University of Wisconsin Center for Wisconsin
Rural Cooperatives, November/December 1999, pp. 7-8, 34.
Published by the Rural Business and Cooperative Development Service
Farm supply cooperatives' income slides downward
By Beverly L. Rotan
What happens on the farm impacts the cooperatives with which it does business. That was especially true this past year for supply cooperatives and their member-farms. With farm income falling, the economic impact on local cooperatives handling farm supplies was negative.
Overall sales between 1997 and 1998 were down 4.7 percent. Individual farm supply products—petroleum products, feed, and fertilizer—were also down, with petroleum having the greatest decrease, 7.7 percent. Feed sales were down as a result of reduced ingredient costs and fertilizer sales were down due to the overproduction of nitrogen. Although total farm supply sales declined by two percent, seed sales increased by almost 20 percent (table 1). Agricultural chemicals and other farm supplies both increased, four percent and three percent, respectively. Grain sales continued to decline in the 199798 farm year, the decline was higher than the 1996-97 decrease. Insufficient grain exports were blamed for this downward slide. Cost of goods sold was down by almost six percent, and this decline was the reason gross margins grew by about four percent. Cost of goods averaged 89 percent of net sales.
There were 329 local cooperatives handling farm supplies that provided detailed financial information to the U.S. Department of Agriculture's Rural Business-Cooperative Service. Some of the cooperatives also marketed farm products — grain being the most prominent. Small cooperatives made up 37 percent of the respondents. Of those, 55 percent sold principally farm supplies. Most of the larger cooperatives (22 percent) marketed grain.
Handling grain also generated storage and services revenues. Service and other income went up by eight percent in the two-year period. Services would include items such as grain handling and storage, trucking, drying, fertilizer and crop protection application, soil analysis, and feed blending.
Net savings before income taxes were down by nine percent. Local savings hit their highest levels in 1997 and fell 17 percent in 1998. The gap between local savings and net income continued to widen. As expected, with net savings losing some ground, income taxes were also down for the period. Expenses, as a whole, rose seven percent in 1998 with bad debt expenses rising the most (table 2). Administrative and salaries/wages also increased over the two-year period. Interest expenses went down 3.2 percent. Patronage refunds declined three percent. Local cooperatives rely heavily on patronage refunds from regional cooperatives as a source of income. These refunds averaged $237,406 and comprised 61 percent of local net savings.
Total assets grew to almost seven percent. The increases were mainly due to the increase in "other current assets" (other receivables) and "other assets" (investments, goodwill, notes receivable). Property, plant, and equipment investments increased by 12 percent (table 3). The fall in grain inventories affected seasonal debt, which also fell four percent. Farm supply inventories increased while grains and oilseeds inventories decreased.
Total liabilities rose four percent from the previous year. Both long-term debt and owner equities increased. Owner equities financed 56 percent of total assets.
Several ratios measure the operational impact and performance levels of cooperative operations. Most ratios should be looked at in conjunction with one another, over a period of time, and with similar sales and functions of other companies/cooperatives in the geographical area to get a true picture. These ratios include: 1) liquidity, 2) leverage, 3) activity, and 4) profitability.
"Current" and "quick" are liquidity ratios. From 1997 to 1998, these two ratios changed slightly. Elements of both ratios included current assets, current liabilities, and inventory. Current assets and liabilities were up slightly, while total inventories were down. Total inventories included farm supply, which was up at 6.6 percent and grain, which was down at 5.1 percent. The gain from current assets and liabilities and the loss from total inventories almost cancelled out each other. A further look at items making up current assets shows that four of the seven declined. For current liabilities, three of the seven declined. To improve these ratios, a cooperative could borrow additional long-term debt, dispose of unproductive fixed assets, or retain greater portions of allocated savings.
Although the debt-to-total-equity rebounded from lows in 1995 and 1996, the upward movement from 1997 to 1998 was small. It went from 0.21 to 0.24. Long-term debt increased 12.4 percent, and short-term debt decreased 4.3 percent. Equity financing remained strong for local cooperatives, with equity growing nine percent between 1997 and 1998. Improvements in this ratio could be achieved by reducing long-term debt, disposing of unproductive assets, liquidating debt, increasing local equity, slowing equity retirement programs, or retaining more allocated savings.
The debt ratio has a slight downward turn, one-tenth of a percentage point. Total assets increased 6.8 percent and short-term debt decreased 4.3 percent. Reducing debt, increasing savings, or financing a greater portion of assets with working capital could improve this ratio.
Times interest earned rebounded in 1997 after a deep slide from 1993 to 1996. In 1993, this ratio reached an all-time high. In 1996, it was at an all-time low. The ratio went from 4.96 in 1997 to 4.72 in 1998. When this ratio is more than one, 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 could be improved by collecting old receivables, improving inventory turnover, disposing of assets and using proceeds to reduce debt, or reducing debt with working capital.
Activity ratios are used to reflect a cooperative's condition. A high ratio usually indicates aging and nearly depreciated fixed assets, or the leasing of property and equipment. The fixed asset turnover was 9.01 in 1997 and 7.66 in 1998. Net investments in fixed assets and total sales are the two main factors in this ratio. Fixed assets investments were up by 12.2 percent and total sales were down by 4.7 percent.
The total asset turnover ratio also took a slight downturn in 1998. In 1997, the ratio was 2.39. In 1998, it slid slightly to 2.13. This ratio is similar to the fixed asset turnover ratio. One element of this ratio increased (total assets) and the other decreased (total sales).
Gross profit margins is a profitability ratio. In 1998, the ratio was 10.12 percent, and in 1997, it was 10.99 percent. Both total sales (-4.7 percent) and cost of goods sold (-5.6 percent) were down for the two-year period. As a proportion, cost of goods represented 89 percent in 1998. This is only one percentage point away from 1997's ratio.
Another profitability ratio is return on-total-asset, which measures cooperative performance and is not sensitive to the leverage position of the cooperative. This ratio includes net savings before interest and income tax and total assets. Return-on-total-asset took a sharp turn in 1998. Although total assets increased 6.8 percent, net savings were down 9.0 percent. In the previous two-year period, 1997 total assets were up 2.3 percent over 1996 levels. Net savings during this period were up 7.3 percent. Within the last 10 years, this ratio was highest in 1997.
Return-on-total-equity was also down to 10.02 in 1998. Elements of this ratio are net savings and total equity. As stated before, net savings were down nine percent while total equity was up 8.8 percent. This ratio measures profitability and is an important measure of the amount of debt capital. Return-on-total-equity and return-on-total-assets are best examined together because they could move positively as a decrease in financial leverage or negatively as a symptom of low-investment adequacy.