Cooperatives: What We’ve Seen in 2023 – Jim English, CPA, Partner

BETTER THAN EXPECTED!

Time and time again, that was the response when asking coop managers and board members about the 2023 harvest. I think the same can be said when discussing the financial years of our cooperative clients.
Many had a bleak outlook when their 2023 fiscal year started, struggling to budget a local income in the black with uncertainty and volatility on the agronomy side, interest rates expecting to rise rapidly, no carry in the grain markets and continued inflation. In the end, most companies saw local savings
decline or stay flat, but declines were less than expected, and some even saw increased local income.

Many of the challenges that faced coops in 2022 continue to be issues in 2023, in particular, rising interest rates, inflation and labor shortages.

Interest rates rose from around 5% to nearly 8%. About a 60% increase in rates but interest expense rose on average less than 10%. Coops adapted to higher interest costs by better handling cash flow through inventory management and improved timing of grain sales. Expenses continue to rise but not nearly at the pace they did a year ago.

Here are more 2023 highlights and trends:

Income Statement
+ Despite seeing record or near record sales in 2022, sales in 2023 by and large were up as prices stayed higher for most of the year.
+ Grain margins and service income were higher, particularly grain storage. Storage numbers coming back as sustained high prices encourage/allow producers to hold on to their grain longer along with excellent yields in some areas. Improved margins as coops learned how to navigate marketing in these
inverted markets and fewer logistical issues compared to 2022.
+ Last year we saw unprecedented agronomy margins. They came back to Earth in 2023, although, for the most part, still very good. Chemical sales remained strong as farmers were willing to invest more in fungicides and insecticides with the higher grain prices. Margins slipped some as certain products saw devaluation but very similar to pre-2022 levels.
+ Gas gallons flat to declining as we return to pre COVID trends. Diesel gallons appeared flat to lower.      + Gas margins continue to trend higher. Up an average of 3 cents each of the last 5 years. Diesel margins were flat after jumping 8 cents in 2022. LP margins saw a nice increase in 2023, approximately 14 cents per gallon after 4 years of relatively flat margins.
+ As previously mentioned, operating expenses continued higher. On average, I would estimate 5.5%
versus the 10% plus increases in 2022.
+ Personnel costs were 5-6% higher which was similar to last year’s increase. This would have been higher if companies could get all of their job vacancies filled.
+ Fixed costs were also up 6-7% higher after similar increases in 2022. This would include depreciation,
property taxes, rent, insurance and term interest. Interest has already been discussed, but property insurance has become one of the highest rising expenses.
+ Saw great improvement in managing variable or other operating expenses keeping increases below 5%. In 2022, these expenses were up nearly 20% over 2021. This would include seasonal interest, advertising,
utilities, data processing, truck expense, repairs and supplies. In most cases, an intentional effort to lower
expenses where possible.
+ The upside of higher interest rates, increased interest income. Many companies sitting on large amounts of cash late this summer, pre-harvest and thus we saw increased interest income.
+ Substantial increase in regional income. Regional cooperatives had successful years in 2022 much like
the local coops which resulted in a significant amount of patronage refunds allocated in 2023.
+ So, what does it all add up to? Most companies saw lower local earnings as agronomy margins normalized while expenses continued to rise. However, increased patronage filled the void for many so bottom lines looked similar to 2022. 

Balance Sheets
+ Balance sheets remain strong.
+ One of the biggest changes in balance sheets this year was the implementation of a new accounting
standard that required operating leases to be included on the face of the balance sheet. Some companies
implemented early prior to this year but now all companies were required to adopt. The adoption of
this new accounting standard resulted in recognition of right-of -use asset and a lease liability based on
the discounted future lease payments over the lease term. In the past, disclosures were made in footnotes
regarding operating leases but with increased transparency in mind, those leases will now be included on the face of the balance sheet.
+ Cash balances much higher heading into 2023 harvest. Result of many factors described below.
+ Receivables are lower as input and grain prices are much lower than the previous year.
+ Cash required for margin deposits down substantially as commodity prices come down and less forward contracting being done by producers.
+ Grain inventories are down substantially as companies are carrying as little grain inventory as
possible along with lower commodity prices.
+ Supply inventories are reduced as fuel, feed and agronomy prices decrease. Also, some instances of
carrying less inventory as coops deal with risk and cash management. Last year companies carrying more chemical inventory in fear of not being able to obtain due to supply chain issues.
+ Property, Plant and Equipment is consistent with last year. Capital expenditures may have slowed slightly with rising construction costs, increasing interest rates and delays in finding contractors to complete the projects. However, I expect that trend to be short-lived as companies assess needs to stay efficient, competitive while adequately serving their members’ needs.
+ On the liability side of the balance sheet, with increased amounts of cash, we are seeing less seasonal
and term debt.
+ As mentioned, supply inventory is down and correspondingly accounts payable is lower as well.

Conclusion – We all know commodity prices rise and fall. It appears we are on the way back down. How coops managed their inventory and continue to do so will determine how successful they will be. It appears that coops have survived higher interest rates and like most things, what doesn’t kill you makes you stronger. The lessons learned about risk and cash management won’t soon be forgotten. 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. As always, we will be there to work with you.