Asset growth for largest co-ops shows resilience to declining revenues

David S. Chesnick,
Agricultural Economist
USDA Rural Development

Editor's note: This is the second of three articles providing an overview of the cumulative performance of the nation's 100 largest farmer-owned cooperatives in 1998. The first pan appeared in the November/December issue.

hile the balance sheet is not a perfect indicator, it does provide a good snapshot of the overall financial strength of a cooperative busi ness. The asset side of the balance sheet lists all the resources the cooperative has invested for its operations. The equity and liability side shows how these resources are financed. Despite the lower revenues in 1998, total asset value increased by 10 percent, hitting a record high of $27 billion. Table 1 shows the consolidated balance sheet of the Top 100 agricultural cooperatives for the years ending in 1997and 1998. Dairy cooperatives were the driving force behind this increase. Dairy cooperatives' assets jumped 34 percent in 1998 followed by diversified, fruit/vegetable, sugar and cotton co-ops. Farm supply, poultry/livestock and rice cooperatives were the only commodity groups to show a contraction in their asset base. Grain cooperatives didn't show much of a change.

Current assets rebound
Current assets are an important part of a business' liquidity. After falling 8 percent in 1997, current assets for the Top 100 rebounded with a 5-percent increase in 1998. This increas was the result of higher amounts of accounts receivable and inventory levels. Cash balances, on the other hand, continued their declining trend. Why are cash balances important? Cash is the most liquid current asset. The value is known and there is minimal risk associated with it. However, holding too much cash is not optimal. The opportunity cost of investing in productive assets could be forgone if too much cash is held. Cash levels for all 100 cooperatives continue to fall, reaching a five-year low. Cash balances at the end of 1998 stood at $759 million, a 9 percent decline. There are several reasons for the decline in cash balances. One relates to cash management practices leading to efficient use of cash by cooperatives, thus requiring lower cash balances. Another reason relates to better access to open lines of credit. Therefore, cooperatives do not need to hold excessive cash. On the negative side, some cooperatives are experiencing poor cash flows. Net cash flows for all cooperatives were down, mostly due to the poor cash flow from operations. Only two commodity groups had an increase in their cash balances-dairy and grain. It's not a coincidence that both of these groups of cooperatives had an increase in their net margins and positive cash flows from their operations. Accounts receivable are comprised primarily of debts owed to cooperatives by their members, usually for product purchases. Accounts receivable jumped 10 percent in 1998, ending the year at $5.6 billion. An increase in this category bears watching. If this increase in accounts receivable is a natural extension of higher sales revenue, then there shouldn't be much of a problem. However, if this increase is a result of tighter cash flows for members, the cooperative may be looking at a higher write off for bad debts in the future. Accounts receivable for all Top 100 cooperatives reached 8.1 percent of total operating revenues, up from 7.6 in 1997. Farm supply, grain, poultry/livestock and sugar cooperatives had lower accounts receivable in 1998. As a percent of total revenues, only farm supply, grain and sugar cooperatives experienced declining values over the past five years. Poultry/livestock and rice cooperatives displayed an increasing trend of accounts receivable to total revenues. The other cooperatives fluctuated and did not show any trends. Inventories often constitute a substantial portion of current assets. In 1998, inventories were 43 percent of total current assets. However, inventories often have little to do with a cooperative's liquidity. In most cooperatives, a certain level of inventory must be kept. If inventories are inadequate, sales volume declines below an attainable level. Conversely, excessive inventories expose a cooperative to storage costs, insurance, taxes, obsolescence, and physical deterioration. Inventories are considered to be the least liquid of all current assets. Inventory levels for the Top 100 increased 4 percent in 1998, to $5.7 billion. Farm supply, grain and rice cooperatives carried fewer inventories in 1998 compared to 1997. Much of the decline for these cooperatives can be attributed to lower sales. Fruit/vegetable cooperatives had the largest dollar value increase in inventories, followed by cotton, dairy, diversified, and sugar cooperatives. Poultry/livestock cooperatives typically do not carry much inventory.

Investments hit record highs
Cooperatives invest in both non- cooperative and cooperative ventures. Non- cooperative investments usually indicate investments in joint ventures or other for-profit subsidiaries. Investments in other cooperatives generally represent business done with those cooperatives. Total investments in cooperatives and other businesses increased dramatically (21 percent) in 1998, reaching a record $3.5 billion (table 2). Most of this increase is due to two cooperatives. These two cooperatives accounted for 34 percent of the total amount invested by the Top 100 in 1998, up from 22 percent in 1997. Investments in other cooperatives (excluding financial cooperatives) increased 13 percent to end the year at $1.7 billion. The majority of the investment here reflects non-cash patronage refunds. However, more recently these investments have been taking the forin of joint ventures between two or more cooperatives. Diversified and farm supply cooperatives make up the majority of investments in other cooperatives. Investment in other businesses reached $1.5 billion, a jump of 41 percent. Most of these investments are in "for profit" joint ventures with other cooperatives or businesses. The dairy cooperatives held more than 50 percent of total investment in non-cooperative businesses in 1998. These investments mostly involved processing facilities and other value-added activities. Investment in cooperative banks remained steady despite the drop in funds borrowed from these financial institutions. Investment in cooperative banks stood at $356 million in 1998, down $1 million from 1997.

Investment in fixed assets continues to expand
Cooperatives need to invest in fixed assets in order to be competitive. These include investing in such things as stateof-the-art processing facilities or equipment that makes their operations run more efficiently. Investment in fixed assets by the Top 100 has steadily increased since 1994. Fixed assets increased 9 percent, to $8.5 billion in 1998. Driving this expansion were dairy, diversified and farm supply cooperatives. These three commodity groups accounted for 78 percent of the total increase. Two commodity groups, rice and poultry/livestock, had a net decline in fixed assets. Other assets jumped 30 percent, ending the year at $1.8 billion. These assets include such things as goodwill, patent rights and long-term receivables. Diversified cooperatives hold nearly 60 percent of the total amount of other assets.

Current liabilities inch upward
After peaking in 1996, short-term debt has fallen each of the last two years. Table 3 compares the amount of various short-term debts over the past five years. Short-term debt fell 13 percent, to $2.9 billion in 1998. Leading the decline were grain and farm supply cooperatives. Some grain cooperatives appear to have refinanced some of their long-term debt, causing a $399 million drop in the current portion of long-term debt, a decline of 93 percent. Farm supply cooperatives required less operating loans in 1998. Total shortterm loans outstanding fell 45 percent, to $268 million. However, just four cooperatives were the driving force behind the decline in short-term loans for farm supply cooperatives. These cooperatives appeared to transfer their operating loans with cooperative banks to long-term bonds issued by the cooperative. Poultry/livestock and rice cooperatives also required fewer operating loans in 1998. All sources of short-term debt for these commodity groups were lower in 1998. The amount of operating loans for rice fell from $183 million to $136 million while those for poultry/livestock

fell 2 percent to $92 million. Cotton and sugar cooperatives increased their use of every type of short-term loan. Cotton cooperatives increased their amount of operating loans by 43 percent, to $167 million. Sugar cooperatives mirrored the increase of cotton, jumping 44 percent, to $65 million. The largest increase from both commodity groups was with the cooperative banks, which accounted for 62 percent (cotton co-ops) and 65 percent (sugar co-ops) of the increase. Fruit/vegetable and dairy cooperatives both lowered the amount of long-term debt currently due, mostly through refinancing their term debt. However, the increase in operating loans from all sources pushed up the total amount of short-term debt. Both commodity groups increased the amount of operating loans from both cooperative and commercial banks. Fruit/vegetable cooperatives jumped 20 percent, to $475 million, while dairy increased 5 percent, to $183 million. Diversified cooperatives increased the amount of long-term debt, thus also increasing their current portion of that debt. They also transferred their operating loans from notes and cooperative banks to commercial banks. The net result was an increase of 7 percent, to $1.2 billion of outstanding short-term debt. Accounts payable for the Top 100 increased by 12 percent, to $3.4 billion. Most of this increase was due to the dairy and diversified commodity groups. Dairy had the largest increase, $219 million, a 5 1 -percent increase. The diversified cooperatives increased the amount in their accounts payable by $197 million, ending the year at $1.2 billion. Only farm supply and poultry/livestock cooperatives had lower accounts payable. Farm supply cooperatives had the largest decrease, $13 7 million, ending the year with $821 million. Poultry/livestock cooperatives typically carry few accounts payable and 1998 was no exception as this sector had only $6.5 million worth of accounts payable, compared to $7.3 million in 1997. Cotton, fruit/vegetable, grain and sugar cooperatives also had increases in their accounts payable. Yet, they were not in the magnitude of the dairy and diversified cooperatives. Rice cooperatives, at $3 3 million, showed no change. "Members payable" represents cash patronage refunds, dividends and revolving equity that have been declared but not yet paid. Liabilities in this area jumped 29 percent, to reach $1.3 billion. The largest increase is attributed to the dairy cooperatives, which accounted for 88 percent of the total increase in member payables. Farm supply cooperatives were the only commodity group to have a significant decline in the members' payable, dropping 51 percent to $95 million. Funds owed to members in the form of patron and pool liabilities jumped $214 million, ending the year at $1.3 billion. Dairy, fruit/vegetable and grain cooperatives account for 77 percent of the total patron and pool liabilities outstanding. Of these three, only the grain cooperatives experienced a decline.

Long-term debt jumps
Continuing a trend that started in 1997, the largest agricultural cooperatives appear to be transferring some of their short-term debt to long-term. As mentioned earlier in this report, shortterm debt fell 13 percent. During this same period, long-term debt less current portion jumped 20 percent, to reach an all-time high of $5.8 billion. Table 4 illustrates the sources of long-term debt for all top 100 cooperatives. Cooperative banks continue to provide the bulk of long-term debt. However, the use of these sources fell 9 percent, ending the year at $2.6 billion. Pushing this decline were farm supply, dairy and grain cooperatives. These three commodity groups represent 39 percent of total borrowed funds from this source. Grain cooperatives had the largest decline. Their use of cooperative banks fell 130 percent, to $237 million, which represented 70 percent of the total decline. The use of cooperative banks by farm supply cooperatives fell $94 million, ending the year at $564 million, while dairy dropped $15 million, ending the year at $191 million. However, all commodity groups did not share this decline. Diversified, fruit/vegetable and sugar cooperatives, which compose 55 percent of this source's total amount, increased their use of cooperative banks. Diversified cooperatives increased their use of these finds by 2 3 percent while fruit/vegetable and sugar both had a 3 -percent increase. Commercial banks held less cooperative debt in 1998 than in 1997. Cooperatives borrowed $200 million less from this source, down from a record high of $901 million in 1997. Only the diversified commodity group borrowed more from commercial banks, increasing their amount from $380 million to $438 million. An interesting trend in the last few years is cooperatives financing their own debt by issuing bonds. Only poultry/livestock, rice and sugar did not issue their own debt. While diversified cooperatives held 43 percent of the total amount of debt issued by the largest cooperatives, it was the dairy, farm supply and grain cooperatives that contributed the largest increase. These three commodity groups accounted for 83 percent of the $971 million increase. It appears that cooperatives are transferring their debt from traditional sources to these self-financing instruments. Other sources of debt include debt held by insurance companies, industrial development bonds, capital leases, and government and other non-traditional sources. The use of these other sources increased by 8 percent. Most of this increase is due to diversified and farm supply cooperatives, which make up 81 percent of the total other sources of debt.

Minority interest continues rapid expansion
When a cooperative holds more than a 50-percent interest in a subsidiary, the cooperative must consolidate the financial statements of the subsidiary with its own statements. If the cooperative does not own 100 percent of the subsidiary, there will be a minority interest that represents the claim of outside investors in the subsidiary that is consolidated into the parent cooperative. The amount of minority interest held in cooperatives' subsidiaries increased by 27 percent, to $481 million. However, almost all of that increase was a result of one cooperative, which acquired several subsidiaries and joint ventures during the year.

Member equity hits record high
Total member equity jumped 10 percent in 1998, to a record high $9.9 billion. Table 5 shows die breakdown of the various types of equity. Common stock is generally used to represent the voting rights in an incorporated cooperative and represents 7 percent of total equity outstanding. However, a few cooperatives use common stock as a form of equity allocation. These cooperatives accounted for most of the increase, with a majority of the increase (58 percent) coming from one diversified cooperative. Two fruit/vegetable and one grain cooperative accounted for another 41 percent of the increase. With the exception of these four cooperatives, there is usually little change in the amount of common stock outstanding. Almost all cooperatives use equity certificates to allocate equity to members. Equity certificates increased to $6 billion up $1.2 billion from 1997. All commodity groups showed an increase. However, nearly 40 percent of the increase was from one cooperative transferring its allocated equities from preferred stock to equity certificates. Several other cooperatives transferred equity from their unallocated account to equity certificates. This is why the amount of equity certificates jumped despite lower net margins generated by these cooperatives. Preferred stock may represent investments by employees and the general public as well as members. Several value-added activities by some cooperatives use preferred stock for investment in these activities. In other instances, retained patronage refunds and per-unit retains are classified as preferred stock. Whatever the reason, the combined value of preferred stock fell by 21 percent, to $1.4 billion in 1998. As mentioned earlier, much of the decline was due to reclassification of preferred stock to allocated certificates. Unallocated equity is generally income from non-member business and other income on which the cooperative has paid taxes. It is typically used as a reserve to offset losses incurred. In 1998, dairy, farm supply and rice cooperatives were the only commodity groups to show an increase in their unallocated equity. The increase in these three commodity groups was more than enough to offset the drop in the other five groups. Total unallocated equity increased 2 percent to $1.8 billion.