Using the ‘extra-value index’ to measure
agricultural cooperative performance
By Carolyn Liebrand, Ag Economist
USDA Rural Development, Cooperative Programs
Editor’s Note: The extra value index was developed by USDA
Cooperative Programs previously to evaluate dairy cooperative
performance. Results for dairy cooperatives can be found in
Research Reports 166 and 212, and also in “Rural Cooperatives”
magazine (Nov./Dec. 1996 and Sept 1998 issues). This article
summarizes the results of “Measuring the Performance of
Agricultural Cooperatives,” a new USDA report that extends the
analysis to all types of agricultural cooperatives.
he task of measuring the financial
performance of cooperatives is problematic
because of the attributes of the cooperative
form of business. One such feature is the use
of member equity to finance cooperatives.
The cost of member equity is often overlooked.
Most of the commonly used financial measures — return
on equity, return on assets, return on operating capital, net
margins on sales, net margins per unit and so forth — do not
yield unequivocal conclusions about a cooperative’s
performance, in large part due to the treatment of equity.
Another complicating factor is a cooperative’s lack of publicly
traded stock. For public companies, the stock price may serve
as a proxy for a company’s performance and market value.
For these reasons, it is difficult for members to judge their
cooperative’s performance. However, members need to be
able to fully evaluate their cooperative’s performance. The
more complete the measure of cooperative performance, the
better equipped the board is to guide the cooperative and to
evaluate and appropriately reward cooperative managers.
What is extra value?
In previous reports, USDA Cooperative Programs took an
innovative business-school tool for measuring the
performance of a business and modified it for use with
cooperatives. This method is fairly simple. It calculates the
“extra value” a cooperative generates through its operations
by subtracting an interest charge on equity capital from net
savings:
Extra value = Net savings - Interest on equity
Interest on equity = member equity x interest rate for equity
Performance was measured using three different interest
rates for the charge on equity to reflect a range of risk
premiums. The December average of the British Bankers
Association’s London Inter-Bank Offered Rate (Libor) plus
200 basis points provides the basic reference rate. This Libor
+ 2 “basic” rate reflects the commonly held opinion that
banks in the United States will generally extend loans to a
firm with a better-than-average credit rating, at an interest
rate of about 200 basis points above the Libor.
The extra-value approach enables a cooperative’s use of
member-supplied funds to be fully measured — whether
member capital is earning more, or less, than it could in
alternative investments. The value a cooperative generates
over and above its expenses, including an opportunity cost for
its equity capital, is termed “extra value.” A positive extra
value indicates that a cooperative has created value by its
operations, while a negative extra value means that a
cooperative has actually diminished the value of members’
investment.
Extra value was also calculated at two higher rates – the
basic rate plus 5 percentage points and the basic rate plus 10
percentage points – to account for the fact that equity
investments are riskier than debt and require higher rewards.
For comparisons over time and among different types of
cooperatives, extra value is expressed as a percentage of
operating capital. This common-sized index is thus scaleand
operating mode-neutral.
Extra-Value Index = Extra Value / Operating Capital x 100
Operating capital = fixed assets + net working capital
Fixed assets = non-current assets
Net working capital = current assets minus current liabilities
Selection criteria for cooperatives
Agricultural cooperatives that were on the “Top 100” list
(compiled by USDA Cooperative Programs, based on a coop’s
revenue) for at least four years in both of the five-year
time periods 1992–96 and 2000–04 were included in this
study. Multiple years were averaged to help minimize the
impact of extraordinary factors on results. Use of this criteria
resulted in the selection of 65 agricultural cooperatives.
Based on their main source of revenue, the cooperatives
were grouped into seven general types: cotton, dairy, farm
supply, fruit and vegetable, grain, sugar and “other.” The few
diversified (where marketing and supply operations both
generate significant revenue), rice, poultry and livestock
cooperatives were combined in the “other” category.
Ag co-op performance
Performance was assigned to one of five categories,
according to the cooperatives’ return on equity and extra
value generated at three different interest rates:
Category I — Negative returns. Cooperatives in this
category had a negative average return on equity for the fiveyear
period.
Category II — Positive return on equity, but no extra
value generated. These cooperatives averaged positive
return on equity for the five-year period, but showed a
negative extra value when the basic rate was charged for
equity capital.
Category III — Extra value generated at a basic interest
charge for equity. These cooperatives were adding sufficient
value through their operations to cover the opportunity cost
of member-supplied capital at a rate similar to what they
would have had to pay for debt capital.
Category IV —Extra value generated with a moderate
risk premium on equity capital. Cooperatives in this group
showed positive average extra value when interest on equity
was charged at a 5 percent premium over the basic rate.
Category V — Extra value generated with a higher risk
premium charge for equity. Cooperatives in this category
were able to average positive extra value for the five-year
period when applying a 10 percent risk premium (over the
basic rate) to reflect the historical risk premium for equity
investment.
Table 1 shows the numbers of cooperatives, according to
type, that performed in each category for each time period.
More cooperatives showed positive extra value (category III,
IV or V) in the second time period (46 cooperatives) than in
the first (39 cooperatives). The different types of
cooperatives followed suit, with the exception of the farm
supply cooperatives, where there were two fewer cooperatives
with positive extra value — at any interest charge for equity
— in the second time period.
For 2000-04, all of the cotton cooperatives showed
positive extra value and more than 80 percent of the grain
and dairy cooperatives generated extra value. A majority of
the other types of cooperatives generated positive extra value
in the second time period.
Five cooperatives showed consistent, strong performance
— generating extra value with a 10 percent risk premium
added to the basic charge for equity capital in both time
periods (category V). Three of these high-performers were
dairy cooperatives.
Furthermore, except for farm supply cooperatives,
cooperatives of each type were found in the highest
performance categories, IV and V, in 2000-04. This indicates
that a range of agricultural cooperatives are capable of
performing admirably, regardless of the product they may
handle.
On the other hand, with the exception of cotton
cooperatives, at least one cooperative of each type failed to
generate sufficient value to cover a basic charge for the use of
their members’ equity. However, fewer cooperatives of each
type (except for farm supply cooperatives) lost value in the
second time period than in the first. In fact, farm supply
cooperatives were the only type where a majority dropped in
performance category between 1992-96 and 2000-04.
Group average extra value index
The simple average of the individual cooperatives’
performances is shown in Table 2. The 65 cooperatives in
the study averaged positive extra value in both time periods at
the basic plus 5 percent rate, a category IV performance. For
2000-04, this group of agricultural cooperatives created 2.3
cents in extra value for every dollar of operating capital
expended, on average, when a charge for equity capital with a
5-percent risk premium over the basic interest rate was
applied.
However, if members’ risk premium was 10 percent, the
65 cooperatives, on average, fell short of being able to pay
member-producers this premium by 1 cent for each dollar of
operating capital used.
Grouping cooperatives according to their main product
showed a range of performance. Cotton cooperatives, on
average, outperformed the other types. They generated
positive extra value, with a 10-point risk premium charged
for equity (performance category V) in both time periods. As
a group, dairy cooperatives performed almost as well, but
they dropped to performance category IV for 2000-04,
missing members’ expectations by an average of just 0.8 cent
per dollar of operating capital when equity was charged a 10
percent risk premium over the basic rate.
The other five types of cooperatives all performed at
category III for 2000-04, averaging positive extra value when
charged a basic rate for their use of equity capital.
The averages obscure the fact that performances of
individual cooperatives of the same type often varied widely.
For example, at the basic plus 10 percent rate, four of the 16
dairy cooperatives ranked in the top 10 of the 65 cooperatives
in 2000-04.
At the same time, a dairy cooperative showed the largest
drop in rank between the two time periods among the 65
cooperatives. Another dairy cooperative was among the
bottom 10 in rank for 2000-04. Similarly, of the three cotton
cooperatives represented in the sample, two were in the top
10 in 2000-04 while the third cotton cooperative showed the
second largest drop in rank of all 65 cooperatives.
The highest and lowest ranking cooperatives were both
fruit and vegetable co-ops. Likewise, there was one grain
cooperative in the top 10 for 2000-04, with two grain
cooperatives ranking in the bottom 10.
Conclusions
The results of this extra-value analysis show that while all
the cooperatives operated in the same general economic
conditions of each time period, some saw their performance
improve, while other cooperatives’ performances worsened
between the two periods. However, at least one of each type
of cooperative (with the exception of sugar cooperatives) in at
least one of the two five-year time periods considered, was
able to add value sufficient to reward members for the use of
their capital at a rate representing a 10-point risk premium
above the basic rate.
Thus, this exercise of measuring cooperative performance
by the extra value method tells us that cooperatives of all
types can be very able performers.
Some factors such as a cooperative’s pricing policies are
not captured by the financial statements and thus are not
reflected in the various financial performance measures,
including the extra value measure. The value of intangible
cooperative benefits is also elusive and hard to quantify.
However, these benefits are very real for members. For
some cooperatives that did not appear to be fully rewarding
members for the use of their equity, it may very well be that
compensation came through avenues not captured by the
extra-value measure.
For references used in this article, please contact the
author at Carolyn.liebrand@wdc.usda.gov.
