Uniquely Cooperative: Equity Redemption
Survey tracks trends in how
co-ops redeem member equity
E. Eldon Eversull, Agricultural Economist
Cooperative Programs
USDA Rural Development
llocating net income and redeeming equity
are unique practices of cooperatives. The
bylaws of the cooperative govern its net
income allocation and equity redemption.
The board of directors is responsible for
determining the allocation of net income, equity redemption
and capital accumulation, subject to adherence to the
cooperative’s bylaws.
User-owners finance the cooperative through the
accumulation of equity capital by direct investment,
patronage refunds and per-unit retains. Without equity
accumulation, the cooperative cannot grow. To maintain
investment proportionality among current users, equity
redemption is used by most cooperatives.
USDA Cooperative Programs last studied equity
redemption practices of cooperatives in 1991. A new equity
redemption study was undertaken with a survey of 2,473
farmer, rancher and fishery cooperatives for their fiscal year
ending in 2008. One of the desired goals of the new study
was a comparison of differences and similarities of equity
redemption over time. The focus of this article will be on the
cooperatives that responded to both surveys. (The entire
report, “Cooperative Equity Redemption,” Research Report
220, will be posted on the Internet: www.rurdev.usda.gov/
rbs/pub/research.htm; for a hard copy, send an e-mail to:
coopinfo@wdc.usda.gov.)
There were 439 local cooperatives and 21 regional
cooperatives that responded to both the 2008 and 1991
surveys. Local cooperatives generally have sales and members
in one or two states. Regional cooperatives have sales in
many states, and some have nationwide sales. Regional
cooperatives usually have other cooperatives as members but
can also have individual farmer, rancher and fishery members.
Co-ops getting larger
In 1991, the median co-op respondent had between $2.5
million and $4.99 million in assets. Almost 20 years later the
median respondent to the 2008 survey was much larger, with
$5 million to $9.99 million in assets.
Between 1991 and 2008, the most used method of equity
redemption changed from redeeming equity based on
patrons’ estates to redeeming it based on a revolving fund.
Both methods are used by many cooperatives, but in 2008, 50
percent of the cooperatives used the revolving fund method,
with only 46 percent using the patrons’ estates method. This
is a major shift from 1991, when 69 percent of the same
cooperatives used patrons’ estates method and only 53
percent used revolving fund method.
The reduced use of redeeming patrons’ estates may be due
to a change in the ownership of family farms. More family
farms are now held in corporate or partnership ownership,
rather than owned by individual farmers or ranchers. A
corporation does not cease to exist when one owner dies, so
the lowered use of patrons’ estates redemption in 2008 may
be due to the change in ownership form of family farms.
Type differences found
Cotton and cotton gin cooperatives mainly use the
revolving fund method of equity redemption.
Dairy cooperatives’ use of the revolving fund fell about 20
points between 1991 and 2008, while redeeming patrons’
estates fell 10 points. In 1991, only two local dairy
cooperatives used a base-capital plan. This increased to seven
cooperatives in 2008.
Fruit, vegetable and nut cooperatives mainly redeem
equity with a revolving fund. In 2008, only one of these coops
redeemed patron’s estates, down from two co-ops in
1991.
About one-third of service cooperatives are regional
cooperatives. Virtually all of these cooperatives use revolving
funds.
Most use combination of redemption methods
Most cooperatives use a combination of methods for
equity redemption (table 2). In 2008, local cooperatives that
used revolving funds also used patrons’ estate redemptions 48
percent of the time. They based redemption on a patron’s age
17 percent of the time; as a percent of all equities, 10 percent
of the time; and on base-capital, 4 percent of the time. A
revolving fund for redemption alone was used by 94 local
cooperatives.
In 1991, 82 cooperatives only redeemed patrons’ estates.
This had fallen to 32 cooperatives in 2008.
For regional cooperatives, it appears there is a large
increase in the use of percent-of-all-equities redemptions in
2008, but this information is missing for 1991. The 1991
survey did not list the “percent-of-all-equities” redemption
method. Its use had to be hand written in by the respondent
Most use combination of redemption methods
Most cooperatives use a combination of methods for
equity redemption (table 2). In 2008, local cooperatives that
used revolving funds also used patrons’ estate redemptions 48
percent of the time. They based redemption on a patron’s age
17 percent of the time; as a percent of all equities, 10 percent
of the time; and on base-capital, 4 percent of the time. A
revolving fund for redemption alone was used by 94 local
cooperatives.
In 1991, 82 cooperatives only redeemed patrons’ estates.
This had fallen to 32 cooperatives in 2008.
For regional cooperatives, it appears there is a large
increase in the use of percent-of-all-equities redemptions in
2008, but this information is missing for 1991. The 1991
survey did not list the “percent-of-all-equities” redemption
method. Its use had to be hand written in by the respondent
as an “other redemption method.” Thus, this 1991
information is no longer available, so an accurate comparison
cannot be made.
Redemption differences between surveys
When comparing the 2008 and 1991 responses of the
same cooperatives, there were a number of differences:
- A revolving fund is now used by 54 local cooperatives that
did not do so in 1991, while 162 co-ops used a revolving
fund in 1991, but did not do so in 2008 (or had a blank
response). In 2008, 51 local cooperatives said they do not
redeem estates, while they did in 1991; an additional 22 coops
said that they redeemed estates in 2008 but did not do
so in 1991.
- Using a patron’s age as a method of redeeming equity is
now used by 45 local cooperatives that did not do so in
1991. Seventeen cooperatives no longer use this method; an
additional 17 co-ops that used a patron’s age in 1991 left a
blank response in 2008. In 2008,
the most common age used by
local cooperatives for redemption
was 65 (23 cooperatives), with age
70 ranking second (20
cooperatives). Forty-three
cooperatives used the same age in
both studies, while 21 now have a
lower age; 15 co-ops use a higher
age for redemption.
- In 2008, 22 local cooperatives
said they use a base-capital plan
for equity redemption, compared
to 6 in 1991.
- Only four local cooperatives in
both 2008 and 1991 said that they
did not redeem equity in the
current year because only small
amounts, or no allocated equities,
were held by patrons. Little or no
allocated equity was given as the
reason for not redeeming equity
by 112 cooperatives in 1991,
while only 16 gave that reason in
2008.
- Eleven cooperatives were
financially unable to redeem
equity in the current year in both
2008 and 1991. About an equal
number of cooperatives (though
not the same ones) were
financially unable to redeem
equity: 57 in 2008, and 65 in
1991.
With the economic recession of
2009, most experts are
recommending that businesses
maintain a stronger balance sheet,
which means more equity
financing. Cooperatives most often
accumulate equity capital through
net income allocated to members as
patronage refunds. To strengthen
their balance sheets with more
equity financing in uncertain
economic times, cooperatives may
need to lengthen their equity
redemption plans.
