Largest 100 agriculture co-ops
post strong margins in 2004
By David Chesnick,Ag Economist
USDA Rural Development
The rapid rate of change impacting
the nation’s 100 largest agricultural
cooperatives slowed considerably in
2004 from the previous several years. It
was not only a year of stabilization, but
of strong performance, as the top 100
ag co-ops posted record gains in sales
and margins (table 1), based on USDA’s
preliminary survey results. Total operating
revenue for the top 100 jumped 19
percent, to $70 billion. All co-op commodity
groups reported increased revenue.
Dairy and diversified cooperatives
led the way, accounting for two-thirds
of the total revenue increase.
Gross margins were up 28.4 percent,
reaching $6.9 billion. The largest
increase was in the dairy sector, which
accounted for 61.5 percent of the total
jump in gross margins for the top 100
co-ops. Fruit/vegetable and rice were
the only sectors to record a decline in
gross margins. Despite higher sales for
these two sectors, fruit/vegetable and
rice cooperatives paid a higher cost of
goods sold. Thus, it appears likely that
these cooperatives returned more to
their members up front, rather than as
patronage later on.
Operating expenses also jumped 24.2
percent, to $5.4 billion. Dairy co-ops
again had the biggest jump in operating
expenses, which increased $859 million.
That jump accounted for nearly three-fourths
of the top 100 co-ops’ total
increase in operating expenses.
Operating margins soar $1.4 billion
Operating margins for the top 100
shot up a whopping 47.8 percent, to
$1.4 billion. Leading the increase were
poultry livestock cooperatives, a reversal
of fortune from 2003, when poultry livestock cooperatives were the only
commodity group to post operating
losses. In 2004, top 100 cooperatives in
this sector had operating margins of
$238 million, a 634-percent jump from
the year before.
Fruit/vegetable and rice cooperatives
saw operating margins decline from
2003 to 2004, mostly due to lower
gross margins. However, fruit/vegetable
cooperatives still posted solid
operating margins of $204 million.
Rice cooperatives continue to operate
with tight margins.
Despite lower total debt levels, interest
expense for the largest 100 agriculture
cooperatives increased 6.7 percent,
to $425 million. The dairy sector saw
interest expense climb 32.8 percent, to
$71 million. Poultry/livestock cooperatives
also saw interest expense rise from
$9 million in 2003 to $37 million in
2004.
“Other revenue,” including interest
income and revenue from operating
sources not directly related to operations,
was down 37.6 percent, to $232
million. Nearly all co-op commodity
groups except for cotton, diversified
and grain saw other revenue decline.
“Other expenses” were up 62.7 percent,
to $194 million. The largest increase in
other expenses occurred in the diversified
and poultry/livestock cooperatives.
Patronage refunds received from
other cooperatives were up 69.7 percent,
to $165 million. However, 78.3
percent of that total increase was due to
dairy cooperatives, which received
$72.4 million in patronage refunds for
2004. Fruit/vegetable cooperatives
were the only commodity group to see
patronage refunds decline.
The 100 largest ag co-ops suffered a
6.7-percent increase in non-operating
expenses, which ended 2004 at $48 million.
These non-operating expenses or
revenues are usually one-time situations,
such as accounting changes or
gains and losses from discontinued
operations.
Net margins were up 32.7 percent,
to $1.2 billion. Leading the jump were
poultry/livestock cooperatives. They
moved from a net loss of $67 million in
2003 to net margins of $150 million in
2004. The largest decline in margins
occurred in the fruit/vegetable cooperatives,
which declined 28.2 percent, to
$154 million.
Assets up 5.5 percent
Assets for the nation’s 100 largest
agriculture cooperatives were up 5.5
percent (table 2) in 2004. Driving the
increase were current assets, which
climbed 8.3 percent and ended 2004 at
$12.7 billion. Nearly all commodity
groups had an increase in current assets,
with the exception of diversified cooperatives.
Current assets for diversified
cooperatives dipped 0.1 percent, to $3.4
billion.
Cash assets had the largest percentage
increase, jumping 23.4 percent, to
$1 billion. Cotton, dairy, grain, poultry
livestock and sugar cooperatives all
had higher cash balances in 2004.
Poultry livestock cooperatives had the
largest increase, $127 million.
Accounts receivable were up $410
million, to $5 billion. All commodity
groups experienced an increase in
accounts receivable. However, it is
more likely a result of higher sales than
a collection issue. This is illustrated by
the “days sales in accounts receivable”
ratio. This ratio divides accounts
receivable by the average daily sales. A
higher number will indicate the longer
it takes to collect on sales. This average
value for all cooperatives dropped from
28.1 days to 26.8 days.
Inventory for the top 100 co-ops was
up $133 million, to $5.3 billion.
Diversified and grain cooperatives were
the only commodity groups that had
declining inventory levels. As with
accounts receivable, most of the inventory
buildup is likely a reaction to
higher sales.
Total investments were down a
slight, 0.7 percent, to $3.4 billion. The
drop in investments was mostly due to
investments in other cooperatives,
including cooperative banks. Diversified,
grain and poultry livestock cooperatives
accounted for nearly 85 percent
of the total drop in cooperative investments.
By contrast, investments in other
businesses were up 3.2 percent, to $1.4
billion. Dairy, diversified, farm supply
and grain cooperative accounted for
about 99 percent of the total increase in
non-cooperative investment.
Modest investment gain
for co-op fixed assets
Investments in fixed assets were up
0.4 percent for the largest agriculture
cooperatives in 2004. The average
amount of fixed assets purchased was
$12 million, up from $10 million in
2003.
Other long-term assets were up $338
million, to $2.4 billion. Dairy cooperatives
accounted for nearly the total
increase.
Total liabilities were up 5.3 percent,
to $15 billion. Driving the surge were
current liabilities, which were up 9.9
percent, to $9.6 billion in 2004. Total
long-term liabilities were down 1.8 percent,
to $5.7 billion.
Despite higher overall liabilities,
debt was lower in 2004. Short-term
debt was down 2.2 percent, to $2.2 billion,
and long-term debt less current
portion was down 3.8 percent, to $4.5
billion.
The decline in short-term debt was
mostly due to diversified and grain
cooperatives. Diversified cooperatives
had a large increase in their cash flow
from operations and were able to pay
off some of their outstanding short-term
loans. They also appear to have
transferred some of their working-capital
financing to vendors in the form of
higher accounts payable.
Grain cooperatives seem to have
shifted some of their working capital
loans to longer term debt and member
liabilities. All the other commodity
groups had higher working capital
loans.
Accounts payable jumped 10.7 percent,
to $3.5 billion. Most of the
increase was in the dairy and diversified
groups. It is interesting to note the
jump in accounts payable for diversified
cooperatives. Generally, accounts
payable are used for short-term financing
of inventory. However, diversified
cooperatives actually reduced the
amount of inventory carried. This indicates
they were funding more of their
operations with accounts payable. On
the other hand, cotton and sugar cooperatives
were the only commodity
groups with lower accounts payable.
Members payable and patron and
pooling liabilities were up for nearly all
co-op commodity groups. Generally,
these are amounts owed to members patrons for commodities marketed
through the cooperative. Higher sales
of member commodities will correspond
with higher memberpatron
liabilities.
The only exception to this was rice
cooperatives. Despite higher sales,
member/patron liabilities were down
31.6 percent.
Other current liabilities were up 13.8
percent. All commodity groups had
higher “other” current liabilities.
Long-term debt lower
As mentioned earlier, long-term debt
was lower in 2004. All commodity
groups had a large decrease in long-term
debt, other than dairy, farm supply,
grain and rice cooperatives. Grain
cooperatives had the largest jump in
long-term debt — larger than dairy, rice
and farm supply co-ops combined.
Grain cooperatives’ long-term debt
increased $74 million, to $458 million.
Diversified cooperatives had the
largest decline in long-term debt levels,
which dropped $141 million, to $1.7
billion. Diversified cooperatives held
31.7 percent of total outstanding long-term
debt.
“Other liabilities” and deferred credits
were 7.1 percent higher, climbing to
$1.1 billion. Fruit/vegetable cooperatives
were the only commodity group
that saw other liabilities and deferred
credit decline.
Twenty-three top 100 cooperatives
have minority interest. Minority interest
represents the amount of interest
minority-share holders have in a subsidiary
of a cooperative that is the subsidiary’s
majority share holder. In 2004,
minority interest fell 3.8 percent, to
$909 million. Most of this decline is
attributed to diversified cooperatives.
Total equity was up 6.9 percent, to
$9 billion. Thanks to near record earnings,
every commodity group posted
higher equity in 2004 than in 2003.
The largest agriculture cooperatives
retained 70 percent of their after-tax net
margins in both allocated and unallocated
equity. This is up from 62 percent
in 2003.
Allocated equity in the form of stock
and certificates was up 4.4 percent, to
$7.5 billion. The only commodity
group not to show an increase was
grain cooperatives, which saw stock and
certificate values fall 1.8 percent, to
$808 million.
Unallocated equity jumped 22 percent,
to $1.5 billion. Unallocated equity
is generally used as reserve for the
cooperative. In 2004, several fruit/vegetable
cooperatives had net losses along
with some higher taxes. The unallocated
equity absorbed these negative
effects, thus causing a decline of 10.4
percent in the fruit/vegetable unallocated
equity accounts. The other commodity
groups all showed positive
growth in their unallocated equity.
Measuring cooperative performance
By David Chesnick, Ag Economist
USDA Rural Development
This financial analysis views the nation’s 100 largest
agriculture cooperatives, taken as a whole. To get a better
picture of the cooperative landscape, this section will
focus on performance measures. Selected average ratios
are used for this analysis (table 1). The average ratio is
used to mitigate the effects of the largest cooperatives on
the performance measurements. The average ratio gives
equal weight to all cooperatives and provides an additional
perspective on the performance of the nation’s largest
agriculture cooperatives.
Liquidity measurements are used to judge short-term
stability of a business. In this analysis, we use the current
and quick ratios. The current ratio is current assets divided
by current liabilities. This provides an insight into how well
the cooperative can meet its current obligations.
The quick ratio is similar to the current ratio except that
inventories are excluded from the current assets. Inventory
is usually considered the least liquid of these assets. Thus,
excluding them from this analysis may provide a more
accurate picture of liquidity.
There was no change in the average current ratio for all
of the top 100 cooperatives. However, there were variations
within the different commodity sectors. Diversified,
fruit/vegetable, poultry/livestock and rice cooperatives had
some loss in their liquidity, as both current and quick ratios
fell. The one exception was the diversified cooperatives,
which improved their average quick ratio due to lower
inventory levels relative to other current assets. All other
commodity groups showed improved liquidity.
Leverage ratios
Leverage ratios provide insight into the use of debt to
finance the cooperative. Debt-to-equity examines the percentage
of assets held by outside interests. The average
debt-to-equity ratio for the top 100 co-ops remained relatively
steady from 2003. There were variations within the
commodity groups, but the variations were substantial with
the exception of cotton, poultry/livestock and rice.
Substantial changes would be those that move more
than 1 percentage point. Both cotton and poultry/livestock
reduced their reliance on outside financing by 3 percentage
points. Rice co-ops, on the other hand, showed a jump
in their average debt-to-asset ratio, moving from 47 to 51
percent.
Long-term debt-to-equity focuses more on the long-term
stability of a business. For all cooperatives, the average
long-term debt-to-equity improved dramatically, moving
from 81 percent to 67 percent. Grain cooperatives were
the only commodity group to rely more on long-term debt
than on equity. Their ratio went up from an average of 46
percent to 51 percent. This also could be a concern due to
an increasing trend since 2001 to use more debt relative to
equity for long-term financing of the cooperative.
Of course, the use of leverage can be beneficial if the
business can generate more margins than it costs to service
that debt. The times-interest-earned ratio examines
how many times margins can cover interest expense.
While interest expense went up for most of the largest
agriculture cooperatives, net margins seemed to increase
more. The average times-interest-earned ratio increased
from 3.3 times to 3.9 times.
Rice and sugar co-ops had declining average values of
times-interest-earned. Rice showed the largest average
drop, falling from 9.3 to 4.0
Efficiency ratios
Efficiency ratios show how a business uses its assets to
generate sales. The average local asset turnover for the
top 100 increased from 3.2 to 3.5 in 2004. This suggests
that, on average, every dollar invested in assets generates
$3.50 in sales. With the exception of fruit/vegetable cooperatives,
all other commodity groups were able to generate
more revenue on the assets they employed.
Fruit/vegetable cooperatives slipped from 2.4 to 2.2
times. However, this was due to the restructuring of one
cooperative. Excluding it, the average local asset turnover
actually increased from 3.5 to 3.6 times.
Fixed asset turnover focuses specifically on how well
the cooperative business uses its fixed assets to generate
sales. Similar to the average local asset turnover, higher
sales lifted most fixed asset turnover ratios. The average
fixed asset turnover for the top 100 cooperatives rose from
16.2 to 17.9 times. Only cotton cooperatives had a lower
ratio. Cotton cooperatives’ average fixed asset turnover
fell from 22.2 to 21.1 times.
One cotton cooperative made a large purchase of fixed
assets in 2004. So this decline may be temporary if the
investment can generate higher sales in future years.
Profitability ratios
While cooperatives are generally considered “not for
profit” enterprises, they do need to generate enough margins
to compensate for their members’ investment. Therefore, profitability ratio trends that show margins eroding
can indicate that a cooperative is heading for trouble.
The gross margin percent gives an indication of the pricing
strategy of the cooperative. If a marketing cooperative is
paying too much for its member’s product or a supply cooperative
isn’t charging enough for its products, there may not
be enough gross margins left to cover operating expenses.
The average gross profit margin of the top 100 co-ops
fell from 14.7 percent to 13.9 percent in 2004. This is a good
time to point out the influence of some of the largest cooperatives
within the top 100 database. Looking at table 1,
the increase in total sales for all cooperatives exceeded
the increase in total cost of goods sold. This resulted in a
cumulative gross profit margin increase from 9.1 percent to
9.8 percent in 2004. This is in direct conflict with the average
gross profit margin.
The top 10 cooperatives generate 58 percent of total
operating revenues for the top 100. Therefore, while the
overall picture has been rosy, there is cause for concern
with the top 100 cooperatives. The average gross profit
margin has been slipping
during the last 5 years. In
2000, the average gross profit
margin was 15.2 percent
and has declined almost
every year since then.
Looking at the gross margins
trend doesn’t tell the
whole story. While it is true
that the gross margins have
declined over the past 5
years, if the cooperatives are
becoming more efficient in
the use of their assets and
other inputs, the lower gross
margins wouldn’t hurt a cooperative. Therefore, members
could benefit upfront from the pricing strategy of the cooperative.
Higher efficiencies will show up in higher net margins.
The net margins percent looks at net margins divided by
total operating revenue. For the largest agriculture cooperatives,
the average net margin percent fell 0.1 percentage
point, to 1.6 in 2004. Fruit/vegetable, rice and sugar co-ops
averaged the largest decline in net operating margins, each
declining between 1 and 2 percentage points. However,
these three commodity groups experienced a substantial
jump in net margins in 2003. The slide in 2004 still left them
with an average ratio of just under 2 percent, which is higher
than the overall average ratio for the top 100.
Poultry/livestock co-ops had the largest increase in net
profit margins. They had a net loss of 1.1 percent in 2003,
but improved to 2.1 percent net margin in 2004.
Return on assets & equity
Return on assets looks at net margins before interest
and taxes are deducted. This looks at the total return for
all interested parties, including debt holders and government.
The average return on assets for all top 100 ag
cooperatives increased from 6 percent in 2003 to 6.3 percent
in 2004. However, fruit/vegetable, rice and sugar all
had declining average return on assets.
The fruit/vegetable co-op sector fell from an average of
14 percent to 8.3 percent, while rice fell from 10.9 percent
to 6 percent in 2004. These two commodity groups had the
largest average decline. Sugar fell from 5.6 to 4.8 percent.
There was a substantial jump in the average return on
assets for cotton and poultry/livestock cooperatives.
Cotton cooperatives increased from an average of 13.3 percent
to 17.3 percent, while poultry/livestock cooperatives
increased from 0.7 percent to 7.4 percent.
Return on member equity measures the return only to
equity investors. In other words, interest and taxes are
deducted from net margins.
The difference between the
return on assets and return
on member equity illustrates
the effect of leverage.
For example, the average
return on assets in
2004 was 6.3 percent while
the average return on
member equity was 11.8
percent. This 5.5 percent
difference represents
returns to members for
using outside financing
where the cost of borrowed funds was less than the
returns generated from those funds. The average return on
member equity fell from 13.3 percent in 2003 to 11.8 percent
in 2004.
Co-ops in good shape
Overall, the largest agriculture cooperatives are in good
shape. There has been some decline in their gross margins,
but efficiencies have been able to keep net margins
from sliding too far. The level of debt has been reduced.
However, the use of credit and member payables helped
fund operations. This leverage has given most members of
the largest agriculture cooperatives higher returns on their
investment than they would have received if they had been
able to invest the total amount. Nevertheless, it is important
to keep in mind that much of the outside funding is located in
the current account. As long as operations continue to show
improvement, this should not be too much of a concern.
However, if operations should fall short for some cooperatives
within the next year or two, there could be a further
shake up in the top 100 agriculture cooperatives.
