Cooperative Equity
Cooperatives are businesses that are owned and controlled by the people who use them. For example, a vegetable cooperative is owned by the vegetable growers that buy membership or stock and use the cooperative to market their products.
When a farmer buys an interest into a cooperative it is considered "an equity investment" or "equity capital" into the business. Therefore, when a group of farmers contribute equity capital into a cooperative, this is the portion of the cooperative they own. Equity is a very important concept for several reasons and I want to take some time to outline a few of these important issues.
Adequate equity is necessary to attract lenders. Many times bankers want at least 40% farmer equity into a cooperative before they will make a loan to the cooperative. For example, if a cooperative is planning on needing $100,000 to start a cooperative, the members should plan on coming up with $40,000 of that $100,000 investment. Where do the farmers get the equity?
The equity can come from several sources. First of all, the farmers should plan on "putting some skin in the game" up front. Cooperatives are owned by its' members, but if the members do not have any of their own money invested in the business, do they really own it? There is no magic number to recommend how much farmers should put into the business, but farmers should contribute enough to understand they are part owners in the cooperative. Another point to make: farmers should understand that their own personal farming assets are not considered equity into a new business. The best way to explain why personal assets are not good sources of equity is to ask this question "If this new cooperative filed for bankruptcy tomorrow, would I want my personal assets sold off as collateral to pay the debts of the cooperative." Most would answer no to this question.
Another source of equity can be grants. Lenders look to grants as a source of equity because grants are considered income into the cooperative. There are several sources of grants farmers can use with the two most recognized agencies being the USDA and the Kentucky Tobacco Settlement Funds. The USDA recently announced the Value Added Agricultural Product Market Grant Program to provide grants to agricultural businesses. You can find more information on the USDA website under rural development programs.
Equity can be a tricky issue in a cooperative. Many farmers are reluctant to put equity into a business because of the risk involved with this investment. A cooperative has the best chance to succeed if the farmers "put some skin in the game". When this happens, the farmers become more involved and have a sense of ownership and pride in their business. For more information please contact the Kentucky Center for Cooperative Development or your county extension agent.
For More Information
For additional information, please contact Heath Hoagland at (859) 257-6527.