Continued Expansion of Assets Shows
Greater Reliance On Debt by Farmer Co-ops

David S. Chesnick
USDA/PBS Cooperatives Services
Agricultural Economist

Editor's note: This is the second of three articles. The last article in the series will appear in the November/December issue of Rural Cooperatives.

    The balance sheets of the nation's 100 largest cooperatives show that they continued to experience significant growth in 1996, although not quite as dramatic as the growth spurt seen in 1995 (figure 1). The rate of growth in combined assets was nearly 9 percent in 1996, down from 15 percent in 1995, but still is a strong indicator of economic health for the nation's largest cooperatives.

    The balance sheet certainly does not tell all, but it does provide a good snapshot of the overall financial strength of the business at one point in time. The assets side of the balance sheet presents all the resources that the cooperative has invested. The other side indicates the sources from which these invested funds were financed. In other words, we see what the cooperative owns and who lays claim to these assets.

    Total combined assets for the top 100 U.S. agricultural cooperatives stood at $25.6 billion in 1996, a $2-billion increase from 1995. The diversified and grain cooperative groups recorded the largest gains. Nearly two-thirds of the total combined increases in total assets were attributed to these two commodity groups. This expansion was fueled by higher levels of debt. Both short-term and long-term debt together increased 13.4 percent while total equity increased by only 7.5 percent (table 1).

Current Assets Climb Slightly

    While the growth of total assets in 1995 was fueled by the expansion of current assets, the growth of current assets in 1996 lagged behind growth in total assets. Current assets (comprised of cash, accounts receivable, inventory and "other" current assets) showed a modest gain of 6 percent, to $14 billion, when compared to 1995's growth rate of 14 percent. The percent of total assets represented by current assets declined from 56.1 percent in 1995 to 54.7 percent in 1996.

    Most of the gains in current assets were in the form of inventory and accounts receivable (figure 2). Cash balances declined $60 million, to $850 million, by the end of 1996. That represents a 6.5-percent drop from 1995. Although dairy, fruit & vegetable and grain cooperatives increased their cash position, it was not enough to overcome the decline registered by all other commodity groups.

    Accounts receivable ended the year at $5.7 billion, a $497 million (9.5 percent) increase, the largest gain in current assets. This increase in accounts receivable was proportional to the increase in sales in 1996. Nearly half of this increase can be attributed to diversified cooperatives with farm supply and grain cooperatives accounting for most of the rest.

    The next largest increase was in inventories, which climbed 5.4 percent in 1996. This increase of $331 million boosted the total to $6.4 billion. However, the increase in inventories did not keep up with the sales level. This could mean cooperatives do not expect to sustain the higher sales volume in 1997 or they are becoming more efficient with their inventory management. This is especially true with the diversified cooperatives, which had a 25 percent increase in revenues but only a .5-percent increase in inventory. Dairy, farm supply and grain co-ops—which had the largest increase in inventories— all had revenue increase as well. Cotton and rice cooperatives had elevated inventory levels but the revenues declined, which is cause for concern.

Investments Hit Record Highs

    Cooperatives invest in both non-cooperative and cooperative ventures (table 2). Investment in non-cooperative businesses generally indicates investments in joint ventures or other for-profit subsidiaries. Investments in other cooperatives usually indicates business done with other cooperatives, including CoBank and St. Paul Bank for Cooperatives. Total investment increased 17.1 percent, to $1.9 billion, a new record that surpassed the previous mark of $1.6 billion set in 1984.

    Cooperative investment in other cooperatives (excluding financial cooperatives) increased almost 25 percent, to $1.5 billion. Out of a total increase of $291 million,70 percent reflected an ownership level of less than 20 percent and usually represents allocated non-cash patronage refunds. Diversified cooperatives provided the bulk of the increase with farm supply and grain cooperatives each contributing their share.

    Investment in financial cooperatives increased 6.6 percent, to $435 million. Grain cooperatives were the only commodity group that substantially increased their investments in financial cooperatives. The diversified and cotton cooperative groups each decreased their investment while the rest of the commodity groups were close to the overall average increase.

    Investments in non-cooperative businesses increased 10.6 percent, to $773 million in 1996. This increase was stimulated mostly by a few diversified, grain and sugar cooperatives which invested in value-added businesses. Dairy cooperatives had a 50-percent drop in non-cooperative investment due to consolidations. However, the combined amount of non-cooperative investment to total assets has remained steady at 3 percent over the past two years.

Fixed Assets Continue to Expand

    Businesses invest in fixed assets (plant, property and equipment) in order to build for the future. Cooperatives are no exception and have invested heavily in fixed assets throughout the past two years. During this time, their total investment in fixed assets is greater than in the prior 14 years combined (figure 3). Fixed assets, which account for 30 percent of all assets, increased 11 percent to end 1996 at $7.6 billion. Although more than two-thirds of the largest cooperatives invested in fixed assets, a large part of this increase can be attributed to only a few cooperatives. These few cooperatives were distributed throughout various commodity groups. As figure 4 illustrates, all commodity groups increased their amount of fixed assets.

Current Liabilities Push Upward

    Current liabilities climbed 9.6 percent in 1996, to $11 billion, surpassing all other liabilities. Leading the increase was short-term debt, which increased 21 percent to more than $4 billion (figure 5). However, this does not mean cooperatives are relying more on short-term borrowing to finance their operations (figure 6). Current portions of long-term debt were the driving force behind much of this increase. With a total combined increase of short term debt of $688 million, current portions of long-term debt accounted for 71 percent of this increase.

    Current portions of long-term debt were up 121 percent from 1995 to $899 million in 1996. All commodity groups showed higher current portions of long-term debt. This is due to higher fixed capital expenditures over the past few years. Yet, most of the increases cannot be attributed to higher long-term debt. Eighty percent of the increase can be attributed to one cooperative reclassifying its debt from long term to current debt.

    Short-term borrowing from commercial banks increased 16 percent, to $729 million. Diversified cooperatives rely more on commercial banks to fund their operations than other commodity groups. Yet, all the other commodity groups—with the exception of grain and cotton—relied more on commercial banks to fund their operations in 1996.

    Although the cooperative banks hold 47 percent of total short-term debt ($1.9 billion), they only realized an increase of $51 million. Only grain and cotton cooperatives increased the amount of short-term funds borrowed from the cooperative banks. Grain cooperatives, needing large amounts of working capital to pay for their members' products, increased their short-term debt held by cooperative banks by $227 million. Short-term debt of cotton cooperatives increased $11 million. All other commodity groups carried less short-term debt from cooperative banks.

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    Other fund sources—including commercial paper, notes issued by the cooperative, government sources, and other nonfinancial institutes—increased 9 percent, to $509 million. Leading the increase were diversified, farm supply and fruit & vegetable cooperatives, with $92 million in new notes issued. Cotton cooperatives replaced $36 million worth of notes with $26 million from government sources and $9 million of commercial paper.

    Accounts payable increased $320 million (10 percent) to $3.5 billion, yet, as a percent of total sales, it remained fairly steady at 5 percent throughout the past five  years. Diversified, farm supply and, to a  lesser extent, dairy cooperatives accounted for  nearly the whole increase in trade accounts  payable.

    Funds owed to members in the form of  patron and pool liabilities decrease by $95 million, ending the year at $1.4 billion. Although dairy and fruit & vegetable cooperatives had an increase in patron and pool liabilities, their $79 million increase was not enough to offset the drop in farm supply and grain cooperatives. This is especially surprising given the increase in grain prices.

Long-Term Debt Posts Record High

    Total combined long-term debt, including  debt currently owed, reached a record $5.6  billion in 1996, a 17-percent increase from  1995. This is the first time since USDA began  tracking the largest agricultural cooperatives  that long-term debt has exceeded $5 billion. As  mentioned earlier in this article, fixed assets  and current portion of long term debt have  shown significant increases throughout the  past two years. As would be expected, this  coincides with the increase in long-term debt  (figure 7). Businesses try to match the term  structure of debt with that of their assets.

    Long-term debt less current portion  increased 8 percent, to $4.7 billion. Figure 8  illustrates the largest creditors by far continue  to be cooperative banks, which held 49  percent of the total long-term debt. These  cooperative lending institutions increased the  amount of debt they held by 11.6 percent, to  $2.7 billion. Cotton, grain, rice, sugar and  poultry & livestock cooperatives rely on this  source for the majority of their long-term financing. Dairy and  fruit & vegetable cooperatives are shifting  away from the cooperative banks and relying  more on self-financing through issuance of  bonds and other long-term notes.

    The next largest sources of debt financing  are bonds issued by cooperatives. Although  bond issues are only used by 27 cooperatives,  they account for 27 percent of these  cooperatives' total long-term debt.  Cooperatives issued $1.3 billion in bonds, up  $226 million from 1995. Like the trend for all  long-term debt, bond issues have taken off in  the past two years. Diversified cooperatives  are by far the largest users of bonds for  long-term financing. Forty four percent of their  total long-term debt is in the form of bonds  and notes.

    Commercial banks also increased the  amount of cooperative debt they hold to $683  million, nearly double the $395 million in  co-op debt they held in 1995. The largest user  of commercial banks continues to be  diversified cooperatives, which accounted for nearly half of all debt held by  commercial banks. Farm supply and fruit &  vegetable cooperatives also rely on commercial  banks for part of their long term financial  strategy.

    Other sources of debt (such as insurance  companies, government sources, leases,  industrial development bonds, etc. ) increased  5 percent, to $890 million. Diversified and  farm supply cooperatives accounted for 65  percent of these other sources of long-term  debt.

    The total combined liabilities for the largest  agricultural cooperatives increased $1.4 billion,  or 9.1 percent, to $16.4 billion. The bulk of  the increase came from long term debt including  its current portion. While a few cooperatives  used a wide variety of financing long-term,  most cooperatives used a single source for  most of their funding.

Minority Interest

    When an outside investor has a stake in a  consolidated subsidiary of a cooperative, those investors are said to hold a  minority interest in the subsidiary. The  amount of minority interest held in  cooperatives subsidiaries increased by 21  percent in 1996, to $227 million. This is the  highest amount since 1992, when the  amount of minority interest first reached  $200 million. However, 80 percent of the  increase was due to acquisitions by one  cooperative that previously did not have  a history of having minority interest.

Member Equity

    One of the more positive aspects of  studying the largest agricultural  cooperatives is that combined members'  equity set record amounts in each year  but one, 1992 (figure 9). However, there is  a negative side to this increase. Over the  past three years, the growth in member  equity has not kept pace with the growth  in assets. As cooperatives become more  leveraged, a downturn in the agricultural  economy could provide disastrous consequences. This will be  especially true as the agricultural sector  becomes more market oriented with less  government involvement.

    Preferred stock may represent  investments by employees and the  general public as well as members. In  other instances, retained patronage  refunds and per-unit retains are classified  as preferred stock. Whatever the reason,  the combined value of preferred stock  increased $129 million, or 8 percent, to  $1.7 billion in 1996.

    Most of the increases were due to  reclassifications of written notices of  allocation to preferred stock, not due to  investments from outside the cooperative  community. Farm supply cooperatives  issued 75 percent of the total outstanding  preferred stock.

    Although there are a few cooperatives  that use common stock as notices of  allocation, it is generally issued for voting  rights. The difference between common stock in IOFs and cooperatives is that  cooperatives will only issue one share of  voting stock per member, where investors  in IOFs can own many shares of voting  stock.

    Common stock represents less then 7  percent of total equity outstanding. In  1996, common stock increased 6 percent,  to $601 million. Most of this increase was  due to diversified cooperatives which  used common stock for payment of  patronage refunds to patrons who do not  meet membership criteria.

    Equity certificates and credits are the  largest segment of allocated equity and  represent more than 50 percent of total  equity outstanding. Combined  cooperative certificates and credits  surpassed $5 billion for the first time in  1996. Although cash patronage refunds  were lower this year, a higher percentage  of net margins were in the form of  non-cash patronage.

    In 1995, a total of 44 percent of  allocated equity was in the form of equity  certificates. By 1996, that percentage was  up to 51 percent. Fruit & vegetable  cooperatives were the only commodity  group to realize a decrease in the amount  of equity certificates.

    Unallocated equity is generally income  from non-member business and other  income on which the cooperative has paid  taxes. It is typically used as a reserve to  offset losses incurred. In 1996,  unallocated equity was up 6 percent, to  $1.7 billion. This represents 18 percent of  total equity outstanding.

    With the exception of grain and fruit &  vegetable cooperatives, all cooperative  commodity groups increased the amount  of their unallocated equity. Fruit &  vegetable cooperatives took the largest  hit, writing off more than $18 million from  unallocated equity.
 

    Agricultural cooperatives occupy six  of the top 10 spots on the National  Cooperative Bank's (NCB) recently  published listing of the nation's 100  largest cooperatives for fiscal 1996. Five of  the top 10 firms accounted for almost  one-third of the revenues for the total  group. Farmland Industries Inc., Kansas  City, Mo., topped the list with revenues of  nearly $9.8 billion in 1996. Harvest States  Cooperatives of St. Paul, Minn., ranked  second, with revenue of $8.154 billion. To  show their growth, Farmland's 1991  revenue was $3.638 billion while Harvest  States had $3.033 billion.

    Mid-America Dairymen, of Springfield,  Mo, ranked fourth with revenue of just  over $4 billion. Revenues of the other  agricultural contenders among the top 10  were: Land O'Lakes Inc., of Minneapolis, $3.4 billion (6th); AgProcessing Inc.,  Omaha, Neb. $2.765 billion (8th) and  CENEX, St. Paul, Minn., $2.683 billion  10th).

    The minimum revenue level of the  bank's top 100 cooperatives grew from  $207 million to $360 million in 1996, up  33.2 percent. The largest 50 in the ranking  posted a 33.5-percent growth compared  with 23.3 percent over 5 years for the  lower tier. Collectively, the top 100  continued their double-digit growth of the  past few years. Revenues of $123.7 million  were up 11.8 percent from 1995.  Eighty-two of the 1991 participants  continued in the 1996 listing and 71 of  them had higher earnings. The  cooperatives kept pace with corporate  America by achieving these gains by  using virtually the same assets as they  did in 1995.

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