volume 58 article #4

Capital Structure Under Stochastic Interest Rates: An Empirical Investigation of the Midwestern Agricultural Cooperative

Joseph L. Parcell, Allen M. Featherstone, and David G. Barton

Parcell is an assistant professor in the Department of Agricultural Economics, University of Missouri; Featherstone and Barton are professors, both in the Department of Agricultural Economics, Kansas State University. This research was partially funded by the Rural Business and Cooperative Development Service, U.S. Department of Agriculture, under Contract No. 43-3J31-2-0009. This is Contribution No. 98-483-J of the Kansas Agricultural Experiment Station. The authors gratefully acknowledge the comments and suggestions of two anonymous reviewers.

Abstract

The financial structure of an agricultural cooperative requires the balancing of debt and equity to assure member patrons the lowest possible costs on goods and services. One of the most important decisions a cooperative must make is the choice of capital structure. This research used a capital structure model incorporating a stochastic interest rate to determine the optimal equity-to-asset (solvency) ratio for Kansas and Midwestern agricultural cooperatives. Optimal leverage was very sensitive to a change in business risk, but less sensitive to a change in interest rate risk. The probability of equity loss declined as the level of risk aversion was increased.

Key words: capital structure, cooperatives, stochastic interest rate.

Article <top>

One of the most important and most difficult decisions cooperative management must make is the choice of capital structure. Through proper capital structure, management can influence the financial performance of the business (Forster). The cost of debt is less than the cost of equity capital because of differences in risk and the tax deductibility of debt (Barry, Ellinger, Baker, and Hopkins). Thus, the use of leverage can increase the rate of return to equity. However, debt increases financial risk, making insolvency a more likely possibility. Previous studies have empirically investigated factors affecting leverage, yet have not accounted for all financial risks (e.g., Collins and Karp; Jensen and Langemeier). In this study we incorporate a stochastic interest rate in a capital structure model and empirically investigate the effect of a change in financial risk¹ on the optimal capital structure of centralized Midwestern agricultural cooperatives.

¹One of the components of financial risk is a variable interest rate (Barry et al.).

An agricultural cooperative requires capital to finance fixed assets (such as land, buildings, and equipment) and other assets (such as investments in other cooperatives), and to provide working capital. Cooperatives acquire capital from equity or debt. They acquire equity capital by direct member investment and/or by retaining equity from revenues and net income generated through operations². Ideally, individual members are expected to provide equity in proportion to their use of the cooperative (Cobia and Brewer). Typically, the equity is held at par value (i.e., does not appreciate or depreciate) and pays no dividends, leading some cooperative managers to incorrectly perceive the cost of acquiring equity to be zero. Thus, cooperative management may follow the practice of maximizing the use of equity capital and minimizing the use of debt.

²Retained equity may include per unit capital retained, retained patronage refunds, or retained earnings.

The size of the equity pool also may depend on the rate of profitability, income distribution, and equity redemption (Barton and Schmidt)³. Decisions by cooperative management and members regarding equity investment should be based on the members’ cost of equity capital. The cost to the member of providing equity is the opportunity cost of investing money in a member’s own operation or other alternatives.

³Equity redemption methods used by cooperatives are special programs (such as estate settlement), age of patron, revolving fund, percentage pool, and base capital.

Cooperatives also acquire capital through debt financing. Using debt is attractive to cooperative directors who represent members’ interests, because it allows for members to achieve a higher return on patronage and equity when the cost of debt is less than the cost of equity. However, acquiring too much debt subjects the cooperative to unbearable financial risk caused by varying profitability and interest rates (Cobia and Brewer).

The cooperative needs to determine a leverage level and then manage equity investment and redemption to achieve this level. Cooperatives must be able to identify optimal levels of debt and equity to operate efficiently and to guard against unexpected economic shocks, because leverage affects the probability of equity loss and bankruptcy (Featherstone, Moss, Baker, and Preckel; Moss, Ford, and Boggess).

For this analysis we used a theoretical model developed by Collins (1985) and incorporated a stochastic interest rate to model interest rate risk. Incorporating a stochastic interest rate into the model had two effects on the optimal solvency ratio. First, the interest rate was allowed to vary over time (increased risk). Second, correlation between the interest rate and the rate of return on assets was incorporated into the model because of the interdependence of the two variables. The probability of equity loss was computed to determine how leverage affects the likelihood of undesirable outcomes. The theoretical model is described in the following section.

The Theoretical Model <top>

An agricultural cooperative is sometimes modeled as an extension of the farm (Sexton)⁴. The member/patron (agricultural producer) purchases inputs and markets outputs through the cooperative, and thereby receives per unit patronage refunds. Cooperatives differ from investor-oriented firms by providing returns on the basis of patronage rather than on the basis of equity. Centralized agricultural cooperatives are owned by members who are producers. Even federated and mixed cooperatives are indirectly, if not directly, owned and controlled by producer-members. Although individual patrons cannot buy and sell equity, the cooperative still will be disciplined at some level by the market. If the objectives of the cooperative differ substantially from what the market suggests, the individual patrons can act collectively to convert to a publicly held corporation (as discussed by Collins 1991, and by Schrader).

⁴For this study, agricultural cooperatives are assumed to not have a market to buy and sell equity. This assumption makes the decision process parallel between farmers and agricultural cooperatives.

In addition, the method of equity redemption can affect the behavioral motives of the cooperative. In those cooperatives that have an equity redemption mechanism in which the primary shareholders are not the primary patrons, more of an economic incentive will exist to convert to a publicly held corporation. In those cooperatives that have an equity redemption mechanism where the shareholder and patrons are aligned, incentives will exist to manage the cooperative to provide products or services at a low cost or at a level that will build equity within the firm. Thus a theoretical expected utility model of economic agents for the cooperative was used⁵.

⁵The boards of directors usually are made up of producers and are responsible for the leverage decision.

Collins (1985) derived a model of optimal leverage. Following his methods, an expected stochastic rate of return on equity can be derived as:

(1)

where represents the mean stochastic interest rate, is the mean rate of return on assets, and δ is the ratio of debt-to-assets. Under the assumption of a stochastic interest rate, the variance of the rate of return on equityis:

(2)

where σ_A,K represents the covariance between the rate of return on assets and the interest rate, is the variance of the interest rate, and is the variance of the rate of return on assets.

Previous studies have assumed that farmers (as the principals of the cooperative) and a cooperative (as the farmers’ agent) maximize expected utility and that their preferences can be represented by a negative exponential utility function (Freund; Selley). Collins and Gbur note that a linear mean-variance formulation is justified as a first-order approximation or by Freund’s assumptions. Collins and Barry developed a single-index model based on the linear mean-variance model. They state:

Still, however, this analysis shows that the risk premiums for new projects in proprietary firms depend on elements of nonsystematic risk as well as on the risk and on the firm’s leverage position. The resulting adoption criterion is expressed in a form similar to that used in cases where the CAPM [Capital Asset Pricing Model] is directly applicable. However, we cannot escape the need for quantitative measures or benchmarks about the individual investor’s risk attitudes (pp. 144­45).

Even the CAPM, although a market equilibrium concept, is based on the assumption that investors are risk averse and that expectations are characterized fully by means and variances over a single-period horizon (Robison and Barry). Thus the linear mean-variance model is also a basis for the CAPM. Under the conditions of normality, and and a constant relative risk-aversion coefficient⁶, the expected utility-maximizing solution is obtained by maximizing:

⁶The formulation of the mean-variance model in rate-of-return space instead of income space causes the Pratt-Arrow coefficient of constant absolute risk aversion to be interpreted as the Pratt-Arrow coefficient of constant relative risk aversion (Moss, Featherstone, and Baker).

(3)

where ρ refers to the Pratt-Arrow coefficient of decreasing absolute risk aversion or constant relative risk aversion. The first-order condition for expected utility maximization results in the derivative of expected utility of the rate of return on equity as a function of leverage:

(4)

Solving equation (4) for δ, the optimal leverage ratio is:

(5)

Note that when the variance of the interest rate is set as zero in equation (2), the computation of the optimal solvency ratio collapses to that derived by Collins (1985). Settingwhere τ_A,K is the correlation between the rate of return on assets and the interest rate, equation (5) can be respecified as:

(6)

Equation (6) provides an optimal leverage ratio for alternative levels of a cooperative’s risk aversion, rate of return on assets, cost of debt, variance of the return on assets, variance on the cost of debt, and correlation between the rate of return on assets and cost of debt. Therefore, the optimal solvency ratio (equity-to-asset ratio) can be written as one minus the leverage ratio This yields an optimal solvency ratio ⁷ of:

(7)

7  The optimal solvency ratio formula derived by Collins (1985) for a nonstochastic interest rate is of the form

To have a solvency ratio less than one, the mean of the rate of return on assets must be greater than the mean of the interest rate for equations (6) and (7). If the mean return on assets is not greater than the mean interest rate, the agricultural cooperative is eroding its equity position with the use of debt. For both the numerator and denominator must be either positive or negative. For all choices of τ_A,K, the numerator in equation (7) is positive, and therefore the denominator is positive as well.

Risk Effects <top>

Differentiating with respect to business risk, financial risk, the interest rate, and the rate of return on assets allows for comparative static results. Let D and N refer to denominator and numerator, respectively, in equation (7). To analyze the effects of business risk on equation (7) can be differentiated with respect to σ_A:

(8)

An increase in business risk is expected to increase solvency; however, to unequivocally sign equation (8) for all choices of the inequality σ_A > σ_K must hold. This hypothesis is tested empirically because of the inequality restrictions required to sign the numerator.

Decreasing business risk would effectively mitigate the risk of business strategies chosen by management. Similarly, the effect of a change in σ_K onis:

(9)

An increase in financial risk also is expected to increase solvency, providing adequate capital stock for potential economic shocks. This hypothesis also is tested empirically because of the inequality restrictions required to sign the numerator.

Differentiating equation (7) with respect to and shows the effects of changes in the cost of debt and the rate of return on assets on the solvency ratio:

(10)

and

(11)

Equations (10) and (11) indicate that the relationships between the solvency ratio and both the mean interest rate and the mean rate of return on assets are determined by the sign of the numerator. Using the identityshows that the numerator in equation (10) is positive, and the numerator in equation (11) is negative. Thus, an increase in the rate of return on assets has a negative impact on solvency, and an increase in interest rates has a positive impact on solvency. As the rate of return on assets increases, more debt financing should be used relative to equity financing. Alternatively, as interest rates increase, the amount of debt financing should decrease relative to equity financing.

The theoretical model derived above allows for the empirical calculation of an optimal solvency ratio for an agricultural cooperative. Additionally, the effects of changes in business and financial risk can be evaluated.

Data <top>

Data used for this study were annual audited operating statements and balance sheets for Midwestern local cooperatives for the years 1984­92⁸. A database incorporating this information was obtained from the Cooperative Finance Association (CFA), a business owned by Farmland Industries, and the local cooperative members of Farmland Industries. Cooperatives represented in this study are local supply and grain marketing cooperatives, which are common in the Midwest.

⁸Cropp and Ingalsbe define local cooperatives as businesses that are "independent and operate in relatively small geographic areas typically within a radius of 10 to 30 miles" (p. 43).

The initial database contained data for over 1,300 cooperatives, but those without data for all years between 1984 and 1992 were eliminated, leaving 866 cooperatives. This pool was narrowed further to include those cooperatives in the eight primary states in Farmland’s trade territory, resulting in 666 cooperatives. Because different production regions such as the corn belt and wheat belt may have different risk and return factors, Kansas was separated out to evaluate the impact of differences in risk and returns. The Kansas data set included 136 cooperatives.

 

 

The optimal level of debt for cooperatives with average earnings on local assets less than the average interest rate would be zero. Thus, only those cooperatives that had an average rate of return on local assets greater than the average interest rate from 1984­92 were used in this analysis⁹.

⁹This step was necessary to meet the model constraint of the average rate of return on local assets being greater than the average interest rate.

The minimum rates of return on local assets were 8.31% and 8.61% for Kansas and the Midwestern cooperatives, respectively¹⁰. Imposing these criteria yielded agricultural cooperative totals of 44 for Kansas and 222 for the Midwest. States comprising the Midwest data set (with number of cooperatives analyzed in parentheses) are: Colorado (17), Illinois (10), Iowa (49), Kansas (40), Missouri (22), Nebraska (29), Oklahoma (18), and Texas (37).

¹⁰Collins’ (1985) model was based on expected rates of return and interest cost measures. Our model assumed that decision makers form their expectations based on historical measures of rates of return and interest cost measures.

Table 1 provides summary statistics on an annual basis for the Kansas and Midwestern cooperatives included in this analysis¹¹. The interest rate shown is for the Bank of Cooperatives (CoBank)¹². The rate of return on local assets (ROLA) to the cooperative, before interest expenses and taxes, is assumed to provide a better measure of the management practices of the individual cooperative, because it excludes regional cooperative investment and patronage refund income.

¹¹The average values for cooperatives omitted from our study were as follows: (a) for Kansas cooperatives, an equity-to-asset ratio of 63.2%, $3.8 million in assets, $8.7 million in sales, and a rate of return on equity of 3.8%; and (b) for Midwestern cooperatives, an equity-to-asset ratio of 66.2%, $3.51 million in assets, $8.6 million in sales, and a rate of return on equity of 4.3%.

¹²The CoBank interest rate does not include an adjustment for a stock rate. The loan repayment obligations to CoBank by cooperative could not be obtained. The stock rate was set such that a minimum of 2% of the loan amount (or $1,000 for loans greater than $50,000) was subtracted from the initial borrowed amount and invested as stock in the bank in the name of the borrower. Adjustment for the stock rate would effectively increase the interest rate paid by a small amount.

As shown in Table 1, the ROLA varied considerably over the period of study, ranging from 6.8% to 14.6% for Kansas cooperatives, and from 9.9% to 14.9% for Midwestern cooperatives. The average equity-to-asset (E/A) ratios for Kansas and Midwestern cooperatives were 70.3% and 69.3%, respectively. The E/A (solvency) generally increased up to 1990, and began declining thereafter for both Kansas and Midwestern cooperatives. The initial upward trend may have been in response to the relatively high financial stress experienced by agricultural cooperatives during the early to mid-1980s. To guard against future shocks during the late 1980s, cooperative management reduced leverage and relied more on equity.

Kansas cooperatives had average total assets in excess of $4.3 million and average annual sales in excess of $10 million during the 1984­92 study period.

Comparable figures for the Midwestern cooperatives were $4.25 million and $10 million. These subsets of Kansas and Midwestern cooperatives showed average rates of return on equity of 10.14% and 12.05%, respectively, over the time period evaluated. The average standard deviations of the rates of return on equity were 6.76% for Kansas and 4.64% for Midwestern cooperatives.

Summary statistics for individual cooperatives are not reported here because of the large number of cooperatives represented. However, the E/A varied substantially, indicating the variations in management practices, types, and the risk and return experiences of cooperatives. The mean ROLA from 1984­92 was relatively stable across cooperatives, but substantial variability was observed in the standard deviation of ROLA. This suggests various degrees of business risk among the cooperatives.

To compute the optimal E/A for alternative levels of risk aversion, means had to be calculated for the ROLA, variance of the ROLA, covariance between the ROLA and interest rate, interest rate, and variance of the interest rate. This was done by calculating each value by cooperative and then averaging values over all cooperatives in both the Kansas and Midwestern data sets.

Values used in the computation of optimal solvency for Kansas (Midwestern) cooperatives were: 10.9% (11.9%) ROLA, 5.7% (6.8%) standard deviation of the ROLA, and 31.8% (18.7%) correlation between the ROLA and interest rate. The mean interest rate and standard deviation of the interest rate were 9.38% and 12.2%, respectively, for both Kansas and Midwestern cooperatives¹³.

¹³Almost 90% of loans made by CoBank to agricultural cooperatives are variable rate loans (Nelson).

Results <top>

The model developed in this study can be applied to an individual firm or cooperative. However, evaluating capital structure through the use of aggregate data provides some indication of the financial performance of a particular group of firms or cooperatives. Cooperatives in this study tended to be larger, suggesting more stability (Brigham and Gapenski) and less credit risk (Sporleder, Malick, and Tough). Solvency values computed are intended to provide empirical evidence of how cooperative management might better achieve and maintain optimal leverage and how leverage can affect risk. For simplicity, solvency refers to optimal solvency.

Table 2 provides empirically determined solvency levels using equation (6), and sensitivity analysis of solvency using a stochastic interest rate for Kansas and Midwestern cooperatives. Alternative levels of risk aversion were required to estimate E/A’s for various risk attitudes.

Risk-aversion coefficients are measures of the tradeoff between expected profit and risk. Relative risk-aversion coefficients chosen for this study ranged from 1.0 to 4.5. Saha, Shumway, and Talpaz estimated a relative risk-aversion coefficient of 5.4 for Kansas farmers, with estimates of 3.8 for small farms and 4.1 for large farms. Numerous other studies have indicated that the risk-averse producer would be in the absolute risk-aversion range of 0.00005 to 0.0001, and the almost risk-neutral producer would be in the range of 0.0 to 0.0001 (Cochran, Robison, and Lodwick; King and Oamek; King and Robison). These studies used annual farm income (which varied by study) as the outcome variable. The average annual local operating income for Kansas and the Midwest cooperatives was approximately $280,000 (from CFA data). Thus the absolute risk-aversion coefficients had to be transformed to determine the relative risk-aversion coefficients used in this study (Raskin and Cochran). The relative risk-aversion coefficient was calculated by multiplying the absolute risk-aversion coefficient by wealth. Relative risk-aversion coefficients used in this study are consistent with those used in the studies mentioned above.

Kansas Cooperatives <top>

The estimated E/A and sensitivity analysis on the E/A for Kansas cooperatives are reported in the upper half of Table 2. The actual average equity-to-asset ratio over the 1984­92 period was 70.3%. During this period, Kansas farmers had an average equity-to-asset ratio of 63.4% (Purdy and Langemeier). Though cooperatives offer additional amenities for their members (e.g., source for input goods and marketing output), insolvency of cooperatives suggests that members may not be making the optimal choice of capital structure. Solvency levels at risk-aversion levels 2.0 or 3.0 yielded a debt-to-equity ratio similar to that found by Royer for local grain and farm supply cooperatives.

As the level of risk aversion increased, the E/A increased (Table 2, column 3). This indicates that a cooperative that is more "risk averse" accepts a lower return on equity (ROE) to guard against business and financial risks. The ROE decreased as solvency increased (column 2).

Columns 4­7 of Table 2 provide sensitivity analysis of the effects of one standard deviation changes in the ROLA, variance of the ROLA, interest rate, and variance of the interest rate, respectively. The sensitivity of the E/A to a change in the measurement of management performance can be seen in column 4. A one standard deviation increase in the ROLA decreased the E/A between 13% and 57%. The percentage change in solvency from a one standard deviation increase in ROLA was greater at lower levels of risk aversion.

In examining the factors affecting cooperative leverage, Parliament and Lerman found that cooperatives increased equity holdings from an increase in business risk. For our study, increasing business risk by one standard deviation (column 5 of Table 2), on average, increased the cooperatives’ usage of equity financing. A one standard deviation increase in business risk increased the solvency between 3.2% and 12.5% for various levels of risk aversion.

The macroeconomic climate affects interest rates and interest rate variability (financial risk), and hence the optimal level of solvency. A one standard deviation decrease in the interest rate (Table 2, column 6) decreased solvency between 11.1% and 46.8%. The stochastic nature of the interest rate decreased the optimal E/A by a higher percentage at lower levels of risk aversion than at higher levels. The effect on solvency from a change in financial risk (column 7) was greater for lower levels of risk aversion. A one standard deviation increase in financial risk increased solvency between 2.5% and 0.6%. Increased debt financing increased financial risk.

Increasing the ROLA lowered the optimal level of solvency. Additionally, the level and the variability of interest rates are important factors in determining the optimal solvency level and should be considered in equity management in Kansas cooperatives. Cooperative management in Kansas can affect profitability by improving business strategies and should be less concerned with variable interest rate loans.

Midwest Cooperatives <top>

The derived E/A and sensitivity analysis of E/A for Midwestern cooperatives are reported in the lower half of Table 2. The actual average solvency level from 1984­92 was 69.3%. Derived E/A’s were considerably lower at all risk-aversion levels than those estimated for Kansas cooperatives. As the level of risk aversion increased, the E/A increased from 17.5% to 77%. The ROE (column 2) decreased substantially for higher levels of risk aversion.

Columns 4­7 of Table 2 provide sensitivity analysis of the effects of one standard deviation changes in the ROLA, variance of the ROLA, interest rate, and variance of the interest rate, respectively. An increase in the ROLA for the Midwestern cooperatives (column 4) affected the E/A less for higher levels of risk aversion using a stochastic interest rate. A one standard deviation increase in the ROLA decreased the E/A between 9.5% and 41.9% for alternative risk-aversion levels. Solvency was extremely sensitive to a one standard deviation increase in business risk (column 5).

Higher levels of risk aversion yielded a lower percentage change in solvency for a one standard deviation decrease in the interest rate. The decreases in solvency ranged between 6.4% and 27.7% (column 6 of Table 2). Because of the stochastic nature of the interest rate, a change in financial risk had a greater effect at lower levels of risk aversion (column 7). A one standard deviation increase in financial risk increased the E/A between 20.7% and 13.7%. Increased debt financing increased financial risk, and increased equity financing reduced financial risk.

Optimal solvency for Midwestern cooperatives was much more sensitive to financial risk than that for Kansas cooperatives. Increasing the ROLA decreased required solvency, and increasing the variability of the ROLA increased required solvency. Midwest cooperative management needs to be aware of business and financial risks when managing capital, but also should focus on improving business strategies.

 

 

Probability of Equity Loss <top>

A negative ROE is an indicator of financial stress in cooperatives (Moller, Featherstone, and Barton) and further indicates that capital stock has declined (Barry). Sustained loss of capital stock ultimately may lead to bankruptcy. Thus, cooperative management needs to regulate leverage to account for the probability of equity loss.

Table 3 presents calculated probabilities for equity loss for Kansas and Midwestern cooperatives from optimal solvency values computed in Table 2 using equations (1) and (2). Values in columns 5­8 show the probabilities that the ROE will fall below the specified level. These probabilities were computed using the standard normal distribution.

As the E/A increased, the probability of equity loss declined for both Kansas and Midwestern cooperatives at each specified level of a negative return on equity. Further, this effect of increasing solvency was less at high levels of risk aversion than at lower levels of risk aversion. Management can reduce the probability of equity loss by increasing equity usage; however, the cost associated with this is a decline in profitability (Table 3, column 2).

For Kansas cooperative management, decreasing equity financing from 64.8% to 43.7% would increase the probability of the ROE falling below 0% from a one in ten chance to a one in six chance. To increase profitability and mitigate the potential of an increase in probability of equity loss, cooperative management could increase the rate of return on local assets, find debt financing with a lower interest rate, or reduce business or financial risk, as shown in Table 2.

For Midwest cooperative management, decreasing equity financing from 68.7% to 51.8% would increase the probability of the ROE falling below 0% from a one in eleven chance to a one in seven chance. To increase profitability and sustain the current probability of equity loss, cooperative management could follow the same practices suggested for Kansas.

Conclusions <top>

The financial structure of an agricultural cooperative requires the balancing of debt and equity to assure member patrons the highest return on their patronage and equity investment in the cooperative. Equity provides security to the cooperative in times of low profitability. Many agricultural cooperatives experienced substantial financial stress during the 1980s, and have since sought to determine an optimal level of equity and debt financing. Sometimes, cooperative management views the cost of equity as near zero, allowing for a strong balance sheet, and the patron views the cost of equity as the opportunity cost of investing in the patron’s own operation. Determination of optimal equity/debt financing is required to meet members’ needs since they are the principals, and management should not pursue its own objectives at the expense of the members’ interests.

This study derived optimal solvency ratios for agricultural cooperatives using a stochastic interest rate for alternative levels of risk aversion. Optimal solvency values were computed and sensitivity analyses were carried out for Kansas and Midwestern local cooperatives.

Kansas and Midwestern local cooperatives that were more risk averse held more equity to guard against financial shocks, and consequently received a lower rate of return on equity. This characterizes the management practice of most cooperatives today. In promoting this practice, manage-ment may be protecting the cooperative against periods of financial stress and reducing job-related stress, while also reducing the profit potential of the member-patron. Many members realize that the opportunity costs of investing in a cooperative are high. For cooperatives to be attractive business ventures for current and potential member-patrons, they need to achieve a return on investment that approaches members’ opportunity costs.

Increasing equity usage reduced the probability of equity loss; however, the cost of increasing equity usage was a decline in profitability. To mitigate an increase in the probability of equity loss and increase profitability, a cooperative could increase the rate of return on local assets, find debt financing with a lower interest rate, or reduce business or financial risk.    

This study found that through effective business and financial management, an optimal level of leverage that addresses the financial expectations of the cooperative member-patrons can be achieved and managed. An important factor in making the cooperative more financially effective is to elect directors and employ management personnel who can make knowledgeable business and financial decisions in a timely manner. As cooperative managers and directors make decisions to more effectively meet the needs of members and compete with other businesses, they need to emphasize decisions that optimally manage capital structure.

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