University of Wisconsin Center for Wisconsin
Rural Cooperatives, November/December 1999, pp. 30-34.
Published by the Rural Business and Cooperative Development Service 

Sales rebound for largest farmer co-ops, but net margins decline

By David S. Chesnick

Ag Economist
USDA Rural Development

Mergers and consolidations continue to dominate the cooperative landscape. The reasons behind each are varied; however, cooperative leaders are continually searching for ways in which their organizations can serve a changing membership through cost-effective services. And while some of the mergers paid dividends this past year, others have not yet reached their potential. Let's review the statistics behind the performance of this changing cooperative landscape.

The largest cooperatives posted a 2.4-percent increase in sales. Sales revenue for the largest 100 agriculture cooperatives ranged from $68 million to $8.8 billion. The top five cooperatives contributed 48 percent of total sales in 1998, up from 46 percent in 1997. Combined sales for all 100 of the largest cooperatives totaled $67.9 billion (table 1). However, not all cooperatives experienced higher sales in 1998. Only 45 out of the top 100 cooperatives had an increase in sales, and 58 percent of that increase was attributed to a single cooperative.

Higher sales show promise

Figure 1 illustrates the source for the combined revenues of the largest agricultural cooperatives. Marketing revenue jumped 8.6 percent to $51.1 billion. Yet this increase should be taken with a grain of salt. Most of it was due to the push of one industry—dairy (table 2). After showing tremendous growth throughout the mid-1990s, farm supply sales fell dramatically in 1998. Combined farm supply sales for all cooperatives fell $2.4 billion to end the year at $16.8 billion. Leading the decline was petroleum, which accounted for more than half of the total drop in sales of farm supplies. Declines in fertilizer and feed sales were other major contributors. Only seed sales showed increases.

Dairy cooperatives were heavily involved in consolidation activities these past few years. These consolidations proved beneficial, with total sales jumping 29 percent to $18.1 billion in 1998. This was the only industry with significant gains in sales.

Grain cooperatives, on the other hand, experienced higher volumes of grain that put downward pressure on prices. Yet the increase in volume was not enough to offset the decline in prices, pushing sales down seven percent from 1997 to $4.1 billion in 1998. Farm supply sales for grain cooperatives fell three percent to $2.3 billion, dropping total sales to $6.3 billion, a 6- percent decrease.

Poultry and livestock cooperatives also felt the pressure of lower prices. Sales of these commodities dropped by 19 percent to $499 million. Rice cooperatives saw mixed results. Strong prices early for some varieties of rice showed promise. However, later in the year, rice cooperatives ended up with heavy stocks pushing down prices for other varieties. Over all, rice cooperatives ended the year with total marketing sales of $1.2 billion, down four percent from 1997.

Sales for cotton, sugar and fruit & vegetable cooperatives held relatively steady during 1998. Cotton prices were down slightly while quantity sold increased, leaving sales up 0.1 percent at $2.6 billion. Fruit & vegetable sales were mixed with fruit prices up and vegetable prices down. The net result brought total sales for fruit & vegetable cooperatives down 0.4 percent, ending 1998 with $6.4 billion in sales. Sugar sales were up one percent to $1.1 billion.

Diversified cooperatives increased their marketing sales, but a decline in their farm supply sales pulled total sales revenue down one percent to $17.2 billion. Total sales for the farm supply commodity group followed the overall trend of farm supply sales and dropped 11 percent to $14.6 billion.

Other operating income for the largest agriculture cooperatives was down 3.7 percent to $620 million. Other operating income usually consists of services associated with storage, hauling, and handling member's products, and spraying, spreading, and scouting members' fields. Most commodity groups had declining service revenue. The exceptions were farm supply and sugar cooperatives; these two groups had a combined increase in service revenues of $25 million.

Cost of goods sold for the largest agriculture cooperatives was $62.2 billion in 1998, an increase of 2.4 percent. The change in cost of goods sold closely followed the change in sales for each commodity group. Yet the net effect on gross margins was an increase of three percent. Cost of goods sold increased by $1.4 billion compared to an increase of $1.6 billion for total operating revenues. Gross margins for all of the largest cooperatives increased $181 million to end 1998 at $6.3 billion.

Gross margins for cotton, dairy, fruit & vegetable, grain, and sugar cooperatives all increased. The surprising group was grain cooperatives. Despite lower sales revenue, gross margins were up 20 percent, reaching $486 million—the highest gross margin in five years. Gross margins for sugar cooperatives also hit a five-year high, ending 1998 up five percent at $262 million. Dairy cooperatives had the second highest percentage increase of 19 percent, ending the year at $ 1.1 billion. The cotton and fruit & vegetable co-ops each increased, at 10 percent and 4 percent, respectively, to end the year with gross margins of $183 million and $1.7 billion.

Conversely, farm supply and diversified cooperatives hit their lowest gross margins in the five-year period. Farm supply cooperatives' gross margins dropped nine percent to $909 million, while diversified cooperatives fell five percent to $1.3 billion. The poultry and livestock and rice co-ops also had lower gross margins. Poultry and livestock margins fell 10 percent, to $15 million, while rice margins dropped 1 percent, to $328 million.

Expenses jump

Operational efficiencies gained in 1997 did not carry over to 1998. Operating expenses for all the largest agricultural cooperatives jumped 7.2 percent to $5.3 billion in 1998. The increase more than offset any gains made in gross margins, and the net effect pushed down net operating margins by $176 million—a 15-percent drop. Wages were not the same driving factor in increased operating expenses as they were in 1997. In 1998, labor expenses increased only 3 percent.

Table 1 - Consolidated Statement of Operations, 1997-98, Top 100 Cooperatives
Operating Statement 1998 1997

Thousand Dollars
Difference % Change
Change Revenues

Marketing 51,135,466 47,077,126 4,058,340 8.62
Farm Supply 16,760,654 19,175,428 (2,414,774) (12.59)
Total Sales 67,896,120 66,252,554 1,643,566 2.48
Other Operating Revenues 620,499 644,696 (24,197) (3.75)
Total Operating Revenues 68,516,619 66,897,250 1,619,369 2.42
Cost of Goods Sold 62,232,480 60,794,107 1,438,373 2.37
Gross Margin 6,284,139 6,103,143 180,996 2.97


Operating Expenses 5,299,150 4,942,304 356,846 7.22
Net Operating Margins 984,989 1,160,839 (175,850) (15.15)

Other Revenues (Expenses)

Interest Expense (594,458 (527,142) (67,316) 12.77
Interest Revenue 103,771 119,415 (15,644) (13.10)
Other Income 342,517 181,499 161,018 88.72
Other Expenses (68,555) (35,218) (33,337) 94.66
Patronage Revenue 96,057 282,511 (186,454) (66.00)
Net Margins from Operations 864,321 1,181,904 (317,583 (26.87)
Non-Operating Revenue (Expenses) (12,066) 10,331 (22,397) (216.79)
Net Margins 852,255 1,192,235 (339,980) (28.52)

Distribution of Net Margins

Cash Patronage Dividends 278,491 371,889 (93,398) (25.11)
Retain Patronage Dividends 379,280 514,252 (134,972) (26.25)
Nonqualified Noncash Patronage 20,115 31,083 (10,968) (35.29)
Dividends 38,486 27,310 11,176 40.92
Unallocated Equity 56,974 112,465 (55,491) (49.34)
Income Tax 78,909 135,236 (56,327) (41.65)
Total Distribution 852,255 1,192,235 (339,980) (28.52)

(graph) Sources of operating revenue

All commodity groups experienced at least some increase in expenses relating to operations. However, some groups overcame the increases. Cotton, dairy, and grain cooperatives had enough gain in their gross margins to absorb increases in expenses. These cooperatives ended the year with higher net operating margins, reversing the decline witnessed in the past few years. Net operating margins for grain cooperatives increased a healthy 108 percent, $90 million at the end of 1998. Cotton cooperatives net operating margins increased five percent to $78 million, while dairy cooperatives jumped 28 percent to $216 million during the same period.

Diversified, farm supply and rice cooperatives compounded their problems with both lower gross margins and higher operating expenses. The five-percent increase in operating expenses, along with a decrease in gross margins, produced a 46-percent decline in net operating margins for diversified cooperatives. These cooperatives ended the year with net operating margins of $146 million, the lowest amount in five years. Farm supply cooperatives also ended the period with five-year lows in net operating margins. Higher labor expenses for farm supply cooperatives pushed operating expenses to their highest levels in the five-year period. As a result, net operating margins dropped 35 percent to $230 million. Meanwhile, net operating margins for rice cooperatives fell 14 percent to $32 million.

Poultry and livestock cooperatives were the only groups that lowered their operating expenses. These cooperatives lowered operating expenses 0.2 percent from their highest level in 1997. However, as a group, poultry and livestock cooperatives still had operating losses of nearly $3 million.

Other income and expenses lower net margins

Income and expenses indirectly related to the day-to-day operations fall into the category of "other income and expenses." These include interest income and expense, gains/losses on the sale of equipment, patronage refunds from other cooperatives, and any other income/expense not related directly to operations. These other incomes and expenses often relate to financing and investing activities of the cooperative.

After abating in 1997 total debt levels jumped six percent in 1998. This increase in debt caused interest expenses to jump 13 percent to $594 million, the highest level in five years. Most of the increases in interest expenses occurred in the dairy, diversified and farm supply cooperatives. Grain, poultry and livestock, and fruit & vegetable cooperatives also paid more for interest in 1998, but those expenses did not increase by the magnitude of the aforementioned cooperatives. On the other hand, cotton, rice and sugar cooperatives lowered their interest expenses.

Interest earned on member accounts and earnings from finance subsidiaries are generally accounted for as interest income. Interest income decreased 13 percent from 1997 to $104 million. This decline was due mostly to a single cooperative, which substantially lowered its investment balances. The excess cash generated from the sale was used for capital expenditures. Excluding that one cooperative, the total balance of interest income remained fairly constant in all cooperative categories.

Other income/expenses represents earnings or losses associated with the operations of joint ventures or unconsolidated subsidiaries. This income is usually indirectly related to operations. Along with increased merger activities, joint ventures with other cooperatives and investor-oriented firms are more popular among the largest cooperatives. This is evident by increases in revenues in this area. Income from these other activities jumped 87 percent to end the year at $274 million, up from $146 million in 1997. Most of this increase, however, was the result of two cooperatives, which accounted for 81 percent of the overall change.

With net margins as a percent of total revenues running at 1.2 percent, patronage refunds from other cooperatives can play a crucial role in determining whether a cooperative shows a gain or a loss. Seven cooperatives would have had a loss without patronage refunds, up from six in 1997. Generally, cooperatives cannot influence the amount of patronage they receive each year and they should rely on their own operations and not others to generate margins.

Patronage refunds from other cooperatives fell to their lowest level in the past five years. They dropped 66 percent to $96 million. The diversified and farm supply cooperatives were the hardest hit and accounted for nearly 95 percent of the $186 million decline. All the other commodity groups changed little from 1997. On a bright note, none of the diversified and farm supply cooperatives needed the patronage refund to salvage a loss on their operations.

The net result of all these changes lowered net margins from operations. Net margins from operations fell 27 percent to reach a five-year low of $864 million. While nearly half of the top agriculture cooperatives showed a decline, most of the drop was attributed to a few cooperatives in the diversified and farm supply sectors.

Overall, the revenues generated from sales increased for the combined top 100 cooperatives. However, cost of goods sold and operating expenses more than offset any gains in sales revenues. Higher interest expenses coupled with lower patronage refunds eliminated the gains made from joint ventures and unconsolidated subsidiaries. The summation of all these operations, along with a drop of $22 million in nonoperating revenues, produced a $340million drop in net margins. The largest cooperatives ended the year with net margins totaling $864 million. This is the lowest amount in the past five years.

Distribution of net margins

The top 100 cooperatives have long maintained a tradition of strong patronage refund practices. Despite lower net margins in 1998, the largest cooperatives allocated a higher percent of their earnings to members in the form of cash, qualified non-cash, and non-qualified non-cash patronage refunds. In 1998, cooperatives allocated 80 percent ($678 million) of their net margins, compared to 77 percent ($917 million) in 1997. Members received $278 million in cash payments in 1998. This represented 42 percent of allocated equity, the same percentage as in 1997, which saw $372 million paid out in cash. Non-qualified non-cash patronage refunds fell 35 percent to $20 million in 1998. Only four cooperatives used non-qualified refunds in 1998, down from seven in 1997.

A small number of cooperatives also distributed cash dividends on stock issued to members. Cooperatives paid out a record amount of these dividends in 1998. The dividends amounted to $38 million and represented five percent of total distributions in 1998. In 1997, $27 million was paid out in these dividends, which represented two percent of total distributions.

Most cooperatives retain a portion of their net margins as unallocated reserves. These reserves provide a source of growth capital for the cooperatives, a cushion for members' allocated equities in the event of a loss and a bonus to members from non-member business. The amount of unallocated equity fell 49 percent to $57 million. Distributions to unallocated equity represented seven percent of net margins. This was the lowest amount in the last five years. Interestingly, 11 cooperatives allocated more net margins to their members than they generated. These margins were taken out of the unallocated account.

Table 2 - Total Operating Revenue by Commodity Group, 1997-98, Top 100 Cooperatives

Total Revenues

1998 1997
cotton 2,576,090 2,570,431 5,659 0.2
dairy 18,112,007 14,067,370 4,044,637 28.8
diversified 17,453,481 17,581,079 (127,598) (0.7)
fruit & vegetable 6,459,822 6,500,802 (40,980) (0.6)
farm supply 14,653,090 16,372,659 (1,719,569) (10.5)
grain 6,466,435 6,859,572 (393,137) (5.7)
poultry & livestock 504,064 619,533 (115,469) (18.6)
rice 1,173,017 1,229,844 (56,827) (4.6)
sugar 1,118,613 1,095,960 22,653 2.1
In $1000

Table 3 - Net Margins by Commodity Group, 1997-98, Top 100 Cooperatives

Net Margins

1998 1997
cotton 63,380 57,105 6,275 11.0
dairy 318,309 207,889 110,420 53.1
diversified 43,981 273,665 (229,684) (83.9)
fruit & vegetable 77,002 95,966 (18,964) (19.8)
farm supply 248,420 505,690 (257,270) (50.9)
grain 87,562 42,863 44,699 104.3
poultry & livestock 45 1,333 (1,288) (96.6)
rice 21,042 19,422 1,620 8.3
sugar (7,486) (11,698) 4,212 (36.0)
In $1000

The largest cooperatives paid $79 million in federal, state, and local income taxes in 1998, down 42 percent. This was the lowest amount paid in the last five years. However, excluding the qualified allocated equity, cooperatives paid an average tax rate of 41 percent on their taxable income. This was down from 44 percent in 1997.

Industry Summary

Cotton cooperatives had an 11 percent increase m their net margins (table 3). The increase was not fueled by any major change. Rather, it was the cumulative effect of small changes in revenues and expenses which produced a $6 million increase in their bottom lines.

Dairy cooperatives were able to enjoy the fruits of their consolidations, which pushed up revenues tremendously while keeping costs in line with the added revenues. Yet, what really helped were the joint ventures and unconsolidated businesses. The $91 million increase in these facets of the dairy business played a big part in the $110 million increase in net margins.

Diversified cooperatives took a major hit to their bottom lines. The decline in revenues was greater than the decline in the cost of goods sold. Combining that with a jump in operating and interest expenses, provides the setting for an 84-percent drop in net margins. At $44 million, net margins reached the lowest level in five years.

Fruit & vegetable cooperatives did not have any major changes to their operations. However, the cumulative effect of a small decrease in sales and slightly higher operating expenses pushed their net margins down 20 percent to $77 million.

Farm supply cooperatives also took a major hit to their bottom lines. Declining sales, higher expenses, and lower patronage refunds received from other cooperatives pushed down net margins 51 percent to $248 million. This is the lowest amount in five years.

Grain cooperatives lowered their cost of goods sold in order to cover rising expenses. Unconsolidated businesses and joint ventures also proved to be helpful in fortifying their bottom lines. Their combined operations pushed up net margins $45 million, an increase of 104 percent from the five-year low in 1997.

Poultry and livestock cooperatives typically operate on low margins. However, 1998 margins proved to be even slimmer than usual. Operations lost nearly $3 million. Interest income and patronage refunds were enough to overcome operating losses so this sector could end the year with $45,000 in net margins. This was down 97 percent from the 1997 five-year high of $1 million.

Rice cooperatives reached their highest net margins in five years. While sales and operating margins were lower in 1998, rice cooperatives lowered interest payments by decreasing debt levels. The result was an eight-percent increase in net margins to $21 million.

Finally, the sugar cooperative sector ended the year with a net loss. However, much of the loss was the result of non-member business. Interest expenses continued to eat up operating margins. Net losses for 1998 stood at $7 million.

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