Measuring the Performance of Agricultural Cooperatives

The task of measuring the financial performance of cooperatives is made problematic by the attributes of the cooperative form of business. Most of the commonly used financial measures give an incomplete picture of a cooperative's performance. However, the extra value approach used in this report enables a cooperative's use of member-supplied funds to be fully measured-whether member capital is earning more, or less, than it could in alternative investments. The value a cooperative generates over and above its expenses, including an opportunity cost for its equity capital, is termed "extra value." A positive extra value indicates that a cooperative has created value by its operations, while a negative extra value means that a cooperative has actually diminished the value of members' investment. Extra value is measured by subtracting an interest charge on equity capital from net savings. Three different interest rates are used for the charge on equity. The December average British Banker's Association's London Inter-Bank Offered Rate (Libor) plus 200 basis points provides the basic reference rate. This Libor + 2 "basic" rate represents the commonly held opinion that banks in the United States will generally extend loans to a firm with a better-than-average credit rating, at an interest rate of about 200 basis points above the Libor. Extra value was also calculated at two higher rates, the basic rate plus 5 percentage points and the basic rate plus 10 percentage points, to reflect a range of risk premiums because investors consider equity investment riskier than debt. For comparisons over time and among different types of cooperatives, extra value is expressed as a percentage of operating capital. This common-sized index is thus scale- and operating mode-neutral. Extra value was calculated for 65 cooperatives that had been on USDA's top 100 cooperatives (based on revenue) list for at least 4 years in each of two 5-year time periods-1992 through 1996 and 2000 through 2004. Looking at these two time periods allows for an examination of how cooperative performance progressed over time. Additionally, averaging over multiple years should have helped minimize the impact of extraordinary factors on results.