How Do Returns Work In Co-ops?

Member investment is an important pillar of the cooperative business model, as seen in many parts of America, especially rural portions of the country. 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 in order for 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. Then there is structures of revolving equity, or proportional equity or equity associated with usage rights.  So there's really three different categories there."

Kenkel explains revolving equity and in turn, how a member may profit from this arrangement.

“Most cooperative use of 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, of course your immediate benefit and then equity. So, you build your equity by owning the co-op.”

Proportional equity is best exemplified by agricultural cooperatives, such as those in the dairy add 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’ll get a higher amount of cash.”

The model used by value added, 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 head home with one 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. They have to be able to deliver their corn and get the ethanol profits or also done another value-added businesses.”

And some cooperatives issue preferred stocks to both members and nonmembers. 

“Preferred stock 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. So that's why we put that limit on dividends on the equity, on the preferred stock.”

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