Cooperatives: What we expect to see in 2023

Cooperatives

By Mark A. Rodruck, CPA, Partner

What does 2023 have in store for the industry and our clients? The following is a short list of potential circumstances that all will be facing when making decisions for your company. Inflation, recession, supply chain disruption, high labor costs, increased interest rates and transportation bottlenecks all pose threats to co-ops and the economy at large. . As always, our perspective comes from being involved in your audits, board and annual meetings, planning sessions and visiting with management.  Time can and usually does prove us wrong, but we see value in attempting to look forward. Now on to our thoughts:

  • Local (Operating) Earnings – As many of you have put 2022 in the rearview, how will 2023 compare? Grain yields by region varied with some seeing record yields and others staying stagnant. High grain prices along with higher interest rates will stress cash flow and seasonal lines of credit again this year. Grain margins will need to increase to cover these increased costs. However, transportation bottlenecks and geo-political issues could make marketing opportunities difficult. On a positive note global grain stocks continue to tighten and are at their lowest levels since 2013/2014. Mother nature gave agronomy great weather to get off to a good start following harvest. Expect to see crop nutrient tons increase to maximize grain yields. With elevated agronomy prices throughout the year it will be difficult to maintain the good carry margins that were available last year.  here will continue to be concerns with the crop nutrient price levels–will they crash or will they hold with supply chain and political issues? Feed tons started to improve and hopefully will continue trending upward. With all that said, we expect to see flat to lower local earnings in 2023.
  • Leases – The new lease standard goes into effect for 2022 calendar year-ends and 2023 fiscal year-ends. This will require the “old” operating leases that were off-balance sheet to come on the balance sheet affecting long-term assets, current liabilities and long-term liabilities. In the year of adoption, working capital will be decreased by approximately a year of operating lease payments, as the liability will have a current and long-term portion.
  • Capital Expenditures – With increased interest rates, availability of contractors, and higher project costs we may see a slowdown in capital projects. We could see some projects put on hold as wants and needs are reevaluated in the boardroom.
  • Expenses – Controlling expenses and looking for efficiencies will continue into 2023. Due to inflation and the tight labor market, we expect to see a steep increase in personnel costs. Fixed expenses will probably climb due to past capital projects, increased interest rates and rising insurance costs. We may see margin structures adjusted to cover increasing costs. Operating expenses will continue to be scrutinized. Will the Fed continue to increase interest rates or have we seen the peek? We expect to see interest expense increase with high commodity prices and increased interest rates over the last year. I’m sure you have all made multiple calls to the banker to evaluate needs and increase your operating lines. Technology will also be an important investment for the future. 
  • Credit Risk – Most have done a great job at managing their credit risk. Continue the efforts and stay focused on our credit policies.
  • Fraud and Cyber Security – This is an area that everyone should stay focused on with what has happened in the industry. Threats continue to become more sophisticated, and as you continue to grow, the risk also grows. With the costs of cyber insurance rising, some will look for alternative ways to manage these risks. Continue to invest in education, training, and technology to battle these risks. Threat assessments and penetration testing are also very important.
  • Mergers and Acquisitions – Companies continue to try to gain efficiencies, maximize talent and help with retirement of key management positions. I’m not sure if these will lead to mergers or if they could lend themselves to unique ways to cooperatively work together and maximize labor talents.
  • People – Staffing will continue to be a concern in 2023. The workplace is going to have to find creative ways to keep and attract talent. This will most likely take higher wages, but also evaluations of working environments and benefits.
  • Technology – With no end in sight to the staffing shortages, companies will turn to technology to do more with less. Technology could help solve some of the labor shortages as it has in the past. Data processing systems will remain under consistent evaluation. Are they keeping up with their changing needs and demands? The current environment demands us to be very mobile and to be able to conduct business from anywhere.

The future continues to shine in agriculture. In my opinion, you won’t find a better group of people to work for and with.  Technology demands in the industry makes agriculture very attractive to people entering the workforce. Cooperatives and agriculture have always adapted and evolved to stay relevant in the industry. We look forward to continuing our relationships with current customers and growing with new ones. Have a great 2023!

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