unit iv

Unit IV.

Co-op Finance

Co-op Balance Sheet

= a financial statement that lists the value of what the co-op owns (assets), what it owes to others or creditors (liabiilties), and what the owners have invested in the business (net worth or equity)

Unique Co-op Balance Sheet Items• Assets

Investments in other co-ops• Liabilities

Cash patronage refunds payableAccounts payable to patronsLoans payable to bank for cooperatives

• Net WorthAllocated credits

Retained patronage refundsCertificates of investmentRevolving equitySurplus

Unallocated reserves (= retained earnings)

Allocated Equity Capital =

• Money invested in a business that can be assigned or attributed to and, therefore, claimed by an individual owner

Co-op Sources of Funds

1. Equity Capital2. Debt Capital3. Operations: Earnings,

Depreciation4. Sale of Assets

Co-op Equity Capital CharacteristicsFeature Co-op IOF

1. Supplied by owners - owners are customers - mainly thru ret pat refs - for unspecified time

XXXX

X

X

2. Rate of return variable - dividends not > 8% - limited stock P gains - return on use emphasis

XXXX

X

3. Voting/mgmt rights - one vote per person - one vote per stock share

XX

X

X

4. No priority over debt X X

5. Reclaimable by owners - easy (sell stock usually) - hard (up to board of dir)

X

X

XX

Co-op Needs for Equity

1. To provide services2. To survive adversity (risk capital)3. To obtain credit

Equity Capital of 100 Largest Ag Co-ops

% of Total CapitalTypically, 35-40% of total co-ops have difficulty obtaining sufficient funding from members.

Type of Equity Capital % of Total Equity

1. Allocated 85-86

a. Direct investment (stocks, mbshps) 28

b. Retained patronage refunds 56

c. Per unit capital retains 1-2

2. Unallocated 14-15

Per-Unit Capital Retains

= investments in a co-op made by patrons through check-offs or deductions that are based on the dollar value or physical quantity of products marketed/purchased through the co-op.

Purpose: For capital investments, not for operating expenses.

Example Co-ops: Swiss Valley, Sunkist

+s and –s of Alternative Co-op Equity Types

1. Direct Investments+ May provide required start-up capital

+ Indication of prospective memberinterest

- Difficult to collect

2. Retained Patronage Refunds+ Easy to collect+ May encourage nonmembers to become members+ Equity provided in proportion to use

- Fluctuate with earnings- Often considered debt or temporary capitalby members- May lead to over expansion

3. Per Unit Retains

+ Same as patronage refunds plusindependent of earnings

- Same as patronage refunds plus oftenviewed as a price increase instead ofan investment

4. Unallocated Equity

+ reserve against losses+ helps relationships w/creditors+ mbrs less likely to ask for it back+ may be some tax advtgs

- not consistent w/operation at cost- ownership by mbrs not as clear

Co-op Uses of Funds• Pay cash patronage refunds• Pay dividends• Redeem certificates of equity• Redeem capital stock• Pay taxes• Redeem bonds• Repay loans• Increase working capital• Asset investment

Co-op Cash Patronage Refunds

• Avg. = 38-40%

• Most Common = 20-24%

Equity Redemption

• The payment to members (in cash or other property) of previously retained patronage refunds or capital retains

• The authority and responsibility for administering a co-op’s program for acquiring and redeeming equity belong to the board of directors.

General Co-op Equity Redemption Methods

• SYSTEMATIC:A definite plan carried out with a fair degree of predictability and regularity

• SPECIAL EVENT:Carried out in response to special events occurring which do not happenvery predictably or regularly

Special Event Methods

1. Death (most common spec. event = 95%)

2. Quit farming3. Reach certain age (2nd most common spec.

event = 33%)

4. Retire5. Patron demand or hardship6. Patron no longer active

Why Co-ops Need to Redeem Equity?

• To insure ownership by those who use the business.

• To encourage patronage by producers.• To counteract negative image co-ops may have

on this matter.• To force improved financial planning on

management.• To reduce legislative pressures for mandatory

equity retirement.• To reduce possible conflicts between active

members and inactive members.

Systematic Methods

1. Revolving Fund

2. Base Capital

3. Percent of Total Equities

Equity Redemption Practices

TYPE % of Co-ops

Systematic only 16Special only 34Systematic and special 26No program 10Equity not redeemable 14

Systematic Plan % of Co-ops

Revolving Fund 91.9

Base Capital 2.4

% of Equities 4.5

Other 1.2

Equity Collection and Redemption Evaluation Criteria

1. Adequacy of capital provided.2. Extent to which it results in members

supplying equity in proportion to use.3. Flexibility.4. Ease of understanding it.5. Ease of administering it.

Revolving Fund Method

• Oldest equities redeemed first.

• Equities redeemed on a first-in, first-out basis

Co-op Revolving Fund Example

YrBeginning

EquityRetained

Pat. RefundsEquity

Redeemed Yrs Redeemed1 0 500 0 --

2 500 500 0 --

3 1000 500 0 --

4 1500 500 500 1

5 1500 1000 1000 2.3

6 1500 500 500 4

Revolving Fund +s and -s

+ Easy to understand+ Easy to administer+ Flexibility+/- Results in user ownership

- Erratic source of funds- Unrealistic member expectations

Length of Revolving Fund % of Co-ops

1-5 years 86-10 2211-15 2516-20 2621-25 725+ 12

Base Capital Method

1. Determine co-ops equity need (goal)

2. Determine each member’s share

3. Determine how to adjust (#2 above) from actual to desired

Example co-ops: CHS, CF Industries

Co-op Base Capital Plan ExampleAssumptions:

1) 5-year base period2) desired equity = $18.5 mil.

Member Share of co-op business1

Beg. Equity Equity Obligation2

Over or Under

A 11 1.685 2.035 -.35

B 19 3.345 3.515 -.17C 14 2.805 2.590 +.215

___________________1Over past 5 years.2Share of business x desired equity.

Base Capital +s and -s

+ Direct link between use and investment+ Flexible+ Proper member expectations

- Hard to understand- Hard to administer

% of Total Equities

= same % of all equities redeemed

(regardless of age)

Co-op % of Equity Redemption Example

MbrBeg

Equity%

RedemptionAmt

RedeemedA 7,500 10 750

B 2,500 10 250

C 5,000 10 500

% of Equities +s and -s

+ Easy to understand+ Easy to administer+ Attractive to new (young?) members+ Flexible

- User ownership

Sources and Uses of Funds$ Sources = $ Uses

To Use X 1. Sources2. Other Uses

Alternative Ways of Increasing Equity Redemption

1. Increase earnings2. Decrease other uses of funds (e.g. cash

patronage refunds, dividends)3. Increase debt4. Redemption earlier but at a discount5. Allow for member exchange of equity6. Use more unallocated equity (if it increases

cash flow)7. Convert to debt or preferred stock8. Increase assistance from regionals

Increasing Cash Patronage Refunds May -

• Reduce capital investments• Reduce equity retirement efforts• Delay loan paybacks• Have short-run and long-run effects on co-op

revenues and costs• Impact member satisfaction• Impact co-op’s ability to meet service/product

needs of members• Increase need to borrow or obtain money from

other sources

A Potential Source of Conflict:

Capital Needs of Co-op

Vs.

Redemption Expectations of Members