afforded to cooperatives for deducting allocated

patronage from taxable income.

Figure 2 shows cash patronage payments generally ranged from 20 to 100 percent. The most

prevalent cash patronage payment, 20 to 24 percent, was paid by 35 percent of cooperatives. The

average cash patronage payment was 38 percent of

allocated net income. In those cases where less than

the required 20 percent in cash was refunded, the

cooperatives paid the related income tax and the

patronage allocations were treated as nonqualified

patronage refunds.

PRACTICES OF CENTRALIZED

COOPERATIVES

Six categories were used to analyze the types

of equity redemption practices that cooperatives

used:

1. Systematic only-cooperatives that

redeemed equities using one or more systematic

programs.

Figure 2-Levels of Cash Patronage Refunds Paid by Centralized Cooperatives

Percent

35

30

20

10

0

< 20 20-24 25-29 30-34 35-49 50-74 75& over

Cash Patronage Refund Percentage

6
2. Systematic and special-cooperatives using

one or more systematic programs in combination

with one or more special programs.

3. Systematic and estates-cooperatives that

use one or more systematic programs and also

redeem to estates. The distinction between this category and the systematic and special category is

made because redemption to estates is the predominant special program practice.

4. Special only---cooperatives that redeem

equities using only one or more special programs,

including estates.

5. Estates only-cooperatives that redeem

equity only to estates.

6. No active program-cooperatives whose

equity is subject to redemption, but have not

redeemed equities under any circumstances for at

least 3 years.

Figure 3 portrays the difference in equity

redemption practices based on the size of the cooperative’s total assets.

There is a distinct relationship between asset

size and the type of equity redemption program(s)

used. For example, larger cooperatives (assets of $10

million and larger) rely primarily upon systematic

programs. Smaller cooperatives (less than $10 million

in assets) depend more on special programs. More

information on this correlation will be cited in sections dealing with specific programs and practices.

The following tabulation shows the important

distinction between the number of cooperatives

with active redemption programs and the amount

of equity represented by these programs.

Type of progmm Number of co-ops Percent of equity

percent

Systematic only 17 25

Systematic and special 13 19

Systematic and estates 18 23

Special only 23 20

Estates only 18 9

No active program 11 4

Figure ZI- Equity Redemption Practices of Centralized Cooperatives

Percent

100

8 0

6 0

l-2.49 2.5-4.99 5-9.99 1 O-49.99 50 & over

Average Assets (million dollars)

0 No equity redemption

pz9 Estates only

m Special only

Systematic & special

m Systematic 81 estates

m Systematic only

7
Forty-eight percent of cooperatives whose Grain cooperatives were the most frequent

equity was subject to redemption had systematic users of special programs, both as their only type of

programs. But these cooperatives held 67 percent of equity redemption and in combination with some

total equity. Those with no equity redemption pro- type of systematic program. Eighty-six percent of

gram held only 4 percent of the total equity. When grain cooperatives used some type of special prothe total amount of equity is considered, 96 percent gram. Farm supply cooperatives ranked a close secof equity was held by cooperatives with active ond with 82 percent. Seventy-two percent of all

redemption programs. cooperatives had some type of special program.

Practices by Commodity Type

Table 4 reports use of the six combinations of

equity redemption categories, using the eight commodity groupings previously identified.

Forty-eight percent of all cooperatives used

systematic programs. Dairy cooperatives were the

largest users of systematic programs, alone or in

combination with special programs. Eighty percent

of dairy cooperatives had some type of systematic

program in use. Fruit, vegetable, and nut cooperatives ranked second with 74 percent, followed by

cotton and cotton gin cooperatives at 71 percent.

Figure 4 illustrates the contrasts in equity

redemption practices between different commodity

types. It also shows similarities in equity redemption practices between grain and farm supply cooperatives. For example, on a combined basis, only 8

percent of grain and farm supply cooperatives used

systematic programs exclusively. In contrast, only 8

percent had no active program.

The graph also illustrates the high use of special

programs. Much of the comparability in equity

redemption practices between grain and farm supply

cooperatives was attributable to similar geographical

locations, parallel organizational and operational

characteristics, and membership attitudes.

Table 4- Equity redemption programs used by centralized cooperatives

Program category

Commodity type Systematic Systematic Systematic Special

only & special & estates only

Percent ’

Estates No active

only program

Cotton and cotton gins 62 3 6 1

Dairy 39 17 24 6

Fruits, vegetables, and nuts 64 6 4 7

Livestock, poultry, and wool 18 2 20 14

Other marketing 24 9 5 10

Service 50 16 11 5

Subtotal average 50 9 10 6

4

5

2

16

12

-

5

24

8

17

31

41

19

21

Grain 6 17 17 31 21 8

Farm supply 9 11 22 27 22 8

Subtotal average 8 14 20 29 21 8

Average, all types 17 13 18 23 18 11

1 Totals may not add due to rounding

8
By contrast, equity redemption programs varied considerably among marketing (other than

grain) and service cooperatives. There was a high

reliance on systematic programs, but also a significant incidence of cooperatives with no active programs.

The reasons behind this were often size-related. Larger marketing cooperatives frequently had

heavy investments in processing and marketing

operations that required aggressive equity programs. Smaller cooperatives usually performed

more limited functions such as providing transportation, bargaining, or assembly of farm products

that required less investment in assets, a more

modest need for equity, and consequently, less

aggressive equity programs. A number of smaller

cooperatives had no programs.

The highest frequency of cooperatives in the

no active program category were those with assets

of less than $1 million such as other marketing

cooperatives at 41 percent and the livestock, poultry, and wool group at 31 percent (Table 4).

Systematic Programs

Three basic types of systematic redemption

programs are used by cooperatives:

1. Revolving Fund-Equities are redeemed

or revolved out on a first-in, first-out basis

2. Base Capital-Equities are redeemed as

an integral part of a base capital program

3. Percent-of-all-Equities-Equities are

redeemed as a percentage of all outstanding

equities, regardless of the year issued.

The small number of cooperatives, who

redeemed under some type of systematic basis

other than the three described, will be discussed

later.

Of the three types, the revolving fund was

most prevalent. Of the cooperatives who employed

some type of systematic program, 91.9 percent used

the revolving fund method (Table 5). Cooperatives

using the revolving fund program by itself or in

combination with other regular or special programs

Figure b-Comparison of Equity Practices, Centralized Cooperatives

Percent

50

M Marketing 81 Service

Grain

=Farm Supply

0

Systematic SystematicSystematic Special Estates No active

only & special & estates only only program

9
represented 44 percent of cooperatives whose equity was subject to redemption. Only 2.4 percent of

cooperatives with systematic programs used a base

capital plan. Most cooperatives used only one systematic plan, but a few used a base capital plan or

percent-of-all-equities plan in combination with a

revolving fund program.

The percent-of-all-equities program, used by

4.5 percent of those with systematic programs, is

mostly found in cooperatives in the Central and

Upper Midwest.

There were several miscellaneous practices

under which a small number of cooperatives

redeemed equities. These operated in a substantially different manner than the traditional systematic

programs. The most prevalent was when a cooperative with 2 to 10 members agreed to periodically

redeem equity. In this situation, the decision was

made by the entire membership group.

Another example of a miscellaneous program

occurred when a cooperative reorganized or several cooperatives consolidated. In these cases, equity

was redeemed under special rules to equalize

investment among different membership groups.

A third type of miscellaneous situation was

when a local cooperative received an equity distribution from its federated cooperative and passed all

the funds through to its members.

Revolving Fund Method

The revolving fund method of capitalization

uses a first-in, first-out method of redeeming equity

to patrons. As with other equity redemption determinations, the decision to redeem equity under the

revolving fund method rests with the board of

directors. A target revolving fund length may be

established as a matter of policy, but the board of

directors must retain the discretion to alter it

depending on the cooperative’s financial ability to

redeem.

Although it represented the predominant type

of systematic equity redemption program, there

was a great variation among cooperatives regarding the length of their revolving fund periods. The

average was 16 years (Table 6), but the range was

from 2 years to more than 50 years. For report purposes, revolving periods were divided into six

groupings: 1-5 years, 6-10 years, 11-15 years, 16-20

years, 21-25 years, and more than 25 years.

Performance by Size of Cooperative

The analysis on how cooperatives of different

size performed in the management of their revolving fund equity redemption programs is based on

six asset-based size categories-less than $1 million, $1 million to $2.49 million, $2.5 million to

Tables- Systematic equity redemption programs used by centralized cooperatives by commodity type

Type of systematic program

Commodity type Revolving Base

fund capital

Percent-ofall-equity

Percent z

Other

plans

Multiple

plans 1

Cotton and cotton gins 97.0 0.7 1.2 1.8 (0.7)

Dairy 90.6 5.2 - 6.1 (1.9)

Fruits, vegetables, and nuts 92.0 9.6 0.6 2.4 (4.5)

Grain 88.2 2.8 8.4 0.8 (0.2)

Livestock, poultry, and wool 100.0 - - - -

Other marketing 89.2 8.2 - 2.6 -

Farm supply 93.5 0.2 5.2 1.3 (0.2)

Service 90.6 - - 9.4 -

Average, all types 91.9 2.4 4.5 1.9 (0.8)

1 Negative values represent the frequency of use of more than one systematic plan

* Totals may not add due to rounding

10
$4.99 million, $5 million to $9.99 million, $10 million to $49.99 million, and $50 million or more.

Table 6 identifies the average revolving fund

period for each of the six categories. There was

very little difference in average revolving periods

for cooperatives with less than $10 million in total

assets. Above that asset level, there was a significant improvement in revolving fund performance,

particularly for cooperatives with $50 million or

more in total assets.

The reason for the better performance by larger cooperatives was not demonstrated by relative

financial strength. In fact, an inverse relationship

existed. Cooperatives with assets of $50 million or

more had an average equity-to-asset relationship of

38 percent. For cooperatives with less than $1 million in assets, the relationship was 74 percent.

Performance by Commodity Type

At 8 years, service cooperatives had the shortest average revolving fund period (Table 7). Grain

and farm supply cooperatives, at 19 years, had the

longest.

Also shown in Table 7 is the average revolving

cycle length weighted by equity. This had the effect

of shortening the revolving fund cycle for most

commodity groups because of the better performance of larger cooperatives.

The weighted-average length of revolving

fund for all cooperatives was 14 years compared

with the numerical average of 16 years.

Improvement was also noted in the number of

Table 6- Revolving fund pfXfOrTTXInCe of centralized

cooperatives by asset size

Asset size Average revolving fund period Equity/assets

Dollars Years Percent

Less than 1 million 17 74

1 million - 2.49 million 17 71

2.5 million - 4.99 million 16 62

5 million - 9.99 million 15 59

10 million - 49.99 million 13 43

50 million or more 10 38

Average, all sizes 16 47

commodity groups with revolving fund lengths of

10 years or less. Reporting average revolving periods on an equity-weighted basis may present a

more meaningful comparison from a member’s

point of view.

The range of revolving periods for each of the

eight commodity types is shown in Table 8. Service

cooperatives had the most aggressive revolving

practices with 80 percent of the cooperatives

redeeming equities in 10 years or less and no cooperatives whose revolving cycle extended beyond 20

years.

At the other end of the spectrum, only 17 percent of the grain and 16 percent of farm supply

cooperatives revolved equity in 10 years or less.

These two types also reported having the highest

percentage with revolving periods exceeding 20

years (21 percent for grain and 25 percent for farm

supply).

Performance by Geographic Region

For purposes of this study, eight geographical

regions of the United States were used to compare

performance. Figure 5 shows these regions and the

States within each.

Table 7-Average revolving period length o f

centralized cooperatives by commodity type

Weighted

Commodity type Equity/assets Revolving length

fund period of revolving

period 1

Cotton and cotton gins

Dairy

Fruits, vegetables,

and nuts

Grain

Livestock, poultry,

and wool

Other marketing

Farm supply

Service

Average, all types

Percent

49

38

35 10 9

56 19 17

48 12 16

47 13 9

65 19 17

69 8 9

47 16 14

- Years -

11 14

15 10

1 Weighted average is based on total equity of centralized

cooperatives with revolving funds.

11
Figure E- Equity Redemption Study Geographical Regions

Table a- Length of revolving fund periods of centralized cooperatives by commodity type

Commodity type

1-5 6-10

Length of revolving fund period (Years)

11-15 16-20 21-25 Over 25

Percent I

Cotton and cotton gins 19 41 19

Dairy 9 29 2 0

Fruits, vegetables, and nuts 19 42 2 8

Grain 2 15 31

Livestock, poultry and wool 23 43 11

Other marketing 19 37 29

Farm supply 3 13 24

Service 32 48 12

Average, all types 8 22 25

15

22

6

30

12

-

35

7

26

- 6

8 11

3 2

8 13

6 5

- 15

10 15

- -

7 12

1 Totals may not add due to rounding

12
The Pacific region had the shortest average On a combined basis, grain and farm supply

revolving period at 9 years (Table 9). At the other cooperatives had average equity/asset ratios of 60

end of the spectrum were the Northern Plains percent, compared with 40 percent for all other

states with an average revolving period of 24 years. cooperatives. In looking at the equity/asset relaAs with size of cooperative, financial strength is tionship across the entire spectrum of revolving

not the determinant in regional differences. cycle lengths, the ratios remained fairly constant.

Cooperatives in the Northeast and Pacific regions The inverse relationship between financial strength

have the weakest equity-to-assets position, but and revolving cycle length could be due to the

report the shortest revolving periods. This perfor- dominant position grain and farm supply cooperamance within a geographical region is primarily a tives occupied in the longer revolving fund periods

function of the commodity types located there. (Figure 7), but care should be taken in evaluating

Equity/Asset Ratio and Revolving Fund Length

Table 10 compares the financial characteristics

of cooperatives with different length revolving

cycles. The relationship between financial strength,

as measured by the equity/asset ratio, and the

length of revolving cycle presented a complex situation.

Table IO- Financial characteristics of centralized

cooperatives by length of revolving fund periods

Average

Revolving fund periods Equity/assets incomNBB:seles revolving

period

Years -Percent- Years

When all with revolving fund programs were

considered, cooperatives with shorter revolving

periods had lower equity/asset ratios. Within specific commodity groups, however, this relationship

was not present. To portray this, cooperatives with

revolving fund programs were divided into three

groups--grain, farm supply, and all other cooperatives (Figure 6).

l-5 4 2 2.5 4

6- 10 4 3 1.2 8

11-15 4 9 1.3 1 3

16-20 5 3 2.3 1 8

21 - 25 5 2 1.1 2 2

Over 25 5 4 1.5 4 0

Average, all periods 4 7 1.6 1 6

Table CI- Revolving fund performance of centralized cooperatives by geographical region

Region Average assets Average net worth Equity/assets Revolving period

Dollars Percent Years

Northeast 14,462,OOO 5,360,OOO 3 7 1 2

Southeast 10,157,000 4,728,OOO 4 7 1 5

Lake States 5,322,OOO 2,906,OOO 5 5 1 8

Corn Belt 7,226,OOO 3,629,OOO 5 0 1 7

South Central 6,592,OOO 3,235,OOO 4 9 1 5

Northern Plains 2,960,OOO 1,856,OOO 6 3 2 4

Mountain 7,763,OOO 3,874,OOO 5 0 1 8

Pacific 11,760,OOO 4,540,ooo 3 9 9

Average, all regions 7,368,OOO 3,486,OOO 4 7 1 6

1 3
Figure 6 Equity/Asset Ratios and Revolving Fund Lengths of Cent1

Percent

*albed Cooperatives

Grain

Farm Supply

All Other Cooperatives

1-5 6-10 11-15 16-20 21-25 over 25

Years

this information because of errors that can arise

when aggregating data across a diverse population.

Base Capital Plan Method

The method by which base capital plans operate provides an equitable link between a member’s

investment and use of the cooperative. A base capital plan provides equity where a member’s capital

obligation is determined annually as a proportion

of the member’s share of total patronage for a specified base period. Under-invested patrons build

equities and overinvested patrons’ equities are

redeemed usually on a formula basis[l].

Base capital plans have been used as an equity

accumulation and redemption program for more

than 30 years, but only a small number of cooperatives employ the program. Centralized cooperatives in only six of the eight commodity types operate with base capital programs. The average base

period in use was 7 years. The shortest base period

was 1 year and the longest 10 years. Shown below

is the average base period for each of the six commodity groups with cooperatives having base capital plans. Because of the small number of cooperatives using the program, some caution should be

used in interpreting the data.

Commodity type Average base period

Cotton and cotton gins

Dairy

Fruits, vegetables, & nuts

Grain

Other marketing

Farm supply

All cooperatives

years

8

4

7

8

6

6

7

Cooperatives with base capital plans use perunit capital retains, retained patronage refunds, or

a combination of both to acquire capital. Forty percent used per-unit capital retains exclusively. An

additional 40 percent relied entirely on retained

14
Fig1Jre 7-Number of Cooperatives and Length of Revolving Fund of Centralized Cooperatives

Percent

80

l-l

60

Grain

m Farm Supply

0 All Other Cooperatives

1-5 6-10 11-15 16-20 21-25 over 25

Years

patronage refunds. The remaining 20 percent used

a combination of the two programs.

Twenty-four percent of the cooperatives with

a base capital program also used the revolving

fund method for redeeming a portion of their equity. Cooperatives that had both types of programs

generally operated them to keep two equity

sources separate. In most instances, the cooperative

was in transition from one equity redemption program to the other. The average revolving fund period for these cooperatives was 11 years, versus an

average base period of 5 years.

Percent-of-all-Equities Program

Only a limited number of cooperatives used

the percent-of-all-equities method of redemption.

Consequently, the data reported should be interpreted with caution.

With this method, cooperative boards of directors establish a percent of all allocated equities to

be redeemed, regardless of the year the equities

were issued. The most common redemption percentage reported was 10 percent, comparable to a

IO-year revolving fund period. Percentages ranged

from 2 percent to 15 percent. Cooperatives redeeming lower percentages (2-5 percent) usually did so

in combination with one or more special programs.

In citing the primary advantage of the percent-of-all-equity program, one respondent said,

“Everyone gets a check.” This was particularly

important to younger members in supplementing

their cash flow compared with having their entire

investment in the cooperative tied up for longer

periods.

Special Equity Redemption Programs

This report identifies six categories of special

redemption payment programs used by centralized

cooperatives:

15
1. patrons’ estates,

2. patrons who achieve a certain age,

3. patrons no longer farming or retired from

farming,

4. patrons who move out of the trade territory,

tally when documentation was presented confirming a patron’s death. Others required redemptions

be approved on a case-by-case basis by the board.

Some cooperatives were also required to obtain

their lender’s approval.

5. patrons claiming certain hardships, and

6. other programs.

Special equity redemption programs are used

by cooperatives, exclusively, or in combination

with systematic programs. Cooperatives may use

more than one special program at the same time,

but the most prevalent type is the payment made to

a patron’s estate.

In some instances, the cooperative did not pay

out the entire amount at time of death. Rather, the

capital stock investment was paid and the estate

had to wait for the regular redemption cycle to

receive any retained patronage dividends.

Table 11 illustrates how frequently these special programs are used, either alone or in combination with systematic programs. Those using special

programs represented 72 percent of all cooperatives

whose equity was subject to redemption.

Patrons’ Estates

In a number of cooperatives, a specific dollar

amount was established each year for redemption

to estates. If claims exceeded the amount set aside

for that year, then the estate, usually on a firstcome, first-serve basis, was put on a waiting list

until funds became available. One cooperative,

instead of paying out the actual amount of equities

to the estate, paid a lump sum death benefit and

the equity was paid out on the regular redemption

cycle. In general, cooperatives made equity

redemption payments to estates once a year,

although others paid monthly or when requested.

Redemption to estates was the most prevalent Redemption to Estates Only

(95 percent) special program (Table 11). As shown in Table 11,633 cooperatives or 25

Cooperatives use a variety of payment procedures percent of the total number of centralized cooperain their redemption practices. Some paid automati- tives who used special equity redemption proTable II- Number of centralized cooperatives using special programs alone or in combination with

systematic programs, by program type

Type of program

Category Number of Revolving Base Percent-of- Age of

co-ops fund capital all-equities Estates Retirement patron Moveaways Hardships Other

Systematic and special 459 416 11 38 406 251 261 20 15 32

Systematic and estates 641 595 12 26 641 _ _ _ _ _

Special only l 845 - - - 761 341 606 81 10 45

Estates only 2 633 - - - 633 _ _ _ _ _

Subtotal 2,578 1,011 23 64 2,441 592 867 101 25 77

Systematic only 629 577 18 15 - - - - - -

Total 3,207 1,588 41 79 2,441 592 867 101 25 77

1 The special category includes cooperatives who redeemed under one or more special programs, which may or may not have included

estates.

2 The estates only category includes cooperatives who redeem only to estates and used no other special or systematic redemption program.

16
Table 12-Characteristics of centralized COOperatiVeS

that redeem equity only to estates

Average asset size:

Financial condition:

Geographical

concentration:

Principal commodity

types:

$2.6 million (87 percent had less

than $5 million in total assets)

Equity/assets - 53 percent

Return on assets - 3.3 percent

Return on equity - 6.3 percent

Eighty-five percent were in the

Lake States, Corn Belt, and

Northern Plains Regions

Ninety-three percent were grain

and farm supply cooperatives

less than $5 million in total assets, and 85 percent

were in the Upper Midwest (Lake States, Corn Belt,

and Northern Plains regions). They were generally

well-capitalized and had an average equity-to-asset

relationship of 53 percent. Table 12 summarizes

these and some of the other financial characteristics

of cooperatives that redeemed only to estates.

Patron’s Age

grams, redeemed to estates only. Cooperatives who

redeemed only to estates are highlighted because

this is considered the minimum level of equity

redemption performance by a cooperative.

As shown in Table 11, age-of-patron was the

second most prevalent special equity redemption

program next to estates. Of more significance was

the close alignment between these two programs.

As an illustration, 93 percent of cooperatives who

redeemed on the basis of patron’s age also

redeemed to estates. This relationship was to be

expected because if a cooperative patron does not

live until the redemption age, payment to the estate

is the logical alternative.

For these 633 cooperatives, 93 percent were Figure 8 shows the distribution of age at

grain and farm supply cooperatives, 87 percent had which cooperatives redeemed equities. Redemption

Figure 8- Retirement Ages Used by Centralized Cooperatives

Percent

2 5

60-64 65-69 70-74 75-79 80-84 85-90

Age

17
ranged from 60 to 90 years of age. The most prevalent age range, at 39 percent, was 70 to 74. The

average of all ages was 72 years.

Although this redemption program is easy to

administer, many cooperatives had conditions, in

addition to age, for determining a patron’s eligibility to receive a redemption payment. Some

redeemed at the stipulated age only if the patron

was receiving Social Security payments. Some

required that the patron be retired from farming. In

other situations the equity was redeemed in annual

installments, beginning at the stated age.

Installment periods reported in the survey ranged

from 5 to 20 years.

The practice of redeeming equity in installments over a period of years is a type of retirement

program or annuity for the patron. To benefit the

patron, however, the payments must begin at a fairly early age. This way, there is a reasonable expectation that the equities will be fully redeemed during the patron’s lifetime. Most cooperatives that

redeem in installments begin paying at age 65 over

5 to 10 year periods.

Cooperative members of federated regionals

may have a split program. Equities based on local

earnings were paid at one age and the remainder,

based on refunds from the federated cooperative,

was paid on a pass-through basis at the age established by the federated regional.

As with estate payments, some cooperatives

established a specific total dollar amount to be

redeemed each year and once those funds are

spent, a qualifying patron must wait until the next

redemption period. Cooperatives may also use a

payment formula in which the amount available to

redeem equities is apportioned by a predetermined

formula, usually outlined in the bylaws. In these

instances, estates are normally first priority, followed by patron‘s age. As above, if there isn’t

enough money available in a certain year, the

patron must wait until a future period.

Many cooperatives said their patron’s age programs were in transition. For example, they might

have a goal to redeem to patrons at age 65, but

were currently only paying to age 75. Many

planned to gradually reach their goals, but the timing was dependent on financial results.

Retirement From Farming

While equity redemption to a patron who

retires from farming was less prevalent than estate

or age-of-patron special programs, it was still

important. Twenty-three percent of cooperatives

with special programs used this method (Table 11).

Cooperatives usually imposed conditions on the

circumstances under which redemption could

occur. The most prevalent condition was that the

equity holder no longer have any farming interests

(could not own land or receive revenue from a

farming operation). In some instances, cooperatives

stipulated that a patron must have attained a certain age and be retired from farming to receive the

redemption. This combined retirement with age-ofpatron criteria.

Moves Out of Trade Territory

This program, although used by only 4 percent of the cooperatives with special programs

(Table ll), is still important. It represents another

way for cooperatives to keep their membership

roles current and the investment in the hands of

current users. Cooperatives using this method most

frequently referred to it as redeeming equities to

“moveaways.”

Many cooperatives who redeemed to “moveaways” imposed a waiting period before equities

were paid. In the survey, this waiting period

ranged from 1 to 5 years. Some cooperatives also

required that the former patron no longer have any

farming interests.

Except for several fruit, vegetable, and nut

cooperatives, the “moveaway” program was used

exclusively by small grain and farm supply cooperatives (total assets less than $10 million), and primarily in the Corn Belt and Northern Plains

regions.

Hardship Situations

Although cooperatives who redeemed equities

under hardship situations represented only 1 percent of those with special equity redemption programs (Table ll), the practice is worth discussing

18
because of the diversity of programs. Most noteworthy were the cooperatives that redeemed to a

patron who becomes totally disabled. Otherwise,

the other types of hardship situations are related to

financial distress such as bankruptcy. Divorce was

also listed as another criteria. Sometimes hardship

redemptions are paid at a discount.

for some period of time (ranging from 2 to 10

years). Non-use of the cooperative usually occurred

when patrons quit farming (other than retirement)

or took their business elsewhere.

No Equity Redemption Program

One common thread that prevailed in the survey responses was that redemption in hardship situations was generally handled on a case-by-case

basis by the board. Most redemption practices (systematic or special) are carried out in accordance

with established policies and procedures.

Other Special Redemption Programs

This group of cooperatives, whose equity was

subject to redemption, had no active programs at

the time of the survey. In telephone inquiries to

many of the respondents in this category, they said

financial difficulty was the primary reason. These

cooperatives did not feel they were strong enough

financially to redeem equities, usually as a result of

several years of operating losses.

The “Other” category of special redemption

programs classified cooperatives who redeemed

equity in some manner that didn’t fit into any other

category, but was not carried out in sufficient quantity to justify a separate category. Three percent of

cooperatives with special redemption plans had

“Other” programs (Table 11).

Other cooperatives indicated their lender

would not approve redemption because of a weak

financial position. Some cooperatives chose not to

allocate net income because members didn’t want

to pay taxes on the allocation. In several situations,

poor record keeping made it difficult or impossible

to determine what amounts were due to each

patron.

The predominant situation was where By commodity type, Table 13 compares these

patrons’ investment falls below a certain level cooperatives with those who had active equity

and/or no use of the cooperative had been made redemption programs. Table 14 makes a geographiTable IS Comparison of financial characteristics of centralized cooperatives with active and inactive equity

redemption programs, by commodity type

Active redemption programs Inactive redemption programs

Commodtty type Average Equity/ Unalloc equity/ Net income/ Return on Average Equity/ Unalloc equity/ Net income/ Return on

asset size assets total equity sales total equity asset size assets total equity sales total equity

Cotton and cotton gins

Dairy

Fruits, vegetables,

and nuts

Grain

Livestock, poultry,

and wool

Other marketing

Farm supply

Service

Average, all types

1,000

dollars

4,598

21,650

17,223 34.7 14.0 1.2 7.2 523 56.7 ** 1.3 8.9

4,513 54.8 28.8 1.6 8.3 1,688 44.1 19.1 l *

30,113 45.3 24.3 1.4 15.1 1,068 49.5 18.5 0.3 10.8

18,638 40.2 17.6 0.4 2.2 10,318 38.6 17.3 3.2 15.4

2,768 64.1 26.5 2.6 9.0 1,485 49.4 13.3 0.8 3.9

2,576 67.4 21.1 5.8 10.6 476 48.2 29.8 l *

5,728 48.9 21.2 1.5 9.3 2,187 44.0 14.9 1.8 10.5

49.5

37.3

7,000

Percent dollars

9.6 3.8 25.2 949

2.0 0.6 9.0 559

Percent

62.6 8.5 10.9 29.1

26.7 l * 0.6 15.0

l Average net income was negative ** Unallocated equity was negative

19
cal comparison by region. Most notably, cooperatives with active redemption programs were more

than 2.5 times larger in average asset size than

those with inactive or no programs. Even more significant size variances were revealed within individual commodity types or geographical regions.

Also noted was that cooperatives with no

active program had a lower percentage of unallocated equity. Cooperatives experiencing losses usually charge these losses against unallocated equity

[5]. The lower level of unallocated reserves and the

presence of negative unallocated account balances

in the dairy and fruits, vegetables, and nuts commodity areas probably indicates a recent history of

losses. This is further supported by the overall

operating losses in the survey year reported for

grain and service cooperatives.

Four of the eight commodity groups in the no

redemption program category probably had financial difficulties in recent years. Despite these specific examples, financial condition doesn’t necessarily

determine a cooperative’s ability or willingness to

redeem equity. Some caution should be exercised in

interpreting the data because of the small number

of cooperatives represented in certain commodity

types in the no program area.

PRACTICES OF FEDERATED AND MIXED

MEMBERSHIP COOPERATIVES

Federated and mixed membership cooperatives represented only 3 percent of the total agricultural cooperative population surveyed for this

report, but their total assets, total sales, and total

net income constituted a much larger percentage of

the total for all cooperatives (Figure 9). For example, total assets of federated and mixed cooperatives represented 40 percent of total assets for all

cooperatives. Total sales of federated and mixed

cooperatives were 34 percent of all cooperatives.

Net income was 44 percent.

It is important to reiterate the information presented in Table 3 comparing the equity redemption

practices of centralized versus federated and mixed

cooperatives. Eighty-seven percent of federated

and mixed cooperatives had equity that was subject

to redemption, compared with 86 percent for centralized cooperatives. Seventy-four percent of federated and mixed cooperatives who had active

redemption programs compared with 76 percent

for centralized. Although these percentages were

quite comparable, there was a notable difference in

the mix of programs. Federated and mixed cooperTable 14-Comparison of financial characteristics of centralized cooperatives with active and inactive equity

redemption programs, by region

Active redemption programs Inactive redemption programs

Geographical Region Average Equity/ Unalloc Equity/ Net income/ Return on Average Equity/ Unalloc Equity/ Net income/ Return on

Asset size Assets Total Equity Sales Total Equity Asset size Assets Total Equity Sales Total Equity

1,000 1,000

dollars Percent dollars Percent

Northeast 19,672 38.5 12.1 1.3 10.2 432 25.7 l * 2.7 41.7

Southeast 8,161 47.4 17.3 1.8 12.1 7,341 39.7 38.2 1.1 4.0

Lake States 4,153 55.8 15.9 1.4 8.5 663 58.4 15.3 0.2 2.1

Corn Belt 5,670 50.7 34.8 1.3 8.7 3,177 35.4 25.0 l l

South Central 5,144 51.0 11.9 1.7 11.6 1,038 68.2 7.0 2.1 11.5

Northern Plains 3,111 60.2 22.9 1.8 7.4 1,257 46.4 13.6 0.9 5.1

Mountain 4,513 55.3 21.8 1.7 10.1 765 69.6 31.6 4.0 14.0

Pacific 12,739 36.6 18.4 1.3 9.3 3,014 32.6 ** 5.7 70.8

Average, all regions 5,728 48.9 21.2 1.5 9.3 2,187 44.0 14.9 1.8 10.5

l Average net income was negative *’ Unallocated equity was negative

20
Figure 9-Comparison of Number, Assets, Sales,

and Income, Centralized vs Federated

Percent

60

Federated/Mix

Number Total Total Total

of Co-ops Assets Sales Net Income

ed By Commodity Type

atives used systematic programs much more frequently. This section will examine the equity

redemption practices of those cooperatives in

detail. Primary emphasis will be on cooperatives

who actively redeemed equities.

Table 15 illustrates the distinctive equity

redemption practices of certain commodity types.

For instance, cooperatives in the “other marketing”

category relied exclusively on systematic programs.

All cotton and cotton gin cooperatives also used

systematic programs, some in combination with

special programs. At the other end of the spectrum,

75 percent of livestock, poultry, and wool cooperatives had no active program and the remainder

only redeemed to estates. Table 15 supports the

observation that federated and mixed cooperatives

are generally substantial users of systematic programs.

For certain commodity types, the practices of

federated and mixed cooperatives closely paralleled the practices of their centralized locals. This is

particularly true for grain and farm supply cooperTable IS- Federated and mixed membership cooperatives by commodity type and equity redemption category

Equity redemption category

Commodity type

Number of Systematic Systematic & Systematic 8 Special Estates No

co-ops only special estates only only program

Percent

Cotton and cotton gins

Dairy

Fruits, vegetables, and nuts

Grain

Livestock, poultry, and wool

Other marketing

Farm supply

Service

Total federated and mixed

13 85 - 15 - - -

13 42 16 24 - - 18

11 58 - 9 9 - 24

10 44 11 - 11 - 34

4 - - - - 25 75

2 100 - - - - -

39 38 8 13 14 15 12

33 87 - 4

- - 9

membership cooperatives 124 58 5 10 6 6 15

21
atives who rely heavily on special equity redemption programs at both levels. This is not surprising

because so many local cooperatives were heavily

invested in their federated regionals.

Systematic Programs

The revolving fund method was used by more

than half the federated and mixed cooperatives

whose equity was subject to redemption. The predominant users of revolving funds were service,

grain, and cotton and cotton gin cooperatives.

Revolving cycle periods ranged from 1 to 32 years.

The average for all federated and mixed cooperatives was 10.5 years. A breakdown of the average

length of revolving period, by commodity type, is

shown in Table 16 for both the numerical and equity-weighted averages.

Contrary to the results with centralized cooperatives, the average revolving fund period,

weighted by equity, was significantly longer. The

average equity-weighted revolving period was 17

years, 62 percent higher than the 10.5 year numerical average. On an equity-weighted basis the average revolving fund period for centralized cooperatives declined 13 percent (Table 8). It should be

Table 16- Federated and mixed membership

cooperatives average revolving periods by

commodity type

Average revolving period

Commodity type Length Weighted by equity 1

Cotton and cotton gins

Dairy

Fruits, vegetables, and nuts

Grain

Livestock, poultry, and wool

Other marketing

Farm Supply

Service

Years

10.4 10.6

10.1 15.6

10.0 14.1

17.6 14.6

- -

2.0 2.0

16.2 20.3

5.2 7.7

Average, all cooperatives 10.5 17.0

1 Weighted average is based on total equity of federated and mixed

membership cooperatives with revolving funds.

noted, however, that the equity-weighted results

for federated and mixed cooperatives were influenced by a large regional farm supply cooperative

whose revolving fund period exceeded 25 years.

Nevertheless, the majority of federated and mixed

commodity types showed longer average equityweighted revolving periods than the unweighted

length.

SUMMARY OF FINDINGS

The primary objective of the 1991 equity

redemption study was to gain a comprehensive

insight into current equity redemption and allocation practices of agricultural cooperatives. The

extensive data base created will serve as a valuable

benchmark for subsequent evaluations. Future

studies, however, should be conducted more frequently than the 20-year hiatus since the last indepth survey.

A goal of this survey was to provide a basis

for comparison with the 1974 Brown and Volkin

study. The most encouraging change observed was

a notable improvement in the number of cooperatives that redeemed equity by using some type of

systematic program. The improvement may have

occurred, however, because of an increase in the

average size of cooperatives, and not necessarily as

a result of more progressive policy.

The study showed that larger cooperatives

(assets exceeding $10 million) were more aggressive than smaller ones in their equity redemption

practices.

This phenomenon of smaller cooperatives was

a constant theme throughout the study. It is understandable in some respects because smaller cooperatives had less financial sophistication and reduced

flexibility due to higher relative investment in

longer term (fixed) assets, more equity tied up in

other cooperatives, and lower performance

demands by membership. On the other hand,

smaller cooperatives were often in better financial

position to redeem, so it is disturbing that performance levels were not higher.

At the tail end of the spectrum were cooperatives whose equity was subject to redemption, but

had no active program. Eleven percent of central22
ized cooperatives occupied this category (Table 4).

Many had legitimately suspended equity redemption activity because of financial stress due to

cumulative years of operating losses. Others

appeared quite capable financially of carrying out

some type of program. The scope of the study did

not permit an in-depth investigation of the reasons,

on a cooperative-by-cooperative basis, for this lack

of performance.

A fascinating group of cooperatives were

those whose equity was not subject to redemption.

The initial tendency was to be critical of these organizations for not adhering more precisely to cooperative principles. In reality, however, their financial and operational characteristics generally made

equity redemption impractical or infeasible.

In these cooperatives, the owner-user principle and user-control principle were followed fairly

closely. The adherence to the user-benefit principle,

however, is less clear. The study, however, supports

the fact that they meet the test in other facets of

operating on a cooperative basis (such as group

action and providing a missing service) that

demonstrate the existence of economic need.

ISSUES AND CHALLENGES

During both the data gathering and analysis

phases of this project, information was obtained or

issues were identified that are worthy of comment

apart from the actual report of findings. Some

issues also indicate that certain cooperatives or

groups of them could benefit from a self-evaluation

of the role equity redemption should play in their

organizations.

Member Equity Investment Levels

The amount of equity invested per member

was closely related to the cooperative’s functions.

For example, cooperatives performing processing

or manufacturing services had larger per- member

equity levels than those providing services or limited handling of product.

Table 17 shows that cotton; dairy; and fruit,

vegetable, and nut cooperatives had the highest

average investment per member. Each type had

extensive processing and marketing operations.

Contributing to the higher member investment

level was the fact that these three groups had the

lowest average number of members.

Also demonstrated in Table 17 is that cooperatives with higher average levels of member investment had more aggressive equity redemption programs. Cooperatives that redeemed equity using

only systematic programs had the highest member

investment level.

The implications of these relationships to

equity redemption considerations are quite clear.

Cooperatives having fewer members with a higher

level of investment are more responsive in their

equity redemption practices. Financial considerations aside, these cooperatives really don’t have

much choice. A smaller membership, having a significant investment in the organization, will have

strong expectations about the cooperative’s equity

redemption performance.

Table 17-Number of members and member

investment in centralized cooperatives by

commodity type and equity redemption practices

Commodity types Average

and redemption members per

practices cooperative

Average

investment

per member

_

Number Dollars

Commodity type:

Cotton and cotton gins 380 4,063

Dairy 481 9,627

Fruits, vegetables, and nuts 451 6,936

Grain 673 2,341

Livestock, poultry, and wool 1,611 1,012

Other marketing 3,170 1,328

Farm supply 972 1,172

Service 1,082 721

Average, all types 882 1,980

Redemption practice:

Systematic only 423 7,257

Systematic & special 1,120 2,515

Special only 971 1,383

No redemption program 777 1,031

Not subject to equity redemption 785 43

Average, all practices 882 1,980

23
In contrast, cooperatives with larger memberships and lower per-member investment generally

were less aggressive or responsive in their equity

redemption practices. Revolving fund cycles were

longer and there was more reliance on special programs. This combination places much less pressure

on the cooperative to perform. The issue is whether

these members had any less right to expect equity

to be redeemed in a timely fashion.

Grain and Farm Supply Cooperatives

Grain and farm supply cooperatives were the

two largest commodity groups, in terms of both

number of cooperatives and number of members.

With such a large representation of the agricultural

cooperative community, it was disappointing that

these cooperatives, on average, did not as a group

demonstrate a higher level of equity redemption

performance.

For example, grain and farm supply cooperatives had the longest average revolving periods

(Table 8) and the highest usage of special programs

(Table 4). What conditions or characteristics of

these groups contributed to their less favorable

equity redemption performance?

One answer lies in their greater use of a combination of systematic and special plans (Table 4).

The following tabulation lists the combined average revolving periods for grain and farm supply

cooperatives with revolving funds only and with

combinations of revolving fund plans and special

plans. Only cooperatives with revolving funds

were included.

Program types Length of revolving fund

ycu rs

Revolving funds only

Revolving funds and estates

Revolving funds and special plans

Average

17

18

21

19

The data above indicate that when grain and

farm supply cooperatives use special programs in

conjunction with a revolving fund, the revolving

cycle moderately lengthens. The implication is that

the demands of redeeming to estates and/or other

types of special programs reduces the amount of

funds available for revolving fund redemption and

stretches out the revolving fund period. This is a

contributing factor to grain and farm supply cooperatives having the longest average revolving

cycles of all commodity types.

Another area that impacts on equity redemption performance for grain and farm supply cooperatives is the amount of investment they have in

other cooperatives. Figure 10 shows that the higher

the percentage of assets a cooperative has invested

in other cooperatives (excluding credit institutions), the longer the revolving period. A parallel

relationship between the percentage of equity represented by investment in other cooperatives is also

shown in Figure 10.

This has implications, in particular, for local

grain and farm supply cooperatives, because of

their extensive memberships in one or more federated regionals. In many cases, locals are quite

dependent on the redemption practices of their

regionals. Grain and farm supply federated regionals have the longest revolving fund periods among

federateds. This has to be a factor in the lower

revolving fund performance of local grain and farm

supply cooperatives.

Size had a major impact on equity redemption

performance. The average asset size of cooperatives

with revolving fund periods exceeding 15 years

decreased as the revolving fund length increased

(Figure 10). Table 6 also shows that smaller cooperatives had longer revolving fund periods. On average, grain and farm supply cooperatives were

smaller than most other commodity groups (Table

13) and had the longest revolving fund periods.

Earlier in this section the equity redemption

implications of weak financial ties that exist in a

large membership organization with small average

investment per member were discussed. Grain and

farm supply cooperatives had among the highest

average number of members per cooperative and

the lowest average investment per member. This

24
Figure IO- Average Assets, Average Equity, Investment/Assets, Investment/Equity of Centralized

Grain and Farm Supply Cooperatives

Million dollars Percent

1-5 6-10 11-15 16-20 21-25 over 25

Length of revolving fund

Average Assets (dollars)

Average Equity (dollars)

Investment/Assets (percent)

Investment/Equity (percent)

was another consideration in evaluating their equity redemption performance.

The five characteristics outlined earlier for

grain and farm supply cooperatives are all indicators of why these cooperatives are the poorest equity redemption performers.

Why is this performance accepted by the

membership and defended by the cooperative?

From the membership’s viewpoint, do product

prices and quality of service overshadow the

importance of equity redemption? And from the

cooperative’s perspective, does the lack of yearly

patronage commitment from the members suggest

that a conservative financial approach be taken? If

either reason, or both, are at stake, an evaluation of

the relationship between the cooperative and its

members may be the key to improving equity

redemption performance.

REFERENCES

1. Cobia, David W., et al. Equity Redemption:

Issues and Alternatives for Farmer Cooperatives.

ACS RR 23, USDA, Washington, DC, October, 1982.

2. Cobia, David W., et al. Cooperatives in

Agriculture. Prentice Hall, Englewood Cliffs, New

Jersey 07632,1989.

3. Richardson, Ralph M., et al. Farmer

Cooperative Statistics, 1991. ACS SR 33, USDA,

Washington, DC, November, 1992.

4. Brown, Phillip F., and David Volkin. Equity

Redemption Practices of Agricultural Cooperatives.

FCS RR 41, USDA, Washington, DC, April, 1977.

5. Royer, Jeffrey S., Roger A. Wissman, and

Charles A. Kraenzle. Farmer Cooperatives’

Financial Profile, 1987. ACS RR 91, USDA,

Washington, DC, September, 1990.

25
U.S. Department of Agriculture

Agricultural Cooperative Service

P.O. Box 96576

Washington, D.C. 20090-6576

Agricultural Cooperative Service (ACS) 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 agency (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.

ACS publishes research and educational materials and issues farmer

Cooperatives magazine. All programs and activities are conducted on a

nondiscriminatory basis, without regard to race, creed, color, sex, age, marital

status, handicap, or national origin.