Some Simple Math on Retaining Profits

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 …

Should You Invite the Devil into Your Board Room?

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 …

Return on Investment from Infrastructure Reinvestment?

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 …

Quantifying the Tradeoffs

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 …

Put a Face to Cooperative Month

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 …

Property Rights and Patronage

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 …

Plenty of Room Under the Cooperative Tent

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 …

Per Unit Retains and a Look Back at the Grain Glitch

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 …

Patronage and Pricing

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 …

Patron Drift

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 …