Determining economic value added for agricultural co-operatives in South Africa

Abstract

No research has been done to date on Economic Value Added (EVA) as a performance measure for South African agricultural co-operatives. The main objective of this study is to calculate Economic Value Added for South African agricultural co-operatives. Further objectives are to determine whether co-operatives add value to their members’ interest, whether there exists a correlation between EVA performances over the years under review and between the individual groups of co-operatives. The study aims to determine EVA for the grain and oilseeds, wine, meat, timber, tobacco, fruit and vegetables co-operatives. The study further calculated EVA values for all the groups of co-operatives under changing beta-values to look at the sensitivity of EVA. EVA can be described as a value–based performance measure, an investment decision tool and also a performance measure reflecting the absolute amount of shareholder value created. Three basic inputs are needed in the calculation of EVA, namely return on capital earned on investments, the cost of capital for those investments and the capital invested in them. These three inputs are determined before the calculation of EVA can be applied. The values for the determination of these inputs are obtained from the income statements and balance sheets of the respective agricultural co-operatives. After the calculation of the EVA values for all the separate co-operatives, it could be concluded that no grain and oilseed co-operatives created value. There was only one wine co-operative which created value, five which improved from a negative to a positive EVA, three which had negative but improving EVA values. The rest of the wine co-operatives destroyed value. In the case of meat co-operatives three of the four co-operatives destroyed value, while the other one created value in the first (1998) and last year (2001) under review. The timber co-operatives created value, except for one of the three which destroyed value in 2000 and 2001. The tobacco co-operatives destroyed value over the four years under review. In the case of fruit and vegetable co-operatives, one co-operative created value, while the rest of the co-operatives destroyed value. All of the general co-operatives, as well as all the requisites co-operatives destroyed value. Averages for all the groups of co-operatives were calculated as well. Grain and oilseeds, wine, tobacco, general and requisites co-operatives destroyed value. The average of the meat co-operatives showed that this group destroyed value over the first three years under review, but created value in the last year. Timber, fruit and vegetable co-operatives created value over all four of the years under review. The average for all of the co-operatives showed that co-operatives, in general, destroyed value. From this study it becomes clear that no correlation exists between the EVA values calculated for the co-operatives over the four year period under review. There is no correlation between the individual groups of co-operatives either. This means that the EVA performance of co-operatives are not influenced by external factors, but depends on the effective management and decision-making within the agricultural co-operatives. By increasing and decreasing beta-values by 10% and 20% respectively and then recalculating EVA with these changed beta-values, the sensitivity of EVA could be determined. There were no significant changes in the EVA values after recalculating them. Most negative EVA values stayed negative and the positive EVA values stayed positive after recalculating EVA. It can be said that EVA is not very sensitive to the changing betas.