Risk and Return Trade-Offs in Partnering Strategies between Co-ops and IOFs



Changes in grain handling technologies and favorable terms on rail services are encouraging construction of state of the art grain handling facilities. Given these are high fixed and low marginal cost operations that are becoming increasingly vertically interdependent, the investments have substantial risks and opportunities. Partnerships are being formed to capitalize construction of fixed assets, provide a means to share specialized services, or to facilitate acquisitions or mergers. Given the mixture of corporate structures in this industry, including investor owned (IOF) and cooperatives, partnership agreement terms must accommodate the interest of a variety of stakeholder types. The purpose of this paper is to develop a financial model to evaluate classes of these partnerships and then compare distributions of risk and returns to each partner. A stochastic simulation model, specified as being highly representative of some contemporary partnerships, was developed for these purposes. Alternative partnership terms are specified and evaluated.