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Governance and Outside Equity Issues Facing Cooperatives

Governance and Outside Equity Issues Facing Cooperatives. Agricultural and Food Cooperatives in Rural Development: Implications of Business Dynamics for the Public Policy Michael Boland, PhD Arthur Capper Cooperative Center Department of Agricultural Economics Kansas State University.

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Governance and Outside Equity Issues Facing Cooperatives

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  1. Governance and Outside Equity Issues Facing Cooperatives Agricultural and Food Cooperatives in Rural Development: Implications of Business Dynamics for the Public Policy Michael Boland, PhD Arthur Capper Cooperative Center Department of Agricultural Economics Kansas State University

  2. Motivation • Capper-Volstead Act has served cooperatives well • Cooperatives used internal earnings to finance growth and revolve allocated equity to members. • In recent years, this has been insufficient to finance growth due to low profitability and aging membership. • Outside equity is needed to finance this growth.

  3. Objective • The objective is to provide examples of well known cooperatives that have changed organizational structure in recent years in an effort to seek outside equity.

  4. Ownership Rights in Co-ops • Traditional cooperative had these ownership rights • Restricted to producer-members • Residual rights are nontransferable, nonappreciable, and redeemable • Benefits based on patronage • Linked to principles of cooperation • Democratic control • Earnings based on patronage • Members provided the equity

  5. Source: Chaddad and Cook

  6. Ownership Rights:Restricted to Member-Patrons • Proportional investment cooperative • Base capital plan which requires members to invest in proportion to patronage (DFA, Land O’Lakes, CoBank) • Member investor cooperative • Earnings allocated in proportion to patronage and equity investment (Fonterra) • New generation cooperative • Investment equity is aligned with delivery rights (sugar beet cooperatives, others)

  7. Ownership Rights:Not Restricted to Member-Patrons • Ownership rights are assigned to investor-oriented firms through • Strategic alliances • Birds Eye Foods has 59% of its equity owned by Vestar Capital and management • Trust Funds • Diamond of California formed a limited partnership with an insurance company • Subsidiaries • DFA uses a holding company to establish joint ventures

  8. Ownership Rights:Not Restricted to Member-Patrons • Ownership rights are assigned to investor class of membership • CHS and CoBank have issued preferred stock

  9. Ownership Rights:Not Restricted to Member-Patrons • Cooperatives demutualize or convert to investor-oriented firms • Public corporations • Dakota Growers Pasta Company • Calavo Growers • Limited Liability Companies • South Dakota Soybean Processors • Tall Corn Ethanol Cooperative • Dakota Ethanol • Others have started the process

  10. Outside Equityholders • Venture capitalists • Preferred stockholders • Technology providers • Local community investors • Cooperative that supplies commodity • Others

  11. Public Policy Issue • Definition of what a cooperative is • Investor and producer classes of membership • Limited return on membership capital • 50% of the voting control in hands of producer class • Different states are redefining what a co-op is • Implications for lenders such as CoBank

  12. Future Issues • Need for outside equity will continue to grow • Business model must be sound • Illiquid and nontransferable equity is an issue • Need for freely traded ownership interests

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