Supply Co-ops' Income Rebounds

Despite lower grain prices, farm-supply co-ops report increased savings, service income and patronage refunds

Beverly L. Rotan
USDA Agricultural Economist

Local farm supply cooperatives experienced increased earnings and savings in 1997. After falling in 1995 and 1996, savings by local cooperatives rebounded strongly in 1997, increasing almost 20 percent. This increase, coupled with higher patronage refunds, helped boost 1997 net income for local supply co-ops by more than 7 percent since 1996, to an average of $350,000. This gain came despite sales levels that were down slightly, 0.8 percent.

Information for this study was collected from 386 local cooperatives handling farm supplies, which supplied detailed financial information to Rural Business-Cooperative Service (RBS). Many of the cooperatives provide grain storage and sales for their members. Most respondents were small farm supply cooperatives, with sales averaging less than $2.5 million. The average sales for the overall sample was $13 million, the average being boosted by the largest cooperatives, which tend to be the co-ops that also sell grain.

Overall, farm supply sales increased 7 percent. The largest growth by supply category was: feed, 10 percent; petroleum, 9 percent; and crop protectants and seed, 7 percent each. However, this increase was offset by lower grain prices, which caused grain sales to decline 8 percent to just over $6 million (Table 1). Income for services-such as grain handling and storage, trucking, drying, fertilizer and crop protection application, soil analysis, feed blending, etc.-rose about 22 percent.

Although cost of goods sold decreased slightly more than the decrease in sales, they are high for these cooperatives, averaging almost 90 percent of net sales. Most expenses grew over last year (Table 2). Total expenses increased 5 percent. Employee expenses increased 7 percent, or by about $59,000. Much of the employee expense increases was due to slight additions in the number of permanent and employees and increases in the cost of benefits. Interest expenses fell almost 24 percent due to decreased use of seasonal debt.

Patronage refunds from regional cooperatives are a very important source of income, comprising 67 percent of local net income. These refunds averaged $231,160.

Coupled with the large increase in local income, net income rose 7 percent.

Assets continue to increase, growing 2 percent (Figure 1), mainly due to the increases in both investments, and property, plant and equipment. Investments grew by 11 percent and property, plant and equipment increased by 9 percent (Table 3). The use of seasonal debt fell by almost 30 percent. This fall was strongly influenced by decreased grain inventories. Long-term debt continued to increase. Owner equity remains strong, financing 55 percent of total assets.

Most ratios used have both a financial and operational impact and measure various performance levels of cooperative operations. To ensure a complete and accurate financial analysis, it is important to look at a group of financial ratios over a period of time and/or evaluate other cooperatives or companies with similar sales and functions in the geographical area.

Liquidity ratios
Figure 2 shows the current and quick ratios for surveyed cooperatives. The current ratio was relatively constant for the 10-year (1988-97) period except for a slight decrease in 1993. The total current assets decreased 4 percent and total current liabilities dropped 6 percent. From 1996 to 1997, three of the elements of current assets grew-accounts receivable, 4.6 percent; cash and cash equivalents, 22 percent; and farm supply inventories, almost 3 percent-and three declined-grain inventories, prepaid assets, and other assets, which were down 22, 3, and 36 percent, respectively. Farm supply inventories were up 3 percent while grain inventories dropped (Table 1).

Selling additional capital stock, borrowing additional long-term debt, or disposing of unproductive fixed assets and retaining proceeds can improve this ratio if it falls below one (1). Current liabilities also may be reduced by retaining a greater portion of allocated savings (reducing the cash portion). A high current ratio is financially favorable, indicating the ability to pay current liabilities from the conversion of current assets into cash. Operationally, a high current ratio increases operating freedom and reduces the probability of bill-paying difficulty from write-downs of accounts receivable or inventory.

The quick ratio went up slightly, from .68 to .72 percent. Besides total current assets and liabilities, inventory is an added variable in this ratio.


Leverage ratios
Generally, short-term debt is used to finance inventories. This debt went down 29 percent from 1996 to 1997. Debt ratio decreased from .47 to .45 because assets increased only 2 percent while debt decreased about 29 percent. Reducing debt, increasing savings, or financing a greater portion of assets with working capital may improve this ratio.

Debt to total equity ratio increased from.11 to .19 (Figure 3). Long-term debt increased and short-term debt decreased 29 percent. This may indicate some short-term obligations were being carried and converted to long-term debt. When low, this ratio has an impact on the cooperative by making it independent from outside sources of funds in relation to owners' equity or may, unfavorably, show a low return on equity.

Operationally, a low ratio tends to reduce interest cost. This ratio may be improved by reducing long-term debt, disposing of unproductive assets, and using proceeds to liquidate debt; accelerating payments on long-term loans; increasing local equity by generating higher levels of local savings; slowing equity retirement programs; selling additional capital stock; or retaining more allocated savings.

Times interest earned ratio fell about one point from 1996 to 4.41 in 1997 (Figure 4). When this ratio is more than one (1), it indicates the ability of current earnings topay current interest expenses. Lending institutions are more apt to lend money to cooperatives in such cases. Subsequently, a bank may lend funds for capital improvements more readily at lower interest rates.This ratio may be improved by collecting old receivables, improving inventory turnover, disposing of assets and reducing debt with proceeds, or reducing debt with working capital. Financially, a high ratio impacts the return on equity and tends to increase it. Over time, a high ratio will reduce interest cost.

Activity ratios
Fixed asset turnover was 8.93 in 1997.Two elements, net investments in fixed assets and total sales were up at 9 percent while sales went down .8 percent 1995. Figure 5 depicts this ratio for the 10-year period. This ratio reflects cooperative conditions. An abnormally high ratio usually indicates aging and nearly depreciated fixed assets or the leasing of property and equipment. A high ratio also indicates use of assets, reduced financial leverage, and/or increased return on equity. It may also reflect reduced depreciation and interest costs. Ms ratio may be improved through investment in fixed assets; redesign of production, selling, or office facilities to increase the sales generating potential of existing space and equipment; sales of idle machinery and parts, unused vehicles, and unnecessary equipment; and improved inventory turnover.

Total asset turnover ratio has turned downward in 1997 from 2.47 to 2.39. This ratio is similar to the fixed asset turnover ratio. One element of this ratio increased (total assets) and the other decreased (total sales).

Profitability ratios
Gross profit margins increased in 1997 to 10.06. Figure 6 displays gross profit margins from 1988 to 1997. Within the 10-year period, the ratio ranged from 9.69 to 11.90 percent. Both sales and cost of goods sold were up. As a proportion of the sales, cost of goods represented 90 percent of all sales in 1996 and 1997. Return on total assets includes net savings before interest and income tax, and total assets. This ratio measures performance and is not sensitive to the leverage position of the cooperative. During 1996 and 1997, this ratio remained about the same at 9 percent (Figure 7). Net savings increased 7 percent while interest expense decreased 24 percent. Over the 10 years, this ratio was highest in 1989 and 1996. This ratio has ranged from 7.39 to 9.41.

The ratio for the return on total equity increased less than 1 point in 1997, remaining relatively the same over the two years at 11.2. This is an important measure of profitability because it is sensitive to the amount of debt capital in the cooperative. Both net savings and total equity increased 7 percent from 1996 to 1997. This ratio is best used in conjunction with other measures such as the return on total assets because it may indicate positively as a decrease in financial leverage or negatively be a symptom of low-investment adequacy.

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