Cooperatives: What We’ve Seen in 2018 – Jim English, Partner, CPA

It’s that time of year when we reflect on what happened over the past year. Depending on where you are geographically, 2018 may be a year that you can’t wait to put in the rear-view mirror (at least I know many of your patrons feel this way). Some areas saw a wet, sometimes snowy spring that made it difficult to get spring fertilizer and chemicals applied. For some the wet spring turned into wet summer, which again made chemical application tough. Other areas endured straight-line winds that did significant damage to the crops, the effect of which will be felt in the upcoming fiscal year with reduced grain to market and less storage income. Even those areas that avoided the wind and excessive early rain couldn’t escape the rainy fall that made the harvest very difficult and pushed back fall fertilizer sales, particularly NH3. But by and large cooperatives survived these bumps in the road. Here is what we saw.

 Income Statements:

+ Grain sales were up and down. Prices were very much consistent with last year, so volume was driving this variation. For those with lower sales, soybean volume seems to be the reason, due at least in part to fewer exports.

+ Fertilizer sales were higher, a reflection of increased tons. Dry fertilizer prices were higher while nitrogen was down compared to last year. Chemical and seed sales trended lower as farmers continue to search out the lowest input costs and more “tin shed’’ cash and carry competition.

+ Gas and diesel sales dollars were higher. This was result of higher fuel prices as gallons were down. LP sales were much higher with 20% higher prices and strong increase in volume from increased grain drying and a colder winter.

+ Grain margins were up to consistent with last year as there were opportunities to capture carry in the market.

+ Fertilizer and chemical margins for the most part held their own.

+ Seed margins in many cases were higher. A function of increased seed treatment, perhaps.

+ Service-related revenues were a mixed bag. Drying was higher for most. Storage was flat-to-down. Agronomy services were more down than up as more farmers are doing their own application.

+ Expenses were higher. Interest costs were up with companies carrying more grain and higher interest rates. Higher fuel costs drove up truck expense. Drying related expense was up with increased drying income.

+ Payroll was up at most clients, but very modest increases for most. Higher per-employee cost offset by fewer employees. As last year, some of you are taking a hard look at this, not replacing some positions opened up from normal attrition and just cutting back. Current job market making it increasingly difficult to find and keep good talent.

+ Depreciation is up for a lot of companies, but, we are seeing more companies with declining depreciation. Some coops are taking a step back and slowing down their cap ex programs after several years of massive spending. Also, seeing longer lives being placed on grain and agronomy facilities. Companies are looking for ways to boost their local earnings.

+ So, add all this up and it feels like increased expenses offset increased gross revenue for local operating savings to be flat compared to last year. We saw a few companies turn red ink into black ink, but we also saw the opposite as well. It continues to be a grind to generate local earnings much like your patrons struggle to break even.

+ Patronage dividend income was down across the board, with CHS being the largest reason.

Balance Sheets:

+ By and large the balance sheets built over the last several years remain very strong.

+ We saw companies increasing their seasonal lines in order to take advantage of grain opportunities.

+ Working capital seems to be higher. Mostly a function of increased long-term borrowings and a decrease in capital spending more so than generated by earnings.

+ Credit has been well-managed, no great shift in agings. We have yet to see significant write-offs despite continued low commodity prices

Members’ Equity:

+ Really no change from the past few years. Balance sheets strength is displayed in your members’ equity sections. Retained earnings continues to keep growing, particularly as a percentage of total members’ equity. Lower earnings were allocated, very strong equity revolvements were paid back to the members and continued use of the Section 199 (DPAD). Some use of non-qualified patronage is being used to shore up the named members’ equity.

Miscellaneous:

+ Mergers seem to be slowing down in 2018, particularly the large peer-on-peer. We will continue to see those mergers that act as a succession plan and for those entities feel they can no longer compete or provide good value to its members.

+ Utilization of Section 199 (DPAD) is very much being done on situation-by-situation basis. Many coops allocated at least a portion back to their members, while others saw more benefit by retaining the deduction and using it internally.

+ There’s been lots of talk about 199(A), subsequent “fixes” and its impact on the industry. Plenty more on that throughout this newsletter.

+ For our Nebraska clients, the end of an era. Dave Thomsen retired 12/31/18.

 Conclusion:

It is going to take great, concerted efforts of employees, management and boards of directors to continue to weather these challenging times to maintain and sustain the solid results to which many our cooperative clients are accustomed. As always, we are confident in our client’s awareness, initiative and responsiveness to ensure the success of your cooperatives. As always, we will be there to work with you.