The relative capital structure of agricultural grain and supply cooperatives and investor owned firms [The cooperative capital constraint revisited]

A recent set of articles in Choices identified some of the major issues facing agricultural cooperatives. Among these are the challenges related to identifying the financing activities and equity capital management strategies that will lead to growth and longevity of cooperatives (Barton, et al 2011). Like their investor-owned counterparts, cooperatives must be profitable and competitive in the markets they face. However, cooperatives face unique challenges in managing equity capital. Because they are limited in their access to outside investments and have nontradable stock, cooperatives rely on member-provided equity through voting shares and equity accumulation through the allocation of profits as retained patronage as the primary sources of equity. Thus, a number of theoretical and empirical investigations identify that cooperatives are constrained in their ability to access capital and, therefore, are limited and perhaps inefficient in their investment activities. This paper seeks to examine the issue of capital constraints on U.S. agricultural supply and grain cooperatives and investor-owned firms (IOFs). A variant of the DuPont model – a technique that breaks down a firm’s rate of return to equity into measures that relate to profitability, efficiency in asset use, and leverage – permits an empirical comparison between IOFs and cooperatives on their activities, debt structure, equity, and liquidity factors. Using firm-level panel data of financial information for cooperativeand IOF agricultural grain and supply firms in Iowa, the two ownership types are compared to identify whether significant differences exists in their investment activities and financial efficiency. Whether capital structure is impacted by firm type and the financial determinants which may contribute to such differences is highlighted.