Their Loyalty or Our Value Package

Phil Kenkel
Bill Fitzwater Cooperative Chair
Oklahoma State University


At a recent cooperative educational program, a large producer was invited to present his perspective toward his local cooperative. He prefaced his remarks with the comment that he placed no value on cooperative stock since it was unclear when it would be redeemed and its value could be written down. His views were another spin on the familiar desire for deep discounts just above marginal costs. The producer was not interested, or perhaps had not been recruited, to serve on the board or become involved in the cooperative.

A common reaction to these types of expectations is to conclude that the producer has no loyalty to the cooperative and wants benefits without the responsibility of investing. There is validity to those claims but the issues are worth pondering. Loyalty to a cooperative is not an end in itself. It is rather a reflection of the belief (and often fact) that patronizing the cooperative on a long-term basis is in the producer’s best interest. The lack of “loyalty” of the disinterested large producer may be explained by his first statement about cooperative equity. In most situations, the prices of products, services and commodities are similar between a cooperative and its independent competitor. The cooperative value package provides three advantages: cash patronage, stock patronage and the opportunity to be involved in and influence the direction of the business. The net impact of cash patronage is reduced by the tax impacts of the qualified stock. A significant part of the cooperative value package is the fact that the member is building equity without any out-of-pocket investment. If members do not consider themselves an owner, their value package is obviously reduced.

Building loyalty in a cooperative comes down to explaining why patronage is in the member’s long-term best interest. That involves creating the best value package of price, service and investment in infrastructure and communicating the value of ownership and governance. Ownership value is diminished by long revolving periods and eliminated when cooperatives channel member returns to unallocated reserves. Rapid equity revolvement requires high profitability, which may diminish the customer-level returns. Overall, cooperative managers and boards do a great job of balancing those tradeoffs and creating an enviable value package. They often fall short in communicating the entire value package, particularly the value of ownership. Are today’s producers less loyal or do we need new ways to communicate our value?


Myth Buster: Cooperative Stock is Debt

By Phil Kenkel
Bill Fitzwater Cooperative Chair
Oklahoma State University


The revolving stock in a traditional cooperative is an interesting instrument. Unlike stock in a publicly traded corporation, it has no market value. This absence of a market value necessitates that it be eventually redeemed by the cooperative firm. This creates the unique structure of the cooperative where equity is continually being destroyed and replenished. Even the national accounting standards board has at times been concerned, or perhaps confused, about cooperative equity. This generated proposals that cooperative equity be treated as instruments with properties of debt. Cooperative accountants were quick to point out that this structure would leave cooperatives without owners.

I have heard both members and cooperative leaders proclaim that a cooperative’s revolving equity is debt. The member’s statement is usually made as part of an argument that the cooperative must redeem their equity at a given age. Cooperative managers sometimes describe revolving equity as debt as part of a rationale for retaining funds as unallocated reserves (retained earnings) rather than as allocated equity. Managers and board members in a cooperative struggling to reduce revolving periods are often particularly hesitant to issue new equity.

Despite the unique characteristics of cooperative equity, it is not debt. Unlike a debt instrument, the cooperative board has discretion as to when it is redeemed. When required by financial circumstances, cooperative equity can be written down in value. A cooperative that has experienced losses obviously doesn’t have the unilateral ability to write down its debt. Cooperative stock has value to members only when it is redeemed. The principle of distributing patronage in proportion to business volume is only ultimately fulfilled when the distributed stock has been redeemed. While it is essential that cooperatives redeem stock, the member is the owner of the firm. Unlike lenders, owners receive the residual claim. The board’s first priority should be to manage the cooperative’s balance sheet. The equity redemption budget should be determined by the cooperative’s financial resources, not as an implication of the redemption system.

Profitable cooperatives absolutely can issue equity and redeem it on an acceptable cycle. There is clear evidence of this from some of Oklahoma’s cotton ginning cooperatives that have very short revolving cycles. Providing your cooperative has adequate levels of unallocated equity, you should have no hesitation in retaining funds as allocated equity. In fact, it is the only vehicle of retaining funds that provides an ultimate benefit to the member. Retained patronage is the primary vehicle for members to build ownership in their cooperative. Issuing stock is not creating debt but rather creating owners.

Myth:  Cooperative Stock is Debt

Status: Busted!