This question is more difficult to answer than it first appears. New venture cooperatives typically return financial benefits to members in the form of net return from operations (cash and retained refunds) and equity stock appreciation. These benefits are received at different times in the future. The difference in time from the initial investment until the receipt of returns should be accounted for by using a net present value analysis. This process accounts for the time value of money which reduces the value of future cash inflows because they are not available for use today. An example of a net present value analysis is included.

The cooperative's prospectus, which is a summary of the business plan, should provide most of the information needed for a net present value analysis. However, an appropriate discount rate must be selected. There are two common approaches used to do this. The first is to select a discount rate which is equal to the next best use of money, usually equal to the highest interest rate that you are paying on debt capital. The second is to select a discount rate which represents a desired rate of return. This second approach has advantages because it allows you to include the risks surrounding the cooperative business and your equity investment. The rule is, the greater the risk, the higher the discount rate.

Risks are commonly divided into two broad categories. The first category is business risks. These include construction and operating risk, market and price risk, technological risk, legal and social risk, and human risk. Most of these business risks have straight-forward explanations. However, human risk is commonly underemphasized. Human risk relates to selecting and maintaining high quality labor, management and board of directors. The people who are involved with the co-op are the ones who make it successful.

The second category is financial risk. Financial risk is the increase in business risk caused by debt financing. These include the availability of borrowed capital, credit terms and changing interest rates. Financial risk may not seem as large as business risk, but the ability to adjust to business risk by using borrowed capital can have a real impact on the co-op's ability to succeed.

Both business and financial risks should be incorporated into the selection of an appropriate discount rate, and be included in your co-op membership decision.

Cooperative membership can influence your farm/ranch production, marketing and finance. Many new venture co-ops develop recommended production practices for their members so that the co-op will have a consistent, high quality supply of commodities. Some of these are mandatory; while others are voluntary. Some practices are very simple to implement and relatively low cost; others are more complex and costly. It is important to consider both direct costs and indirect costs to your other farm/ranch enterprises before making changes in production practices.

In most cases, the responsibility for profitably marketing the commodity is turned over to the co-op through its processing activities. It is important to understand how and when you will be paid for the commodity you deliver. It may be necessary to adjust the marketing of your other commodities or short-term borrowing to adapt to the co-op's payment schedule. You should also understand what will happen if you cannot deliver the quantity or quality of product which is listed in the co-op's marketing agreement. Some co-ops have developed marketing pools which can be used to fill shortfalls. Other co-ops require that you purchase the commodity from alternative sources.

There are both long-term and short-term financial impacts on your farm/ranch from co-op membership. The long-term impacts can be captured by preparing two whole farm budgets. The first budget should represent business as usual, without co-op membership. A second budget should include co-op membership. A comparison of the two budgets will show the projected long-term impact on net farm income, change in net worth, and long-term cash flow. These are three of the most important measures of the farm/ranch financial health.

It is not unusual for a new venture co-op to take several years of operation before positive net returns are realized and returned to its member/patrons. It is critical that the farm/ranch be able to meet all of its financial obligations during this time. A short-term cash flow projection will show if this is possible.

It is important to discuss co-op membership with your lender regardless of whether your membership investment is self-financed or debt-financed. Any significant change in your farm/ranch operation should be reviewed with your lender to maintain good working relations.

Your lender will have many of the same questions about co-op membership that have already been discussed. However, your lender may also want to know how possible co-op losses will be distributed and how easily membership stock can be transferred. These additional questions will help your lender determine the maximum loss potential and co-op stock liquidity. The answers may influence loan terms, as well as collateral levels and sources.

Some lenders have developed special loan programs which meet the unique needs of new venture co-op membership, while others rely on traditional lending practices. In either case, loan terms and collateral sources and amounts would be thoroughly discussed to reduce the potential for future financial problems.

One of the most commonly cited personal benefits of co-op membership is the ability to have a voice in the operation of the business. Some farmers and ranchers list this as one of the main reasons they became a member in a co-op.

Potential community economic benefits and increased job prospects are also reasons for becoming a co-op member/investor. Even though these are important reasons, you should consider whether the co-op will locate within your community. It is also important to understand that not all of the economic impacts on a community are positive. Some communities have found that increased populations have put a strain on existing water, sewage, fire fighting, police, medical services, and schools. An expanded job market may also increase competition for labor and put additional financial pressure on existing businesses.

The desire to assist the next farming/ranching generation is another factor which is commonly given for new venture co-op membership.