Why Yankee is Reducing Allocated Retained Earnings and Not Issuing More

by Dean W. Moreau, president and CEO, Yankee Farm Credit

Yankee Farm Credit's regional annual meetings in April were the best attended series of annual meetings I can remember. It was a pleasure to see so many people taking an active interest in their association.

We design our four meetings to be brief and functional. Our goals are to increase the number of votes cast for directors; keep you informed about Yankee's operations; get feedback from you, both good and bad; and give you the chance for a nice meal out with friends. If you think we need to do anything differently, please give your directors or me a call.

I always walk away from these meetings a little smarter. This year at the Middlebury meeting, a member asked a very thoughtful question: "Why is Yankee reducing its allocated retained earnings and not issuing more?"

"Retiring allocated retained earnings and not issuing more is another cost reduction for you. We want to minimize the costs to be a Yankee member."

Hearing that question, it dawned on me that while I may have done a pretty good job explaining to you "what" we were doing with revolving equity and shifting to 100 percent cash patronage, I needed to do a better job explaining "why" we were doing it.

First, let me start with my personal philosophy. The core of a cooperative's business strategy should be that the cooperative and its members are one, not two separate pieces. A cooperative exists for the simple purpose of providing its members with a better deal than the noncooperative marketplace can provide. A cooperative has no reason for being if it can't do a better job and beat its noncooperative competition.

Every cooperative has some cost to join, such as fees, dues or required capital investment. This cost needs to be offset against any value provided, to see if there is a net benefit to members. Yankee's approach is low cost: no loan fees for farmer customers, low rates, no dues and the lowest required stock investment allowed. Retiring allocated retained earnings and not issuing more is another cost reduction for you. We want to minimize the costs to be a Yankee member.

What about the association's capital needs?

Can Yankee prudently operate without allocated retained earnings from members? Every business needs capital to provide a cushion for tough times — some margin for safety. More capital is needed, the longer it takes and the harder it is to convert assets into cash. Yankee is fortunate that our assets are primarily high quality member loans that we can readily convert to cash. For that reason, we need just 15 to18 percent capital, and we are already at that level.

What about growth?

Doesn't Yankee need all the member capital it can get to support future growth? Our intention is to grow Yankee for only three reasons: to meet member needs for loans; to stay efficient and profitable; and to diversify the commodity exposure of our portfolio. Slow and steady capital accumulation of 3 to 4 percent each year is enough to fund this growth. We can retain this amount from earnings given the tax advantages of our ACA holding company.

The best strategy for Yankee and its members as a unit is for us to pursue a low cost, modest growth, low member-investment strategy. Excess loan growth requires more member capital. We'd rather see you invest this capital on your farm or in your family's future.

This letter appeared in the Summer 2002 issue of Financial Partner (F.P.) magazine, Yankee Farm Credit's customer publication. Click here if you would like to start receiving F.P. magazine in the mail.

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