Category: Cooperatives

Phil Kenkel

Bill Fitzwater Cooperative Chair

The Rochdale Pioneers adopted a series of laws, objectives, practices and procedures that assured their economic success. However, they never actually adopted as a group the specific set of principles known historically as the Rochdale Principles. Almost every major writer of the history of the Rochdale Pioneers has his or her own list of what the principles were, and each list is different both in content and number. With that being said, The Rochdale …

Phil Kenkel

Bill Fitzwater Cooperative Chair

Most U.S. agricultural cooperatives were formed around the needs of a homogeneous set of members.  Over time, the membership base has evolved to include producers of different ages, different farm operations and different needs for products and services.  Membership heterogeneity includes differences in member age and time horizon.  A member’s time horizon affects their preferences for the cooperative’s financial choices.  For example, members with shorter time horizons may favor distributing the maximum amount of …

Phil Kenkel

Bill Fitzwater Cooperative Chair

Volume have been written on the roles and responsibilities of the various participants in a cooperative.  The member role is often described as: “Members have a responsibility to provide capital to the cooperative, a responsibility to use and support the cooperative and a responsibility to actively participate in governance”.   That is a great description of a cooperative that is hitting on all cylinders.  At the other end of the spectrum, there are cooperative members …

Phil Kenkel

Bill Fitzwater Cooperative Chair

One somewhat circular definition of an effective board of directors is that a good board does things right.  That statement becomes more useful when we try to categorize the areas that the board needs to get right.  I’m going to suggest eight areas that your board needs to get right.

A good board also needs the right structures.  Those structures are unique to each cooperative but includes components such as the right number of …

Phil Kenkel

Bill Fitzwater Cooperative Chair

Patronage is one of the benefit streams from a cooperative.  Patronage is affected by both prices and efficiency.  One would hope that a cooperative sets prices at market level and the resulting profits and patronage reflect the efficiency of the firm.  From that line of reasoning, it is easy to see why cooperatives focus on efficiency.  Research suggests that the ratio of expenses to gross margin (a common measure of efficiency) is correlated with …

Phil Kenkel

Bill Fitzwater Cooperative Chair

The old saying is “You have to spend money to make money!”  In terms of our discussion of growth, the cooperative has to reinvest in equipment and infrastructure to maintain and grow.  Every investment should be evaluated to determine if is forecast to generate an acceptable return.    Many boards and CEOs skip that step concluding that if they committed to replacing the asset the return is ill relevant.  However that return is very relevant …

Phil Kenkel

Bill Fitzwater Cooperative Chair

Most open membership commodity marketing and farm supply cooperatives use a system of revolving equity.  Despite its prevalence, revolving equity has few cheerleaders.  Many cooperatives have relatively long revolving cycles.  For that reason, cooperative leaders often don’t mention revolving equity as a key part of the value package.  It is common to hear statements suggesting that the creation of revolving equity also creates future burdens.  As in any part of the cooperative financial model, …

Phil Kenkel

Bill Fitzwater Cooperative Chair

Cooperatives have two types of equity.  Allocated equity, which included membership stock, retained patronage and preferred stock, and unallocated equity.  Allocated equity has a name associated with it and a clear property right.  Unallocated equity is a general reserve fund.  The members collectively own unallocated equity but it is not associated with any specific member, hence the term “unallocated”.  While allocated equity is a central part of the cooperative business model it is rare …

Phil Kenkel

Bill Fitzwater Cooperative Chair

In my last newsletter I introduced the concept of a cooperative’s sustainable growth rate.  That is the rate that the cooperative can grow without increasing its debt ratio.  The sustainable growth rate is a function of the cooperative’s return on equity and its retention ratio.  The retention ratio is in turn, the percent of profits that are not distributed to members as either cash patronage or equity retirement.  In simple terms a cooperative’s growth …

Phil Kenkel

Bill Fitzwater Cooperative Chair

Tax reform is still a work in progress as of this writing.  While the final analysis cannot be completed until the dust settles I have been using my cooperative simulation program to determine the impact of tax reform on a typical grain and farm supply cooperative.  I won’t go into the details of the simulation but it is based on financial data from a case study cooperative and considers the members return over a …