Measuring top 100
co-op performance
By David Chesnick
USDA Rural Development
e can take a closer look
at what the numbers in
the preceding article
(page 25) reveal about
the financial performance
of the nation's 100 largest agricultural
cooperatives by using table 1
(page 29). In this analysis, average performance
measurements are used.
This “averaging” will, in effect, lower
the influence of the largest cooperatives
of the top 100 and reflect less
“swing” between commodity groups.
The average ratio generated gives
equal weight to all cooperatives and
provides an additional perspective on
the performance of the nation’s largest
farmer cooperatives.
Average liquidity rose in 2003 for
the largest cooperatives. While the
average current ratio for all the top 100
edged up from 1.37 in 2002 to 1.38 in
2003, the average quick ratio jumped
from .74 to .78. This indicates better
inventory control by cooperatives. An
increase in cash balances helped reduce
the amount of debt and reliance on
outside sources for working capital.
However, not all commodity groups
were able to generate higher liquidity.
The better performers were concentrated
among diversified and poultry/
livestock cooperatives, which showed a
tremendous increase in both their
average current and quick ratios. Both
commodity groups showed a broad
decrease in debt and an increase in
cash balances.
On the other hand, cotton cooperatives
had a build-up of inventory. This
inventory appears to be financed mostly
by working capital loans, since there
was a net outflow of cash from operations.
Thus, the average liquidity ratios
for cotton cooperatives were down.
Leverage ratios examine the use of
debt. One of the most important is the
debt-to-assets ratio, which illustrates
outside ownership in a business’ assets.
The average debt-to-asset ratio for the
top 100 co-ops remained fairly stagnant
in 2003, at 61.4 percent.
The highest leveraged commodity
groups were sugar, poultry/livestock
and diversified, with ratios of more
than 65 percent. The least leveraged
commodity groups were cotton and
rice cooperatives. Rice cooperatives
had a debt-to-asset ratio of 47.5 percent,
the only group to have a debt-toasset
ratio of less than 50 percent.
Long-term debt-to-equity
falls, but still too high
Long-term debt-to-equity examines
the long-term stability of a business.
The average long-term debt-toequity
ratio fell from .87 to .78 in
2003. This signals less reliance on
debt and more equity for long-term
financing.
However, a long-term debt-to-equity
ratio of .78 is still relatively high compared
to the ratio between .5 and .6
recorded from 1999 to 2001. Cotton
and rice cooperatives do not use much
long-term debt in their capital structure.
Due to a reorganization of one cooperative,
the fruit/vegetable group saw its
average long-term debt-to-equity ratio
decline from 2.74 to .65. Excluding that
one cooperative, the average ratio still
improved, from .75 to .69.
Poultry/livestock had a tremendous
jump, from 3.12 to 7.20 in average longterm
debt-to-equity. Much of this jump
resulted from a transfer of short-term to
long-term debt. Sugar cooperatives are
also highly leveraged, with an average
long-term debt-to-equity ratio of 1.18.
Being leveraged, in and of itself, isn’t
a problem. It becomes a problem when
the operations do not generate enough
margins to cover interest expense,
resulting in default on the loans.
Times-interest-earned is a ratio that
looks at how many times margins can
cover interest expense. In 2003, the
largest agriculture cooperatives had an
average times-interest-earned ratio of
12.45, down from 14.32 in 2002. Much
of this decline can be attributed to the
dairy sector. However, the dairy cooperatives
fall from an average of 68.06
to 56.27 in 2003 should not be a cause
for concern.
What may be a cause of concern for
some sugar and poultry/livestock coops
is having both low times-interestearned
values and high long-term
debt-to-equity values. Poultry/livestock
cooperatives had an average ratio
of .72 while sugar co-ops had a ratio of
2.14. On a positive note, sugar cooperatives
have shown improvement on
this score in each of the past five years.
Efficiency ratios examine how a
business uses its assets to generate sales.
The average local asset turnover for the
top 100 increased from 3.10 to 3.14
times in 2003. Most of the commodity
groups had a ratio of between 2 and 3.
Cotton, dairy and sugar co-ops were
the exception. Both cotton and dairy
cooperatives had a declining localasset-
turnover ratio. However, both
were above the average.
Cotton cooperatives fell from 4.69
to 3.91 and dairy cooperatives fell from
6.01 to 5.49. Sugar cooperatives operate
in a heavily capitalized industry, so
their turnover ratios reflect this with
average lower values. This will be more
evident in their fixed-asset-turnover
ratio. The average total-asset-turnover
for sugar cooperatives was .96 in 2003.
The average fixed-asset turnover for
all of the top 100 was up slightly from
2002, from 14.57 to 14.66. Most commodity
groups had a turnover rate that
ranged from 10 to 15 times. The more
processing a cooperative performed,
generally the lower the turnover rate.
As mentioned earlier, sugar cooperatives
are highly capitalized and their
average fixed-asset turnover was 1.92
in 2003. Despite the low value, they
showed a strong improvement from
2002, when the ratio was 1.75. Other
commodity groups which do less processing
— such as poultry/livestock
cooperatives — have higher fixed asset
turnover ratios. In 2003, poultry/livestock
co-op turnover ratio was 31.43,
up from 30.30 in 2002.
Dairy cooperatives also had a high
turnover value of 29.21 in 2003.
However, there was a high variation
level between dairy cooperatives,
which ranged from a high of 175.28
times to a low of 4.83 times.
Gross margins reflect
pricing strategy
While most cooperatives do not have
profit as their primary objective, they
still must generate margins in order to
continue operations. Profitability ratio
trends indicate whether a cooperative is
headed for failure.
Gross margin percent generally
measures pricing strategy of the cooperative.
In other words, it looks at margins
generated after the cost of goods
sold is subtracted from total operating
revenues. If a marketing cooperative is
paying too much to its members up
front for their commodities, the gross
margins left may not be enough to
cover expenses. So, looking at changes
in gross margins as a percent of total
revenue can help determine a co-op’s
pricing strategy.
The average gross margin percent
for the largest agriculture cooperatives
in 2003 was 14.29. This value has been
declining steadily from a high in 1999
of 16.48. Most of the commodity
groups tend to have a ratio between 10
and 20. However, co-ops that perform
more processing tend to generate higher
expenses and will require higher
gross margins to cover those expenses.
Changes in gross margin percent
are only half the story. If cooperatives
are becoming more efficient in their
operations by lowering operating
expenses, they will not need higher
gross margins. Therefore, members
can benefit directly on the front end by
receiving higher prices for their commodities
they market through the
cooperative or pay lower prices for
inputs. The gain in efficiencies will
manifest itself in net margins. This is
where net margin percent will show
the other half of the picture.
The average net margin percent for
the largest agriculture cooperatives was
up from 1.36 in 2002 to 1.68 in 2003.
Leading the increase were cotton,
fruit/vegetable, rice and sugar cooperatives.
Fruit/vegetable cooperatives
enjoyed the largest jump in their average
net margin percent, which
increased from 1.52 to 3.99 in 2003.
Poultry/livestock cooperatives, on
average, had the largest decline, falling
from 2.23 to .56 in 2003.
Return on assets
The return on assets (ROA) looks at
net margins before interest and taxes
are deducted. This attempts to look at
all returns for interested parties. In
2003, ROA increased from 5.62 to
5.98 for the top 100.
Due to a major co-op reorganization,
fruit/vegetable cooperatives
showed a surprising jump in their
ROA, increasing from 7.91 to 13.38.
Cotton and rice cooperatives also
had ROA of over 10 percent in 2003.
All other commodity groups had
ROA between 5 and 6 percent.
Poultry/livestock cooperatives were
an exception, with ROA falling from
4.95 percent in 2002 to 2.69 percent
in 2003.
Return on member equity (ROME)
measures returns attributed only to
equity investment. This excludes
interest and taxes from net margins.
The difference between ROA and
ROME illustrates the benefit or curse
of leverage. ROME for the top 100
co-ops jumped from 5.28 percent, to
13.09 percent.
With the exception of dairy and
grain cooperatives, all other commodity
groups shared in the higher
returns to their members in 2003.
The largest increase in ROME
occurred in the fruit/vegetable and
poultry/livestock cooperatives. In
2002, both of these commodity
groups had a negative ROME while
both had positive ROME in 2003.
Fruit/vegetable cooperatives had the
most dramatic increase, jumping from
-11.43 percent to 38.84 percent in
2003. Declining values were felt in
both the dairy and grain commodity
groups in 2003.
By Dave Chesnick,
USDA Rural Development
