A Comparison of Traditional and Newly Emerging Forms of Cooperative Capitalization

This paper compares the traditional forms of capitalization used by American co-ops to newly emerging forms. It is based on an in-depth review of several case co-ops. A broad framework is provided that may be beneficial in more extensive studies of capitalization practices of cooperatives and similar organizations. It is divided into three parts. Part One outlines the alternative capitalization forms being used by cooperatives and their antecedents, where conversions to other structures and forms have occurred. Two basic capitalization forms have been used by cooperatives: traditional (open) and new generation (closed). Cooperatives using both forms have elected to add new capitalization features, such as use of publicly listed stock, or have elected to convert to different forms, such as an LLC or a C corporation. Several perceived advantages have motivated these changes besides the traditional advantages utilized by cooperative corporations, limited liability and single taxation. They include access to capital, liquidity and appreciability of stock. Part Two provides a brief description of the nature and experience of several modern cooperative organizations using the framework presented in Part One. The descriptions are based on in-depth case studies. The case study selections are from a broad cross-section of cooperatives that include the following: (1) Mid-Kansas Cooperative (traditional, centralized, local grain marketing and farm supply using only internally generated equity); (2) Land O'Lakes (traditional, centralized and federated, regional dairy marketing and processing and farm supply using only internally generated equity and registered debt financing); (3) CHS Cooperatives (traditional, primarily federated, regional grain marketing and processing and farm supply, with the recent addition of publicly listed preferred stock); and (4) U.S. Premium Beef (new generation, centralized, regional beef processing using closely held but tradeable common stock and proposal to convert to an LLC with member and non-member tradeable stock). In addition brief mention is made of other cooperatives including (5) Dakota Growers Pasta (new generation, centralized, regional durum wheat processing with recent conversion to C corporation); (6) South Dakota Soybean Processing (new generation, centralized regional soybean processing with conversion to LLC); (7) Pro-Fac and Birds Eye Foods (new generation centralized regional frozen vegetable processing with publicly listed stock and transition of processing entity, Birds Eye, to majority ownership by investor-oriented partner likely to exit through an IPO) and (8) Gold Kist (traditional, centralized regional poultry processing with proposed conversion to publicly traded C corporation). Part Three will briefly outline some of the challenges facing cooperatives in the future with reference to capitalization.