Tag: newsletter articles

Phil Kenkel

Bill Fitzwater Cooperative Chair

Cooperative leaders have the responsibility of protecting the cooperative’s financial security and providing members with information as to the firm’s status and performance.  One aspect of that transparency is to describe how the cooperative retained and distributed profits.  In the early days of U.S. agricultural cooperatives, there was very little non-member business and all profits were allocated to members in a combination of stock and cash patronage.  Under those conditions, the description of the …

Phil Kenkel

Bill Fitzwater Cooperative Chair

One of the key aspects of managing a cooperative is the control function.  The controlling function involves checking actual performance against benchmarks and historical standards.  This leads to the concept of “Management by Exception” where management attention is concentrated on the areas of greatest need where outcomes differ from the standard.  Many managers think of management by exception in terms of defining when to take corrective action.  However there are actually two types of …

Phil Kenkel

Bill Fitzwater Cooperative Chair

There are many flavors of cooperatives and many descriptions of the value package from participating in a cooperative.  Members are both customers and owners and also participate in governance.  I was recently asked to describe the “DNA” that is, the core element of the cooperative model.  That is a tough question because all three roles, customer, owners and member, are important.  The member value package is influenced by prices, service and access to infrastructure …

Phil Kenkel

Bill Fitzwater Cooperative Chair

In my last newsletter article I discussed the revised Section 199A deduction.  As you may recall Section 199A now creates a deduction at the cooperative level which can be retained or passed on to the producer.  Producers marketing to a cooperative potentially face a reduction in a farm level deduction.  My analysis based on “typical” grain cooperatives and grain producers indicated the cooperative needed to pass on 75% of their Section 199A deduction to …

Phil Kenkel

Bill Fitzwater Cooperative Chair

Cybersecurity is an increasingly important risk for all firms. I would be the first to say that I am no expert in cybersecurity.  Most cooperative board members are also not experts. Our natural tendency is to avoid areas where we are unfamiliar. However, the board has the responsibility of monitoring and safeguarding the cooperative’s assets. That includes monitoring the risk management plan and cyber risk are one of the types of risks that the …

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 …