Are cooperatives transitioning from cost minimizers to profit maximizers?

PurposeThe purpose of this paper is to examine the optimizing behavior of agricultural supply and marketing cooperatives in the US Midwestern states.Design/methodology/approachThis paper uses firm-level data from CoBank, the primary lender to agricultural cooperatives, to evaluate optimizing behavior of 77 Midwestern agricultural marketing and supply cooperatives from 2014 through 2017. The study uses the data envelopment analysis (DEA) and the weak axioms of cost minimization and profit maximization to identify whether or not a cooperative is following a cost minimization and/or profit maximization objective.FindingsIn contrast to previous research, results provide stronger support for profit maximization as the behavioral objective of agricultural cooperatives instead of cost minimization, especially for larger cooperatives.Practical implicationsTraditional firm theory for investor-owned firms states that businesses seek to maximize profits. Agricultural cooperatives however, could aim to maximize profits so as to redistribute profits back to user-owners as patronage refunds. Or, they could minimize costs so as to lower cost of products sold and services provided to their user-owners. Given users-control the cooperative, knowing the primary objective of agricultural cooperatives will allow for better design of research and education programming.Originality/valueGiven recent changes and consolidation in the agricultural industry among farms and agricultural cooperatives, this study reexamines past work that evaluated the optimizing behavior of agricultural cooperatives. Changes in industry and the necessity to remain competitive from an agribusiness standpoint have resulted in an anticipated shift toward a profit maximizing objective. The value of this study is providing an evaluation framework, using a firm-level comprehensive dataset, that represents the cooperative system.

Distributing Mutual Advantages in Italian Cooperatives

Italian cooperative organizations contribute sensibly to the national growth and development, pursuing a social function of economic redistribution. Since they are based on the mutuality principle, the related accountancy and taxation systems follow such logic, in particular as far as the patronage refunds discipline is concerned. The aim of the chapter is to advance the understanding of such flows; the scope is pursued through an accounting records' comparative analysis based on the main legislative acts and professional and scholar literature. The results converge into a cause-and-effect model built according to a system dynamics perspective.

Financing agricultural cooperatives with retained earnings

Purpose The purpose of this paper is to explore the advantages equity capitalization programs based on retained earnings from patronage sources may provide cooperatives and their patrons that traditional equity financing methods do not offer. Design/methodology/approach The analysis is based on a model used to assess patron benefits from a cooperative that is financed by a combination of allocated equity acquired from noncash patronage refunds and unallocated equity acquired from retained earnings. The level of patron benefits is represented by the present value of the after-tax cash flow patrons receive from the cooperative, and the model is used to determine the combination of noncash patronage refunds and retained earnings that provides the greatest present value given the levels of those parameters that affect capitalization of the cooperative and the distribution of cash benefits to patrons. Findings The analysis demonstrates that only pure plans, i.e., plans based entirely on retained patronage refunds or entirely on retained earnings, will be associated with the greatest present value for any particular set of parameter values. Cooperatives that are characterized by low marginal tax rates and growth rates and whose patrons are characterized by high marginal tax rates and discount rates are those most likely to benefit from equity capitalization programs based on retained earnings. Research limitations/implications The model is based on the assumption of constant parameter values and does not account for the existence of nonpatronage income. Practical implications A useful extension of this work would be the development of a decision aid capable of generating basic operating statement and balance sheet data and enabling cooperative decision makers to conduct experiments concerning alternative financing strategies based on retained earnings. Originality/value The analysis contained in this paper is based on an explicit model and extends across a broad range of values for various parameters that affect the level, timing, and present value of cash distributions from cooperatives. Because the cash flow received by patrons is determined after the cooperative’s planned equity growth is met, cash flow comparisons are equivalent with respect to the capital provided the cooperative. In addition, the revolving period is endogenously determined.

An equity management and planning tool for cooperatives

Purpose – The purpose of this paper is to describe an equity management and planning tool used by rural electric cooperatives (RECs) and based on the times-interest-earned ratio (TIER). The objectives of the paper are to construct a mathematical model that provides a rigorous foundation for the TIER approach, modify the approach so the rate of return on equity is a function of the cooperative’s equity position, demonstrate how elements of the model can be used by RECs in setting electric rates that will enable them to accelerate the retirement of member equity, and derive a generalized form of the “modified Goodwin formula” that can be used by both RECs and agricultural cooperatives. Design/methodology/approach – Mathematical and graphical expressions of the TIER approach are developed. Simulations are used to demonstrate how RECs can set electric rates according to a target revolving period. The modified Goodwin formula is generalized to include the payment of cash patronage refunds through use of a growth model of an agricultural cooperative developed in Royer (1993). Findings – This paper demonstrates how TIER analysis and the modified Goodwin formula can be used by cooperatives to aid their decisions regarding debt and equity financing and their choices regarding cash patronage refunds, equity retirement, and growth. The paper demonstrates that cooperatives that fail to recognize the functional relationship between the rate of return on equity and the equity position may substantially underestimate the equity position necessary to meet interest coverage requirements and overestimate their ability to grow and retire equity. It also shows that RECs may be able to make substantial improvements in equity revolvement with only modest increases in electric rates. Research limitations/implications – The model developed in this paper has been simplified to focus on fundamental financial relationships. To apply this model, cooperatives may need to modify it to accommodate the complexities of their business operations. Practical implications – TIER analysis can provide a useful equity management and planning tool for both RECs and agricultural cooperatives. It also can be used by lending institutions to assess the financial health of individual cooperative organizations. Originality/value – Constructing a mathematical model that provides a foundation for TIER analysis, modifying the approach so that the rate of return on equity is a function of the equity position, demonstrating how RECs can use the model to set electric rates according to a target revolving period, and generalizing the modified Goodwin formula so it can be used by agricultural cooperatives are all original contributions.