University of Wisconsin Center for Wisconsin
Rural Cooperatives, November/December 1998, pp. 32-35.
Published by the Rural Business and Cooperative Development Service 

Supply Co-ops' Income Rebounds

by 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 coops 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 part-time 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.

Table 1- Farm supplies sold and grain marketed by cooperatives, 1996 and 1997
Item Total Average, 1996 Total Average, 1997 Change

-------------------Dollars-------------------
Percent
Farm supplies sold


Feed 1,206,601 1,325,427 9.8
Seed 137,056 146,852 7.1
Fertilizer 1,405,797 1,464,016 4.1
Crop protectants 1,027,069 1,100,776 7.2
Petroleum products 1,981,355 2,157,189 5.1
Other(1) 760,689 799,922 7.3
Total
6,518,520 6,993,422 7.3




Farm products marketed


Grain and other 6,913,793 6,336,553 -8.3
Total
6,913,793 6,336,553 -8.3




Total sales 13,432,360 13,330,034 -0.8
(1) "Other" includes packaging supplies, farm machinery and equipment, meat and groceries, hardware, chicks, and other supplies not separately classified.
Table 2- Compared abbreviated income statement, 1996 and 1997
Item Total Average, 1996 Total Average, 1997 Change

-------------------Dollars-------------------
Percent
Sales 13,432,360 13,330,034 -0.8
Cost of goods sold 12,112,621 11,989,094 -0.1
Gross margin
1,319,639 1,340,940 1.6
Service and other income 393,511 479,814 21.9
Gross revenue
1,713,150 1,820,754 6.3
Expenses


Salaries and wages(1)
821,088 879,703 7.1
Administrative(2)
72,465 75,450 4.1
General(3)
333,985 367,739 10.1
Depreciation
202,951 217,831 7.3
Interest
144,461 110,285 -23.7
Bad debts
14,464 22,398 54.9
Total Expenses 1,589,414 1,673,406 5.3




Local savings 123,938 147,348 18.9
Patronage refunds received 224,560 231,160 2.9
Savings before income taxes 348,498 378,508 8.6
Less income taxes
24,680 31,143 26.2
Net savings 323,818 347,365 7.3
(1) Salaries and wages include payroll taxes, employee insurance, unemployment compensation, and pension expense.
(2) Administrative costs include professional services, office supplies, telephone, meetings and travel, donations, dues and subscriptions, directors' fees and expense, and annual meetings.
(3) General expenses include advertising and promotion, delivery (auto and truck), insurance, property taxes, other taxes and licences, rent and lease expense, plant supplies and repairs, office supplies, repair and maintenance, utilities, miscellaneous, and other.
Table 3- Comparable balance sheet, 1996 and 1997
Item Total Average, 1996 Total Average, 1997 Change

-------------------Dollars-------------------
Percent
Assets


Current Assets


Cash and equivalents 308,565 377,229 22.2
Accounts receivable 672,576 703,388 4.6
Inventories - total 1,442,528 1,323,958 -8.2
Grain
639,570 500,010 -21.8
Farm supplies
802,958 823,948 2.6
Prepaid expenses 72,461 70,086 -3.3
Other current assets(1) 376,769 273,014 -35.5
Total current assets
2,872,513 2,747,676 -4.3




Investments and other assets


Investments -


Other cooperatives
1,050,320 1,164,761 14.2
Bank for cooperatives
67,116 72,586 8.2
Total
1,117,361 1,237,347 10.7
Other assets(2) 87,020 99,420 14.2
Total investments and other assets
1,204,381 1,336,766 11.0




Property, plant, and equipment


At cost 3,493,638 3,768,176 7.9
Less: Accumulated depreciation
2,118,906 2.273.229 7.4
Net property, plant, and equipment 1,374,732 1,494,947 8.7
Total assets 5,451,626 5,579,390 2.3




Liabilities and Owner's Equity


Current Liabilities


Current portion of long-term debt 89,515 85,685 -7.3
Notes payable-seasonal 773,267 552,256 -28.6
Accounts payable 335,756 350,219 4.3
Patron credit balances and other liabilities 723,077 785,242 8.6
Accrued taxes 33,191 33,574 1.2
Accrued expenses 82,288 91,364 11.0
Patronage refunds (cash) 77,559 85,615 10.4
Total current liabilities
2,114,653 1,983,954 -6.2
Long-term debt 454,974 515,223 13.2
Total liabilities 2,569,627 2.449,177 -2.7




Owners' Equities


Allocated equity 2,167,068 2,304,951 6.4
Unallocated equity 714,931 775,261 8.4
Total owners' equity 2,881,999 3,080,213 6.9




Total liabilities and owners' equity 5,451,626 5,579,390 2.3
(1) "Other" current assets include prepaid expenses and other receivables.
(2) "Other" assets include investments, goodwill, notes receivable, etc.

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.

Figure 1
Total Assets

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 m 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 to pay 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.

Figures 2-4 (Left graph) Current and quick ratios; (middle graph) Debt-to-equity and debt ratio; (right graph) Times interest earned

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. This 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 10year 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.

Figures 5-7
(Left graph) Total and fixed asset turnover; (middle graph) Gross margin percent; (right graph) Return on asset and allocated equity

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