Myth Buster: Cooperative Stock is Debt
Phil Kenkel
Bill Fitzwater Cooperative Chair
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 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 it only ultimately fulfilled with 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!
12-21-2011