The Coop Model and FrontierAg, Inc
The coop business structure provides a unique model where the business is owned by the customers, and the customers share in the profits of the business in proportion to the amount of business they do with the coop. Here’s how it works:
· To become an owner, you buy your first share of coop stock; at Frontier Ag, Inc the first share of stock costs $100.
· As you buy products and sell grain to the coop, you are increasing your business activity and potentially increasing the amount of patronage you may receive.
· At the end of their fiscal year, the coop divides its earnings proportionately among those owners who did business with the coop; this is done based on the coop’s financial results, and at the discretion of the coop’s Board of Directors. At Frontier Ag, this is done annually after the coop’s fiscal year end.
· Earnings are distributed as patronage, often with a portion of cash and equity, all at the Board’s discretion;
A. The cash portion, normally around 30% from Frontier Ag, is paid as a check at the annual meeting;
B. The equity portion is maintained for the customer until the Board decides to distribute it, with a target of ~10 year revolve- ment;
C. The coop must have enough earnings to pay patronage; more earnings generally means more patronage, and less earnings means less or no patronage.
· When equity is distributed, it is generally tax free to the producer owner, depending on how the owner handled the taxes on the equity portion of that patronage paid ~10 years earlier.
· At Frontier Ag, customer owners earn stock up to $2,000 through the patronage distributions of coop earnings, and then everything that they earn over $2,000 is equity;
A. Equity is distributed at the discretion of the Board, with a 10 year revolvement goal;
B. Stock (the first $2,000) is distributed upon death.
· The uniqueness of the coop model is that the customers are owners, and they share in the earnings of the coop which reduces their risk, and the tax treatment of this relationship benefits all parties.
· Coops use the equity to finance business operations, which reduces their need for debt capital.
Below is a chart showing Frontier Ag’s total patronage, stock, and equity payouts since 2007: