Forging into the dawn of a new era
MFA's success in 2015 was evidence that a diversified portfolio of products and services mitigates the extremes of weather and markets. With supplies and personnel aligned for a promising year, the cooperative suffered the same fate as its farmer/owners—the wettest spring in memory. For much of the planting season, MFA’s agronomic inputs and services were idle along with farmers’ planters.
The planting season was greatly compressed in most of MFA’s trade territory, with extremely late corn and soybean plantings, and on too many acres, no planting at all. In just Missouri, there were about 1.7 million acres idled by wet conditions.
While this dramatically impacted volumes and profitability in MFA retail, plant foods and seed operations, the company finished profitably. Precision agriculture acres continued to increase. The crop-protection business was strong. Strength in grain sales along with growth in feed and farm supply income helped bolster the bottom line.
MFA’s CFO Jeff Raetz reported a pre-tax profit of $12.5 million for fiscal year 2015.
That profit is derived from the financial performance made up of MFA’s constituent business entities: MFA Incorporated, MFA Enterprises, AGMO and several joint ventures.
MFA Incorporated is the member cooperative business with some $1.3 billion in sales. MFA Enterprises is a wholly owned subsidiary of MFA Incorporated. Formed in 2001, MFA Enterprises represents non-cooperative expansion including operations in southern Iowa, southeast Kansas, west central Missouri and northwest Missouri. It contributed some $217 million in sales in fiscal 2015.
AGMO is a farm-input financing business that until recently operated as a separate cooperative. In fiscal year 2015, it originated $71 million of crop input loans. At the beginning of fiscal year 2016, AGMO became 100 percent owned by MFA Incorporated.
Also contributing to MFA profitability were the company’s joint ventures. MFA has 50 percent ownership in these ventures. Cache River Valley Seed contributed $39 million in sales. Agri Services of Brunswick contributed $188 million in sales. Mid-State Seeds contributed $21 million in sales. Alliance Animal Care contributed $16 million in sales, and Central Missouri AgriServices, of which MFA is a 45 percent owner, contributed $127 million in sales. Together, the joint ventures delivered $391 million in sales.
Total volume for MFA’s business entities, including joint ventures was just less than $2 billion. That’s about $86 million short compared to sales figures from a year earlier. The decrease was primarily due to reduced sales volume in field crop sales and lower grain commodity prices.
“It was not the year we thought we would have coming out of the winter but a good profit year considering the challenges we encountered in the spring,” said Raetz.
Grain sales income has remained even for the past three years, even as bushels have increased. Grain moving through the system from the 2014 harvest meant MFA handled 83 million bushels in fiscal year 2015, a 33 percent increase compared to a year earlier. However, due to sagging commodity prices, grain sales income dipped slightly compared to fiscal year 2014. Raetz reminded the audience that grain sales reflected the bin-busting crop harvested in 2014. For reference, consider that in the four years leading up to the 83 million bushels handled in fiscal year 2015, the MFA system averaged about 56 million bushels per year.
Field crop sales
Field crop sales (plant food, seed, crop protection products) produced revenues of $665 million in fiscal 2015 compared to $741 million in 2014. A decrease of $76 million. Volume was driven lower from considerable weather difficulties in the planting season.
“The 1.7 million acres of prevented planting had significant impact on these volumes,” said Raetz. Plant food sales were down 7.5 percent compared to a year earlier which totaled 945,000 tons. This resulted in a $30 million decrease in sales. Seed sales slipped 23 percent compared to a year earlier to total $75 million. Crop protection sales volume reached $164 million, a 11 percent decrease from fiscal year 2014.
Livestock supply sales
Livestock supply sales (feed, farm supply and animal health) totaled $169 million in fiscal 2015, similar to total sales from a year earlier.
“This is not a true reflection of the volumes we are handling in livestock supply sales,” said Raetz. “Lower commodity/feed unit values have driven category sales dollars lower.”
After several years of decline, animal numbers in MFA’s trade territory are projected to increase as the beef herd rebuilds and the livestock complex adjusts to market signals in general.
Even as the low end of the beef cycle occurred in fiscal year 2015, MFA increased tons of feed sold to 343,000, about 3 percent more than the previous year.
“We continue to feed a higher percentage of the animals in our trade territory. Our feed division has developed products that set us apart from our competition,” Raetz said. “While livestock prices have recently come off all-time highs, the forecast continues to be favorable for this segment of our market.”
Higher value for livestock has meant that producers are willing to spend more on their investment. Animal Health and Farm Supply sales were up a consecutive year. In fiscal year 2015, Animal Health sales increased 14 percent to $16.1 million while Farm Supply sales increased 16 percent to $37 million.
Margins and expenses
Product margins, service revenues, joint venture earnings and patronage combined for a total of $216 million, a $7 million decrease compared to fiscal year 2014. This decrease follows the softer sales numbers mentioned earlier. In general terms, areas that reported increases in margins included MFA retail stores, due largely to increased grain volume from the 2014 harvest. Farm Supply, Feed and Animal Health increased margins on the strength of livestock markets. Areas in which margins decreased reflected the weather challenges for the year. They were Plant Foods, Crop Protection and Seed.
For fiscal year 2015, joint venture earnings, which tend to follow margins on agronomic offerings, were $2 million compared with $5.1 for fiscal 2014.
Expenses for fiscal year 2015 totaled $203 million, a 2 percent increase over a year earlier. This total includes operating and fixed expenses, but excludes income taxes.It doesn’t come as news to farmers that agriculture is a capital-intensive business. Maintaining inventories and operating facilities requires significant expenditures.
“Good facilities, good equipment and good employees are essential to our success,” said Raetz, “And there is a cost associated with maintaining each of these. We have and will continue to manage these areas closely.” Perennially, the budget categories of Car & Truck, Repairs & Maintenance and Personnel Costs account for approximately 80 percent of MFA’s operating expenses.
Working capital measures MFA’s ability to meet short-term financial obligations. In simple terms, it is current assets (receivables, inventory and prepay) minus current liabilities (vendor/grain payables and short-term debt).
“Strong working capital gives us the flexibility to take advantage of volatility in commodity prices, prepay opportunities and expansion opportunities,” said Raetz. “And it allows us to pay patronage and retire past equities.”
For fiscal year 2015, working capital finished at $75 million, down from $91 million in 2014. The decrease represents capital expenditures, additional investments in joint ventures and more than $10 million in patronage and retirement of past equities during the year. All of these expenditures were funded through working capital.
Investment activity, also funded from working capital, represents MFA’s ownership in joint ventures, interregional cooperatives and deferred assets. The total for fiscal year 2015 was $61 million, an increase of $12 million compared to a year earlier. Of that total, some $32 million is accounted for through investments in joint ventures.
Fixed assets (land, buildings, equipment and owned rolling stock) totaled $97 million, up $1 million from fiscal year 2014. This figure doesn’t account for leased equipment, which, if owned, would add an additional $30 million to the fixed assets column.
“MFA continues its plan to invest significant capital to upgrade facilities and equipment and to acquire assets in new geography,” said Raetz. “Over the past four years, the company has invested a total of $87 million in those categories.”
Total assets for fiscal year 2015 were $441 million, up slightly from the previous year’s total of $439 million.
For MFA, there are two primary sources of long-term debt: term loans with CoBank and the MFA Bond Program, which is classified as unsecured debt. Bonds are an important source of non-bank financing for MFA and represent some $57 million of $72 million in outstanding long-term debt.
“We have a good trend line in net worth since 2011,” Raetz said. Total net worth increased to $154 million in fiscal year 2015. “This number represents the amount of the company owned by you, the farmer member,” he said.
On Aug. 31, 2015, the end of the fiscal year, member ownership was 35 percent, up a percent from the previous year. MFA has a standing goal to reach 40 percent member ownership.
Raetz said that a five-year run of strong profits on its own operations has strengthened MFA’s balance sheet and made it a much stronger company. He added that MFA has leveraged that success by building for the future through increased investment in facilities as well as increasing cash payments to member/owners.
MFA by-laws stipulate that patronage will be paid on earnings. For fiscal year 2015, total pre-tax earnings were $12.5 million. Of that total, some $2 million was non-patronage eligible as it came from outside of cooperative-designated earnings through joint ventures and MFA Enterprises. These earnings are not eligible for distribution.
Additionally, there was $2.7 million in earnings from business with non-members—mostly from non-member wholesale business. This also is not eligible for distribution.
There was a tax adjustment of $3.4 million.
Therefore, of total earnings, there is $4.4 million available for distribution to MFA members. MFA Incorporated’s board of directors voted to make a patronage allocation of the full $4.4 million back to the members. Half ($2.2 million) will be paid in cash. The remaining 50 percent will be allocated equities.
“If you look at our member equities, they currently go back to 1980 which is 35 years,” said Raetz. “MFA management has developed a plan to reduce this timeline. It’s obviously contingent on continued profitability.”
Raetz said that the company’s continuing goal is to incrementally work outstanding equities down to 25 years, then 20. He pointed out that the reduction will take time.
As part of that plan, MFA’s board of directors voted to retire 50 percent of remaining 1980 equities ($2.8 million).
The cash patronage along with 1980 equities bring the total paid to back to member/owners to $5 million.
Wholesale patronage and equity retirement began in December. Retail patronage and equity retirement began in January 2016.
Domestic production deduction
In addition to patronage, MFA will once again take advantage of a manufacturing deduction that falls under the IRS designation “Domestic Production Activities Deduction.”
“Our preliminary calculations suggest that approximately $5.5 million in deductions are available and can be passed through to members on grain sales made to MFA during fiscal 2015,” said Raetz.
Raetz informed the audience that a notice separate from patronage checks will be sent to eligible members sometime in late spring 2016. Calendar-year taxpayers will be able to use the deduction on 2016 tax returns.
Going into a challenging agricultural economy, Raetz said that MFA’s financial plan for fiscal year 2016 reflects target net income after taxes of $11.7 million, up slightly from $10.8 million this year.
“Each year, we set goals. We develop and fine-tune operating plans to continue to build the financial strength of MFA,” said Raetz.
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