Features of new generation
cooperatives
New generation
cooperatives (NGCs) have several features that distinguish them from more
traditional cooperatives found in the Northern Great Plains states.
These features are:
-
delivery rights that are tied to the level
of equity invested
-
closed membership
-
higher level of initial equity investment
-
transferability and the opportunity for appreciation
or depreciation in the value of delivery rights.
Delivery rights
Equity shares
in a NGC not only assign membership to producers, but they also allocate
delivery rights and obligations. Producers purchase equity shares
that obligate them to deliver a certain amount of farm product to the cooperative
each year. For instance, one equity share may give the producer the
right and obligation to deliver one bushel of a stipulated commodity to
the cooperative every year. In the case of a NGC that processes livestock,
the equity share may give the producer the right and obligation to deliver
one animal to the cooperative every year. The delivery rights ensure
that members provide up-front equity capital to the NGC that is proportional
to their level of use of the cooperative. Any patronage refunds that the
cooperative generates are distributed to members according to the level
of product that they delivered to the NGC.
Essentially, delivery
rights shares act as a two-way contract between the producer-members and
the cooperative; they obligate the producer-members to deliver product
each year to the cooperative, and in turn they obligate the cooperative
to accept delivery of the product. The use of delivery rights assures
producers a market for their product, and assures the cooperative a steady
source of its primary input. Quality stipulations are specified;
if the producer cannot fulfill his delivery commitments with his own product,
then he must make arrangements to purchase the product from elsewhere to
fulfill the delivery requirements. Otherwise, the cooperative will
make arrangements to purchase the needed product from another source and
charge the member for the difference.
The total quantity
of delivery rights shares that the cooperative sells to producers depends
on the processing capacity of the cooperative’s operations. The cooperative
only sells enough shares so that it meets its efficient capacity level.
For example, if the cooperative plans to operate a facility that has a
capacity to process 3 million bushels of a commodity each year, then it
will sell 3 million equity shares that each require the owner of the share
to annually deliver one bushel of that commodity to the cooperative.
The price of each
delivery right share is typically determined by dividing the total amount
of equity capital that the cooperative requires to finance the business
by the processing capacity of the cooperative’s facilities. Continuing
with the above example, if the cooperative determines that it requires
$12 million in equity capital, then the price per delivery right share
will be found by dividing $12 million by 3 million bushels, which was the
annual processing capacity of the facility. Thus, the price per share
would be $4.
The shares that
allocate delivery rights are separate from membership shares. Each
individual producer holds only one membership share, but can hold more
than one delivery rights share. Voting rights are attached to the
membership share, and therefore each producer only has one vote in the
cooperative’s affairs, regardless of how many delivery rights shares he
may hold. This is consistent with the democratic principle of one
member, one vote that characterizes most cooperatives. The cost of
a membership share is typically a nominal amount.
Closed Membership
In contrast to
many traditional cooperatives that typically accept new members on a continual
basis, membership in new generation cooperatives is restricted once the
targeted amount of delivery rights shares are sold. Once that occurs,
new members will only be allowed if an existing member wishes to sell some
of his delivery rights shares to another producer. This ensures a
stable level of supply of product for the NGC; membership may change somewhat
because producers wish to sell some of their delivery rights shares, but
this does not change the supply of product being delivered to the cooperative.
The sale of shares between producers typically requires approval from the
board of directors before they occur.
Higher Level of Initial Equity
Investment
Because of the
presence of delivery rights, the initial equity investment required from
producers is higher for a NGC than that found in most traditional cooperatives.
NGCs typically raise between 30 and 50 percent of their total capital requirements
from the sale of equity shares (Harris, Stefanson and Fulton 1996).
Producers must pay for the right to deliver their commodities to the cooperative;
in order to participate in the cooperative's value-added processing, producers
must provide up-front capital by purchasing delivery rights. The NGC usually
sets a minimum required number of delivery rights shares that a producer
must purchase in order to be eligible for membership. Because the
members invest a significant amount of equity and are obligated to deliver
product, they tend to remain more committed and involved in a NGC then
they might be in a traditional cooperative.
In comparison
to a more traditional cooperative, the NGC receives a higher level of equity
financing at the start of its operations. The NGC is therefore in
a position at the end of the year to return a greater portion of its patronage
refunds in cash to its members, rather than retain them in the business
as additional equity financing. In other words, since the members
invest a significant amount of capital up front, most of the net earnings
generated are returned to members at the end of the year rather than used
as equity financing for the business. If the NGC decides to expand
its operational capacity, then it issues more delivery rights shares, which
provide the necessary equity financing for the expansion.
Transferability and the Opportunity
for Appreciation or Depreciation in the Value of Delivery Rights
As mentioned,
members of the cooperative are typically allowed to transfer their delivery
rights shares to other members or other producers who wish to become members,
subject to board approval. The price of the shares in these situations
is negotiated between the member who is selling and the producer who is
buying. The price of the shares will therefore fluctuate according
to the performance and earning potential of the cooperative. If the
cooperative is performing well and the buyer perceives strong earning potential
from owning the delivery rights, then he may offer a price that is higher
than that originally paid by the member. The member would therefore
be able to realize a gain from the appreciation of the share value.
Alternatively, if the buyer perceives that the earning potential is weak,
then the share might have decreased in value for the member.
References
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