1. Governance and Outside Equity Issues Facing Cooperatives Agricultural and Food Cooperatives in Rural Development: Implications of Business Dynamics for the Public Policy Michael Boland, PhD Arthur Capper Cooperative Center Department of Agricultural Economics Kansas State University

2. Motivation Capper-Volstead Act has served cooperatives well Cooperatives used internal earnings to finance growth and revolve allocated equity to members. In recent years, this has been insufficient to finance growth due to low profitability and aging membership. Outside equity is needed to finance this growth.

3. Objective The objective is to provide examples of well known cooperatives that have changed organizational structure in recent years in an effort to seek outside equity.

4. Ownership Rights in Co-ops Traditional cooperative had these ownership rights –Restricted to producer-members –Residual rights are nontransferable, nonappreciable, and redeemable –Benefits based on patronage Linked to principles of cooperation –Democratic control –Earnings based on patronage –Members provided the equity

5. Source: Chaddad and Cook

6. Ownership Rights: Restricted to Member-Patrons Proportional investment cooperative –Base capital plan which requires members to invest in proportion to patronage (DFA, Land O’Lakes, CoBank) Member investor cooperative –Earnings allocated in proportion to patronage and equity investment (Fonterra) New generation cooperative –Investment equity is aligned with delivery rights (sugar beet cooperatives, others)

7. Ownership Rights: Not Restricted to Member-Patrons Ownership rights are assigned to investor- oriented firms through –Strategic alliances Birds Eye Foods has 59% of its equity owned by Vestar Capital and management –Trust Funds Diamond of California formed a limited partnership with an insurance company –Subsidiaries DFA uses a holding company to establish joint ventures

8. Ownership Rights: Not Restricted to Member-Patrons Ownership rights are assigned to investor class of membership –CHS and CoBank have issued preferred stock

9. Ownership Rights: Not Restricted to Member-Patrons Cooperatives demutualize or convert to investor-oriented firms –Public corporations Dakota Growers Pasta Company Calavo Growers –Limited Liability Companies South Dakota Soybean Processors Tall Corn Ethanol Cooperative Dakota Ethanol Others have started the process

10. Outside Equityholders Venture capitalists Preferred stockholders Technology providers Local community investors Cooperative that supplies commodity Others

11. Public Policy Issue Definition of what a cooperative is –Investor and producer classes of membership Limited return on membership capital –50% of the voting control in hands of producer class –Different states are redefining what a co-op is –Implications for lenders such as CoBank

12. Future Issues Need for outside equity will continue to grow Business model must be sound Illiquid and nontransferable equity is an issue –Need for freely traded ownership interests