Category: Cooperatives

Phil Kenkel

Bill Fitzwater Cooperative Chair

The cooperative business model has many unique aspects.  Even great business models have their imperfections.  One of those imperfections is the “imperfect property rights” in an open membership cooperative.  Cooperatives retain profits in the form of both allocated equity (stock patronage) and unallocated retained earnings.  That reinvestment helps to create future profits and future patronage payments.  In the case of allocated equity the member has a defined property right to the face value but …

Phil Kenkel

Bill Fitzwater Cooperative Chair

October is cooperative month and the time to celebrate the strong network of user-owned and  user-controlled businesses that serve almost every sector of our economy.  In rural communities agricultural cooperatives along with their rural electric and farm credit cousins are the face of the cooperative business model.  These cooperatives have long been vital to rural communities.  An individual producer is at a disadvantage in sourcing inputs and in marketing their commodities.  Agricultural cooperatives were …

Phil Kenkel

Bill Fiztwater Cooperative Chair

Per Unit Retains are an amount of equity deducted from a commodity payment based on the units of commodity handled.  They differ from retained patronage in that they are based solely on quantity handled and not profits.  Per Unit Retains originated in marketing cooperatives operating on a pooling basis.  Pooling cooperatives do not purchase the commodities that they market and then pay patronage.  Instead, members receive one or more volume based intermediate payments and …

Phil Kenkel

Bill Fitzwater Cooperative Chair

One of the original Rochdale cooperative principles was “Goods Sold at Market Prices”.  Many students assume that the goal was to discourage cooperatives from setting prices too high.  In fact, the rationale for the principle was just the opposite.  The Rochdale Pioneers were cautioning cooperatives not to provide benefits up front through favorable prices.  Instead, the cooperative was encouraged to price at market levels and distribute the resulting profits through patronage.

Ever since the …

Phil Kenkel

Bill Fitzwater Cooperative Chair

Cooperative firms, like all firms, must evolve over time.  Cooperatives face unique challenges because their customer owners have a long-term relationship with the firm.  That long-term focus is one of the strengths of the cooperative business model but it also creates challenges.  When our legacy agricultural cooperatives were formed they had a homogeneous membership that had come together because they had no source of inputs and no access to markets.  Over time, the needs …

Phil Kenkel

Bill Fitzwater Cooperative Chair

In my last newsletter I discussed a recent research study examining the factors associated with the continued participation in a cooperative.  The members’ trust in the cooperative leaders, which had several dimensions, was strongly related to membership commitment.  Another important factor is the members’ understanding of and support for the cooperative’s mission.  The members’ support of the cooperative mission was measured by multiple questions which determined if the member understood the cooperative’s mission, whether …

Phil Kenkel

Bill Fitzwater Cooperative Chair

Cooperatives can distribute profits as cash patronage or retain profits in the form of qualified stock, nonqualified stock or unallocated retained earnings.  Members pay taxes on qualified stock when issued and pay taxes on nonqualified stock when redeemed.  I sometimes hear managers and board members relating the benefit of nonqualified stock to the member’s tax rate.  They assume that the benefit of nonqualified stock is that the member will be a lower tax rate …

Phil Kenkel

Bill Fitzwater Cooperative Chair

Under the federated cooperative model, local cooperatives are both receiving patronage from regional cooperatives and issuing patronage to their producer members.  Regional patronage has always created tax, cash flow and balance sheet issues for local cooperatives.  In recent years, several regional cooperatives have issued patronage in the form of non-qualified equity.  That has raised questions as to how non-qualified regional patronage effects the local cooperative.   Many local cooperatives calculate patronage on a tax basis …

Phil Kenkel

Bill Fitzwater Cooperative Chair

Under the federated cooperative model, local cooperatives receive patronage (cash and retained equity stock) from regional cooperatives.  The patronage of a federated co-op and its member co-ops creates tax, cash flow and balance sheet considerations for its member cooperatives.  Historically, federated cooperatives, commonly called regionals, have structured stock patronage in the form of qualified equity. Qualified regional equity becomes part of the local cooperative’s taxable income in the year the equity is issued.

In …

Phil Kenkel

Bill Fitzwater Cooperative Chair

As I mentioned in last week’s newsletter, our cooperative research group developed a number of representative cooperatives as part of our project analyzing the impact of the 2017 Tax Cuts and Jobs Act.  Representative cooperatives are useful for providing an understandable example of the effect of a decision or policy.  Cooperative leaders obviously need to take the representative cooperative result with a grain of salt since their mileage may vary.

The representative cooperative analysis …