Member investment is an important pillar of the cooperative business model, as seen in many parts of America, especially rural areas. Yet, as Phil Kenkel of Oklahoma State University Extension points out, there are many examples of what equity and its returns might look like.
“In most cooperatives, there is some membership equity. So, from according to me become a member, I make some investment and buy a share of stock, and then that gives me both voting rights and the right to get profits. And then there is structures of revolving equity or proportional equity, or equity with associated usage, right? So, there’s really three different categories there.”
Kenkel explains revolving equity, and, in turn, how a member may profit from this arrangement.
“Most cooperatives use the revolving equity, and so at the end of the year, they pay back their profits, and they pay back that in a combination of cash, which is, of course, your immediate benefit, and then equity. So, you build your equity. You build your equity by owning the co-op.”
Proportional equity is best exemplified by agricultural cooperatives, such as those in the dairy and cotton sectors.
“Those co-ops, it’s called a base capital system, and you would have an equity requirement based on the amount of business you’re doing. Until you get to that, you get less cash patronage, and then once you build up that, you’ve got the required amount, then now you’re fully invested, and you would get a higher amount of cash.”
The model used by value-added cooperatives — one example is the ethanol industry — is what Kenkel calls proportionate share.
“For every bushel of corn I bring to an ethanol co-op, I had hauling one on a stock, one share of stock, and that stock has a usage right. I still get the profits off of that one bushel of corn, but my equity was linked to it, and under that model, that’s the only co-op model where the equity does actually buy and trade. And so, I can sell my shares and usage right to another farmer if they want to buy that to be able to deliver their corn and get the ethanol profits, or also done in other value-added businesses.”
And sub-cooperatives issue preferred stocks to both members and nonmembers.
“Preferred stocks usually pays a stated dividend, and then, in co-ops, by federal and a lot of times by state laws, we have a limit on dividends of 8%. Some co-ops, actually, when we talk about revolving the equity, they revolve it into preferred stocks. We’re supposed to be giving most of our returns in proportion to use, and so that’s why we put that limit on dividends, on the equity, on the preferred stock.”