University of Wisconsin Center for Cooperatives
Rural Cooperatives, September/October 1997, pp. 21-24
Published by the Rural Business and Cooperative Development Service
Record Gross Revenues Do Not Translate
Into Higher Net Margins for Largest Co-ops
David S. Chesnick
Editor's Note: This is the first of three articles which provide an overview of how the nation's 100 largest agricultural cooperatives (based on gross sales) performed in 1996. Part II follows on page 25 of this issue. Part lil will appear in the November/December issue.
The nation's 100 largest agricultural cooperatives reported record revenues for the second year in a row in 1996. Operating revenues totaled more than $74 billion, up nearly $11 billion from the 1995 record (figure 1). However, net margins for the year were down.
Strategic alliances, higher grain prices and increases in value-added processing by cooperatives were major contributors to the rise in revenues. However, 52 percent of that increase was realized by just two cooperatives—Farmland Industries Inc., Kansas City, Mo., and Harvest States Cooperatives, St. Paul, Minn. They represented nearly a quarter of total operating revenue for the 100 largest co-ops, up from 20 percent in 1995.
Farm supply cooperatives enjoyed substantial sales gains in 1996, following a year of relatively small gains in 1995. Farm supply sales rose 15 percent, to nearly $19 billion. However, 70 percent of that gain was due to five cooperatives. Sales increased for nearly every category of farm supplies, with 85 percent of the increase attributed to higher feed, fertilizer and petroleum sales.
Table 1—Consolidated statement of operations, 1995-96, top 100 cooperatives
Other operating revenues were down neraly $46 million. These revenues are generally earned from services (such as storage, handling, spreading and other services provided to members). Although service revenue contributes an average of only 1 percent of total operating revenues, some cooperatives rely heavily on service revenue to boost their bottom line. For example, one cooperative received more than 35 percent of its operating revenue from receipts for services.
Cost of goods sold increased $10.8 billion in 1996, up 1 percent from 1995. This gain nearly surpassed the increase in total operating revenues, due most likely to increases in grain prices paid to members. However, substantial increase in farm supply sales, which carry higher margins, should have produced a relatively smaller increase in the cost of goods sold.
Operating expenses rose nearly 4.5 percent, to $5.4 billion, largely reflecting increased labor costs. Labor statistics obtained from 44 of the largest agricultural cooperatives showed labor expenses increased 7.5 percent from the previous year. If this sample is representative of the population, nearly 60 percent of the increase in operating expenses will be attributed to labor expenses.
Despite increased operating expenses, mergers
and consolidation among cooperatives in the past few years have
helped streamline their operations. For example, operating expenses
as a percent of total sales continue to show small declines
in each of the past 5 years. In 1992, total operating expenses consumed
11 percent of total revenues. By 1996, this ratio was down to 7 percent.
This would imply that cooperatives are continuing to improve
on the use of their resources.
Income and expenses not directly related to the day-to-day operations fall into the category of "other income and expenses." These include patronage refunds received from other cooperatives, interest income and expense, gain/loss on the sale of equipment, and any other income/expense not related directly to operations. These expenses often relate to financing and investing activities of the cooperative.
Increased debt by cooperatives pushed up their interest expenses. Interest expense jumped 18 percent, or $91 million, to a record $591 million in 1996. This marks the third year in a row for double digit increases in interest payments. On the other hand, interest revenue dropped 4 percent from a high of $103 million in 1995.
Patronage refunds (cash and non-cash) received from other cooperatives climbed 16 percent. Of the $162 million in patronage refunds, 27 percent was in cash. The rest were allocated non-cash patronage refunds. Seven cooperatives would have had an operating loss without patronage refunds.
In 1996, net margins before taxes and extraordinary items were $1.3 billion. This is down 12.5 percent from the 1995 record. Higher cost of goods sold and labor expenses were the main reasons for the lower margins. Despite the decline, net margins from operations still posted the second highest level since USDA began tracking the largest agricultural cooperatives.
One cause for the drop in net margins was the
number of cooperatives suffering losses during 1996. Nine cooperatives
ended 1996 with a loss, up from six co-ops in 1995. Net margins before
losses were $1.4 billion in 1996 (figure 2). Losses amounted
to $86.6 million. However, 73 percent of the loss was attributed
to one cooperative.
Non-operating revenues include gains or losses from discontinued operations, accounting changes and other extraordinary revenue or expenses not associated with operations. In 1996, these revenue sources reached $5.5 million, up 90 percent from 1995. However, that was not enough to boost net margins above 1995 levels.
Distributions of Net Margins
Cooperatives not only had fewer margins to distribute in 1996, but also paid out less cash as a percentage of total margins allocated (figures 3 and 4). In 1995, the largest agricultural cooperatives paid out $436 million (30 percent) of allocated equity in cash. By 1996, this figure was down to $338 million (26 percent).
The value of non-cash qualified patronage refunds declined from $629 million in 1995 to $621 million in 1996, a drop of 1 percent. But, as a percent of total distribution, cooperatives retained a higher percentage of the* patronage refunds in 1996 (47 percent) than in 1995 (42 percent).
Although non-qualified non-cash patronage refunds
represent 3.3 percent of total net margin distribution, the value
jumped 50 percent, to $44 million, between 1995 and 1996. However, most
of the increase was due to a single cooperative. Although these non-qualified
patronage refunds add flexibility to the distribution mix, they are slowly
losing favor with cooperatives. In the 1980s as many as 15 cooperatives
used this form of allocation, but the number dropped to six co-ops in '1996.
In 1996, three commodity groups had lower sales than in 1995 (table 2). However, the drop in sales for these three cooperatives (cotton, poultry & livestock and rice) was overshadowed by the tremendous gains made by the other commodity groups. The biggest gainers were grain, diversified, dairy and farm supply cooperatives. However, the drop in net margins for grain and fruit & vegetable cooperatives more than offset the gains made by the other commodity groups, resulting in lower net margins for all cooperatives (table 3).
Table 2—Total revenue by commodity group, 1995-96, top 100 cooperatives
Table 3 - Net margins by commodity group, 1995-96, top 100 cooperatives
*Cannot take percentage increase ffom a negative base.
Grain cooperatives had the largest increase in sales, up 41 percent to $16.4 billion. The average prices for all grains in 1996 neared record levels. However, the high prices also pushed up payments to members and caused gross margins to drop 10 percent, to $593 million. Operating expenses increased 20 percent, to $492 million, half of which was due to higher labor costs. Consequently, net margins of $76 million were the lowest in the past five years.
The diversified cooperatives had the second highest increase in total revenues, up 25 percent, to $17 billion. Most of the increase was due to higher sales for grain (up 53 percent) and livestock (up 19 percent). Operating expenses increased a modest 5 percent while net margins rose 8 percent, to $365 million.
Due to a combination of higher prices and larger quantities, total revenues for dairy cooperatives hit $18.5 billion, up 10 percent from 1995. However, higher prices also pushed up cost of goods sold by 12 percent, to $1.8 billion. This lowered gross margins by 4 percent. Despite higher labor costs, dairy cooperatives cut operating expenses by 5 percent, thereby minimizing the effect of lower gross margins. Operating income was off only 1 percent from 1995. The $22 million increase in patronage refunds from other cooperatives helped push net margins up 12 percent to $214 million.
Farm supplies had another good year. Total revenues are up 13 percent, or $1 billion, reaching $9.1 billion. Even though cost of goods sold and operating expenses each increased by 8 percent, net margins reached the highest level to date. At $558 million, farm supply cooperatives also had the highest net margins of all commodity groups.
After two years of net losses as a commodity group, sugar cooperatives finally turned their operations around, posting $2.8 million in net margins. Although sales and gross margins have been increasing during the past five years, expenses increased faster. In 1996, the rate of increase for expenses slowed to 12 percent. Consequently, net operating margins increased 19 percent, to $14 million. Sugar cooperatives also had a 20 percent decease in interest expense which lead to the first positive net margins in the past three years.
Total revenue dropped for three commodity groups: rice, cotton, and poultry & livestock. Yet, all showed increases on their bottom line.
Rice cooperative revenues dropped 4 percent during 1996 while gross margins were down $14 million. However, this group was able to cut expenses by 7 percent, or $21 million, ultimately resulting in an 8-percent increase in net margins, to $11 million.
Cotton cooperatives faced a different situation. In 1996, cotton prices and volume were less than in 1995. Revenues dropped 13 percent in 1996 to $2.3 billion. However, cost of goods sold declined by 14 percent, to $2.1 billion. This combination caused gross margins to increase 5 percent, to $211 million. The cotton cooperatives held operating expenses to a 1-percent increase. Net margins increased 10 percent to $71 million—the highest amount since USDA began tracking the largest agricultural cooperatives.
While revenues and cost of goods sold both dropped 5 percent for poultry & livestock cooperatives, gross and net operating margins remained virtually unchanged. However, the poultry & livestock cooperatives continued to lose money on operations. Net operating losses were $6 million in 1996 and 1995. Yet, interest and other income were enough to offset operating losses in 1996, thereby pushing net margins to $1.3 million compared with $0.4 million in 1995.
AMPI Units Split To Pursue Separate Futures
At a joint meeting in Minneapolis, Minn., Oct. 30, delegates unanimously approved splitting Associated Milk Producers Inc. (AMPI), into two separate cooperatives so each could pursue individual future opportunities. Subsequently, members of AMPI's Southern Division unanimously favored the merger with other major dairy cooperatives in forming Dairy Farmers of America, a proposed new national cooperative.
Meanwhile, the old North Central division embarked on its own as the new North Central AMPI dairy cooperative based at New Ulm, Minn. Mark Furth, its general manager, said the cooperative will focus on the well-being of its Midwest members. "We have an opportunity to build on an already successful cooperative. Our goal is to improve profits for members with better milk checks and earnings returned on equity invested."
Wayne Bok, North Central AMPI's president, felt separating the two divisions would allow each to pursue its members' goals and objectives. The dairy producer from Geddes, South Dakota, said, "We intend to be big enough to succeed in the marketplace and small enough to service our members' interests."
The new North Central AMPI ranks sixth among the nation's dairy cooperatives in terms of production, according to industry sources. North Central has 5,200 dairy-producer members in Wisconsin, Minnesota, Iowa, Nebraska, Missouri, South Dakota and North Dakota. It annually markets 4.5 billion pounds of milk. The cooperative owns a network of 13 dairy plants.