Net income, sales decline for local farm cooperatives

Rural Cooperatives, March-April, 2004 by Beverly L. Rotan

Local U.S. farm supply cooperatives (many of which also market grain) had slight declines in both sales and net income in 2002, but patronage refunds from regional cooperatives helped many show a profit for the year. The year was a dynamic one, with cooperatives facing many challenges.

Average sales per local co-op were $15,288,026 in 2002, a 0.14-decrease from $15,309,299 in 2001. The average net income per local co-op was $228,500 in 2002, a 0.13-percent decline from $265,622 in 2001.

Of 263 local co-op financial statements analyzed for this article, 85 (or 32.3 percent) had losses in 2002. However, patronage refunds paid by regional cooperatives were up 40.1 percent. When patronage is included, only 20.1 percent of the local co-ops showed a loss.

Farm supply sales by co-ops declined 2.44 percent in 2002. Fertilizer sales were down 3.6 percent and petroleum sales fell almost 11 percent. Farm supply sectors showing gains were: feed, up 4.4 percent; seed, up 13.1 percent; and crop protectants, up 3.1 percent.

Grain sales were stronger for local cooperatives--which is particularly impressive in the face of declines in national production in some major grains (corn production was down 1 percent, spring wheat production was off 17 percent, durum wheat declined 23 percent and winter wheat was down 5 percent). Soybean production, however, was up 1 percent.

The 263 local cooperatives studied were classified by size: small, medium, large and super (table 2). The cooperatives were further classified into four types based on what percentage of their sales come from farm supplies (see table 2 for the precise criteria).

Stronger local co-op assets

Both current assets and total assets were lip slightly, 9 and almost 6 percent, respectively. All aspects of current assets, except cash, increased during the two-year study period. Cash was down almost 7 percent.

Current liabilities for local co-ops jumped nearly 10 percent during the study period, with allocated equity (cash), current term debt and short-term (seasonal) debt having double-digit increases. Dividend on equity, had the largest decrease (58 percent), with revolving equity redeemed (53 percent) showing the second largest decline.

Possible causes for declines in revolving equity include losses allocated from previous years, merger and/or the cooperative was fully capitalized.

Although total revenue was up 0.8 percent, total sales were down 0.14 percent. The rise of revenue was attributed to a slight increase in service income, marketing products and a sizable increase in patronage refunds from regional co-ops.

The average operating income (from commodity marketing, farm supplies and service income) rose slightly. Marketing farm commodities (crops and livestock) and grain sales both rose almost 4 percent. Service income increased 8 percent. Cost of goods sold was down 0.11 percent. In 2002, cost of goods sold averaged about 88 percent of net sales.

Total expenses was also up about 3 percent). Total wages were up for the two-year period by nearly 5 percent and represented 8 percent of total expenses. Wage expense includes payroll/salaries, employee benefits including retirement and payroll taxes.

Co-ops in the study had an average of 41 employees (part- and full-time), who earned an average salary of $24,681. Although there was an increase in employees, salaries were about the same as in 2001.

Directors' fees and expenses were a small part of total expenses. However, director compensation is an important factor that helps many cooperatives convince producers to divert time each month to help guide their cooperative. Co-op boards averaged seven members, who were paid an average of $942 per year. Director's fees were up 3 percent.

Monitoring performance

Some performance factors are within the control of cooperative management, but others are not. One way to monitor the performance of your cooperative is through financial statements and ratios. Ratios for the surveyed cooperatives remained relatively unchanged from 2001 to 2002 (table 3). Ratios that help assess your cooperative's performance include:

* Liquidity ratios--focus on a company's ability to pay bills when due. If liquidity ratios remain relatively high for a prolonged period, too much capital may be invested in liquid assets (for example, cash, short-term investments, accounts receivable and inventory) and too little is devoted to increasing member equity. These ratios should equal one or more. On average, surveyed cooperatives had quick and current ratios of slightly more than 1.0. Small cooperatives did a better job, with a current ratio of 2.09 and a quick ratio of 1.09.

* Leverage ratios--reveal a company's use of borrowed funds (rather than members' equity for investments) to expand its business. The goal is to borrow funds at a low interest rate and invest in business activity that produces a high rate of return, exceeding the target rate of return for investment. Debt-to-equity ratio measures the long-term solvency of a company by comparing debt to net worth. A company with a high debt-to-equity ratio could have trouble meeting fixed interest/debt payments if business falters or does not grow as planned. Most lenders would prefer this ratio to be 3 or lower. Farm supply cooperatives had a debt-to-equity ratio of 0.57, which is better than average.