Comparing Financial Performance of Cooperatives and Independent Firms
Phil Kenkel
Bill Fitzwater Cooperative Chair
In last week’s article I discussed a study that suggested that offering a diversified mix of
products and services, good purchasing strategies and operational efficiency were correlated with
success for both cooperatives and independent firm. The study also suggested that independent
grain elevators and farm supply firms had a higher return on assets relative to cooperatives. The
relative performance of cooperative and investor owned firms is an interesting question that has
been subject of many studies. Studies conducted in 1979 and 1983 found that cooperative grain
elevators and farm supply firms had similar return on assets. The cooperative firms had lower
leverage but were also less efficient (lower asset turnover). A study comparing regional
cooperatives with similar investor owned firms found that the firms generated similar returns to
equity. Studies in the dairy industry concluded that dairy cooperatives outperformed
independent dairy processors.
A controversial and widely publicized study published in 2002 by an international management
consulting firm concluded that cooperatives “destroy value” because they did not generate
sufficient returns on assets to justify their member’s investment. In response to this conclusion
researchers at the University of California Center for Cooperatives compared the financial
performance of 41 west coast cooperative with similar independent firms. The cooperative data
represented 14 farm supply cooperatives, 11 grain cooperatives, 11 fruit and vegetable
cooperatives and 5 dairy cooperatives. The study found that cooperatives and independent grain
and farm supply firms had similar profitability. The cooperatives had slightly lower leverage
(lower debt levels) but also had slightly lower liquidity. The grain, farm supply and fruit and
vegetable cooperatives had a lower asset turnover relative to the independent firms while the
dairy cooperatives had a higher asset efficiency.
What the moral from these mixed results? As I have discussed in previous newsletters a
cooperative’s true value cannot be measured entirely by financial performance. However even
under this criteria cooperative firms do not appear to underperform or over perform other
business forms. Cooperatives tend to be less leveraged (a good trait in today’s economy). They
tend to be over-invested in assets, possible because of pressure to service their diverse
membership. Cooperatives also appear to be slightly more challenged in maintaining liquidity,
probably due to pressures to redeem equity and provide cash patronage. In business, managers
run a race with no finish line. In my book, cooperative managers are ahead of the pack.
10-20-2009