Governance and Outside Equity Issues Facing Cooperatives

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 RightsRestricted to Member-Patrons

• Proportional investment cooperative
• Base capital plan which requires members to
  invest in proportion to patronage (DFA, Land
  OLakes, 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 RightsNot 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 RightsNot Restricted to Member-Patrons

• Ownership rights are assigned to investor class
  of membership
• CHS and CoBank have issued preferred stock

9
Ownership RightsNot 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