Valuing the Cooperative Firm

Phil Kenkel

Bill Fitzwater Cooperative Chair

Oklahoma State University

What is the value of a cooperative?  We know the true value includes its role in keeping the market competitive, service and the subtle value of being an owner-user.  There is also clearly a financial value.  Placing an amount on that value is an interesting question.  Starting with the balance sheet, we could look at the value of allocated equity.  The value to the member of allocated equity is the present value of the amount received when it is redeemed.  In the case of an inactive member, the value of their cooperative stock is some discount on the face value depending on how long they wait for the stock to be redeemed.  If the cooperative was dissolved, the value to the inactive member would be their share of the total cooperative.  If the dissolution is at book value, the value is the value of both the allocated and unallocated equity.

In the corporate world firms are constantly valued in the market place.  Analysts also value firms to try and determine if a stock is over or under priced.  Those valuations are rarely based on balance sheet value but are instead the discounted value of future cash flows.  Applying that concept to a cooperative would give us a very different picture of financial value.  Since the approach is not typically applied to cooperatives there is no accepted procedure.  A conservative value would be the future cash patronage and redeemed equity, all adjusted to present dollars.  A member who owns stock in a cooperative this year and intends to continue using the cooperative can anticipate future cash patronage and ultimately an equity redemption which involves not only the stock they currently hold but stock that will be issued in future years.  The most comprehensive value of the cooperative would be the present value of future cash flows.  That would be analogous to corporate valuation.  The members, as a group, will not only receive future cash flows and redemptions but will own the physical assets that the cash flows support.

Putting these in the context of a case study cooperative is interesting.  For my example cooperative the allocated equity is 59% of total equity, which means the stock has a value of 59% of the cooperative assets.  If a member is 10 years from retirement the present value of that stock is 74% of face value.  In this case the liquidated value of the firm (at book value) is worth 170% of face value.  Using a 30 year time horizon the present value of future patronage and redemption is over 300% of face value.  In other words, even accounting for the time value of money and assuming the member will have to wait 30 years for redemption; the value of the cooperative stock is three dollars on the dollars.  The present value of all cash flows to the cooperative is over 450% of face value.  We could come up with higher or lower number by changing the time horizon, interest rate and consideration of taxation.  It is clear that the value of the cooperative in creating future patronage is much greater than the face value of cooperative stock.

If cooperative researchers are able to agree on measuring the value of a cooperative, the next challenge will be communicating that value.