Cooperatives – What We’ve Seen in 2021 – Jim English, CPA, Partner

A year ago, I wrote, “When the pandemic started, I don’t think any of us would have anticipated that nearly a year later we would still be enduring the pandemic.” Well now, nearly two years later, every time we think we see light at the end of the tunnel, the virus develops a new variant and we take a step backwards. As the pandemic has evolved, we have evolved and so have you. Everyone has learned how to work more remotely and that it can be done successfully, possibly a positive by-product of the pandemic. One of the largest concerns this year for nearly all industries was supply chain–not “if” we will be impacted, but to what degree–fortunately, our businesses have done well navigating these challenges.

The year started with grain prices on the rise after several years of being flat and on the low side. That trend continued up through summer and still remain very good at year-end. As commodity prices rise, the input costs are sure to follow, with fuel costs, chemical and fertilizer prices seeing substantial increases this year. This fall we saw a nearly unprecedented rise in nitrogen prices. The largest consequence of all of this is increased demand for seasonal money. Some of you had to go to your lender multiple times to increase your line to cover these higher costs and the related margin calls.

Many of our client’s trade territories experienced dry, near droughtlike conditions. Despite this, we have heard lots of stories of very good yields, far exceeding expectations. Fortunately, most elevators went into harvest as empty as they have been for several years, so they are able to handle effectively. The higher prices encouraged farmers to sell grain that they had been holding onto for a while.

So how did co-ops fare this year? For the most part, local savings were similar to last year. The composition of those earnings was different as margins increased but other operating revenue trended lower. Some coops that were more adversely affected by preventative plant in 2019 saw some big increases. Here is what we saw:

Income Statement:
+ Grain sales dollars were tremendously due to higher prices. These gains were so helped by increased bushels as we saw facilities emptied.

+ As expected, storage and drying income were much lower. Farmer sales were up fall of 2020, so farmers had fewer bushels to store and that crop came in dry to diminish grain revenues. 40-50% decreases in storage revenue weren’t uncommon, with some decreases in drying being as much 50-75%.

+ Corn margins were flat to slightly higher. Bean margins seem to be more variable, with sizable swings either way.

+ Fertilizer sales were mostly higher, a reflection of increased volume. Dry fertilizer tons were also higher.

+ Nitrogen was mostly higher as well. Chemical sales were higher as prices rose and farmers were willing to invest more in fungicides and insecticides with the higher grain prices. Overall, seed sales seemed flat.

+ We saw excellent margins in fertilizer particularly dry and liquid, but NH3 was flatter.

+ Chemical margins seem to be flat to lower partly due some tweaks in rebate programs.

+ Application income higher with the increases in chemical and fertilizer sales.

+ Gas and diesel sales dollars were up after dipping last year. Gas gallons rebounded nicely after steep drop last year due to COVID. Diesel gallons were flat to lower. LP dollar sales were down. As noted earlier, drying was down significantly therefore LP was down as well. Average propane price was up slightly.

+ Gas and diesel margins were up on average 2-3¢. Petroleum margins seem to have been trending up for a few years now.

+ LP margins were more up than down but no major swings.

+ Expenses were higher, but only by 3-5%. Payroll would fall into that 3-5% increase. Other expenses on the rise include depreciation, property insurance, interest costs, and repairs.

+ Depreciation remains on the rise as most companies continue to spend significant dollars on capital expenditures.

+ Seeing big jumps in property insurance and hearing many grumblings that it is going to continue to rise at a pretty good clip.

+ Interest costs were higher as term money borrowed for the increased fixed asset spending and more seasonal money needed for higher inventory costs and margin calls.

+ Repairs are higher simply because materials cost more–one of the biggest supply chain consequences.

+ Drying related expenses were down significantly to help mitigate increases in other areas.

So, what does it all add up to? Decreased drying and storage revenue put many companies in an early hole to their fiscal years but improved margins particularly, fertilizer, petroleum, and increased volumes helped mitigate those loses to allow companies to have decent years, comparable to prior year.

Balance Sheets:

+ Balance sheets remain strong; however, they look much different than they did last year.

+ Current assets–inventories, margin deposits, prepaid inventories, receivables–are all consistently higher. Grain inventory and margin deposits direct reflection of higher commodity prices. Agronomy inventory and deposits on undelivered inventory are higher as input costs have increased. In addition, with fertilizer prices on the steep incline, companies have taken delivery or prepaid to lock in prices sooner than they typically would. Chemical suppliers also pushing for retailers to take earlier delivery and those product costs are rising as well.

+ Property, plant, and equipment is higher as capital expenditures continues to outpace depreciation. Companies constantly looking to improve and upgrade facilities to meet the demands of their customers that are growing.

+ On the liabilities side, we have seen increases in seasonal lines, unpaid grain, customer credit balances and long-term debt. The increase in seasonal money result from increases in inventories and margin calls. Unpaid grain is the result of higher prices and with higher prices, farmers can defer payment on more bushels. The increase in customer credit balances can be attributed to not only higher prices but also farmers interested in locking in prices before they go higher.

+ Not all increased long-term debt but more did than did not–a result of increased cap-ex spending and others shoring up working capital as lenders were requiring more working capital to cover increased seasonal lines.

+ On a positive note, those companies that participate in multiemployer defined benefit plans saw the value of their plans show very nice improvement thus lowering the corresponding liability.

+ Discussion in the board rooms continue to center around how to manage their company’s equity through allocations, equity redemptions and the Section 199A (DPAD) deduction.

+ Non-Qualified Allocations continue to be used manage the equity section.

Miscellaneous

+ Cybersecurity more than ever continues to be an important part of a company’s risk management program. We saw several cyber-attacks this year. 

+ Finding enough competent seasonal help to get through the busy times has always been an issue in your industry, but it now has become a nearly around the calendar problem.

+ We saw some significant mergers and merger studies done this year.

+ Most co-ops took advantage of the benefits of the CARES Act. Most companies applied and received PPP Loans. These loans were forgiven and included in income in the current year.

+ Utilization of Section 199A (g) (DPAD) still very much done on 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. IRS regulations finalized in 2021 will impact the calculation at the cooperative level. More analysis needs to be done to understand the full impact.

As we go through another cycle of rising commodity prices and the corresponding rise in input costs, co-ops continue to provide value for its members. Cooperatives are in better shape this year than a year ago. It will continue to take the great, concerted efforts of employees, management, and boards of directors to navigate these continually changing times. 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.