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Unit IV.

Unit IV. Co-op Finance. Co-op Balance Sheet. = a financial statement that lists the value of what the co-op owns (assets), what it owes to others or creditors (liabiilties), and what the owners have invested in the business (net worth or equity). Unique Co-op Balance Sheet Items. Assets

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Unit IV.

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  1. Unit IV. Co-op Finance

  2. Co-op Balance Sheet = a financial statement that lists the value of what the co-op owns (assets), what it owes to others or creditors (liabiilties), and what the owners have invested in the business (net worth or equity)

  3. Unique Co-op Balance Sheet Items • Assets Investments in other co-ops • Liabilities Cash patronage refunds payable Accounts payable to patrons Loans payable to bank for cooperatives • Net Worth Allocated credits Retained patronage refunds Certificates of investment Revolving equity Surplus Unallocated reserves (= retained earnings)

  4. Allocated Equity Capital = • Money invested in a business that can be assigned or attributed to and, therefore, claimed by an individual owner

  5. Co-op Sources of Funds • Equity Capital • Debt Capital • Operations: Earnings, Depreciation • Sale of Assets

  6. Co-op Equity Capital Characteristics

  7. Co-op Needs for Equity • To provide services • To survive adversity (risk capital) • To obtain credit

  8. Equity Capital of 100 Largest Ag Co-ops % of Total Capital Typically, 35-40% of total  co-ops have difficulty obtaining sufficient funding from members.

  9. Per-Unit Capital Retains = investments in a co-op made by patrons through check-offs or deductions that are based on the dollar value or physical quantity of products marketed/purchased through the co-op. Purpose: For capital investments, not for operating expenses. Example Co-ops: Swiss Valley, Sunkist

  10. +s and –s of Alternative Co-op Equity Types • Direct Investments + May provide required start-up capital + Indication of prospective member interest - Difficult to collect

  11. Retained Patronage Refunds + Easy to collect + May encourage nonmembers to become members + Equity provided in proportion to use - Fluctuate with earnings - Often considered debt or temporary capital by members - May lead to over expansion

  12. Per Unit Retains + Same as patronage refunds plus independent of earnings - Same as patronage refunds plus often viewed as a price increase instead of an investment

  13. Unallocated Equity + reserve against losses + helps relationships w/creditors + mbrs less likely to ask for it back + may be some tax advtgs - not consistent w/operation at cost - ownership by mbrs not as clear

  14. Co-op Uses of Funds • Pay cash patronage refunds • Pay dividends • Redeem certificates of equity • Redeem capital stock • Pay taxes • Redeem bonds • Repay loans • Increase working capital • Asset investment

  15. Co-op Cash Patronage Refunds • Avg. = 38-40% • Most Common = 20-24%

  16. Equity Redemption • The payment to members (in cash or other property) of previously retained patronage refunds or capital retains

  17. The authority and responsibility for administering a co-op’s program for acquiring and redeemingequity belong to the board of directors.

  18. General Co-op Equity Redemption Methods • SYSTEMATIC: A definite plan carried out with a fair degree of predictability and regularity • SPECIAL EVENT: Carried out in response to special events occurring which do not happen very predictably or regularly

  19. Special Event Methods • Death (most common spec. event = 95%) • Quit farming • Reach certain age (2nd most common spec. event = 33%) • Retire • Patron demand or hardship • Patron no longer active

  20. Why Co-ops Need to Redeem Equity? • To insure ownership by those who use the business. • To encourage patronage by producers. • To counteract negative image co-ops may have on this matter. • To force improved financial planning on management. • To reduce legislative pressures for mandatory equity retirement. • To reduce possible conflicts between active members and inactive members.

  21. Systematic Methods • Revolving Fund • Base Capital • Percent of Total Equities

  22. Equity Redemption Practices TYPE% of Co-ops Systematic only 16 Special only 34 Systematic and special 26 No program 10 Equity not redeemable 14

  23. Systematic Plan% of Co-ops Revolving Fund 91.9 Base Capital 2.4 % of Equities 4.5 Other 1.2

  24. Equity Collection and Redemption Evaluation Criteria • Adequacy of capital provided. • Extent to which it results in members supplying equity in proportion to use. • Flexibility. • Ease of understanding it. • Ease of administering it.

  25. Revolving Fund Method • Oldest equities redeemed first. • Equities redeemed on a first-in, first-out basis

  26. Co-op Revolving Fund Example

  27. Revolving Fund +s and -s + Easy to understand + Easy to administer + Flexibility +/- Results in user ownership • Erratic source of funds • Unrealistic member expectations

  28. Length of Revolving Fund% of Co-ops 1-5 years 8 6-10 22 11-15 25 16-20 26 21-25 7 25+ 12

  29. Base Capital Method • Determine co-ops equity need (goal) • Determine each member’s share • Determine how to adjust (#2 above) from actual to desired Example co-ops: CHS, CF Industries

  30. Co-op Base Capital Plan Example Assumptions: 1) 5-year base period 2) desired equity = $18.5 mil. ___________________ 1Over past 5 years. 2Share of business x desired equity.

  31. Base Capital +s and -s + Direct link between use and investment + Flexible + Proper member expectations • Hard to understand • Hard to administer

  32. % of Total Equities = same % of all equities redeemed (regardless of age)

  33. Co-op % of Equity Redemption Example

  34. % of Equities +s and -s + Easy to understand + Easy to administer + Attractive to new (young?) members + Flexible - User ownership

  35. Sources and Uses of Funds $ Sources = $ Uses To  Use X  1.  Sources 2.  Other Uses

  36. Alternative Ways of Increasing Equity Redemption • Increase earnings • Decrease other uses of funds (e.g. cash patronage refunds, dividends) • Increase debt • Redemption earlier but at a discount • Allow for member exchange of equity • Use more unallocated equity (if it increases cash flow) • Convert to debt or preferred stock • Increase assistance from regionals

  37. Increasing Cash Patronage Refunds May - • Reduce capital investments • Reduce equity retirement efforts • Delay loan paybacks • Have short-run and long-run effects on co-op revenues and costs • Impact member satisfaction • Impact co-op’s ability to meet service/product needs of members • Increase need to borrow or obtain money from other sources

  38. A Potential Source of Conflict: Capital Needs of Co-op Vs. Redemption Expectations of Members

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