Cooperatives – What we’ve seen in 2022

Jim English, CPA, Partner

WOW - 2022 was a wild ride! It all started in the fall of 2021 as grain prices continued to rise along with record increases in dry fertilizer and nitrogen prices. Those that could stay ahead of the rising prices saw unprecedented agronomy margins in 2022, or as one manager called them “stupid good” margins.  On the supply side, margins were also generally very good, which is typical in times of rising prices. But the margins needed to be higher as expenses grew across the board. However, growth in margins outpaced growth in costs, helping most supply co-ops enjoy improved bottoms lines.  On the other hand, grain co-ops and grain departments saw lower earnings as margins were flat to lower with little to no carry in the market and increased interest and transportation costs. 

2022 was filled with many challenges–supply chain, inflation, logistics, rising interest rates and labor shortages to name just a few.

 From parts needed for standard repairs to electrical components needed for large capital projects, supply chain issues persisted in 2022. To make matters worse, inflation drove increased expenses in nearly every aspect of your operation.  Personnel costs were higher as companies gave inflation-related wage increases to remain competitive. Furthermore, the Federal Reserve attempted to combat inflation with higher interest rates, which combined with higher commodity prices to result in substantial increases to interest expense during the year. Repairs driven by the higher labor and interest costs were up significantly as well.

Logistics was also a big issue in 2022. Lack of water in the rivers, speculation of a rail strike, and shortage of truck freight all pressured co-ops this year. These shortages made it difficult for companies to react quickly to the rapidly changing markets and maximize opportunities when they presented themselves. This doesn’t even take into effect the large increase in fuel costs that cut into margins. On top of all of that, finding enough good labor continued to be a problem. The 2022 harvest was such that breaks were far and few between which took a toll on employees–mentally and physically. 

Here are more 2022 highlights and trends

Income Statement:

• Most companies saw record or near record sales as grain, feed, agronomy and petroleum prices were all higher.  
• Grain service income was higher, particularly grain drying, partially due to decreased revenue recorded in 2021. Storage numbers still lag behind typical performance, as harvest sales remain very strong. Despite increased drying revenue, net drying income wasn’t always higher as the cost of dryer fuel was up significantly.
• As mentioned above, agronomy sales and margins for the most part were tremendous. Chemical sales were mostly higher as chemical prices rose and farmers willing to invest more in fungicides and insecticides with the higher grain prices. Despite the higher prices, margins not only held, but more often than not, were higher. Much of that increase can be attributed to increased rebates. Dry Fertilizer margins were up over 40%, liquid margins up nearly one-third and NH3 up 20%.
• Application income was higher with the increases in chemical and fertilizer sales.
• Gas gallons continue to rebound from COVID. Diesel gallons were flat to lower. LP gallons were higher mostly due to increased drying.
• Gas margins continue to trend higher. Up an average of 3¢ each of the last 4¢. After years of consistent diesel margins, margins jumped nearly 8¢ over last year and are more in line with gas margins. LP margins were flat year over year.
• As previously mentioned, operating expenses were much higher, an average of roughly 10% according to my estimation.
• Personnel costs were 6-7% higher. This would have been higher if companies could get all of their job vacancies filled.
• Fixed costs were also up 6-7% higher. This would include depreciation as most companies continue to invest in fixed assets and the cost of those investments are have risen sharply. Also includes property insurance which continues to rise and interest on long term debt impacted by higher interest rates.
• The largest increase in expenses was in the variable or other operating expenses. Nearly 20%. This would include seasonal interest impacted by higher commodity prices and rising interest rates.  Also includes truck and fuel expense and repairs. 

So, what does it all add up to?  Most companies capitalized on opportunities to increase margins on the supply side which turned out to be necessary to offset significant increases in expenses.

Balance Sheets: 

• Balance sheets remain strong.
• Receivables are much higher as input and grain prices are much higher than the previous year. Fortunately, with increase in receivables we have not seen an increase in bad debt write-offs, on the contrary we are seeing some slow and old accounts finally getting cleaned up.
• Another noticeable difference is an increase in agronomy inventories. Obviously, higher prices but also seeing companies carrying more physical chemical and fertilizer inventory. Companies not returning excess chemical inventory. Combination of suppliers not taking back excess inventory and companies wanting to insure they have product when they need it.
• 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 in their own right.
• On the liability side of the balance sheet. We have seen sizeable increases in unpaid grain and customer credit balances.  Unpaid grain result of sustained higher prices demonstrating strength of the ag economy.  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 even higher. 

We all know commodity prices rise and fall, but what matters is how long will this cycle last? Will input costs come down when commodity prices fall? Will coops be positioned and prepared when/if the bubble bursts? How will coops navigate the labor shortage and logistical challenges that lie ahead? In all my years of working with coops I have seen their resiliency, initiative and responsiveness to overcome whatever comes their way. As always, it will continue to take the great, concerted efforts of employees, management and Boards of Directors to navigate these rapidly changing times. And, as always, we will be there to work with you.