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# Agricultural & Applied Economics Association

A Model of Cooperative Finance Author(s): John J. VanSickle and George W. Ladd Source: American Journal of Agricultural Economics, Vol. 65, No. 2 (May, 1983), pp. 273-281 Published by: Blackwell Publishing on behalf of the Agricultural & Applied Economics Association Stable URL: http://www.jstor.org/stable/1240873 Accessed: 06/10/2010 08:16

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This paper analyzes the economics of a cooperative's financial structure. Helmbergerand Hoos. customers and owners are separated. Research dealing with capital structureoptimization in corporations is exemplified in Vickers' analysis. The price of a noncooperativefirm's common stock is determinedin the marketplace. J-10249 of the Iowa Agriculture and Home Economics Experiment Station. he concluded that the optimum allocation of the firm's demand for capital over alternative capital sources equates the cost of each capital source at the margin. Phillips) significantly contrasts the relationbetween-studiesof noncooperative financial structureand short-run behavior. (d) Cooperativesmay operate with a single tax on income. Vickers looked at two sources of capital. Department of Agriculture. VanSickle is an assistant professor of food and resource economics at the University of Florida. Ronald E. He found that the optimumfinancialleverage occurs where the marginalrate of return on equity is equal to the marginalrate of interest on debt. Korzan and Gray. (b) The price of a cooperative's common stock is fixed by the articles of incorporation. A noncooperative firm's objective is to benefit its owners. Noncooperative firms do not. U. John J. He then developed a debt-cost function that stated the average interest rate of debt as a function. The financial structure of cooperatives has received much less attention. Journal Paper No.A Model of Finance Cooperative John J. In general. In the noncooperative firm. Coffman. Ladd fromthe of The uniquecharacteristics cooperativesrequirethey be analyzeddifferently firm. financethanis the noncooperative Key words: cooperatives.A mathematical and instruments. (e) The cooperative's objective is to benefit its member-customers.firmtheory. debt and owners' equity.finance. Ladd is a professor of Economics at Iowa State University. Nervik and Gunderson. Many textbooks and at least one journal are devoted to the financialstructure of noncooperative firms. (c) One source of capital is availableto the cooperative that is not available to the noncooperativefirm-deferred patronagerefunds. Wilson. George W. Cooperativesdiffer from noncooperativecorporations in at least five majorways: (a) A cooperative's customers also are its owners. This research was partially financed by the Cooperative Management Division of Agricultural Cooperative Service. The assumedobjective of the cooperativeis to Copyright 1983 American Agricultural Economics Association . maximizingthe rate of returnon the book value of owner investment. a numerical analysisderivesresultsfor a cooperativeundervarious the hypothesizedscenarios. This paper modifies Vickers' approach to make it applicableto a cooperative. after-tax profitsof the cooperativemember amongthe variousfinancial analysisderivesthe relationships patrons. an objective consistent with short-runprofitmaximization. and the stock is not tradedin an open market.S.We suggestthata modelincorporating unique tool of characteristics cooperativesis the moreappropriate for studyingcooperative model. The authors are grateful to the anonymous reviewers for helpful comments. VanSickleand GeorgeW. Fenwick. total capital employed.of the coefficient of variationin the earnings stream availableto cover the interest on debt and the leverage ratio. The differences just listed require that cooperative financial structure be analyzed differently from a noncooperative's financial structure. Raikes made valuable contributions to this research.Tubbs. Beierleinand Shrader.A modelof cooperativefinanceis developedthat moretraditional noncooperative the has the objectiveof maximizing total. Cooperative Objective The relation of long-run cooperative finance studies (Snider and Kohler. and the leverage ratio (debt/total liabilities). Vickers computedthe financial leverage. Dahl) to typical short-runcooperative studies (Bar. He related equity cost to the coefficient of variation in total net operating income.

M. maximize the total profits. 38) report that in 1976 only 1. Net savings are allocated to dividends on capital stock and to qualified and nonqualified patronage refunds. and Vickers and do not de.Order of Appearance sible because it can be used in studies of Definition short-runproductionand pricingand long-run Symbol financial structure. ? DS NS r 0 per (fixed) Number of members in the cooperative (fixed) Total number of years deferred patronage refunds are deferred Proportion of patronage refunds paid in cash Amount of net savings allocated as qualified patronage refunds Total capital supplied by qualified patronage refunds Total capital employed by the cooperative (fixed) Total debt employed by the cooperative Members' total profits after taxes Members' total net revenues after taxes from products traded inside and outside the cooperative during the current year (fixed). Econ. of the Table 1. be assumed fixed to reflect point (b) in the opening paragraph. Definitions of Symbols Used. p.m DS. The capital supplied each year' by qualified i. These net revenues represent all current income and outlays of members before allocations of net savings from the cooperative Present value of patronage refunds paid to members Net (of income taxes) dividends on capital stock paid to members Members' total net revenues before taxes from products traded inside and outside the cooperative during the current year (fixed).274 May 1983 Amer.. the word "cooperative" means "Section 521 cooperative. Agr.. J. In memberpatrons(Ladd). Griffin et al. nonqualified patronage refunds are assumed to be zero." The cooperative must determinethe total amount of debt and owners' equity. deferred patronage refunds. deferred qualified patronage refunds. Cooperativesorganizedas stock corporations commonly require a common stock purchase for membership. This is done mainly for convenience. Membershipallows the paof tron to be involved in the management the The price of common stock will cooperative. A qualitativemodel for cooperatives that do not meet Section 521 criteria can be formulated.The numberof members also is assumed fixed in this paper. Hereafter. PVPR. This is done mainly for convenience. (p. The contributionof common stock to the financialstructurethen may be written (1) CS = P . after taxes. In this paper we follow Total value of common stock outTubbs. The other form of memberequity.M p d See table 1 for definitionsof all symbols used. Because of their negligible use. Owners' equity includescapital stock.. These net revenues represent all current income and outlays of the members before allocations of net savings from the cooperative Members' average income tax rate Ratio of member business to the sum of member and nonmember business Members' discount rate defined as equal to the members' average marginal interest cost of debt Dividend rate on capital stock Maximum allowed dividend rate on capital stock (fixed) Total (before income taxes) dividends on capital stock paid to members Net savings of the cooperative Average interest rate on all current and long-term debt used by the cooperative Net operating income of the cooperative defined as equaling total receipts less all expenditures except the interest cost of debt (fixed) . T t. Supply of Capital tM 7 s QPR TKQP K D Tr T. is derived from the cooperative's net savings. but is much more complex. and nonqualifiedpatronagerefunds. This satisfies an early principle of cooperation establishedby the Rochdale Society (Abrahamsen. share of common stock Price P CooperativeFinanceModel This paper studies financialstructureof Section 521 cooperatives that use revolving fund financing. This objective is sen.CS standing termine the amount of capital. It is assumed that the cooperative limits common stock ownership to one share per member. Fenwick. 48).2% of the equity capital in cooperatives was supplied by nonqualified patronage refunds..

patronagerefunds depends on the proportion of refunds paid in cash to the patrons. i. 5) E MIC ME1PV. The fifth constraint is that the net savings must be allocated. is written tions governing cooperatives.. A small positive number(fixed) Marginalinterest cost of debt Effect on the present value of one dollar of deferredpatronagerefunds of varying7 Total current liabilities employed by the cooperative (fixed) Total long-term liabilities employed by the cooperative Averageinterestrate on long-term debt Cooperatives are requiredby law to allocate refunds to members and nonmembers alike. total capital employed may be written Constraintson Cooperatives = PSI + r(1 .mQPR].whicheveris greater.tm)icPM. The first Cooperative Objective Function constraint is that the cooperative employs K The assumed objective for the cooperative is amount of capital. T is a fixed parameterbecause membership (11) and capital employed are fixed. 4.0 . (6). cooperativeduringthe currentyear. The fourth constraint limits the dividend = Tm + PVPRm + DSm. The total. p. The capital which qualifies for dividends includes common stock and equity suppliedby deferredpatronagerefunds.tm)T + p s + (+ d)tm QPR The total capital employed by the cooperative is the sum of equations (1) and (2). We assume that the cooperative pays a dividend only on membershipstock. The cooperative rate Members' total net revenues.. Symbol L (cont. (8) T = (1 .tm).il debt. Tm = (1 . after-tax profits of the and third constraints specify that the propormember patrons.2. and the net dividends on capital These constraints stem from the legal regulastock paid to members. and most cooperatives do not pay dividends on equity supplied by patronage refunds (Griffinet al. CL LT r. after-tax profits tion of qualifiedpatronagerefundspaid in cash of the memberpatronsare equal to the sum of will be greater than or equal to 20%but less the members' total net revenues. (12) td . 85).tm)T. for products traded inside and outside the (9) s . The second to maximize the total. ent value of patronage refunds paid to the (10) members. Cooperativesare not requiredto pay the same dividendrate on each capital source.Van Sickle and Ladd A Co-op Finance Model 275 Table 1. 3. than or equal to 100%. after taxes. The total capital suppliedfrom qualifiedpatronage refundsis equal to the capital suppliedby that source each year times the number of years deferred. (3) k The objectivefunctionis maximizedsubjectto constraints faced by cooperatives. (5) i > ic. Thus. the pres1. 2. The objective function may be rewrittenby substituting equations (5). and + (1 .s)QPOR + D. (2) TKQP = r(1 . equation (3).) Definition Lagrangefunctionfor determining financial structure in cooperatives Lagrange multipliers X(i = 1. The capital stock patrons hold in membership(common) stock is equivalentto CS in equation (1). distributionof net PVPRm may be defined as savings can be described as (6) PVPRm = p s + (1-s) . and (7) into equation (4).e. cooperative association may be specified as This upperlimit varies by states and is defined here as i. (4) 7r rate on capital stock. J 1[ (1 + d)T NS = DS + QPR. cannotexceed 8%per annumor the limit specfor products traded inside and outside the ifiedby state regulations. after taxes.s. Dividends on members' capital stock are taxable to the members so that the net dividends on the members' capital stock may be stated (7) DSm = icPM(1 .s)(QPR).

PMAi . but not of D. the amountof net savings allocated as qualifiedpatronagerefunds (QPR).tm)T conditionfor r equal setting the Kuhn-Tucker to zero.That is.s)QPR] = 0. Agr. only if r equals 0.0. (13) 84% of cooperatives used some form of dewhere 0 is a fixed parameterbecause member.). the lengthof the revolvand ing fund (r).E _ s. and (16) equation (21) and rearranging EconomicAnalysis (17) s < 1.D] + X2[s .icPM . Econ.2.(1 .tmIQPRI state the constraint in equation (10) as J ] + where Eis a fixed. Net savings can also be described as the net Value of s operating income of the cooperative less the Most cooperative associations use deferred interest cost of debt.s]+ X4[i. and expressions (9) through (11) and (14) as therefore. As an alternacates the first-order tive we carry out two analyses.(1 + d)' ( 1 d) and 7 equal 0.icPM . the Lagrangeanmay be stated the unnecessary assumption leads to a solution for s. *+ (1 . must be discarded.ferred patronagerefunds. so that expressions (16) and (17) must be satisfied. The Kuhn-Tuckercondition for r is aL (1 . J. Assume 7 and QPR. Substitutingequation (20) into r > 0. Under assumptions (16) and (17) we can use qualitative analysis to deter.0.s) . the The precedingmodel is incomplete because it Tucker conditionfor s is satisfiedas an Kuhnequallacks the requirementthat s equals 1. Griffinet al. . then X2and X3are we require that equal to zero. (22) In a later section we require that s equal 1.One assumption.rD.rD.proach proportion to use.ic] + X5[0 .276 May 1983 Amer. (18) 1. Because s must be greater than 0. 40) report that in 1976 over NS = 0 . patronage refunds as a source of financing.Discardingonly constraints.s)ln(1 + d) QPR The variables that the cooperative decision (19) (1+ d)T makercan manipulateto achieve its objective -7 are the proportion of qualified patronage re+ X1[-(1 .tm)icPM+ h. small.2] + X3[1. conditions.0.[K . equation (22) remine optimum values of s and ic. We will assume deferred ranging.s)QPR . (14) 0 termines we use proof by contradiction. Expression (17) is satisfied if we re+ pts + (1J. The constraint in expression (9) dictates that s must be greater than or equal to 0. and the A In + d) (20) (1 = amount of debt to employ (D). Expression (16) can be satisfiedby (15) L = (1 .0 .If QPR is greater than zero. quires that the bracketed expression be equal to zero. the constraintcan be written patronage refunds are used. To de-rDO .2 < s < 1 . QPR-p 1. In this section Assumingthatthe solutionfor s is not a corner solution (0. Using deferred paship and capital also are fixed.3 = 0. the dividend rate on common Equation(19) can be rearranged simplified as stock (i.0 =0. positive number.0.e). we show that the conjunctionof four reaLagrangean sonable assumptions yields a conclusion that With equation (8) as the objective function contradictsthe assumptions. +P (1s d).QPR]. funds paid in cash (s). The length of the deferral 1 period must be zero if all patronage refunds (21) _L=pI are paid in cash. Adding constraints to the as Ll (1 + d)']1QPR j model to incorporatethis restriction compli+ Xh(7QPR) + 2 . (p.0 if and ity.QPR = 0. tronage refunds allows a cooperative to apSubstitutingequation (7) for DS and equathe principle of member financing in tion (13) for NS into equation (12) and rear.

we conclude that s is greater than 0.2 and X2equals zero. r. highervalues of s increased the present value of patronage refunds. and (23). To prove this.X5 = 0. Consequently. (31) aL L (1 - X4 Mtm)PMPROP• But this contradictsthe assumptionin expression (16). Royer showed that for constant annualpatronagerefunds and constant total capital supplied by deferredpatronagerefunds.(1 + d)' (1 + d) 7= 0. Substitutingequation and (30) for X.- [ r + D ?r0. Substituting equation (20) and (28) into exmultiplythe expression inside the brackets of pression (29) and rearranging yields equation (22) by (1 + d)7 and rewrite as 1 E (30) X5 = p (1 1 = (1 + d)' . And patronagerefunds in financing.tm). into expression (34) (20) for Xh and rearranging yields (35) MIC [ 5 IInQ(1 1 C (1 + d) 1 _ + d) (1 tm) rln(1 + d)-' Value of ie - (1+ d)' (1+ d) " The Kuhn-Tuckercondition for QPR will be Note from equation (6) that 1/(1 + d)' is the an equality if the cooperative uses deferred present value of one dollar of patronage refunds deferred 7 years. Thus not all of the conditionscan be true.2) or X3 is positive (implyingthat s equals 1 . (24) 1T. equation (26) is satisfied if and (32) Xh= PM (1 . That is. Therefore. (27) Substitutingequation (25) into (24) yields aic _ 1 (23) d > 0.E1 ( . ic= Values of D. The only condition that can be dropped is the assumptionthat both X2and X3 equal zero. Because p is less than or equalto one then X4must be positive.Van Sickle and Ladd A Co-op Finance Model 277 (29) ps + (1. and QPR (33) The Kuhn-Tuckercondition for D can be expressed as (34) -aD .E Eand the expression multiplyingEin (32) are positive. only possible value for r that satisfies both equation (22) and (23) is zero.E).tm) only if 1 + d) An(I .) -tm = P (1+ d)T is logical because d is the Q LQPR Expression (23) discount rate of the members.p [( . aD The bracketedexpression in (34) is the marginal interestcost of debt (MIC) since the interest cost of debt is rD.An(1 + d). .X17(1 . i. (31) is an equality. s = 1.(1 d) ti)n(30) + d) (1 Note that the series expansion for (1 + d)Tis (1 + d)' (25) (1 + d)' = 1 + iln(1 + d) can be The Kuhn-Tucker condition for [In(1 + d)]i + I ic stated as j?2 . Assum+ d)y (26) 1 1 + [n(1 ing (31) is an equality. (16). Reis jecting this assumptionmeans that either X. j! 0. If the cooperative pays a dividend on members' capitalstock.s) . and the asand X3 equal zero. The conjunctionof the assumptions expressed in (10). Then X3must be positive.2 conclusion that contradicts expression (16).2 negative (implying that s equals . yields a sumption that X. The average . implying (28) for a maximum. substituting(30) into (31) for X5 yields Since d > 0.

07 + O. were obtainedfromdata suppliedby a marketing and supply cooperative surveyed in July 1979.08. one needs to check that the solution is a maximum rather than a minimum. With no interest on current liabilities. For each value of LT. Agr." CL + LT Finally. The values for CL. Econ. We assumed that the cooperative employs currentand long-termliabilities as sources of debt. Values for s below 0. for the specified value of s. p. p and t. and QPR can be determined Because currentliabilities (excludingthe current portion of long-term debt) often can be used for financing with relatively low or no interest. 7.K. For the ber of values of s. By using equations (33) and (41). we assumed that the average interest rate on current liabilities is zero. and is arbitrarily specified as (40) rL = 0.. To obtain solutions for all three.a rough estimate of members'marginalinterest cost for 1979.. K.rD . M.OI[LT/(K .52 used the minimum amount possible for deferred Substitute this result. defer payment of a small percentage of patronage refunds.QPR = 0. equations gorithm. the definition of MEIPV. Each line of table 3 shows the combination of values of LT.[n(1 + d)/(1 + d) '] which is the negative of the first right-handside term of equation(35). d[1/ (1 + d) 7]/dr = . The analysis considered val. that were used in the ues for s from 0. r.400. . and from equations (36). 7.CL)]'.PAf . we combined (38) dX5 a search method with the Gauss-Seidel alBecause MIC is a function of D. 0. the average interest rate on debt may be written (41) rL LT r= r..QPR = 0.0 in each case. and (38) are three equationsin three ified. and QPR were substitutedinto (8). equation and X.r(1 . M. The values of LT.T.s)QPR (37) P-Ml K (42) 8 .99.CL)]. Expressions (39) and (42) providetwo equations in the three unknowns LT.8 0. Hence. (36) MIC (1 .1. compute 7r . In using Gauss-Seidel for solving first-order conditions. and (1 . and (38). (37). 6.. Table 2. 7 and QPR. 7 and QPR. the Gauss-Seidel instrumentalvariables:D. the Kuhn-Tuckerconditions for X.iPM .icPM .35 p t.. the solutionprocess to determinevalues for LT. alongwith (28) and (33) to QPR given values for s. Then substitute (40) into (41) and solve for MIC.LT . K.2 through 0. This is the effect of varyingr on the present value of one dollarof deferredpatronagerefunds. The average interest rate on long-term debt is assumed to be an increasing function of the permanent leverage ratio [LT/(K . Label it ME1PV. r. Table 2 presentsthe assumedvalues for CL..CL)] + 0.E 1i [ 1d) (1+ d)T rln(1 + d) (1 + d)7 -MEIPV. and QPR that maximizedIr less T. Predetermined Variables for the Cooperative Variable CL Value $775.' 7 was requiredto be greater analysis. r. This combined searchand an interest rate function for r. and QPR. d.D = 0..s) into (38) to obtain a third. These algorithmwas used to solve (39) and (42) for 7 eauations can be used to solve for D. can be written as (38) may be rewrittenas aL -r(1 . and M ar/8D = ar/aLT. P.r1 ..03[LT/(K .. 7 and and QPR.000 $3.s)QPR .000 P 0 R M $500 1200 members $400. equation(37) may be writtenas (39) R .(CL + LT) = 0 values of D. If the cooperativeuses debt equation(35) is an equality and implies that the cooperative will employ sufficientdebt so that MIC is greater than the negative of ME1PV. and i was set to 0. Then.equation to be solved with (41) and (44) by the Gauss-Seidel algorithm. P. t.000 0. The computed values of the objective function support the earlier conclusion that higher values of s yield highermembers'total net revenue. (37).A numberof values of LT were spec(36)... = 0.t. A numerical analysis was performed to Gauss-Seidelprocedurewas used for a numevaluate the nature of the solutions. J.278 May 1983 Amer. An alternative is the following: fix CL so that dD = dLT and . the cooperative was assumed to than or equal to 1.) . P. equation (28). The value d was assumed to be 12%.

i.12 nent leverage ratio of 0.525.72 .T. The re.0 352.025. s LT s LT . If p is less than one. In the cases straints that may be needed for practicality where s was less than 0.38 352.645 of long-term debt.Van Sickle and Ladd A Co-op Finance Model 279 Table 3. .7 1.0 0 160. Also.3 1.rLLT iPM.00 0.0 171.0 0 123.7 113. modified to incorporate these additional re.was approximatelyequal to 0. length and limits of $1.942.816.4 1.025.7.39 112.0 $1.PMf.902.71 .875 1.939. OptimumSolutionswith Restricted sults of the mathematical analysis can be Levels of 7 and LT shown to indicate that with these restrictions Optimum Solution for the cooperative must either pay the maximum Maximum Allowed LT/ allowable cash patronage refund rate. the permanent We now assume s equals 1 and r equals 0.0 1.71 to 0. . Further restrictions were added to the And QPR is obtained from (42) as model to evaluate the effect of limitationson QPR = 0 .0 113. Solutions for QPR. revolving fund length and debt.43 123.76 352. equals 1 refunds as long as possible..0 1.43 . years were considered for revolving fund 12 .000) patronage ($1. While Under this assumptionthere is only one soluit is possible for cooperatives to have perma.875.525 1.025 1.Table 4. The search-Gauss-Seidel algorithm was 4 . .5 for long-term debt depend on the maximum .1 1. the cooperative should employ . and twelve 8 8 ..0 allowed value of 7. i.72 . $1.2 176.147.4 1.5 113.four years and LT is constrainedto be less than $1.7.025 1. leverage ratio ranges from 0.38 122.59 116.2 the optimum value of long-term debt gener. in the previous model some con.0 0 139.5 conditions must hold.000 (a perma. In every case the LT 7T .E.39).875 1.025.000 (a a No feasiblesolutionexists when 7 is constrained be less than to permanentleverage ratio of 0.. The results also funds and no long-termdebt.57 116.CL) 7r.5 1.99 and 7 equals 575 years.51 the maximumsolutionexists where heavy The previous analysis assumed (16) and (17).8 111. the optimumlevel of .51 1.6 14.1 For instance.0 0 186.72 . show that in six of the eight feasible solutions s However. or the cooperative must defer r (K .0 0 211.8 28.507.52 352.99 575. when r is restricted to twelve .3 1. The results also indicate that solutions .7 19.0 175. is (33).98 352.0 .0 1.011.525 1.28 352. 1. 0.Values for s greaterthanor being and s decreasing to allow substitution of equal to 0.921.4 long-termdebt is less than the allowed level.6 1.T.74.e.8 .000) a a a a equals the maximum allowed value.4 2. r (Years) ($1.9 57.520.e.0 0 113..4 1. i.525 1.554. no feasible solution were omitted.58 109. .883. and r for sidered for long-term debt.7 1. The numericalanalysis shows existed for values of s greaterthan those in the the maximum solution to be where s equals table.e.8 ally decreases.69 .8 1.5 years.0 173. The optimumreVariousValues of s sults from all combinationsfor these restrictions are listed in table 4.54 . As 7 is allowed to increase.7 maximumfor values of 7.4 1. QPR s results show that the cooperativeshould defer patronage refunds the maximum allowable -------(Years) ($1. debt financing is used. it is quite likely LT = k. . Long-termdebt is derived from (39) as nent leverage ratios this high. Adding these (44) restrictions required adding two additional constraintsand Lagrangian multipliersfor the maximumallowed values of 7 and D.52 11. the lenders would impose severe operating (43) constraints on such cooperatives.58).5 .0 171. leverage ratio of 0.025.875 1. strictions. or both 4 1.025 4 .000) ($1. Limits of four.72 ..147.71) were con. LT. Restricting long-termdebt to an amount that is less than the optimum amount leads to long-termdebt used at the maximumallowed amount patronagerefunds. The numerical analysis shows that for values of s below Analysis Two 0.000 (a permanent 12 . for some prespecified .1 111.000)-------time.43 123.tion.146. and $1. eight. the solution for i.6 1.2 1.17 352.000.3 112. A revolving fund of 575 years is not reallyfeasible.52 used all deferred patronagereequity capitalfor debt capital.69 113.

"Alternative Long-Run Financial Implications for the Local Multi-Enterprise Farmers ferralperiodfor patronagerefundsleads to the Cooperative Elevator under Varying Levels of cooperativeusing moredebt and payingless of Growth and Capital Rationing.S. Our analysis yielded optimumvalues for the leverage ratio Beierlein. Res. Iowa the patronage refunds in cash.Coffman. in Haugen's paper." Ph. Proceedings of a symposium at the annual meeting. Econ.. 17. Peter G. Feb.] conditions studied here a cooperative can do better for its memberpatrons if it pays about 70%of its patronagerefundsin cash than if it References pays all in cash or only 20% in cash. lied too heavily on deferredpatronagerefunds Francis P. And tion is. These results State University. 1976. 1981. "Patron Valuafrom 0. J.. Mar. "An Analysis of Financial Management deferralperiods may explainwhy HaugenwitPractices and Suggested Alternative Strategies in nessed the increase in debt use. Martin A. Washington DC: USDA ACS Staff Rep. 57(1975):35357. in 1974and 0.. Rolf E. The maximumlever. University of Wisconsin. 60(1978):636cooperatives showed their average leverage 41. Gerald E. The model could become more useful by developing appropriateinterest rate functions and discount Conclusions and Implications rates for the membercustomers and considering the dynamic aspects of variable earnings We have studied a cooperative whose objec. The last line of table 3 presents the results for of cooperativefinance. "'A Mathematical Model of a Village CooperaGriffinet al. tive is to maximize the after-taxprofits of its [Received May 1981.and interest rates." Development and Application of Cooperative Theory and Measurement of Cooperative Performance. Hoos. 68-74. it should pay the Abrahamsen.54 results in table 4 show that shorteningthe de.100 larger)than the these unique features into a practical model last value in table 3. Rep. 4(1981).. Gray. 1964. Our results also show that if a cooperative pays a dividend on common stock. WashHaugen argues that the leverage ratio for ington DC: USDA ESCS Farmer Coop.' Coop. Tubbs. thesis. Haugen's sample of tion of a Farmer Cooperative under Alternative Finance Policies. thesis..D.33. Clemson.. 27 July. Our results sugaverage gest that he may be correct in arguing that Helmberger. aged approximately 0. Gray. Bar. Accounage ratio in our study nearly equals the 1980 tant.. Richard A. and Lee F.D. William J." Amer. Schrader. Dick L. 1972. Nervik and Gunderson. We maintain that a noncooperative finance model is an inappropriate tool to use for study Growth and Adjustment of Agricultural Cooperatives. The ques46(1964):603-17. cooperatives moved in a dangerousdirection between 1974and 1980. New York: McGraw-Hill Book Co. and Dahl. and Sidney J. Enterprise and Organization Theory.. Yager. who conUniversity of Missouri. Agr. and Elmer Perdue. are consistent with those of Snider and thesis.. No. Financial Structure of Farmer Cooperatives. Sta. "Capital Acquisition Strategies for Missouri Farm Supply Cooperatives. Ladd.39 to 0. J. Cooperative Business Enterprise. Fenwick. A study of cooperative T.Haugen." M. James G. Monroe. The Changing as a source of financing. 1976. J. Agr. Cooperative Farm Econ. and Edward L. revision accepted memberpatrons. 1980." currentleverage ratios are too high. The ratio to be 0. no. Ourresults show that for the September 1982. 32) showed that in 1976 tive Based on the Decomposition Principle of Linear cooperatives' permanentleverage ratio averProgramming. Wilmer A. 1982. Values of 7 . pp." Oregon Agr.98. Josef. Agr." Amer. "Capital for this solution. Bull.71 in 1980.69. No. 1975. Econ. (p. "The Objective of the Cooperative Association.52 and 7 of cooperatives listed at the beginningof this equals 11.in table 4 are paper. how do we test this hypothesis? Korzan. .. and growth. Econ. Our results Wisconsin Local Supply Cooperatives. Exp. Our study is an effort to incorporate generally larger(up to $9.T.280 May 1983 Amer. almost finance must incorporatethe unique features equals the value when s equals . 596. Roger Wissman. This value of -r what can be prescribed if the hypothesis is accepted? We suggest that the responsible individuals operate with inappropriate models-cooperative decision makers and coopperative creditors use the familiar noncooperative finance model typified by Vickers. J. cluded that cooperatives have in the past reGriffin. maximumallowable rate. "Financing Growth While Coping with Inflation--A Financial Perspective. Kohler. SC. George W." Ph. Nelda. Korzan and Fenwick. coupled with the recent pressure to shorten Dahl. for analyzingcooperative finance.

The Theory of the Firm: Production. D. "The Developmentand Analysisof Phillips.and RobertGunderson. Jeffrey S. Patrons.D. Walter. Bull." Min1968. Iowa State Royer. No. and E. thesis. 1971." J. 1971.D. Sta. Farm Econ. 434. Cornell eratives. "The Cost of and Finance. "DistributingCooperativeBenefits to University. New York: McGraw-HillBook Co. Bull."Economic Nature of the Cooperative a Cooperative Decision Model for Product Pricing Association. No. Snider. E. thesis. Exp. 1974.D. Accountant." Coop.Richard." Ph.Van Sickle and Ladd A Co-op Finance Model 281 Nervik. Capital ."FinancingCoopand Cooperative Finance.John Jay. Universityof Georgia. in press. "An Economic Analysis of AlternaTubbs. University. Wilson. and FinancialStructure." for Cooperatives:Implications FarmFirm Ph. Marketing Vickers. 1981." South Dakota Agr. thesis.. 1954. Capital in Minnesota Dairy Cooperatives. Fred Koller. VanSickle. Ottar." Ph. Thomas E. Alan Roy. 35(1953):74-87. "Capital Investmentsin Agricultural tive FinancingPlansfor Agricultural Cooperatives. nesota Agr. 503.. Sta. Exp.