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 …
Phil Kenkel
Bill Fitzwater Cooperative Chair
The characteristics of the tax reform package and even its likelihood of passage are still in play as of this writing. Still, it is not too early to begin to think about how changes in tax regulations should impact how we distribute and retain profits in cooperatives. The tax treatment of cooperatives is one of the more interesting aspects of the cooperative business model. In general terms, Sub-Chapter T of the IRS code allows …
Phil Kenkel
Bill Fitzwater Cooperative Chair
A common aspect of the strategic planning process is to identify the core competencies of the organization. When a cooperative, or other organization, is forced to downsize they are also advised to concentrate on their core competencies. That raised the question of what constitutes a core competency.
C.K Prahalad and G. Hamel introduced the concept of core competencies in a 2014 Harvard Business Review article “The Core Competence of the Corporation. According to the …
Phil Kenkel
Bill Fitzwater Cooperative Chair
Sometime there are great questions with no simple answers. An example of that is the question of how much Section 199A deduction a cooperative needs to pass on to keep their members equivalent with farmers marketing through non-cooperative firms. The first difficulty in answering the question is that the effect is unique for each producer. Producers marketing through cooperatives face a possible offset (reduction) to another deduction that they would otherwise have available. The …
Phil Kenkel
Bill Fitzwater Cooperative Chair
As we have been discussing, most agricultural cooperative now face a diverse membership with different time horizons, different needs for goods and services and different attitudes toward the cooperative. Time horizon issues are influenced by the equity management system with an age of patron system creating the most issues. The length of the revolving period also affects time horizon issues. Another dimension in membership heterogeneity is differences in the goods and services needed from …
Phil Kenkel
Bill Fitzwater Cooperative Chair
As cooperatives mature, their membership becomes more diverse. There are many dimensions of membership diversity and each has different implications for the CEO and board. Cooperative members have different time horizons. The cooperative’s equity management system and revolving period can exaggerate or minimize time horizon differences. Cooperative members have different needs for products and services. Patronage pools and margin structures can partially address those differences. A final level of member heterogeneity is differences in …
