Targeted Capital Base Plan Bob Cropp Interim Director University of Wisconsin Center for Cooperatives March 30, 2006

A Pure Capital Base Plan The co-op would decide what percentage of total assets should be member equity. Then each member contributes their share of equity up-front based on what percent of the total cooperative business volume is their business.

Example Capital Base Plan: Total assets $2,000,000; equity = 60% Member A: Accounts for 5% of the co-op business volume Up-front equity $1,000,000 $1,000,000 X 5% = $50,000 $50,000 Member B: Accounts for 2% of the co-op business volume Up-front equity $1,000,000 $1,000,000 X 2% = X 2% = $20,000 $20,000 Also, the guideline for board in redeeming equity.

Base capital plan not widely used. The new generation (value-added) co-ops are practicing base capital plans. - Purchase marketing rights (shares) in proportion to planned business with co-op. - Example, $2.00 per bushel for planned bushels corn marketed through the ethanol plant. - These are enforceable delivery rights - Shares appreciate/depreciate and are transferable

Targeted Base Capital Plan: Not widely used More applicable for marketing than supply co-ops An equity target is set for each member; for example, $2.00 for each hundredweight of milk to be marketed. Two options; 1) pay $2.00 up-front, or 2) accumulate equity with allocated retained patronage If under-invested, receive 20% of patronage refund in cash and 80% retained as allocated equity. If fully-invested, received 100% of patronage refund in cash

Example, targeted capital base plan Member A: Markets 14,000 Cwts. $2 X 14,000 = $28,000 Accumulated equity = $12,000 Balance = $16,000 Co-op net margin = $0.30 $0.30 X 14,000 = $4,200 20% cash = $840 Retained allocated = $3,360 Member B: Markets 12,000 Cwts. $2 X 12,000 = $24,000 Accumulated equity = $24,000 Balance = $0.00 Co-op net margin = $0.30 $0.30 X 12,000 = $3, % cash = $3,600 Retained allocated = $0.00

Summary points: Targeted base capital plan won’t be much different than standard equity revolvement unless profits generated allow for reaching equity target in a reasonable time period.---Can’t redeem equity faster than it accumulates. Fully or over-invested members may be interested in selling their excess equity at a discount to under- invested members.