Cooperatives – What We’ve Seen in 2024

Cooperatives

Jim English, CPA, Partner

WHAT GOES UP MUST COME DOWN!

After two years of record or near-record sales, the age-old adage “what goes up must come down” has proven true. Commodity prices, which surged in recent years, took a sharp downturn, leading to a noticeable drop in overall sales revenue. Fortunately, earnings didn’t follow the same trajectory. For the most part, companies saw local savings remain consistent with last year. Overall expenses saw a slight increase, though payroll costs and fixed expenses are on the rise, while interest expenses have retreated.

2024 Highlights and Trends

Income Statement:

  • Sales Revenue: As anticipated, sales revenues declined across key sectors—grain, feed, agronomy, and petroleum. This reduction aligns with a return to more normal (though variable) pricing levels. Grain volumes dropped slightly due to lower prices and farmers opting to hold onto their inventory, while chemical sales were impacted by reduced demand for fungicides and insecticides. Propane sales saw a significant decrease due to a mild winter and reduced grain drying activity.
  • Grain Margins: Grain margins remained consistent with the prior year, but gross revenue increased significantly thanks to a surge in storage revenue. In fact, storage income rose by 50-100% in many cases, as farmers chose to store grain rather than sell at lower prices.
  • Agronomy Margins: Agronomy margins remained strong, though fertilizer margins have softened from their highs in 2022. This trend reflects a return to more typical pricing after the spike seen in recent years.
  • Fuel Margins: Gas and diesel margins remained similar to the previous year, indicating stability in these sectors.
  • LP Gas: After a 14-cent per gallon increase in 2023, LP gas margins experienced a slight market correction, dropping by approximately 4 cents in 2024.
  • Operating Expenses: Operating expenses increased, but the rise was moderate—less than 3% on average. Payroll costs were up 6-7%, mirroring last year’s increase. Many cooperatives continue to face challenges in maintaining full staffing levels.
  • Fixed Costs: Fixed expenses, including depreciation, property taxes, and insurance, saw a 6-7% increase for the third consecutive year. Companies are investing resources in size and speed to enhance operational efficiency and competitiveness. We have seen sizable increases in property taxes as taxing agencies have reexamined assessed values. Insurance premiums are trending upward despite higher deductibles and decreased coverages. Captive insurance companies have become popular as cooperatives look for ways to combat these rising insurance costs.
  • Interest Rates and Financing: Although interest rates remain elevated, they have begun to ease from recent highs. With commodity prices falling, borrowings were significantly reduced, leading to a nearly one-third reduction in interest expenses compared to 2023. On the flip side, many cooperatives saw an uptick in interest income as they sat on large cash balances ahead of the harvest.
  • Expense Control: Despite higher operating costs, efforts to control variable expenses paid off. Seasonal borrowings were lower, fuel prices dropped, and drying-related costs decreased. Companies also focused on trimming other operational expenses where possible.

Balance Sheet:

  • Cash Balances: Heading into the 2024 harvest, cash balances were higher than in previous years. This reflects a combination of factors, including lower commodity prices, more efficient operations, and strategic financial management.
  • Receivables and Inventory: Receivables decreased in line with lower input and grain prices. Grain inventories also dropped as many cooperatives held less grain due to reduced prices. Supply inventories—especially for fuel, feed, and agronomy products—were reduced as well.
  • Fixed Assets: Property, plant, and equipment spending is on the rise, after a slowdown due to rising construction costs, higher interest rates, and delays in finding contractors to complete the projects. Cooperatives have determined they can ill afford to fall any further behind in their ability to stay efficient and competitive while adequately serving their members’ needs.
  • Liabilities: On the liabilities side, the decrease in debt was notable. With stronger cash balances, cooperatives have been able to reduce seasonal and term borrowings. Correspondingly, accounts payable have also fallen due to lower supply inventories.
  • Earnings Retention vs. Allocation: Discussions around earnings allocation have shifted towards retaining more of the current year’s profits. This is largely due to the need to reinvest in facilities and systems that improve size, speed, and efficiency—key factors as farmers continue to scale up their operations.

Conclusion

Despite the significant drop in commodity prices, overall financial results are very comparable to 2023. Companies that have been strong in recent years remain strong, while those that have struggled continue to face challenges but have been buoyed by strong regional earnings. It appears that cooperatives have adapted to today’s economy, with higher interest rates and inflation. Margin structures will need to be reevaluated and adjusted as personnel and fixed expenses continue to rise. As always, it will take the great, concerted efforts of employees, management, and boards of directors to navigate these rapidly changing times.

We remain committed to partnering with you to navigate these challenges and seize the opportunities ahead.

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