How to Innovate Financing for the New Generation Cooperatives in the United States

The financing experience of European and American farmers’ cooperatives mainly includes: in terms of government, designing sound laws and regulations to provide institutional guarantees for the development and financing of cooperatives, comprehensively utilizing fiscal and monetary policies to provide diversified policy support for cooperative financing, and establishing a sound cooperative financial system to provide support for cooperative financing. In terms of self exploration of farmers’ cooperatives, we encourage members to pay their joining funds, establish a unique distribution system to increase the accumulation of cooperative funds, establish cooperative banks or holding companies to absorb external funds, issue stocks, or establish holding companies. Enlightenment for China: Comprehensively utilizing fiscal and monetary policies to alleviate credit constraints in cooperatives, guiding cooperatives to carry out internal fund mutual assistance or establish holding companies; Promote the reform of the cooperative system and ensure direct internal financing; Innovate the profit distribution mechanism of cooperatives and appropriately expand the accumulation of funds such as cooperative provident fund.42.jpgThe Composition of Cooperative Preferential Policies and the Establishment of Agricultural Credit System in the United StatesFirstly, preferential policies help to enhance the financial strength of cooperatives. The preferential policies provided by the US government to cooperatives mainly include: tax incentives for cooperative operations, subsidies for cooperative processing business, funding support for cooperative member training programs, and tax exemptions for surplus returned to members, dividends distributed to members, and other funds based on the amount of patronage provided by cooperatives. In addition, cooperatives can enjoy exemption from antitrust and disclosure obligations. Secondly, the agricultural credit system greatly meets the credit needs of cooperatives. Among them, cooperative banks are one of the main channels for cooperative financing. The cooperative banking system in the United States provides preferential interest rate loans specifically for commodity procurement, equipment procurement, and operational capital replenishment of cooperatives.43.jpgThe idea of establishing an agricultural credit system in the United States stems from the successful experience of the European credit and cooperation system. The United States Congress systematically examined the European credit and cooperation system as early as 1912. In 1914 and 1915, proposals aimed at developing agricultural credit, such as the establishment of a specialized agricultural credit fund, the establishment of a joint-stock land bank, and the establishment of local cooperative organizations, were submitted to Congress for review. On the basis of the above series of propositions, in 1916, the United States Congress passed the first Agricultural Credit Act – the Federal Farm Credit Act. The law divides the United States into 12 agricultural credit zones and establishes two types of land banks: 1. Federal land banks owned by investors. Each credit zone establishes one federal land bank, whose main business is to approve and issue real estate mortgage loans to farmers. At the same time, the government guides farmers to establish grassroots federal land bank cooperatives, as a subsidiary of the federal land bank, responsible for preliminary review of farmers’ loans, providing loan guarantees, and being entrusted by the federal land bank to manage loans; 2. National Agricultural Credit Association owned by farmers. Belonging to a mutual aid financial institution.44.jpgThe Federal Land Bank was approved for establishment in April 1917, with all start-up capital provided by the federal government. In order to settle federal government funds and make Federal Land Bank Cooperatives and borrowers the true owners of Federal Land Bank. The federal government requires farm owners to purchase stocks or equity certificates equivalent to 5% to 10% of the loan amount when borrowing from the Federal Land Bank Cooperative. The Federal Land Bank Cooperative then purchases the same amount of shares from the Federal Land Bank Cooperative. To achieve the liquidation of federal government funds and the hierarchical transformation of ownership. As of 1947, federal government funds were repaid, and the Federal Land Bank Cooperative and borrowers became the true owners of the Federal Land Bank. At the same time, the Agricultural Credit Association has developed rapidly since its establishment, reaching approximately 4000 by the end of 1919. However, the development of the Agricultural Credit Association fell into difficulties (by 1933, nearly half of the Agricultural Credit Associations went bankrupt) and was gradually replaced by the Production Credit Association and the Cooperative Banking System.45.jpgIn 1923, in order to solve the problem of short-term funding shortage in agricultural production, the Agricultural Credit Law passed that year stipulated the establishment of one Federal Intermediate Credit Bank in each of the 12 agricultural credit zones. The service target and main business of the Federal Intermediary Credit Bank is to provide short-term bill discounting services to farmers’ cooperatives, commercial banks, and other lending institutions, and does not directly provide credit services to individual farmers.46.jpgIn 1933, in response to the Great Depression and financial crisis, the Agricultural Credit Law of that year stipulated the establishment of a production credit association (one in each credit zone, totaling 12) and a cooperative banking system (one in each credit zone, totaling 13. Twelve regional cooperative banks and one central cooperative bank). Among them, the cooperative banking system mainly provides loan services for farmers’ cooperatives. At this point, the agricultural credit system composed of the Federal Land Bank, the Federal Intermediary Credit Bank, the Production Credit Association, and the Cooperative Bank was finally formed. After continuous adjustment and improvement, the agricultural credit system gradually matured.The characteristics and financing innovation of the new generation of cooperatives47.jpg01. Characteristics of the new generation of cooperativesAccording to the characteristics of its governance structure, the development of cooperatives has generally gone through two stages. The first stage was before the 1990s, when cooperatives were referred to as traditional cooperatives, with a focus on enhancing market competition and obtaining services. Its governance structure presents four main characteristics: open membership, equal capital among members, democratic control among members, limited capital compensation, and return of surplus based on patronage (Du Yintang and Pan Jin, 2000). However, this governance structure can easily lead to five types of property rights issues: free riding issues, scope issues, control issues, investment ratio issues, and impact cost issues (Cook, 1995). The second stage is from the 1990s to the present, where cooperatives are referred to as the new generation cooperatives (referred to as proportional cooperatives in Europe), guided by processing and value appreciation. Its governance structure presents four main characteristics: limited membership; 2. differential capital, and the number of contributions made by members is linked to the number of product patrons; 3. democratic control by members; and profits distributed as refunds to members as patrons (Du Yintang and Pan Jin, 2000; Chad and Cook, 2004). As mentioned earlier, since the 1990s, many cooperatives have chosen vertical or horizontal integration strategies to cope with market competition. The scale of cooperatives has continued to increase, resulting in a significant increase in capital demand (Yu Liyan and Jerker Nilsson, 2017). The new generation of cooperatives has innovated their governance structure to address this issue.48.jpg02. Financing Innovation of the New Generation CooperativeThe main ways for the new generation of cooperatives to improve their internal capital accumulation capacity include: (1) determining the optimal operating scale and capital demand of the cooperative based on the feasibility study report issued by experts, and then determining the total number of members and total capital stock.(2) Implement a trading share system, where members subscribe to corresponding shares based on the number of customers they have with the cooperative. The number of stock subscription matches the number of product patrons. Each member usually needs to subscribe for a stock of $5000 to $15000. In order to avoid potential ownership disputes, especially control disputes, caused by a dominant shareholder. Cooperatives set maximum and minimum limits on the shareholding of members. The total share capital of members accounts for approximately 40% to 50% of the total capital of the cooperative. The transaction share system balances the interests between capital factor owners and labor factor owners, achieving an organic combination of returning surplus based on patronage (transaction volume) and distributing dividends based on shares. In addition, member shares can be transferred, but cannot be freely withdrawn, thereby ensuring the stability of capital.(3) Issue non voting preferred shares to attract external investment.