How well are dairy cooperatives performing?

By Carolyn Liebrand
Agricultural Economist
USDA Rural Development

airy farmers and their milk marketing cooperatives join the list of commodities to be hard-hit by volatile market prices last year. But let's take a step back to review the financial performance of these individuals and organizations at the end of the 1990s. A picture of the financial performance of dairy cooperatives in the United States was developed from the results of a 1998 USDA survey. Detailed information on cooperatives' 1997 finances were collected as a special part of one of USDA's annual mail surveys of agricultural cooperatives. Thirty-nine percent of the nation's 226 dairy cooperatives supplied complete data. However, these 88 cooperatives represented about 96 percent of the total assets held and 90 percent of the milk handled by U.S. dairy cooperatives. Overall, dairy cooperatives used $5.15 per hundredweight (cwt) of milk of total assets to market their members' milk in 1997. Of their total assets, 55 percent ($2.84 per cwt) were current assets; 26 percent ($1.32 per cwt) were net property, plant and equipment; and the remaining 19 percent ($1 per cwt) were investments in other cooperatives and assets (table 1). On the other side of the ledger, total liabilities were 60 percent of total assets ($3.12 per cwt), current liabilities were 43 percent ($2.22 per cwt), and long-term liabilities were 18 percent ($0.90 per cwt). The remaining 40 percent of total assets consisted of member equity both allocated ($1.70 per cwt) and unallocated ($0.34 per cwt). Fluid milk and finished product sales by dairy cooperatives were $19.85 per cwt, which made up 88 percent of their total income. The second largest segment of income came from supply sales ($1.77 per cwt), but these were just 8 percent of total income. The other 4 percent of total income came from other sales, service receipts and other income, and patronage refunds from other cooperatives. Net margins before tax was $0.30 per cwt. The ratio of net margins before tax to total income was 1.3 percent. Return on the assets used by cooperatives to market milk was 7.1 percent (measured by dividing net margins before taxes and interest expense by total assets).

Performance by group
A portrait was also developed by type of dairy cooperative, based on the variety of functions the cooperative performed to ensure a market for member milk. There were differences in the financial structure of cooperatives, depending upon their primary function. The following dairy cooperative categories were identified:

bargaining only focus exclusively on negotiating milk prices and do not own plants;
bargaining and balancing bargain for milk prices and manufacture about 25 percent of the milk handled into commodity products in their own plants;
hard-product manufacturing most member milk used in their own, large-scale manufacturing plants where they make undifferentiated, commodity dairy products;
branded cheese marketing and fluid processing typically process all their member milk in their own plants, manufacturing and marketing specialty or branded cheese, or bottled fluid milk, respectively,
diversified manufacture or process more than half the milk they handle into both differentiated and commodity products, as well as bargain for milk prices.

For this study, diversified and fluid processing cooperatives were grouped together.

Assets
Bargaining only cooperatives used $1.20 to market 100 pounds of milk, while branded cheese cooperatives used $10.06 per cwt. The other types of dairy cooperatives fell in-between this price spread. Bargaining only cooperatives' current assets of $0.91 per cwt accounted for 75 percent of their total assets. For the other groups, current assets made up between 53 percent (diversified and fluid processing cooperatives) and 66 percent (branded-cheese cooperatives) of total assets. Property, plant and equipment (PPE) accounted for only 11 percent of bargaining only cooperatives' total assets, reflecting their lack of facilities. In contrast, PPE was 25 percent of total assets for diversified and fluid processing and 38 percent for hard-product manufacturing cooperatives. Diversified and fluid processing cooperatives had the highest level of investment in other cooperatives and other assets, $1.49 per cwt, which was 22 percent of total assets. The others had low proportions of assets invested in other cooperatives and other assets, with the exception of bargaining-only cooperatives where investments in other cooperatives represented 11 percent of their assets.

Liabilities and equity
Total liabilities (current plus long-term liabilities) ranged from $0.83 per cwt for bargaining-only cooperatives to $5.59 per cwt for branded-cheese marketing cooperatives. However, liabilities made up the largest proportion of total assets for bargaining-only cooperatives, 69 percent, compared to the other groups of cooperatives, which ranged from 55 percent (hard-product manufacturing cooperatives) to 66 percent (bargaining-balancing cooperatives). Diversified and fluid processing cooperatives had the most long-term liabilities, reflecting a greater investment in plants and facilities and reliance on borrowed capital. Long-term liabilities for the remaining groups ranged from 15 percent of total assets for hard-product manufacturing cooperatives to 3 percent for bargaining-only cooperatives. Members of bargaining-only cooperatives held the lowest equity stake in their cooperatives, $0.37 per cwt (30.9 percent of total assets). Member equity in hard-product manufacturing cooperatives was 45 percent of total assets, the largest share among the groups. However, member equity per 100 pounds of milk was highest for branded-cheese cooperatives at 44 percent of total assets. Most member equity was allocated (directly assigned to individual members), regardless of the cooperative's primary function. Bargaining-balancing and hard-product manufacturing cooperatives had the smallest portions of unallocated equity (not assigned to members) among the different types (4 percent and 6 percent of total equity, respectively). About one-fifth of the branded-cheese and bargaining-only cooperatives' equity was unallocated.

Sales and income
Milk and dairy product sales per hundredweight ranged from $14.90 for bargaining-balancing cooperatives to $23.16 for branded-cheese cooperatives. Ninety-nine percent of the hard-product manufacturing cooperatives' income came from milk and dairy product sales, $16.79 per cwt, the highest proportion among the groups (fig.1). Milk and dairy product sales of $22.23 were 87 percent of total income for diversified and fluid processing cooperatives, the smallest proportion among the different types. However, diversified and fluid cooperatives had the largest proportion of supply and other sales (12 percent of total income) along with bargaining-only cooperatives where 11 percent of total income was from the sale of supplies and other items. The other three types of cooperatives had minimal sales of these types.

Net margins
Net margins before tax per 100 pounds of milk ranged from $0.06 for bargaining-only cooperatives to $0.98 for branded-cheese cooperatives. Hard-product manufacturing cooperatives had the second largest net margins before tax, followed by diversified and fluid processing and bargaining-balancing cooperatives. Branded-cheese cooperatives realized the highest profit margin (4.1 percent of total sales). Hard-product manufacturing cooperatives yielded the second highest net margins to sales (2.8 percent). Diversified and fluid processing cooperatives' net margin was 1.4 percent of sales, and similarly, bargaining-balancing cooperatives' was 1.3 percent of total income. Bargaining-only cooperatives generated the lowest net margins (0.3 percent of total income).

Average
The average (per cooperative) financial statement for each type highlights the magnitude of their differences (table 2). Diversified and fluid processing cooperatives were the largest cooperatives, on average, in terms of total assets, milk and dairy product sales, net margins, and volume of milk handled. On average, diversified and fluid processing cooperatives used almost 50 times the assets used by bargaining-only cooperatives and four times the assets used by the second largest type of cooperative in terms of assets hard-product manufacturing cooperatives. Diversified and fluid processing cooperatives' average milk and dairy product sales were more than three times larger than for bargaining-balancing cooperatives, the second largest type in terms of average sales. Branded-cheese cooperatives had the lowest average milk and dairy product sales per cooperative, reflecting their generally smaller size. Diversified and fluid processing cooperatives had the highest net margins, on average, almost twice those of the next highest. Branded-cheese cooperatives had the second smallest net margins. But, these were more than four times the average net margins of bargaining-only cooperatives and were generated with less than half the average milk and dairy product sales of bargaining-only cooperatives, an indication of the value-added nature of branded-cheese cooperatives' operations.

To obtain a copy of the full report, visit our website at:www.rurdev.usda.gov/rbs/pub/research.htm.

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