Category: Cooperatives

Phil Kenkel

Bill Fitzwater Cooperative Chair

As I discussed in my last newsletter, tax reform eliminated the Section 199 deduction, changed the corporate tax rate and created new deductions for both the cooperative and the member. These changes have implications for profit distribution choices which in turn impact the cooperative balance sheet.  Simulation modeling which held the cooperative’s cash flow constant across choices found that member return was highest when profits were retained as nonqualified stock, followed by unallocated retained …

Phil Kenkel

Bill Fitzwater Cooperative Chair

I received an interesting question the other day as to how the Tax Cuts and Jobs Act of 2017 and the accompanying Section 199A provision might affect the cash patronage rates of marketing cooperatives. That led me to think through the tax and cash flow implications.  Most marketing cooperatives have a portion of non-member business.  The reduction in the corporate tax rate therefore reduces the cooperative’s tax payment.  If the cooperative’s objective were to …

Phil Kenkel

Bill Fitzwater Cooperative Chair

Patronage refunds are a fundamental aspect of the cooperative business model   Patronage creates the “User Benefit” principle that we stress as we describe cooperatives to potential members.  According to cooperative principles, patronage can be calculated in either physical units or monetary units.  A cooperative can operate with a single patronage pools, netting profits and losses across departments or use multiple patronage pools. For example, patronage on grain can be calculated separate from patronage on …

Phil Kenkel

Bill Fitzwater Cooperative Chair

 

All Businesses have key customers.  In many cooperative a small portion of the membership, sometimes as low as 5%, accounts for a majority of the revenue stream.  I call those members “strategically important”.  Cooperative boards consider the future needs of strategically important members during planning sessions.  Still, I wonder if some aspects of our standard operating procedures makes it difficult for cooperatives to attract and keep strategically important members.

Cooperatives are member-focused organizations and …

Phil Kenkel

Bill Fitzwater Cooperative Chair

As I have been discussing in the last few newsletters, the Tax Cuts and Jobs Act of 2017 has created some new issues for cooperative boards.  Cooperative principles do not mention tax deductions or tax effects.  However, those issues are clearly now part of our cooperative business model.  The cooperative board’s challenge has expanded to a three dimensional balance of cash flow, patronage and tax deductions.  Before your board meets with the auditor to …

Phil Kenkel

Bill Fitzwater Cooperative Chair

Sometimes we over complicate things.  Cooperative have three choices as to how to retain funds: qualified revolving equity, nonqualified revolving equity and unallocated retained earnings.  That choice has nothing to do with the decision on the amount of cash retained.  The board should first decide how much cash the cooperative needs.  After making that decision, they can decide which method of retaining funds will be most beneficial to the member.  When analyzing the choices …

Phil Kenkel

Bill Fitzwater Cooperative Chair

The Devils Advocate (Advocatus Diaboli in Latin) is the popular name for a former official position within the Catholic Church, who “argued against the canonization  of a candidate in order to uncover any character flaws or misrepresentation of the evidence.  Some cooperatives have considered using the devil’s advocate structure in the boardroom.  The board would designate a devil’s advocate on a rotating basis.  The devil’s advocate would take an opposing view to challenge …

Phil Kenkel

Bill Fitzwater Cooperative Chair

In this series of articles I have been addressing the simple question: “Are we reinvesting enough in our cooperative?”  We have been working through the equation:

Growth rate = reinvestment rate x return on equity

A cooperative’s reinvestment rate is the ratio of net capital reinvestment to net income.  Net capital reinvestment is capital expenditures less economic (or book) depreciation.  Last week we discussed why tax depreciation is a poor measure of actual or …

Phil Kenkel

Bill Fitzwater Cooperative Chair

As part of my work analyzing Section 199A, I developed representative farm supply and grain marketing cooperatives.  Simulations of the representative wheat cooperative indicated that member return is improved by retaining profits as nonqualified stock, even when the cash portion was adjusted to keep the cooperative’s cash flow constant.  The results also indicate that the “typical” wheat cooperative needs to pass up to 50% of the Section 199A deduction to keep the “typical” producer …

Phil Kenkel

Bill Fitzwater Cooperative Chair

As we celebrate cooperative month we all try to communicate the unique value package of cooperatives.  There are lots of great talking points including the economic impact of cooperatives, their importance in rural communities and their importance in keeping markets competitive.  Research shows that the public trust cooperatives and cooperative firms rank high in employee satisfaction.  Cooperative boards tend to “drive it like they own it!”  Is’ rare to hear of a cooperative engaging …