Acquiring and Maintaining Adequate Equity

Phil Kenkel

Bill Fitzwater Cooperative Chair, Oklahoma State University

In a recent national project, academic researchers, cooperative managers and members, USDA, agricultural foundations and other stakeholders collaborated to identify the critical issues facing agricultural cooperatives. A two-stage Delphi survey was conducted, followed by expert panel sessions in Washington, D.C. and Minneapolis, Minnesota. The material below summarizes some of the findings from the project.

The major financial issue identified by the panel of cooperative experts was the need to acquire and maintain adequate equity capital. Cooperatives need additional equity to help finance growth and provide increased working capital. Production agriculture is experiencing a boom, especially in the crop production sector. This has resulted in a need for infrastructure updates and improvements. In addition, input and commodity markets have become more volatile, increasing the price risk to producers and agricultural cooperatives. Increases in crop yields coupled with the ability of seed genetics to grow crops in geographic regions where they had not been grown are creating the need for “speed and space.” Equity capital is also needed to improve liquidity and solvency so that the cooperative can offer risk management tools to producers, such as locking in a net margin per acre, by executing a grain selling decision in conjunction with agronomy and energy purchase decisions.

Members want the cooperative to invest in assets that increase profitability and reduce business risk. This requires more equity investment to finance the assets and strengthen the balance sheet. At the same time, members do not want the cooperative to slow down the rate at which equity is redeemed to the members. In other words, members want the benefits of the cooperative but do not want to accept the corresponding ownership responsibility. This puts even more pressure on boards of directors and managers to be profitable, to create more equity investment.

Cooperatives have explored a variety of innovations and structures to address the challenge of adequate equity. Traditional cooperatives have used the base capital system to more actively manage their equity structure. The “New Generation” cooperative model links delivery or usage rights with equity investment. Cooperatives have also explored issuing dividend-paying preferred stock to attract both member and non-member equity. The hybrid member-investor cooperative was designed to facilitate outside equity but to date has had limited traction. While all of these structures can be pieces of the puzzle, maintaining adequate equity is likely to remain a critical challenge for cooperative firms.