No Substitute for Member Equity In Cooperatives
With the rapid structural changes occurring throughout agriculture (highlighted in the cover story of the September-October 1998 issue of Rural Cooperatives), questions and ideas frequently surface about new and innovative ideas for financing cooperatives. Inevitably, these discussions fall back to the basics of cooperative finance. If members want to control their off-farm businesses over the long term, they have to provide adequate risk capital (equity) to finance the cooperative. Control follows ownership.If outside sources of equity are engaged, they often put a different set of fiduciary responsibilities into play, diminishing maximum benefits for cooperative owner-users. Longer term reliance on outside equity can also have the affect of creating more of a "corporate" than a "cooperative" culture in the organization. In a limited number of cases, this has eventually led to conversion of cooperatives into investor-owned firms.
A solid owner-equity base provides cooperatives with the ability to acquire credit through cooperative and commercial banks, insurance companies, governmental financial programs, or through issuance of commercial paper. Owner equity in 1997 represented 55 percent of total assets of 386 local farm supply cooperatives (see page 32) and 36.4 percent for the largest 100 cooperatives (see page 12). The equity to total asset ratio for all farmer cooperatives was 42 percent in 1997.
Under a policy to encourage development of cooperatives, USDA Rural Development, through its Business and Industry (B&I) Guaranteed Loan program, has earmarked $200 million in 1999 for two program areas to spur the development of cooperatives. One is for conventional B&I loan guarantees for loans originated by cooperative or commercial banks. Examples of the use of this instrument are documented in the article on page 26. The second is for guarantees of loans to farmers for stock purchases in new value-added cooperatives.
Cooperative leaders need to be mindful of maintaining a strong owner-equity base as the foundation for their continued operations. Cooperative practices need to be scrutinized to identify and change faulty practices, such as: 1) allowing ownership to fall into non-producer, non-patron hands; 2) failing to service equity properly so that ownership is not in the hands of current users, including the failure to plan for equity redemptions; 3) allowing unallocated reserves to be a dominant equity source, thereby raising the question of who really owns the cooperative; and 4) attempting to "grow" the cooperative faster than the carrying capacity of members' equity.
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