Cooperatives: What we’ve seen in 2019 – Jim English, Partner, CPA
It’s that time of year when we reflect back on what happened over the past year. In many ways, 2019 looked very similar to 2018. That’s not necessarily a good thing. Most of you couldn’t be done with 2018 fast enough. Once again, we saw a very wet spring. We thought the spring of 2018 was wet, but the 2019 spring made 2018 look dry. Some areas saw flooding that may never be recovered from. Almost all areas saw significantly more preventive plant acres than had been seen in a very long time. Some of the acres that did get planted were planted extremely late, which created another set of problems to be discussed later. So we start the year with less seed needed, less fertilizer, less chemicals, and less diesel fuel. 2019 was not off to a flying start. Then comes fall, and with it, more wet weather including the dreaded white stuff. This wet weather compounding the wet spring delayed what was already going to be a late harvest. On the bright side for cooperatives was increased drying income and LP sales which will be felt in next year’s earnings. The downside was LP shortages and less than ideal grain quality. This will create many challenges for co-ops as they store the grain. Fortunately, winter didn’t arrive as early in 2019, and it appears that more fertilizer was applied this fall–particularly anhydrous ammonia.
As we have learned over the years, cooperatives are very resilient with the ability to overcome and adapt to whatever is thrown at them. This year is no different. It seemed many cooperatives were able to maintain income levels, or even saw improved local earnings, except those hit particularly hard by weather issues. Here is what we saw:
- Grain sales were mostly down due to lower soybean prices. Corn prices averaged slightly higher than usual, while overall volume seemed flat to down as some area’s yields felt the effects of 2018 weather issues.
- Fertilizer sales increased as a reflection of higher prices, particularly NH3. Dry fertilizer tons appeared to be pretty consistent with 2018. A wet spring saw an increase in liquid fertilizer and a decrease in anhydrous ammonia. Chemical sales were mostly flat, but there were some decreases in areas hit particularly hard by a wet spring. Seed sales trended lower as there was a sharp increase in preventative plant acres.
- Gas and diesel sales dollars were down. Gas gallons continue to trend downward and a slight decrease in prices caused the gas to be lower. Diesel gallons were also lower as discussed earlier, while prices were up slightly. LP sales were mostly lower as gallons for most 2019 fiscal year-ends were down due to less drying during the 2018 harvest. Average propane price was flat.
- Corn margins were flat to slightly higher. We mostly saw big improvement in soybean margins as there were opportunities to capture carry in the market.
- Chemical margins were pretty consistent to the prior year, while fertilizer margins were mostly improved in 2019.
- Seed margins in most cases were lower. Seed margins continue to tighten as farmers continue to search out the lowest input costs.
- For the most, part LP margins seem to be improved.
- Service-related revenues were a mixed bag. Drying was down significantly, as much as 40-50%, except for Nebraska, where it was up a little. Storage was flat to down. Agronomy services was more down than up as weather limited the number of passes made, and preventive plant reduced the number of acres in some areas. Grind and mix was mostly higher. Finance charges seemed to be higher, indicative of lower commodity prices and customers slower to pay their bill.
- Expenses were slightly higher. Interest costs were mostly up, with companies carrying more grain. Overall expenses kept in check as drying related expenses were down with decreased drying income.
- Payroll was up at most clients, but the growth was very modest. The increases in payroll were mostly driven by insurance and pension related costs. Companies are becoming leaner by not replacing vacancies left from normal attrition. Some of these vacancies are left by choice, but some clients are just having a hard time filling vacancies. The current job market is making it increasingly difficult to find and keep good talent.
- Depreciation is up for most companies. Although the growth is not significant growth, it indicates that companies are continuing to invest in capital assets. As weather seems to be a major factor each year, companies are investing in equipment to enable them to get the work done in a shorter period of time. Many companies are Increasing storage for NH3, liquid fertilizer, and LP to avoid potential shortages– whether it be from supply issues or logistical problems.
- Patronage dividend income was up across the board after being down significantly last year - nice increases from AGP, CHS and CoBank.
So what does it all add up to? It feels like improved margins offset lower other operating revenues and increased expenses, which resulted in an overall improvement in local earnings. Not to say there wasn’t any local losses, because there are still plenty of those. In many cases, these were driven by lost agronomy income from the loss of acres to preventative plant. It continues to be a grind to generate local earnings, much like your patrons struggle to breakeven.
- For the most part, balance sheets remain strong.
- We saw companies increasing their seasonal lines in order to take advantage of grain opportunities.
- Working capital seems to be fairly consistent from year to year. Companies are doing a good job of balancing capital expenditures, equity redemptions, and debt repayments.
- Credit has been well managed, with no major shift in agings. We have yet to see significant write-offs despite continued low commodity prices
- There really was 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.
- Discussion in the board room often centers around how to manage their company’s equity through allocations and equity redemptions and the Section 199A (DPAD) deduction.
- Seeing an increased use of Non-Qualified Allocations, often in conjunction with an equity redemption in lieu of a current year cash allocation.
- Mergers and merger studies continue. Some out of need due to an inability to be profitable and a deteriorating balance sheet. Others are considered more peer-to-peer in the hopes of gaining efficiencies or a succession plan for a retiring manager.
- Utilization of Section 199 (DPAD) is still very much done on a situation by situation basis. Many co-ops allocated at least a portion back to their members, while others saw more benefit retaining the deduction and using it internally.
- Cybersecurity is becoming an important part of a company’s risk assessment.
- Ability to find and retain employees for both managerial and operational roles has become increasingly difficult.
Conclusion – Cooperatives are continuing to evolve and adapt to the myriad of challenges that present themselves– whether it’s Mother Nature, trade wars, environmental or political obstacles. It will continue to take great, concerted efforts of employees, management, and Boards of Directors to rise up to these difficult times. As always, we are confident in our client’s awareness, initiative and responsiveness to ensure the success of your cooperatives, and we will be there to work with you.