Cooperatives: What We Expect to See in 2015
This is an article we have been drafting for several years now. As much as we want to provide you some profound insight into what we see coming down in the next year, this will sound like a re-run. Much of what we expected to see over the last year continues to be what we expect over the coming year.
- Mergers: The number of mergers we have seen has ramped up to a level similar to that from a decade ago, perhaps pre-Section 199 (DPAD). We have a number of merger discussions going on right now. We don’t anticipate all of these discussions to turn to combinations, but seeds are being planted to provide for a possible future combination. All reasons imaginable are driving these discussions: retiring managers, strategic trade territories, efforts to leverage a strength or overcome a weakness, smaller cooperatives coming to terms with their opportunities, etc.
- Retained Earnings: Cooperatives still seek the answer to: “how much retained earnings is too much?” We have this discussion with cooperatives of all sizes at every meeting. As you might guess, not much resolution to the question. A few have drawn a line (percentage) that they would like to have the percentage of retained earnings to total equity not exceed.
- Non-qualified Patronage: As we ponder the above question regarding retained earnings with our clients, non-qualified patronage allocations surfaces as a solution. More clients have looked to utilizing these to stem the growth of retained earnings (un-named equity) to named equity. The use (by the company) of the Section 199 deduction and/or bonus depreciation typically reduce what can be allocated to a patron unless the articles or bylaws have been amended and non-qualified dividends provided for. If an allocation is reduced by these tax deductions, without the use of non-qualified patronage, the retained earnings will continue to grow, and likely outpace named member’s equity.
- Member’s Equity: Equity redemption programs are continuing to be reviewed and reconsidered. The mindset is to create value in deferred equity for all members today, particularly the younger members. That said, many of you have had very robust equity revolvement efforts. Unfortunately, as positive as this has been, it has perpetuated the problem of trying to get more equity in the hands of the member (or managing the growth of retained earnings). Many of you revolve (payout) as much patronage as you defer on an annual basis; meaning, your named equity is maintaining a certain level, at best.
- Personnel: Many well-established, successful managers are likely to retire in the next few years. Succession planning needs to be addressed, the number of qualified candidates is going to be tough, particularly considering the size of your organizations today. Not only is there going to be struggles to replace general managers/CEOs, division heads are going to be tough positions to fill, let alone trying to retain qualified individuals.
- Data Processing Systems: The number of mergers and the demands on more mobile applications is driving a number of you to take a look at your data processing systems.
In closing, we do not expect the next year to bring record earnings for our cooperative clients. Fortunately, balance sheets have never been stronger, and we expect our cooperative clients to still thrive and be a valuable partner to their farmer members in their operations.
- Maximizing the benefit of Section 199 (DPAD)
- Credit risks associated with accounts receivable with lower grain prices
- Maintain aggressive capital expenditures