Author: Chris Peterson, Michigan State University, peters17@msu.edu
The good news about cooperative finance is that many members coming together to form and operate a cooperative have more financial resources collectively than each would have alone. As a result, cooperatives allow members to reap returns on assets related to their personal operations that they could not otherwise reap. But challenges exist for cooperatives and their members in the financial arena.
As the only source of equity capital, the total pool of equity from members may be too small to make needed investments. This is particularly true in the current market environment for many products and services that might be provided by cooperatives. Today’s markets are often global in scope, large in the absolute amount of capital needed to invest to serve the market and fast in terms of the change and innovation needed to stay in the market. Each of these market characteristics puts pressure on the need for capital from cooperative owners.
In addition, cooperative equity has some structural limitations. It is not very liquid. Once members invest it, getting it back from the cooperative tends to be a problem. Only other members can provide the equity needed to pay out a departing member. It is bound by “horizon problems.” As members get older and want to retire from the personal businesses that make the cooperative valuable, they have a growing need to have their equity capital returned, but the cooperative business still needs the capital to continue operations. Finally, when member equity is returned, it is most often returned at book value or the value at which it was first paid in. As a result, retiring members do not recoup any excess or residual value of the cooperative’s strong financial condition.
These challenges have existed for a long time with cooperative finance. They are growing more acute. We have no magic answers to these challenges but members, existing and potential, need to be aware of their importance.