Excerpted with permission from Curtis, K. R.*, M. Cowee, A. Acosta, W. Hu, S. Lewis, T. Harris. 2007. Locally Produced Livestock Processing and Marketing Feasibility Assessment. Technical Report UCED 2006/07-13: University Center for Economic Development, Department of Resource Economics, University of Nevada, Reno.
Owner Investment Strategies for Cooperatives
Ownership options that can be exchanged between members within the cooperative are referred to as exchangeability. Redemption refers to the expectation that member ownership will be redeemed under specific conditions, such as retirement or death. Investment amounts should be determined by comparative usage requirements. Producers interested in owning more than their usage percentage can purchase additional preferred stock or capital certificates.
Cooperatives must maintain financial reserves to tie them over during periods of reduced production or environmental recession. These reserves can be earmarked for specific spending, such as debt reduction, facility improvements, or operational growth. Reserves also provide peace of mind for members, allowing the cooperative to weather hard times without the need for additional investment by members.
After reserves have been established, the cooperative needs to develop a system to repay investors their initial cash outlays. Usually a percentage of operating revenues are dedicated for the repayment of owner equity and the purchase of stock or certificates of outgoing members. This can be done in two ways: either a payment amount is determined based on the input of each member; or the resources are pooled and distributed based on the percentage share owned in the cooperative. Both systems require a delayed payment for initial livestock inputs, so that the cooperative pays for the initial livestock and repays profits after the meat has been successfully sold.
With traditional cooperatives, the initial investments are very low, often less than $100. Ownership is offered through the issuance of capital certificates and not stock options. Traditional cooperatives are generally more restrictive than other ownership types in allowing exchanges. This is usually done through the sale of certificates between members at the board of director’s discretion. Traditional cooperatives usually have an established par value for certificates that is determined at the time of buy-in. Traditional cooperatives allow new members to join at any time, so a par value must be established.
Traditional cooperatives use a set price system for profit distribution. Based on the number of certificates owned or the amount of meat produced, the cooperative will disperse profits as flat fees at the close of the business cycle.
Members in new generation cooperatives typically invest $10,000 - $12,000 to purchase marketing rights (Coltrain, Barton, and Boland, 2001). NGCs do not normally establish a par value, so ownership stocks are valued at market price. It is highly correlated to the expected profitability of the organization; so certificate sales are usually done through a flat fee. Since NGCs are exchangeable, redemption obligations are not required.
NGCs commonly use the pooling system. In the pooling system, a pool is opened at the start of the production period, with payments made as meat is sold. An initial payment can be arranged at delivery time, with additional progress payments made until the pool is closed and the final margins are determined. The amount of profit distribution is directly tied to the amount of meat generated by each member and is tied to the producer's contract.
For investor-owned firms, stock certificates are purchased, with the stock value based directly on the profitability of the organization, and profits are distributed through dividends. The value of a stock certificate is based on the future anticipated profitability of the enterprise. Stock sales and exchanges can occur through an open market, and non-producers can buy-in to the cooperative.