Tag: newsletter articles

Phil Kenkel

Bill Fitzwater Cooperative Chair

The wording of the Section 199A provision of the Tax Reform and Jobs Act of 2017 has created great consternation.  One aspect of the section provided members with a 20% deduction on “qualified cooperative dividends”. A “qualified cooperative dividend”  was defined as “any patronage dividend (as defined in section 1388(a), any per-unit retain allocation (as defined in section 1388(f)) and any qualified written notice of allocation (as defined in section 1388(c),….” Perhaps this is …

Phil Kenkel

Bill Fitzwater Cooperative Chair

When we discuss the circle of responsibility in a cooperative we typically describe four groups consisting of the members, board, CEO and employees. That raises the interesting question of whether any of those groups could overlap.  More specifically, should employees who are bona fide agricultural producers be allowed to apply for membership?

The distinction between employees and members varies across cooperative sectors.  Not surprisingly, in worker owned cooperatives almost every employee is a member.  …

Phil Kenkel

Bill Fitzwater Cooperative Chair

In my last newsletter I described how the growth of a firm is determined by its earnings retention rate (net capital investment as a percent of net income) multiplied by its return on equity.  Net capital investment is capital investment less depreciation.  The intuition is easy to understand. In order for your cooperative to grow you have to be investing in assets at a rate greater to the rate at which they are wearing …

Phil Kenkel

Bill Fitzwater Cooperative Chair

A sea captain who ignores drift can miss their intended destination by hundreds of miles.  The cooperative board faces a similar challenge in accounting for patron drift.  Patron drift is the constant evolution of the needs and attitudes of a cooperative’s membership.  In most cooperative part of that drift relates to the fact that the membership has become more diverse.  It is impossible for a cooperative to evolve in every needed direction at once.  …

Phil Kenkel

Bill Fitzwater Cooperative Chair

I came across some interesting research, still in progress, which investigated the impact of specific governance practices with cooperatives return on assets and return on equity.  Interestingly enough, size, at least as measured by total sales did not appear to affect profitability.  Of course sales is not always a good measure of the relative sizes of cooperatives across different sectors such as grain, farm supply and cotton ginning.  The frequency of strategic planning was …

Phil Kenkel

Bill Fitzwater Cooperative Chair

Differential pricing, which is charging or offering different prices to different customer groups, can make good business sense.  In many cases, equal pricing is not equitable because there are cost differences associated with volume, location or handling method.  Most cooperative members understand and accept the rationale for pricing differences which are clearly related to cost factors.  Differential pricing can become controversial when it is beneficial but not necessarily equitable. For example, because many of …

Phil Kenkel

Bill Fitzwater Cooperative Chair

The cooperative business model is unique in that members are both customers and owners.  For that reason pricing strategies in a cooperative can become controversial.  As owners, members should want pricing that allows the cooperative to effectively compete and be financially stable.  That allows the cooperative to be profitable and distribute benefits through patronage.  As customers, each individual member wants favorable prices that create immediate benefit.  Differential pricing, charging different prices in different situations …

Phil Kenkel

Bill Fitzwater Cooperative Chair

In my cooperative class I have student teams create hypothetical cooperatives and perform a feasibility analysis.  It is always interesting to see how fresh eyes look at the cooperative business model.  That makes me ponder how I would design the perfect cooperative. I’ll limit that discussion to a traditional open membership cooperative such as a farm supply and commodity marketing cooperative.  The closed membership or “New Generation” cooperative is really a different animal.

I …

Phil Kenkel

Bill Fitzwater Cooperative Chair

In 2000 a major electronic retailer began selling the same DVD movies at different prices to different customers.  The differential prices were based on the customer’s previous purchases.  Customers who had purchased more DVDs in the past were actually charged a higher price.  In essence, the retailer was trying to target price incentives to new or infrequent customers.  Loyal customers soon uncovered the differential pricing strategy and flooded the chat boards with complaints.  The …

Phil Kenkel

Bill Fitzwater Cooperative Chair

My students in Ag Cooperatives class often struggle with the concept of depreciation.  It is a complex subject particularly when all of the impacts on the firm are considered.  The basic concept of depreciation is a measure of the amount of an asset “used up” during an accounting period.  If my son mows yards and calculates his income without depreciation he will be overestimating his actual income since he is gradually wearing out his …