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ARS Home » Plains Area » Mandan, North Dakota » Northern Great Plains Research Laboratory » Research » Publications at this Location » Publication #347617

Research Project: Sustainable Agricultural Systems for the Northern Great Plains

Location: Northern Great Plains Research Laboratory

Title: Examining the financial performance of agricultural cooperatives in the United States

Author
item Pokharel, Krishna
item REGMI, MADHAV - Kansas State University
item FEATHERSTONE, ALLEN - Kansas State University
item Archer, David

Submitted to: Agricultural Finance Reviews
Publication Type: Peer Reviewed Journal
Publication Acceptance Date: 11/16/2018
Publication Date: 4/8/2019
Citation: Pokharel, K.P., Regmi, M., Featherstone, A.M., Archer, D.W. 2019. Examining the financial performance of agricultural cooperatives in the United States. Agricultural Finance Reviews. 79:271-282. https://doi.org/10.1108/AFR-11-2017-0103.
DOI: https://doi.org/10.1108/AFR-11-2017-0103

Interpretive Summary: Agricultural cooperatives in the U.S. are in a state of transition with increasing consolidation leading to larger and fewer cooperatives. Identifying financial stress and causes of financial stress can help in making management recommendations to deal with changing conditions. The real rate of return on equity was used to identify financially stressed agricultural cooperatives. This approach allows the sources of financial stress to be identified. Results suggest that smaller cooperatives are more likely to face financial stress than larger cooperatives. Results also showed that a substantial percentage of financial stress was correlated with a low return on assets or profitability. A smaller percentage of financial stress was due to financing decisions. The results are helpful to agricultural cooperative managers, boards of directors, and lenders in making management decisions to reduce financial stress.

Technical Abstract: Purpose – The purpose of this paper is to identify financial stress and the causes of financial stress for agricultural cooperatives and provide management recommendations to stakeholders including cooperatives’ managers, boards of directors and lenders. Design/methodology/approach – This research used the geometric mean of the real rate of return on equity to identify financially stressed agricultural cooperatives. The real rate of return on equity allows the allocation of total financial stress among the return on assets, leverage and interest rate issues. Findings – This study found that financially non-stressed agricultural cooperatives had a higher rate of return on equity and rate of return on assets, but lower leverage ratios and interest rates than stressed agricultural cooperatives. Further, non-stressed cooperatives had higher total assets and sales compared to stressed cooperatives. This suggests that smaller cooperatives are more likely to face financial stress than larger cooperatives. The decomposition of the financial problem showed that a substantial percentage of financial stress was correlated with a low return on assets or profitability. A smaller percentage of financial stress was due to financing decisions. Originality/value – This study provides value by measuring the impact of profitability, leverage and interest rate on the financial performance of agricultural cooperatives. Results showed that a substantial proportion of financial stress was associated with a low return on assets. This indicates that profitability is a problem for agricultural cooperatives. This study also examines profitability during a period of volatile returns in production agriculture.