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Enterprise Risk Analysis of Marketing and Farm Supply Cooperatives

Phil Kenkel

Summary

Two million U.S. agricultural producers are members of agricultural cooperatives. In aggregate, producers hold over $37B in equity in supply and marketing cooperatives which are extensions of their farms. Despite their importance, the impact of cooperative level risks on producers is rarely investigated. Agricultural cooperatives use a system of revolving equity in which profits are distributed in a combination of cash and revolving equity. The equity is eventually redeemed for cash at a later date. The profitability and financial stability of the cooperative impacts both the amount of cash patronage received and the length of the revolving period. Cooperatives can also be forced to write down the value of revolving equity if a large loss is experienced. Research at Oklahoma State University investigated the risk factors impacting grain and farm supply cooperatives using a simulation approach and a time series of financial information from 10 case study cooperatives. The framework of enterprise risk management was applied to identify and quantify all of the risks facing these producer owned firms including volumes and margins of commodities and inputs. The research identified strategies for cooperatives to better manage their risk exposure, thus protecting cash patronage and revolving equity payments to members. Some of the identified risk management strategies such as advanced booking of fertilizer purchases had the potential to reduce risk at both the producer and cooperative level. The results were presented at various industry conferences leading to follow up projects with boards of directors of individual cooperatives.

Details

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