| The practice of retaining cooperatives' net income in the form of unallocated equity is often adopted by the Farm Credit System direct lending associations. The resulting indiscriminate use of unallocated equity has often been criticized by scholars because it violates the cooperative principle of service-at-cost, and tends to dominate other net income allocation practices available to the associations.; The present study addresses the contested allocation policies of agricultural credit cooperatives. It is hypothesized that the objective of credit cooperatives is affected by the power structure of its participants, which in turn determines what allocation policy is adopted. A stochastic, multi-period simulation approach is used to analyze the sustainability and impact of various forms of net income allocation practices on a cooperative's capital structure, financial performance, and members' benefits from cooperative use. Simulation results indicate that depending on the level of cooperative capital, gains from allocation accrue for members while the increase in the risks associated with the reduction in the levels of cooperative capital are minimal for small proportions of net income allocated. The optimal allocation policy, however, is difficult to determine because it depends on the existing combination of forces among the cooperative participants, and the present and future conditions of the agricultural economy. |
