Progress 12/01/10 to 11/30/15
Outputs
Target Audience:Agricultural economists and other professionals who conduct research on cooperatives and/or provide educational programs, technical assistance, or advice to cooperatives. Changes/Problems:
Nothing Reported
What opportunities for training and professional development has the project provided?
Nothing Reported
How have the results been disseminated to communities of interest?Six articles on topics related to objective A (equity financing decisions of agricultural cooperatives) were published in Cornhusker Economics, the department's weekly extension newsletter, in an effort to distribute some of the results of this research to cooperative managers and boards of directors. Topics included patronage refunds and equity management, the cost of equity capital, the least-cost mix of borrowed capital and equity, equity retirement practices, the use of unallocated retained earnings, and choosing federal income tax status. What do you plan to do during the next reporting period to accomplish the goals?
Nothing Reported
Impacts
What was accomplished under these goals?
Accomplishments: (1) Extended an equity management and planning tool used by rural electric cooperatives (RECs) so it can accommodate the payment of cash patronage refunds and can be used by agricultural cooperatives. In addition, the tool was modified to properly account for the relationship between the degree of financial leverage and the rate of return on equity. Completed research on the advantages of retaining earnings from member business in unallocated form and began research on the cost of equity capital and on determining the least-cost mix of borrowed capital and equity. (2) Assembled and/or developed material on cooperative theory that includes original contributions and analyses of the effects of cooperatives on the behavior of other firms in markets characterized by imperfect competition. (3) Constructed an economic model of a food processing industry in which there is a single leader firm that uses its leadership position in the industry to set its output and several follower firms that set their output in response to the leader's output decision. The model was used to compare the differences in performance between an industry with a cooperative leader and an industry with a profit-maximizing leader. (4) Performed a review and analysis of research relevant to the relationship between the cooperative organizational form and the ability of cooperatives to expand vertically into the retail-oriented processing stage of the marketing channel. Impacts: (1) The knowledge gained from this research will help cooperatives improve their financial condition and increase the profitability of their members. (2) The development of cooperative theory has been useful for generating insights into the behavior of cooperatives in various market structures, helping cooperatives develop business strategies consistent with their objectives, and informing public policy decisions regarding cooperatives. The material developed here should be useful to instructors who teach courses on cooperatives at either the undergraduate or graduate level, as well as to agricultural economists and other professionals who conduct research on cooperatives and/or provide educational programs, technical assistance, or advice to cooperatives. (3) The knowledge gained from this work should be useful in informing public policy discussions about the competitive effects of cooperatives in agricultural markets and the policy treatment of cooperatives. (4) This work should provide useful information to cooperatives that seek to increase their presence in the retail-oriented processing stage of the marketing channel. Objective A (equity financing decisions of agricultural cooperatives): Research on a cooperative equity management and planning model was completed, and a journal article was published. The article demonstrates how the model can be generalized to consider the payment of cash patronage refunds so it can be applied to both RECs and agricultural cooperatives. The article also demonstrates how the rate of return on equity is a function of the equity position, and the model was corrected to account for that relationship. This research makes important contributions to both RECs and agricultural cooperatives by providing them an improved equity management and planning tool they can use in making decisions concerning cash patronage refunds, growth, and equity retirement. Research was completed on the use of unallocated retained earnings from member business as a source of equity capital, and a manuscript is being prepared for publication. The knowledge gained from that research can be used by cooperatives to determine whether financing plans based on retaining earnings in unallocated form can increase the after-tax present value of member cash flows given the values of several relevant variables, thus enhancing the value of patronage refunds to members and making cooperatives more attractive to potential members. Research on developing a measure of the cost of equity capital that properly accounts for the opportunity cost of its members and on determining a cooperative's optimal equity position given its rate of return on capital and average interest rate will help cooperatives lower total capital costs, avoid overinvestment in assets, and encourage the timely retirement of member equity. All these results should improve the quality of decision making by cooperatives, thereby helping to improve their financial condition and the profitability of their members. Objective B (the behavior of cooperatives in imperfect markets): Three journal articles and a monograph on cooperative theory were published. Those publications include analyses of the behavior of cooperatives and their effects on other firms in a farm supply industry and a food processing industry characterized by imperfect competition. In a model of a cooperative in a farm input industry dominated by profit-maximizing firms engaged in monopolistic competition with one another, the cooperative produces a greater quantity of the input than the other firms and usually at a lower average cost. Research also was completed on a model of a processing industry based on the Stackelberg leader-follower model in which there is a leader firm that is able to use its leadership position in the industry to set its output and several follower firms that set their output in response to the leader's output decision. That model demonstrates the performance of the industry would be better if the leader were a profit-maximizing firm rather than a cooperative. This result is contrary to the expectation that cooperatives are procompetitive agents in imperfect markets and suggests that favorable policy treatment of cooperatives should be based on empirical evidence instead of theoretical assumptions. Objective C (incentives for cooperative vertical integration): A review and analysis of research related to the cooperative organizational form and vertical expansion was published as a journal article. That article should provide useful information for cooperatives that are seeking to increase their presence in the retail-oriented processing stage of the marketing channel. The article also provides information on how cooperative members can hedge against farm-level risks while capturing some of the benefits of retained ownership without an extension of ownership interest by investing in food and agribusiness stocks. Objective D (integration of cooperative pricing and financing decisions): There is no progress to report for this objective. The effort invested in this project was concentrated on the first three goals.
Publications
- Type:
Journal Articles
Status:
Published
Year Published:
2012
Citation:
Royer, J. 2012. Implications of the cooperative organizational form for vertical expansion. Journal of Rural Cooperation 40(2): 162-180.
- Type:
Journal Articles
Status:
Published
Year Published:
2014
Citation:
Royer, J. 2014. The neoclassical theory of cooperatives: Part I. Journal of Cooperatives 28(1): 1-19.
- Type:
Journal Articles
Status:
Published
Year Published:
2014
Citation:
Royer, J. 2014. The neoclassical theory of cooperatives: Part II. Journal of Cooperatives 28(1): 20-35.
- Type:
Journal Articles
Status:
Published
Year Published:
2014
Citation:
Royer, J. 2014. The neoclassical theory of cooperatives: Mathematical supplement. Journal of Cooperatives 28(1): 36-49.
- Type:
Journal Articles
Status:
Published
Year Published:
2015
Citation:
Royer, J. 2015. An equity management and planning tool for cooperatives. Agricultural Finance Review 75(2): 267-281.
- Type:
Books
Status:
Published
Year Published:
2014
Citation:
Royer, J. 2014. The theory of agricultural cooperatives: A neoclassical primer. Department of Agricultural Economics Faculty Publications Paper 123, University of Nebraska-Lincoln.
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Progress 10/01/13 to 09/30/14
Outputs
Target Audience: Agricultural economists and other professionals who conduct research on cooperatives and/or provide educational programs, technical assistance, or advice to cooperatives. Changes/Problems:
Nothing Reported
What opportunities for training and professional development has the project provided?
Nothing Reported
How have the results been disseminated to communities of interest? An article, "Determining Your Cooperative's Cost of Equity," was published in Cornhusker Economics, the department's weekly newsletter, in an effort to distribute some of the results of this research to cooperative managers and boards of directors, both in Nebraska and across the nation. What do you plan to do during the next reporting period to accomplish the goals? Objective A--Equity financing decisions of agricultural cooperatives: Manuscripts on “Equity Management and Positioning in Cooperative Organizations” and “The Optimal Use of Unallocated Retained Earnings by Agricultural Cooperatives” will be completed and submitted for publication. In addition, a manuscript on determining the cost of equity capital in cooperatives will be written and submitted for publication. Objective B--The behavior of cooperatives in imperfect markets: The material contained in the three articles published on the neoclassical theory of cooperatives, including that on the effects of cooperatives on prices and output in imperfect markets, will be used to develop and publish a monograph on the topic.
Impacts
What was accomplished under these goals?
Research accomplished during this period adapted TIER analysis, which is an equity management tool widely used by rural electric cooperatives and their lenders, for use by agricultural cooperatives. TIER analysis is based on the times-interest-earned ratio (TIER), a measure of interest coverage. A rural electric cooperative can use TIER analysis to determine its optimal level of equity capitalization, and lenders can use it to assess a cooperative's financial strength. In the TIER model, the cost of equity capital is determined by the rate of return on equity necessary for the cooperative to achieve its goals with respect to equity revolvement and growth. Calculations based on the TIER model could not be applied to agricultural cooperatives because they are generally required by federal tax statutes to pay cash patronage refunds to their members whereas rural electric cooperatives are not. This research used a cooperative growth model to generalize the TIER calculations so they account for cash patronage refunds and can be used by agricultural cooperatives as well as rural electric cooperatives. Other work accomplished during this period extended TIER analysis to adjust for a weakness in the model, specifically that it does not account for the change in the rate of return on equity that generally accompanies a change in a cooperative's equity position. In the extended model, the direction of causation is reversed. Instead of selecting the rate of return on equity necessary to meet the cooperative's equity goals and then determining the cooperative's optimal equity position, the extended model determines the rate of return on equity according to the cooperative's equity position and then determines the range of goals possible given that rate of return. The optimal equity position can be calculated given the rate of return on capital and the interest rate. For rural electric cooperatives, the electric rate necessary for maintaining a particular revolving period can also be calculated. This research makes important contributions to both rural electric and agricultural cooperatives by providing them an improved equity management and planning tool they can use to set their financial goals and determine the optimal level of equity capitalization. The knowledge gained from this tool should help cooperatives improve their financial position and the profitability of their members. During the period, work was begun on developing a model for determining the cost of equity capital in cooperatives. It is important for a cooperative to assign an appropriate cost to the equity capital its members provide. Because cooperatives usually do not issue publicly traded capital stock, there is no market value on which they can base the cost of equity. In addition, cooperatives generally do not pay dividends on equity certificates representing retained patronage refunds. Consequently, it is easy for them to undervalue the cost of equity, which can cause them to rely too much on equity capital and underestimate overall capital costs. That can result in capital costs that are higher than necessary and overinvestment in assets. A cooperative that undervalues the cost of equity is also less likely to retire member equity in a timely manner so an unfair share of the costs of financing the organization is borne by individuals who no longer benefit from its services. The neoclassical theory of cooperatives has been useful for generating insights into the behavior of cooperatives in various market structures, helping cooperatives develop business strategies consistent with their objectives, and informing public policy decisions concerning cooperatives. Articles published during this period describe the application of neoclassical theory to farm supply and marketing cooperatives within various market structures in both the short and long run. Topics covered include the stability of cooperative price and output solutions, strategies for reducing the cost of producing a farm input sold to members and for raising member raw product prices, open- and restricted-membership policies, and the effects of cooperatives on economic welfare, including their effects on other firms in imperfect markets and a discussion of the competitive yardstick concept. Objective A--Equity financing decisions of agricultural cooperatives: A manuscript, “An Equity Management and Planning Tool for Cooperatives,” was submitted, revised, and accepted for publication in 2015. Work continued on two other manuscripts, “Equity Management and Positioning in Cooperative Organizations” and “The Optimal Use of Unallocated Retained Earnings by Agricultural Cooperatives.” Work was begun on developing a model for determining the cost of equity capital in cooperatives. Key outcomes: This research generalized TIER calculations so they account for cash patronage refunds and can be used by agricultural cooperatives as well as rural electric cooperatives; this research also extended TIER analysis to account for the change in the rate of return on equity that accompanies a change in a cooperative's equity position. Objective B--The behavior of cooperatives in imperfect markets: Three manuscripts on the neoclassical theory of cooperatives were submitted, revised, and published. Key outcomes: Major revisions of the manuscript include analysis of the effects of cooperatives on prices and output in food processing industries characterized by oligopoly or monopolistic competition. There were no accomplishments to report for objectives C and D.
Publications
- Type:
Journal Articles
Status:
Published
Year Published:
2014
Citation:
Royer, J. 2014. The neoclassical theory of cooperatives: Part I. Journal of Cooperatives 28(1): 1-19.
Royer, J. 2014. The neoclassical theory of cooperatives: Part II. Journal of Cooperatives 28(1): 20-35.
Royer, J. 2014. The neoclassical theory of cooperatives: Mathematical supplement. Journal of cooperatives 28(1): 36-49.
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Progress 10/01/12 to 09/30/13
Outputs
Target Audience: Agricultural economists and other professionals who conduct research on cooperatives and/or provide educational programs, technical assistance, or advice to cooperatives. Changes/Problems:
Nothing Reported
What opportunities for training and professional development has the project provided?
Nothing Reported
How have the results been disseminated to communities of interest?
Nothing Reported
What do you plan to do during the next reporting period to accomplish the goals?
Nothing Reported
Impacts
What was accomplished under these goals?
Research for two journal manuscripts, “An Equity Management and Planning Tool for Cooperatives” and “Equity Management and Positioning in Cooperative Organizations,” was completed, and drafts of the manuscripts were prepared. Research reported by the first manuscript adapts TIER analysis, which is an equity management tool widely used by rural electric cooperatives and their lenders, for use by agricultural cooperatives. TIER analysis is based on the times-interest-earned ratio (TIER), a measure of interest coverage. A rural electric cooperative can use TIER analysis to determine its optimal level of equity capitalization, and lenders can use it to assess a cooperative’s financial strength. In the TIER model, the cost of equity capital is determined by the rate of return on equity necessary for the cooperative to achieve its goals with respect to equity revolvement and growth. Calculations based on the TIER model cannot be applied to agricultural cooperatives because they are generally required by federal tax statutes to pay cash patronage refunds to their members whereas rural electric cooperatives are not. This research uses a cooperative growth model to generalize the TIER calculations so they account for cash patronage refunds and can be used by agricultural cooperatives as well as rural electric cooperatives. Research reported by the second manuscript extends TIER analysis to adjust for a weakness in the model, specifically that it does not account for the change in the rate of return on equity that generally accompanies a change in a cooperative’s equity position. In the extended model, the direction of causation is reversed. Instead of selecting the rate of return on equity necessary to meet the cooperative’s equity goals and then determining the cooperative’s optimal equity position, the extended model determines the rate of return on equity according to the cooperative’s equity position and then determines the range of goals possible given that rate of return. The optimal equity position can be calculated given the rate of return on capital and the interest rate. For rural electric cooperatives, the electric rate necessary for maintaining a particular revolving period can also be calculated. This research will make important contributions to both rural electric and agricultural cooperatives by providing them an improved equity management and planning tool they can use to set their financial goals and determine the optimal level of equity capitalization. The knowledge gained from this tool should help cooperatives improve their financial position and the profitability of their members. The research during the current reporting period was conducted under goal A (equity financing decisions of agricultural cooperatives). No research was initiated under goals B (the behavior of cooperatives in imperfect markets), C (incentives for cooperative vertical integration), and D (integration of cooperative pricing and financing decisions). Plans for the next reporting period include submitting the two manuscripts on TIER analysis and the manuscript on unallocated equity for publication.
Publications
- Type:
Journal Articles
Status:
Published
Year Published:
2012
Citation:
Royer, J. 2012. Implications of the cooperative organizational form for vertical expansion. Journal of Rural Cooperation 40(2):162-180.
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Progress 10/01/11 to 09/30/12
Outputs
OUTPUTS: A simulation model was developed to determine the proportion of cooperative earnings that should be retained as unallocated equity to maximize the present value of cooperative distributions of cash and noncash patronage refunds to members. The model calculates the length of the cooperative's revolving period and the present value of the patronage refund distributions given the cooperative's rate of return to equity, the percentage of patronage refunds paid in cash, the cooperative's growth rate, the tax rates of the cooperative and its members, and the member discount rate. Information about the use of unallocated retained earnings by U.S. farmer cooperatives, the advantages and disadvantages of using unallocated retained earnings, and the issues related to their use has been distributed to clientele in the state in a departmental publication; information about the results of this research will be disseminated by a journal article currently in manuscript form, in addition to future outreach publications. In a separate analysis, the relationship between the cooperative organizational form and the relative infrequency with which cooperatives integrate forward into value-added processing activities was investigated. Results of this analysis were disseminated in a paper presented this past summer at an international academic conference on cooperatives and a forthcoming article in an international journal. PARTICIPANTS: Not relevant to this project. TARGET AUDIENCES: Not relevant to this project. PROJECT MODIFICATIONS: Not relevant to this project.
Impacts
The simulation model developed to determine the optimal proportion of cooperative earnings that should be retained as unallocated equity will provide information useful to U.S. farmer cooperatives as they search for efficient ways to finance their operations through the accumulation of equity capital from earnings while seeking to maximize the value of cash patronage refund distributions to members. Information concerning the advantages and disadvantages of using unallocated retained earnings and the issues involved in their use will also be helpful to cooperatives as they decide whether to adopt or expand their use of this financing method. In addition, the economic model upon which the simulation model is based will provide a greater understanding of this financing method to cooperative decision makers, university faculty members, and other professionals who work with cooperatives, and the model does well in explaining empirically the relative use of unallocated retained earnings during the past forty years. Results of the analysis of the relationship between the cooperative organizational form and vertical expansion will provide the same groups useful information as cooperatives seek to increase their presence in the retail-oriented processing stage of the marketing channel. The forthcoming journal article also provides information about how cooperative members can hedge against farm-level risks while capturing some of the benefits of retained ownership without an extension of ownership interest by investing in food and agribusiness stocks.
Publications
- Royer, J. 2012. The increasing use of unallocated retained earnings by farmer cooperatives. Cornhusker Economics, March 14.
- Royer, J. 2012. Implications of the cooperative organizational form for vertical expansion. Journal of Rural Cooperation 40(2) (in press).
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Progress 10/01/10 to 09/30/11
Outputs
OUTPUTS: Analyses were conducted to assess: (1) the effects of cooperatives on imperfect markets, and (2) the incentives for cooperatives to integrate forward in oligopsonistic market structures. The first analysis was based on a two-stage vertical market structure consisting of producers and processors, variously assuming Cournot, competitive, and collusive behavior on the part of processors. It also focused on the incentives of producers to join and form cooperatives. The second analysis was based on a three-stage vertical market structure consisting of producers, assemblers, and processors. It assumed Cournot behavior among assemblers and processors and an oligopsonistic assembled product market. Both analyses have been reported in manuscripts recently submitted to journals. PARTICIPANTS: Not relevant to this project. TARGET AUDIENCES: Nothing significant to report during this reporting period. PROJECT MODIFICATIONS: Not relevant to this project.
Impacts
The results of the analysis of the effects of cooperatives on imperfect markets suggest that cooperatives can have a positive effect on noncompetitive markets but that output restriction by cooperatives can have a negative effect on competitive markets. However, the possibility of a negative effect is diminished by the result that producers may only have incentives to form cooperatives in imperfect markets. The results of the analysis of the incentives for cooperatives to integrate forward in oligopsonistic market structures suggest that cooperatives in those structures may have incentives to integrate forward into processing activities. Even cooperatives that do not restrict output in order to maximize member profits may have an integration incentive when there is a high degree of competitiveness in the market structure. However, integration under these circumstances will result in a net welfare loss due to industry overproduction. These results have important policy implications for the support of cooperatives and the income of producers, and will be disseminated through journal articles and presentations at conferences.
Publications
- No publications reported this period
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