Using Principles of Finance to Interpret Co-op Theory

The trouble with economics is that by the time professors are done layering in and valuing costs and benefits, its not clear whether you should get out of bed in the morning or put a bullet in your head. The costs and benefits of either alternative can be shuffled around to prove either point.

Principles of finance clarify and help us answer the question: clearly getting out of bed is the stronger option. Not only will you have a day's more pay in your pocket at the end of the day, but you'll avoid the expense of your funeral. That kind of clarification is needed in the co-op community for managing allocated equity.

How does one look at equity management through a finance lens and conclude that the CoBank approach does not have clear strengths over the CHS approach?

The strengths of the CoBank approach are clear:

• Stronger value proposition for members - time value of money. 
• Stronger capital structure for co-op - less allocated equity; less "debt", in other words
• Conservation of capital - reduce exposure of board to failing to discharge its fiduciary obligations
• Greater satisfaction for all stakeholders
• Easier to govern and manage the co-op - like steering the co-op from the front rather than the rear.
  
• Easier for members to monitor - if the Co-op is holding back too much cash, members know immediately and can press board for distribution of more cash.  Co-ops using CHS approach are unlikely to have too much cash, and more likely to operate with chronically tight liquidity positions because they have (again, using the $100.0 million distribution of cash example) $90 million more per year to redeem over the life of the co-op than the Co-op using the CoBank approach.

The weaknesses of the CoBank approach are ambiguous

• Jettisoning co-op theory? Response: why is applying finance principles to co-op theory a threat to that theory if the co-op's value proposition and capital structure are stronger?
  
• Wasting the Sub-T patronage tax deduction?  Response:  the CoBank approach allocates less with QNAs and hence uses less of the patronage tax deduction than the CHS approach, but the CoBank approach wrings far more value out of each dollar of patronage tax deduction taken on the Co-op's income tax return.
  
• Complexity? Response: benefits outweigh complexity, plus complexity is overcome with experience.
  

Remember, I'm not referring to any co-op that allocates all or substantially all patronage earnings and can reasonably redeem it all according to member expectations without creating capital deficits that hurt the co-op by re-directing capital from necessary expenditures on PPE, and/or strengthening the co-ops solvency and/or liquidity positions. I'm also not referring to co-ops that are not sufficiently profitable to switch around their capital structure if doing so creates too much financial pressure.