Risk, Profitability, and Efficiency in Agricultural Cooperatives under Allocated and Unallocated Equity

Today, more agricultural cooperatives have experienced a surge in their unallocated equity or equity held at the cooperative level as retained earnings. Key factors contributing to this rise are soaring non-member business and various tax deductions available to cooperatives. Many agricultural cooperatives directors and managers are questioning the sustainability of such a change in equity structure. The purpose of this research is to explore how this change in equity structure has impacted agricultural cooperative’s efficiency, profitability, and risk exposure. The study discovered a positive relation between averaged efficiency indices and the allocated equity to total asset ratio and the unallocated equity to total asset ratio. Higher profitability lifted the average allocated equity to total assets ratio as well as the unallocated to total assets ratio. The higher the business risk, the greater the equity cushion that the firm employs. Higher financial risk implies higher borrowing, hence a lower proportion of equity. Furthermore, larger cooperatives can afford to accept a lower level of equity than smaller firms of comparable business risk.