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Senior Advisor

COOPs Keeping Profits

This study concludes that over the last 50 years, COOPs are keeping more and more profits and returnig less to members.  Does this describe your COOP?  

 

"Summary:
 Over the past 50 years, the financial operations of cooperatives have changed which have seen them retain more profits on their balance sheet and return less to their members. Part of the reason has come from the development of products and services purchased by non members and ineligible to receive patronage dividends and others has resulted from the need for more financial protection for the entity. It remains to be seen if the practices result in less member loyalty and loss of the member to the cooperative."

 

http://www.farmgateblog.com/article/1565/has-your-co-op-been-changing-with-the-others 

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13 Replies
Advisor

Re: COOPs Keeping Profits

I would say "yes" to your question.  I believe there's some justification for it, though.  The co-ops of thirty years ago were not as professionally managed, they were less sophisticated and skilled in managing the business when compared to today.  They also returned a larger part of the equity to the membership and in my opinion, increased the risk level of operating the day to day business.  Today, co-ops have greater working capital requirments mandated by their bankers, primarily represented by CoBank, which is not a bad idea.  Just think back to 2007-08 when many cooperatives stood on the brink of bankruptcy because their hedge loan accounts were unable to withstand tremendous price volatility. 

 

As for the non-member patronage that accrues, my preference would be to return part of this to the member owners, in order of the percentage of patronage they have done.  After all, they own the business and have stood by with management when times were tough.  They should benefit from that risk taking as well.

 

 

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Veteran Advisor

Re: COOPs Keeping Profits

Our local co-op went through 2 bankrupcies if not 3 in my lifetime.  My dad lost all his equity, each time.

Myself, when the 'other' grain elevator sometimes outbids them by 5+ cents, I go there, to get my money now, and not have that risk.


However, if by retaining back a bit more of the equity, keeps them from going under again, that may very well be a good thing, as I would rather get 100% of 2 cents a bushel back, than 0% of 5 cents.

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Senior Advisor

Re: When one is voting on directors

He should consider whether the director is interest in the coops financial well being or the owner members well being. There needs to be a healthy medium in that they [provide the goods and services the members need along with putting dollars in their pocket.

 

Your employees in the coop have a primary interest in a healthy wage and benefit package. In addition they oprefer the best of equipment and facilities to make their job easier. That is understandable, but members would like to have an occasional dollar added to their pocket or at least have the members interests considered.

 

Some of us sacrifice to do business with our own coop business. But we do get alittle grumpy paying a premium for those goods and services. Then waiting for 40 years for our retained savings. In fact, I served on a coop board when the firm chose not to settle estates when they had unexpected cash to do it.

 

I recieved the local portion of the retained savings at age 71. I was so grateful even though some had been retained since 1971. If they paid interest on the retained savings they wouldn't be showing the profits that they are. I am unimpressed with a manager that produces a modest income when he has free borrowed money worth millions.

 

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Re: COOPs Keeping Profits

Sure.

 

There are a lot of different kinds of co-ops and in specialty and dairy, for instance, they can be hugely important to the business.

 

In plain vanilla ag, grain and supply co-ops, I really don't think they are particularly differentiated from other private businesses in those lines.

 

I happne to think my primary co-op is a pretty good organization- primarily becasue of the quality of the people- but they'll never return enough patronage to compensate for how much money I'd make if I priceshopped them on every single item or used their prices to extract better off the competittion.

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Re: COOPs Keeping Profits

Actually, I've got to say one of the positives of co-ops in grain is that Co-Bank stood behind most hedge lines during the '07-'08 crisis and a lot of them at least had new crop bids when Cargill, ADM, Bunge etc. did not.

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Senior Advisor

Re: COOPs Keeping Profits

 I find these responses very intereting with all of the merger mannia that has went on in this industry ---

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Re: COOPs Keeping Profits

Yes.

 

There was a time where, assuming I was happy with the service and price was reasonable, I was at least glad that the money was staying in the community as HQ was there employing 20 or so support staff, paying taxes etc. No longer.

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Advisor

Re: COOPs Keeping Profits

You are correct about that nox.  Our co-op's line of credit on its hedging account went from less than 30m to 150m and the bank stood behind it all the way.  We were in good financial shape as well, so that didn't hurt, either.

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Advisor

Re: When one is voting on directors

One challenge board members have with a cooperative structure is to build value to share holder's investment while serving that same shareholder as a customer.  It's a fine line to walk on.  However, it can be done with the right people and the right attitude.

 

As for settling estates, if the co-op does not have a disciplined approach to paying out retired shareholder equity, it can become a noose around the neck in the future when the equity to be retired is getting bigger and estates are demanding money while reinvestment programs have to be delayed until they work through all that cash as payouts.  It has to be paid on a regular basis or it can sink the company and take shareholder's value with it.

 

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