Cooperative Risk Management: Rationale and Effectiveness

Agricultural cooperatives tend to be riskier than investor-oriented firms, both in a business and financial sense. However, cooperative managers are often reluctant to actively manage risk. Although the "risk management irrelevance proposition" suggests that cooperative managers should be unable to add shareholder value through risk management activities, this study argues that there are several reasons why this is not likely to be the case for cooperatives. Several empirical examples are provided through numerical simulation of pro-forma financial statements from representative agricultural cooperatives. Using mean variance, expected utility and value-at-risk metrics, the results of these simulations show that various risk management strategies can improve the risk-return profile of a typical cooperative. Keywords: cooperative, expected utility, futures, option, risk management, value at risk.