News

Cooperatives – What we’ve seen in 2016

By Dennis Gardiner

With the firm’s 100+ cooperative client base, we like to reflect back in the first edition of each year’s newsletter on what we have seen over the past year. There is obviously exceptions, outliers that performed much better than our overall characterization of the past year. Sadly, there are those that performed much worse. That being said, here is what we saw:

Income Statements:

  • Sales were up a little this year with higher grain volumes, mitigated by lower corn and soybean sales prices. There did not appear to be any great weather affected volume issues, like we have seen in some of more recent years across our clients.
  • For the most part, sales were flat for agronomy and feed. Fuel gallons were up, but the prices were down; and LP gallons were down.
  • Grain margins were down pretty much everywhere we went, as there was no opportunity to capture any carries in the market.
  • Chemical margins were down at several clients; as this business continues to be very competitive with products being sold at a loss in many instances, relying on rebates to provide the sales margin.
  • Seed margins seem to be giving our clients some struggles, as we saw them fall in many instances. The seed business is becoming very competitive.
  • Service related revenues were up overall with grain storage and handling up the most, offset by lower drying revenues.
  • Expenses were all over the board, from up, down and flat. Some of our clients had already been taking a hard look at expenses in an effort to slow their creep.
  • We did see payroll costs lower this year at many of our clients, although plenty of you had typical increases. Again, some of you are taking a hard look at this, not replacing some positions opened up from normal attrition and just cutting back.
  • No surprise, but depreciation was up across the board; it is rare to find a comparative income statement with lower depreciation.
  • So add all this up and we saw lower gross revenue to expense ratios, grain divisions that had losses and local (operating) income down almost everywhere we went. Local (operating) incomes were down at least 33% to 50% from the prior year, with some down much more than that. We probably saw more local (operating) losses from our clients this year than we have seen collectively in the past several years.

Balance Sheets:

  • The solace we take, even with this year’s results, is that most of your balance sheets are bullet-proof; due to the ability to have strong profits, maximizing tax benefits/ deductions and retaining such a significant portion over the past decade.
  • Plenty of cash. Many of you have low debt, with more cash in the bank.
  • Working capital was down at many of our clients, utilizing their own resources to fund capital expenditures and also paying down debt.
  • Capital expenditures were still at a strong pace during the past year.
  • Despite all of the concerns about credit, we did not see a great shift in agings or an unusual amount of write-offs.

Members’ Equity

  • The strength of your balance sheets has been in your members’ equity sections. Retained earnings continues to keep growing; particularly as a percentage of total members’ equity. It is not surprising as we saw lower earnings to be allocated, very strong equity revolvements back to the members and continued use of the Section 199 (DPAD). Without deploying non-qualified patronage as a means of shoring up the named members’ equity, this pace is not going to slow down, without reducing the revolvements back to members. Of course, you could always allocate a greater percentage and roll back the use of the Section 199 (DPAD), but that seldom is a favorite choice as we discuss patronage alternatives with management and boards.

Miscellaneous

  • 2016 was a big merger year, we saw a number of peer-on-peer mergers throughout our clients along with a number of smaller cooperatives merging into larger one. Economies of scale, combining of resources and managers retiring in some instances, amongst some of the reasons. Our larger clients find themselves as a magnet for other cooperatives looking to them as merger partners.
  • Section 199 (DPAD) is still being used largely for the benefit of the cooperative, and allocating back to the patrons any remaining (unused) portions of the deduction.
  • Acquisitions of neighboring non-cooperative business that have been your competitors is on the uptick. These smaller businesses, many of them “Ma and Pa businesses” have been your competition through the years, but now they look to you as part of an exit-strategy and ability to keep health insurance benefits until they reach retirement.
  • Fraud – the worst “F-word” we can hear uttered is becoming much more frequent. We would like to say nothing surprises us anymore, but that just isn’t true. Controls have improved so much through the years as you all have grown, merged and developed more sophisticated accounting systems and controls; but those that want to try to “steal” from the company seem to find a way to do it.
  • Increased use of (investments in) technology, to provide greater information to your members as they make their input decisions and expect greater mobility from you as their business partners.

Conclusion

We can look back fondly over the past decade and recognize that it is likely to be a few years before we return to that. We have great confidence in all of you to respond, and adapt to your “new normal” business environment and continue the success of your cooperatives. As always, we will be there to work with you to ensure your success.