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Equity Management
Phil Kenkel
Bill Fitzwater Cooperative Chair
The objective of equity management is to attract
members while keeping current members needs satisfied.
Also, equity management should try to maintain
cooperative profitability while allowing for growth.
Equity Process
1.
2.
3.
4.
5.
Determine income generation and distribution
Determine assets
Determine desired financial structure
a. Debt/equity
b. Working Capital
Determine equity redemption budget
Determine equity redemption program
Equity Redemption
Equity redemption is the process of returning equity in
cast to member-patrons who have previously invested.
The over invested or inactive members should not be
responsible for financing a cooperative they do not use.
Failure to redeem equity reduces member realized return
on equity (ROE).
Entire member equity is due at one time. An event
must trigger the redemption such as:

Member death
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Age of Patron
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Retirement from farming

Move out of trade area

Hardship
Advantages
Special Programs are used to understand the low
financial burden on the cooperative. In this program high
priority cases get attention when other plans are not
working. Also works well for co-ops offering favorable
prices.
Disadvantages
Cooperative financial planning could be difficult
because special programs does not tie equity base with
current patronage. The members get poor realized return.
Age of Patron (oldest first)
Calculations
Beginning equity
Special Programs
$1,000,000
+ Additional Investment
$200,000
The patronage redeems when the patron reaches a
specific age and is the natural person and not a LLC or
Trust. Finally upon redemption the patron birth date
information is required.
= Maximum equity
$1,200,000
Advantages
- Ending equity (target)
$1,100,000
The Age of Patron is simple and easy to understand.
Also works well for cooperatives with favorable price.
= Redemption budget
$100,000
Equity Redemption Programs
Defines the way that one or more classes of equity
are treated for redemption. The redemption policy is used
of everyone in a particular equity class. The overall
program should be consistent with the cooperatives equity
management objectives.
Alternative Redemption Methods
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Special Programs (uses trigger event)
Age of Patron (oldest first)
Age of Patron (pro-rated)
Revolving Fund plan
Base Capital plan
Percentages of all Equities plan
Disadvantages
The young farmers have little incentive to participate.
Equity investment is not proportional to patronage.
Members expect redemption regardless of the financial
condition.
Age of Patron (pro-rated)
Redeems a portion of each patron accounts for
patrons past a set age, and the coop establishes a
redemption budget. Pro-rated also determines the total
equity of members older than 55. Some coops establish a
redemption percentage while others use a fix percentage.
Advantage
Pro-rated is easier to integrate with the redemption
budget. More members receive redemptions and are
popular with members who are eligible for AOP.
Disadvantage
Still not proportional and is redeemed at a decreasing
rate but never completely redeemed. With some coops,
fixed percentages limits flexibility.
Revolving Fund Plan
Redeems are based on the age of the stock, based
on FIFO, “first in- first out.” Ranging form 18 months to 30
years, and some coops have multiple revolving funds.
Advantages
Easy to understand and administer. Equities
somewhat proportional to use for short revolving periods
and coops can adjust equity by adjusting length.
Disadvantages
With the revolving fund plan there will be good year
problems and bad year problems. Disparities can occur
between equity and use. And members may expect fixed
revolving regardless of financial conditions.
Base Capital Plan
A base equity is established under invested members
continue to increase investments, while over invested
members get partial or total redemption. Also, can be
combined with a variable cash patronage refund plan, and
over invested members receive large cash refunds.
Percentage of All Equities
(After trigger age: after 65)
Reduces member equity by percentages and retiring
a percent of outstanding equity, regardless of issuance.
Used by a limited number of cooperatives.
Advantages
Rewards new patrons and works well for cooperatives
with a stable membership and patronage. Also, easy to
understand and administer.
Disadvantages
With the percentages of all equities there can be a
poor transfers of ownership. Transfer of ownership cannot
be completed with out additional provisions from the
cooperatives.
Conclusion
Age of patron is the least desirable because it is the
least proportional. The best plan for most cooperatives is
age of stock combined with estates. But no simple
strategy is best for everyone.
Alternatives to Redemption
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Partial Redemption or Discounting
Conversion to Debt or Preferred Stock
Exchange of Equity Between Members
True Secondary Markets
Partial Redemption or discounting
Members get paid discounted value of future equity
redemption, but have difficulty on choosing discount rate.
Income tax consequences are not well established.
Conversion to Debt or Preferred Stock
Improves co-op cash flow, but it changes co-op’s
balance sheet, which gives members more return. Allows
exchange of equity between members even though the
markets of members are limited. Purchase price may not
be realized as a value and member income tax issues are
unclear.
Exchange of Equity Between Members
Most cooperatives restrict these transactions and the
price is privately negotiated. Each transaction must be
approved by the board and recorded by the cooperative.
Advantage
Reflects true market value therefore having
immediate cash for equity sold. Also, cooperatives do not
provide cash for the transaction.
Disadvantage
Limited markets among qualified members and the
purchasers’ faces risk of depreciation of stock.
Secondary Markets
Allowing cooperative equity to trade in a secondary
market…
Members control is comprised and relieves
cooperatives of liquidity equity for members.
Comprise of power must be made for voting
stock for producer-members and public nonvoting stock for non-producers.
Putting it All Together
Equity Programs should raise adequate equity and
minimize redemption burden. Also, it should assure fair
treatment and generate adequate returns over time.
Finally, a cooperative should choose an equity redemption
plan that meets their circumstances.