by David Chesnick, Ag Economist
USDA Rural Development
Editor's note: USDA's annual look at the financial performance of the top 100 U.S. farm cooperatives has been condensed into a single article this year, instead of the three-part series that has run in the past. A more in-depth version of this article will soon be available at: www.rurdev.usda.gov/rbs/pub/miscell.htm.
As go the farmers, so go their cooperatives and communities.
For yet another year, most of the farming community suffered through depressed prices. In turn, this affected all agribusinesses, including cooperatives. According to a preliminary report from the Rural Business-Cooperative Service, Farmer Cooperative Statistics, 1999, there are 3,466 agriculture cooperatives. The business volume for all marketing, farm supply and related-service cooperatives dropped nearly 5 percent in 1999.
This article focuses on the 100 largest agricultural cooperatives because of their dominance in the co-op community. The contribution of the "top 100" co-ops to total business transacted by all ag co-ops illustrates their contributions. While representing only 3 percent of the total number of agriculture cooperatives, they account for 58 percent of total gross business volume. They also control 59 percent of total assets.
The largest 100 cooperative vary tremendously in their type and volume of business. The total volume of business ranges from $63 million to $10.8 billion. The types of businesses include manufacturing, farm supply sales, marketing and processing. While more than half of the largest cooperatives sell farm supplies, only those that sell predominantly farm supplies were included in that category in this report. Cooperatives involved with several commodities were classified as "diversified."
Stagnant sales hamper agriculture cooperatives
Low prices and adverse weather put pressure on the farm community. For the third consecutive year, operating revenues for the largest ag cooperatives slipped. While some bright spots existed, most of the largest organizations did not fair well in 1999. Sixty-four of the top 100 saw revenues decline. The hardest hit were cotton, farm supply and grain cooperatives, which accounted for the majority of lower sales.
As shown in Figure 1, marketing revenues generally held steady during the last three years. Farm supply sales on the other hand declined steadily from their high in 1997 of $20.6 billion. Other operating income dropped as well.
In the two-year comparison of sales revenue (Table 1), total farm supply sales by all top 100 co-ops fell 2.7 percent,
to $16.1 billion, while sales by top 100 co-ops that specialize in farm supplies fell 2.5 percent, to $5.4 billion. Grain and cotton cooperatives also took large hits to their revenues. Cotton fell 23 percent to $1.8 billion while grain fell 19 percent to $3 billion. Production of both cotton and grain increased from 1998. However, prices fell thereby suppressing the overall sales for these cooperatives (Table 2).The bright points included increased total revenue for sugar, dairy, fruit/vegetable, and poultry/livestock cooperatives. However, the gain made in these sectors couldn't overcome the drop in the other sectors.
Gross margins show resilience to sluggish sales.
Gross margins for all 100 cooperatives (Table 3) jumped 4 percent despite stagnant sales. The poultry/livestock sector caused most of the jump.
While all cooperatives in that sector had an increase, one cooperative accounted for nearly one-third of the total increase in gross margins for the top 100 co-ops.
Higher expenses hurt operating income
An increase in operating expenses for the cooperatives wiped out any gains made from higher gross margins. Operating expenses jumped 10 percent in 1999, the largest increase in the five-year period examined.
Labor expenses account for some of the increase. The average increase for labor was 5 percent in 1999. Only some cooperatives and sectors could control labor costs. Cotton cooperatives had lower operating expenses, due almost entirely to lower labor costs. Rice cooperatives also had overall lower labor costs. However, they were also able to find greater operating efficiencies that lowered their expenses further.
The other sectors showed higher labor costs and higher overall operating costs. However, most were able to control some of their operating costs despite huge increases in labor expenses.
These overall higher operating expenses hurt operating margins (Table 4). Operating margins for all cooperatives fell 25 percent to $747 million in 1999. All sectors except poultry & livestock and sugar cooperatives ended the year with lower operating margins.
Lower interest rates made debt financing more attractive. High debt pushed interest expenses to 1980 levels. Interest expenses jumped 12 percent to $634 million. While not a crisis, there should be some concern by cooperatives if interest rates climb.
Most of the increase in interest expense can be attributed to diversified and fruit/vegetable cooperatives. These two groups accounted for two-thirds of the total increase in interest expenses as well as the total increase in debt. Farm supply and sugar cooperatives were the other two commodities with increased interest expenses. Fruit/vegetable, farm supply and sugar cooperatives had a major firm in each sector that pushed interest expenses higher while the others in their respective groups remained consistent. The other sectors all showed lower interest expenses.
Patronage refunds received for all cooperatives fell to a new decade low. Patronage refunds from other cooperatives declined 51 percent, to $48 million. Cotton and dairy cooperatives were the only sectors to receive higher patronage refunds. The major decline occurred in diversified and grain cooperatives.
Interest income for all co-ops also dropped 25 percent, to $69 million. Interest income includes revenue earned on member accounts and finance subsidiaries. For some cooperatives, interest income is substantial and represents up to 7 percent of total revenue. For most co-op, it represents less than 1 percent of total revenue. Every commodity group had lower interest income.
Other income/expense represents earnings or losses associated with joint ventures or unconsolidated subsidiaries. Generally, this income indirectly relates to operations. For all co-ops, other income/expense reached record levels, jumping 9 percent to $305 million. While most sectors showed higher amounts of other income, diversified and fruit/vegetable cooperatives account for 85 percent of the total increase. Only dairy and poultry/livestock cooperatives had lower other income. Usually these other income/expenses are not substantial. However, eight cooperatives would have ended 1999 with a loss if not for income generated by these sources.
Net margins continue to slide
After peaking in 1995, net margins before distribution for the largest agriculture cooperatives turned downward. Figure 2 illustrates this point. While cooperatives generated higher margins on their sales, they were not able to control operating expenses. These expenses eroded their bottom line. Table 5 shows net margins for each commodity group. Sugar co-ops showed higher margins only after suffering losses in the prior two years. They turned their operations around and ended 1999 with $2 million in net margins. However, persistent slumping sugar prices will continue to put pressure on these cooperatives.
Allocated patronage refunds declineMembers did not get back much in the way of allocated patronage refunds in 1999 (Figure 3). Not only were there fewer margins to distribute, but also the largest cooperatives allocated a smaller percent of their income than in past years. Table 6 shows the distribution of net margins by commodity type.
Cooperatives allocated only 64 percent of their net margins to members, compared with 75 percent in the prior years. Income taxes took a larger chunk of net margins in 1999 than in 1998. Retention of a higher percent of net margins was partially to blame. However, nonmember business and other ventures contribute to the increase as well.
Cooperatives also are paying out more dividends. These dividends are not the same as patronage dividends paid on business done with the cooperative, but rather dividends paid on shares owned. Some cooperatives are using more non-patronage sources of equity to help finance their operation and expansion.
Total assets jump as co-ops accumulate more debtDespite slumping sales, cooperatives continue to increase their asset base. Assets for all cooperatives jumped 7 percent in 1999 (Figure 4), ending the year with a value of $2 8.2 billion.
Current assets increased 5 percent, to $13.7 billion. Cooperatives were holding a higher percentage of cash in 1999 than in 1998. While both accounts receivable and inventory increased, their percentage of total assets fell for the fifth straight year. This would indicate that cooperatives are trying to adjust to a declining agriculture economy. The largest increase in assets occurred in investments, and joint ventures accounted for most of it. The largest increasein investments was with non-cooperative- joint ventures and unconsolidated subsidiaries.
Expansion of assets fueled by higher debt
Liabilities financed 80 percent of asset expansion in 1999. Total liabilities climbed 9 percent, to $17.7 billion in 1999. Leading the way was debt. Total short- and long-term increased by $1.3 billion.
Current liabilities increase by 5 percent, to $10.1 billion. Short-term debt and accounts payable were the leading causes of this increase. Those liabilities owed to members -either through cash patronage and other revolving equity or through pool liabilities - fell by $313 million. All this leads to a higher leveraged cooperative and greater influence from outside creditors.
Equity climbs but is overshadowed by debt
Equity for the largest agriculture cooperatives increased 3 percent, to a record high level of $9.9 billion. Every category of equity increased, with member equity having the greatest increase (Figure 5). Member equity, which includes common stock, preferred stock, equity certificates and credit, jumped $286 million, ending 1999 at $8 billion. Unallocated equity increased I percent, to $1.9 billion. However, the increase in equity did not rise as much as the liabilities of these co-ops.
Large co-op performance continues to take beating
The average performance measures for all 100 cooperatives continued to show deterioration over the prior year. The tools developed to analyze the cooperative's financial information include several performance measurements or ratios (Table 9). These measurements are standard ratios found in most financial textbooks.
The current and quick ratios examine the cooperative liquidity. Both ratios show that the average cooperative liquidity has been eroding over the 4 years preceding 1999. The current ratio fell from 1.37 to 1.36 between 1998 and 1999. The quick ratio fell from .76 to .74 during the same period. While this change is relatively small, it does support the assumption stated earlier that most cooperatives are relying more heavily on outside financial sources.
With short-term debt and accounts payable increasing faster than current assets, cooperatives are also relying more on outside sources to finance their day-to-day operations.Other ratios, such as days-to-sell inventory and days-in-accounts receivable, also point to lower liquidity. Days-to-sell inventory represents the average number of days a cooperative holds inventory before marketing it. This ratio increased from 51.6 to 54.1 days. Similarly, days-in-accounts receivable represents the average number of days cash is tied up in accounts receivable. This value increased from 27.8 to 32.1 days. An increase in these values would indicate a less liquid position and a greater need to manage inventory and accounts receivable.
Leverage ratios show the risk associated with financing and the cooperatives' ability to meet their long- and short-term obligations. The debt-to-asset ratio illustrates an asset financing option. In 1999, the debt-to-asset ratio was 0.6, up from 0.59 in 1998. Looking at it another way, members financed only 40 percent of assets directly. Examining long-term financing, we focus on the long-term debt-to-equity ratio. This ratio jumped from 0.5 in 1998 to 0.58 in 1999.
While leveraging a cooperative is not necessarily a bad thing, it does put more risk on the business. The biggest risk comes from a co-op defaulting on its loans. An examination of the times-interest-earned ratio provides a quick look at that scenario. The times-interest-eamed ratio looks at the number of times interest expense is covered by net margins with interest added back. This ratio fell from 5.2 to 3.8 in 1999. While there is no current crisis, the leverage ratio points to a situation where cooperatives are leveraging themselves at a time when their businesses are beginning to show some financial stress.
Activity ratios look at how well the cooperative uses its assets. Again, cooperatives are finding activity ratios sliding. Local-asset-turnover, calculated by taking total revenues divided by local assets, dropped from 3.5 to 3.2. This represents the amount of revenue generated by each dollar invested in local assets. Local assets are total assets less investment in other cooperatives. This seems to indicate that revenues are not keeping pace with the growth in the cooperative's assets. Fixed-asset-turnover also fell, from 15.5 to 14.8.
These ratios indicate cooperatives are losing efficiency in their asset use. In other words, cooperatives are increasing the amount of assets they hold but these assets are not generating the revenues they once did.Profitability ratios, while limited as an absolute indicator, do provide a view of financial strength for the cooperative. We have already seen that cooperatives were less profitable and efficient with their assets. Therefore, we would expect return on assets to fall and indeed that is what we find. Return on total assets, calculated as net margins plus taxes and interest expense divided by total assets, fell from 7.4 to 6.2 in 1999. This ratio focuses on the operation itself without respect to cooperative financing.
Return on member equity looks at the return on member investment after deducting all expenses, including taxes and interest. Here we can see the effects of leveraging on the cooperative. While the return on assets fell 1.2 points, the return on member equity fell from 12.1 to 9. 1. Leverage, in affect, caused a greater proportional drop in member returns. This is the risk of using borrowed capital. Interest must be paid whereas members must take what is left over.
Cooperatives must brace for the future
Overall, cooperatives are finding themselves in a "catch 22" position. With depressed agriculture conditions, cooperatives are finding their bottom line shrinking. Since traditional equity financing for cooperatives relies on their net margins, cooperatives are increasingly turning to outside sources of capital to find their operations. This action puts
further pressure on their expenses, with higher interest payments cutting deeper into their net margins. If cooperatives did not borrow funds, it would be more difficult for them to fund expansion. Putting off these investments will make it hard to increase efficiencies in their operations and thus cut into their future net margins.While it is not time to panic, cooperatives must balance their need for capital with their need for investment. Many cooperatives are taking a proactive approach to funding as well as to how they are conducting their operations. We see various experiments with new forms of funding, but there are no "sliver bullets" for financing cooperatives. Mergers, consolidations and joint ventures (with both cooperatives and non-cooperatives) are other ways cooperatives are trying to streamline their operations. A few questions remain. Will the agriculture economy finally recover enough for the remaining cooperatives to survive? Are these cooperatives in a position to weather a tight agriculture economy or will more change be forthcoming?
