Record Gross Revenues Do Not Translate

David S. Chesnick
Agricultural Economist
USDA Rural business-cooperative service

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.

    Marketing sales continue to show tremendous gains, increasing more than 18 percent, to $55 billion, from the $46 billion recorded in 1995. This increase doubles the gain made the previous year. While three-quarters of the cooperatives that market their members' products had higher sales in 1996 than in 1995,75 per
cent of the gain was generated by just 10 cooperatives. Grain sales accounted for about 65 percent of the total increase, followed by milk sales, which accounted for about 20 percent of the increase.

    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.

    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.
 
Other Income and Expenses

    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.

Net Margins

    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 Revenue

    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.
 
    Whether by regulation or cooperative policy, dividends usually play a minor role in distributing cooperatives" net income. However, the amount of dividends paid has increased in recent years. Before 1992, the average amount of dividends paid ranged between $13 million and $18 million. Since 1992, that amount has steadily increased, from $20 million to $27 million in 1996. Dividends paid on stock investment differs from patronage dividends or patronage refunds, which are based on the amount of business done with the cooperative.
 
    Generally, unallocated equity or retained earnings are accumulated from non-member business. In 1996, unallocated equity levels declined. Cooperatives retained nearly 30 percent less of their earning than in 1995. This marks an abrupt change in the trend over the past five years. In 1992, the largest coopera tives retained $29 million. By 1995, this value stood at $240 million and in 1996 it dropped to $170 million.
 
    Even though cooperatives have a special tax status, they still pay income taxes. In 1996, cooperatives paid more than $114 million in income taxes, 19 percent less than in 1995. As a percent of net margins, the largest agricultural cooperatives paid an average tax rate of 9 percent, unchanged from 1995.
 
Revenues by Commodity Group

    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 3 - Net margins by commodity group, 1995-96, top 100 cooperatives

Net Margins	1996	1995
	--- Thousand Dollars ---		Difference	Percent Change
Cotton Dairy Diversified Fruit & Vegetable Farm Supply Grain Poultry & Livestock Rice Sugar	70,862 216,559 365,339 14,441 558,024 76,037 1,317 11,029 2,812	64,691 190,661 339,809 143,646 506,655 249,539 355 10,211 (7,941)	6,171 25,898 25,530 (129,205) 51,369 (1 73,502) 962 818 10,753	9.5 13.6 7.5 -89.9 10.1 -69.5 271.0 8.0 *

*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.

    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.