A Collective and Common Ownership in a Cooperative

Phil Kenkel

Bill Fitzwater Cooperative Chair

Oklahoma State University

Agribusinesses in the former Soviet Union were organized under a structure of “collective and common ownership”.  These enterprises went by a number of names including “collective” and later “cooperative”.  The members of the organizations had a common ownership in the operation but no individual property rights.  In the U.S. these collective operations (which had a very different structure relative to U.S. cooperatives) were widely criticized as having poor incentives for productivity and for their inefficiency.

In light of this perception, it is interesting to see the U.S. cooperative industry transition toward collective and common ownership.  Over the past decade there has been a general trend in agricultural cooperatives to increase the portion of equity held as unallocated reserves relative to amount of allocated equity.  This creates a situation in which the ownership in the cooperative is a collective and common ownership but where the value of the shares allocated to specific members represent a relatively small share of the total real value of the cooperatives assets.

There are several issues with a high ratio of unallocated to total equity.  First, it creates a temptation for members to demutualize (liquidate) the cooperative to gain property rights to the cooperative equity.   For example, the average ratio of retained earnings to total equity in large grain and oilseed cooperatives in the U.S. is almost 63% (USDA Cooperative Statistics 2012).  If members of those cooperatives liquidated the cooperative at book value, the value that the members received would be 270% of their total stock value.   The ratio of unallocated equity to total equity for the entire agricultural cooperative sector is a more reasonable 35%.  That implies a book liquidation of 150% of stock value.

The second issue, which has been alluded to, is that the individual member never receives the share of profits retained as unallocated equity.  Channeling funds to unallocated equity reduces the present value of a member’s future cash flows from the cooperative.  The value of future equity redemptions may not be a major consideration for a young producer.  On the other hand, we seldom see a member who is receiving a redemption donating the funds back to the cooperative.  That would b the same outcome as unallocated retentions.  This would suggest that the cash redemption has some value to members.

The final issue with higher levels of unallocated equity is whether it reduces the members’ sense of ownership and loyalty to the cooperative.  The question is whether members perceive a distinction in owning a specified amount of stock in the cooperative relative to knowing that the membership as a whole has a collective and common ownership of the firm.  Based on observations of former Soviet Union style cooperatives, I would argue that it does make a difference.

I’ll expand on the topic of unallocated equity in my next newsletter.