Cooperatives – What we have seen
By: Dennis Gardiner, Partner | email
Just when we thought we had seen it all with the grain price volatility last year! We see a year of extreme price volatility in the fertilizer prices. What a time for the prices to go nuts; many of you had made significant investments in building facilities to allow you to take delivery and inventory many more tons! Who would have thought we would see certain fertilizers sell for over $1,000 and then drop to a couple hundred dollars just a few months later.
Most of our client’s agronomy departments lost money in their last fiscal year. We estimate that 80% of our client’s agronomy departments lost money. We probably had 5% of these departments actually thrive, due to timing and use of derivatives.
Despite all of the losses in agronomy, many of our clients enjoyed record “local” earnings in the last fiscal year. The grain departments, with good margins and significant drying and storage revenues more than offset the losses in the agronomy departments.
Feed departments largely performed pretty well and energy divisions were down, again due to price volatility. LP offset gas and fuel losses for a few clients.
As I stated earlier, significant investments were made in fertilizer facilities and also in grain storage.
Most of you retained the benefits of the Section 199 deduction, providing significant increases in your retained earnings. This represents permanent capital and strengthens your balance sheets. But we did see a few clients allocate the benefits of the deduction to their members. The great thing for you is that we now have another option in managing your member’s equity, allocating patronage to the patrons and minimizing your tax obligation, depending on your circumstances.
What lies ahead……
• Answering the question, how much retained earnings is enough? As mentioned earlier, many of you have really built up substantial dollars in retained earnings.
• Risk management. With the price volatility in your commodities and products for each division, assessing and managing risk should become a priority for your cooperative.
• Time to consider non-qualified patronage allocations? With the cash flow savings many of you have enjoyed with the tax savings associated with the Section 199 deduction, now is as good as time as any to contemplate utilizing non-qualified patronage allocations.
With all that in mind, we wish you the best for a happy and prosperous new year!
