Targeted Capital Base PlanTargeted Capital Base Plan

Bob CroppBob Cropp

Interim DirectorInterim Director

University of Wisconsin Center for CooperativesUniversity of Wisconsin Center for Cooperatives

March 30, 2006March 30, 2006

A Pure Capital Base PlanA Pure Capital Base Plan

The co-op would decide what percentage of total The co-op would decide what percentage of total assets should be member equity.assets should be member equity.

Then each member contributes their share of Then each member contributes their share of equity up-front based on what percent of the equity up-front based on what percent of the total cooperative business volume is their total cooperative business volume is their business.business.

Example Capital Base Plan: Total assets Example Capital Base Plan: Total assets $2,000,000; equity = 60%$2,000,000; equity = 60%

Member A:Member A:

Accounts for 5% of Accounts for 5% of the co-op business the co-op business volumevolume

Up-front equityUp-front equity

$1,000,000$1,000,000

X 5% =X 5% =

$50,000$50,000

Member B:Member B:

Accounts for Accounts for 2% of 2% of the co-op business the co-op business volumevolume

Up-front equityUp-front equity

$1,000,000 $1,000,000

X 2% =X 2% =

$20,000 $20,000

Also, the guideline for board in redeeming equity.

Base capital plan not widely used.Base capital plan not widely used.

The new generation (value-added) co-ops are The new generation (value-added) co-ops are practicing base capital plans.practicing base capital plans.

- Purchase marketing rights (shares) in proportion - Purchase marketing rights (shares) in proportion to to planned business with co-op.planned business with co-op.

- Example, $2.00 per bushel for planned bushels - Example, $2.00 per bushel for planned bushels corn marketed through the ethanol plant.corn marketed through the ethanol plant.

- These are enforceable delivery rights- These are enforceable delivery rights

- Shares appreciate/depreciate and are - Shares appreciate/depreciate and are transferabletransferable

Targeted Base Capital Plan:Targeted Base Capital Plan:

Not widely usedNot widely used

More applicable for marketing than supply co-opsMore applicable for marketing than supply co-ops

An equity target is set for each member; for example, An equity target is set for each member; for example, $2.00 for each hundredweight of milk to be marketed.$2.00 for each hundredweight of milk to be marketed.

Two options; 1) pay $2.00 up-front, or 2) accumulate Two options; 1) pay $2.00 up-front, or 2) accumulate equity with allocated retained patronageequity with allocated retained patronage

If If under-invested,under-invested, receive 20% of patronage refund in receive 20% of patronage refund in cash and 80% retained as allocated equity.cash and 80% retained as allocated equity.

If If fully-investedfully-invested, received 100% of patronage refund in , received 100% of patronage refund in cashcash

Example, targeted capital base planExample, targeted capital base plan

Member A:Member A:Markets 14,000 Cwts.Markets 14,000 Cwts.$2 X 14,000 = $28,000$2 X 14,000 = $28,000Accumulated equity = Accumulated equity = $12,000$12,000Balance = $16,000Balance = $16,000Co-op net margin = $0.30Co-op net margin = $0.30$0.30 X 14,000 = $4,200$0.30 X 14,000 = $4,20020% cash = $84020% cash = $840Retained allocated = Retained allocated = $3,360$3,360

Member B:Member B:Markets 12,000 Cwts.Markets 12,000 Cwts.$2 X 12,000 = $24,000$2 X 12,000 = $24,000Accumulated equity = Accumulated equity = $24,000$24,000Balance = $0.00Balance = $0.00Co-op net margin = $0.30Co-op net margin = $0.30$0.30 X 12,000 = $3,600$0.30 X 12,000 = $3,600100% cash = $3,600100% cash = $3,600Retained allocated = Retained allocated = $0.00$0.00

Summary points:Summary points:

Targeted base capital plan won’t be much different than Targeted base capital plan won’t be much different than standard equity revolvement unless profits generated standard equity revolvement unless profits generated allow for reaching equity target in a reasonable time allow for reaching equity target in a reasonable time period.---Can’t redeem equity faster than it accumulates.period.---Can’t redeem equity faster than it accumulates.

Fully or over-invested members may be interested in Fully or over-invested members may be interested in selling their excess equity at a discount to under-selling their excess equity at a discount to under-invested members.invested members.