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
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.
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.
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
Traditional Cooperatives
al
ion ent
t
r
o tm
op
s
-Pr Inve
n
o
r
N be
m
Me
Pro
Mem portional
ber I
nvest
ment
Proportional Investment
to
fits s
e
n
Be tron
Pa
Bene
fits
Inves to
tors
le
ab
m
ee
ed
R
Ownership
Rights
o
dt
cte rons
i
r
t
st
Re er-Pa
b
m
Me
No
t
Me Rest
r ic
mb
ted
er to
Pa
tr o
ns
NonRe
and T deemabl
e
ransf
erab
le
Cooperatives
Member-Investor Cooperatives
New Generation Cooperatives
e
nversion
Non-Co
Pu
bli
c
Out
erativ
in Coop
t
o
N
y
it
side Equ
Out
side
Equ
i ty i
Co
nv
ly ers
Tr
ion
ad
ed
Co
mm
on
Sto
c
n Co
oper
ative
Cooperatives with Capital
Seeking Companies
Investor-Share Cooperatives
k
Investor-Oriented Firms
Source: Chaddad and Cook
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)
Ownership Rights:
Not Restricted to Member-Patrons
• Ownership rights are assigned to investororiented 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
Ownership Rights:
Not Restricted to Member-Patrons
• Ownership rights are assigned to investor
class of membership
– CHS and CoBank have issued preferred stock
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
Outside Equityholders
•
•
•
•
•
•
Venture capitalists
Preferred stockholders
Technology providers
Local community investors
Cooperative that supplies commodity
Others
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
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