Cooperatives – What We Expect to See in 2018

By Dennis Gardiner

This year seems to be starting with a lot of excitement, anxiety, confusion and uncertainty over the new tax law changes. How that will impact this year’s decisions, or perhaps 2019 decisions, is unknown at this point. We believe once we have a full grasp of the impact of the new tax rules, you will adapt to the change and move on, as you have done in the past. We look forward to working with you on the impact of it. We don’t believe we have any overly profound insights for the coming year that will deviate from this last year. Our perspective comes from being involved in audits, sitting through board and annual meetings, and visiting with you managers. Here is what we expect to see in 2018:

  • Capital Expenditures – Some slow-down in capital expenditures; although we anticipate that the benchmark of spending your depreciation will continue. Still many of you have identified large projects to pursue, and have made significant investments; that will likely continue.
  • Improved or Stable Local (Operating) Earnings – There appears to be a carry in the markets for your grain business that you have not enjoyed in the past few years. Drying should be up for many of you with a wetter crop; and storage should be higher due to lower grain prices and the carry in the market. The chemical and seed businesses continue being extremely competitive, compressing margins on those two significant areas of your business. Challenges of the “tin-shed” competitors will be faced head-on.
  • Fertilizer Sales – Higher yields of crops will continue to keep fertilizer sales strong; even with indications of price increases. Although with lower commodity prices and greater use of precision ag, fertilizer sales tons are less likely to increase.
  • Expenses – With the operating results the last few years, we anticipate greater conscious efforts to reduce and manage expenses. Those that really focused on this over the last year have been met with favorable results. Fixed expenses are likely to continue to increase.
  • Credit Risks – Maybe this will be the year that we will begin to see more issues. Although most of you are very disciplined in your granting of credit and managing the risks associated with it. Diligence and adherence to strict credit policies have helped your cooperative minimize risks and losses.
  • Cybersecurity – We just can’t emphasize this area enough. We all seem to be more vulnerable to and concerned about hacking and cyber fraud. Strengthening of controls over information, access restrictions to your systems, applications, data, third party records and sensitive data will continue to improve.
  • Fraud – Continue to focus on creating an ethical work environment with a strong “tone-at-the-top” to minimize your fraud risks. Continue to have honest discussions about fraud, your lack of tolerance, and whistle-blowing to help set the tone for your organizations.
  • Mergers – The beat rolls on. Mergers are going to continue. We anticipate many of you will identify strategic reasons to talk with your neighboring cooperatives. Primary reasons: a divisional weakness (or strength), retiring management, retention of key management and employees, and trade territories. The larger cooperatives are a natural “magnet”, attracting smaller neighboring cooperatives to join with them.
  • Acquisitions – Opportunities are likely to continue to come to you from smaller businesses that are in your trade territories that have been your competition. These entities look to the cooperative as a means of selling-out, staying in the business, having an exit-strategy and being able to maintain health insurance for the owners. And if there is a competitive advantage from a tax stand-point of doing business with a cooperative, it should impact these private entities.
  • Retained Earnings – Retained Earnings (equity without a patron’s name on it) will continue to grow; particularly as a percentage of total equity; maybe even greater, depending on how the new tax law changes are contemplated. Lower or stable earnings overall earnings, the desire to continue robust equity revolvement plans (to demonstrate value of the deferred equity), and use of available tax deductions (sun-setting Section 199/DPAD AND the new Section 199A; Interest deduction limitation and CapEx expensing) will make it very difficult to change the growth of retained earnings. We look forward to working with you in the coming year as the IRS issues further guidance on the new tax law changes, to begin to understand how it will impact taxable income and ultimately your qualified patronage allocation decisions.
  • Non-Qualified Patronage Allocations – It is unclear how non-qualified patronage will be utilized in the future. As we see the IRS issue further guidance on the new tax law changes, it may become a clear alternative to getting equity in the name of the member. We continue to be a proponent of non-qualified patronage and we will be sure to help you understand the place it can have in your equity management.
  • People – You can’t say enough here. The good thing is all of you are painfully aware of the fact that your people are your organization’s greatest asset. Continuing efforts to retain staff, making investments in them and providing a career path will be the way to ensure the success of your cooperative to have the “best” team.
  • Technology – As improvements and advancements in technology continue, we expect to see additional resources dedicated to enhance innovation at our cooperative clients.
  • New Tax Law Changes – as we work our way around the calendar, the final tax year (2017) of the Section 199/ DPAD will be utilized. Your ability to allocate the Section 199/DPAD to patrons ended on 12/31/17. You will still be able to calculate Section 199/DPAD for the 2017 tax year, unfortunately any amount not utilized will “die at the coop” and go unused. This is likely to compromise your ability and/or decision to allocate qualified patronage. Will this force more of you to contemplate non-qualified patronage allocations? Maybe.

This coming year, the effects of the new tax law changes will become clearer, and the impact on the current and future years will become evident; from both a coop perspective and for your farmer/members. Our crystal ball might be as unclear as ever as we draft this article; but all indications are that the future remains bright for cooperatives. If we can be of assistance with any questions you have, or want to address in the coming year, please reach out to us. As we have seen in the past, you all have demonstrated great resilience, adaptability and flexibility in the past, giving us great confidence that you will embrace the changes coming at you, overcome them and demonstrate continued success.