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: 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.




May/June Table of Contents