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Measuring cooperative performance.

This financial analysis views the nation's 100 largest agriculture cooperatives, taken as a whole. To get a better picture of the cooperative landscape, this section will focus on performance measures. Selected average ratios are used for this analysis (table 1). The average ratio is used to mitigate the effects of the largest cooperatives on the performance measurements. The average ratio gives equal weight to all cooperatives and provides an additional perspective on the performance of the nation's largest agriculture cooperatives.

Liquidity measurements are used to judge short-term stability of a business. In this analysis, we use the current and quick ratios. The current ratio is current assets divided by current liabilities. This provides an insight into how well the cooperative can meet its current obligations.

The quick ratio is similar to the current ratio except that inventories are excluded from the current assets. Inventory is usually considered the least liquid of these assets. Thus, excluding them from this analysis may provide a more accurate picture of liquidity.

There was no change in the average current ratio for all of the top 100 cooperatives. However, there were variations within the different commodity sectors. Diversified, fruit/vegetable, poultry/livestock and rice cooperatives had some loss in their liquidity, as both current and quick ratios fell. The one exception was the diversified cooperatives, which improved their average quick ratio due to lower inventory levels relative to other current assets. All other commodity groups showed improved liquidity.

Leverage ratios

Leverage ratios provide insight into the use of debt to finance the cooperative. Debt-to-equity examines the percentage of assets held by outside interests. The average debt-to-equity ratio for the top 100 co-ops remained relatively steady from 2003. There were variations within the commodity groups, but the variations were substantial with the exception of cotton, poultry/livestock and rice.

Substantial changes would be those that move more than 1 percentage point. Both cotton and poultry/livestock reduced their reliance on outside financing by 3 percentage points. Rice co-ops, on the other hand, showed a jump in their average debt-to-asset ratio, moving from 47 to 51 percent.

Long-term debt-to-equity focuses more on the long-term stability of a business. For all cooperatives, the average long-term debt-to-equity improved dramatically, moving from 81 percent to 67 percent. Grain cooperatives were the only commodity group to rely more on long-term debt than on equity. Their ratio went up from an average of 46 percent to 51 percent. This also could be a concern due to an increasing trend since 2001 to use more debt relative to equity for long-term financing of the cooperative.

Of course, the use of leverage can be beneficial if the business can generate more margins than it costs to service that debt. The times-interest-earned ratio examines how many times margins can cover interest expense. While interest expense went up for most of the largest agriculture cooperatives, net margins seemed to increase more. The average times-interest-earned ratio increased from 3.3 times to 3.9 times.

Rice and sugar co-ops had declining average values of times-interest-earned. Rice showed the largest average drop, falling from 9.3 to 4.0

Efficiency ratios

Efficiency ratios show how a business uses its assets to generate sales. The average local asset turnover for the top 100 increased from 3.2 to 3.5 in 2004. This suggests that, on average, every dollar invested in assets generates $3.50 in sales. With the exception of fruit/vegetable cooperatives, all other commodity groups were able to generate more revenue on the assets they employed.

Fruit/vegetable cooperatives slipped from 2.4 to 2.2 times. However, this was due to the restructuring of one cooperative. Excluding it, the average local asset turnover actually increased from 3.5 to 3.6 times.

Fixed asset turnover focuses specifically on how well the cooperative business uses its fixed assets to generate sales. Similar to the average local asset turnover, higher sales lifted most fixed asset turnover ratios. The average fixed asset turnover for the top 100 cooperatives rose from 16.2 to 17.9 times. Only cotton cooperatives had a lower ratio. Cotton cooperatives' average fixed asset turnover fell from 22.2 to 21.1 times.

One cotton cooperative made a large purchase of fixed assets in 2004. So this decline may be temporary if the investment can generate higher sales in future years.

Profitability ratios

While cooperatives are generally considered "not for profit" enterprises, they do need to generate enough margins to compensate for their members' investment. Therefore, profitability ratio trends that show margins eroding can indicate that a cooperative is heading for trouble.

The gross margin percent gives an indication of the pricing strategy of the cooperative. If a marketing cooperative is paying too much for its member's product or a supply cooperative isn't charging enough for its products, there may not be enough gross margins left to cover operating expenses.

The average gross profit margin of the top 100 co-ops fell from 14.7 percent to 13.9 percent in 2004. This is a good time to point out the influence of some of the largest cooperatives within the top 100 database. Looking at table 1, the increase in total sales for all cooperatives exceeded the increase in total cost of goods sold. This resulted in a cumulative gross profit margin increase from 9.1 percent to 9.8 percent in 2004. This is in direct conflict with the average gross profit margin.

The top 10 cooperatives generate 58 percent of total operating revenues for the top 100. Therefore, while the overall picture has been rosy, there is cause for concern with the top 100 cooperatives. The average gross profit margin has been slipping during the last 5 years. In 2000, the average gross profit margin was 15.2 percent and has declined almost every year since then.

Looking at the gross margins trend doesn't tell the whole story. While it is true that the gross margins have declined over the past 5 years, if the cooperatives are becoming more efficient in the use of their assets and other inputs, the lower gross margins wouldn't hurt a cooperative. Therefore, members could benefit upfront from the pricing strategy of the cooperative. Higher efficiencies will show up in higher net margins.

The net margins percent looks at net margins divided by total operating revenue. For the largest agriculture cooperatives, the average net margin percent fell 0.1 percentage point, to 1.6 in 2004. Fruit/vegetable, rice and sugar co-ops averaged the largest decline in net operating margins, each declining between 1 and 2 percentage points. However, these three commodity groups experienced a substantial jump in net margins in 2003. The slide in 2004 still left them with an average ratio of just under 2 percent, which is higher than the overall average ratio for the top 100.

Poultry/livestock co-ops had the largest increase in net profit margins. They had a net loss of 1.1 percent in 2003, but improved to 2.1 percent net margin in 2004.

Return on assets & equity

Return on assets looks at net margins before interest and taxes are deducted. This looks at the total return for all interested parties, including debt holders and government. The average return on assets for all top 100 ag cooperatives increased from 6 percent in 2003 to 6.3 percent in 2004. However, fruit/vegetable, rice and sugar all had declining average return on assets.

The fruit/vegetable co-op sector fell from an average of 14 percent to 8.3 percent, while rice fell from 10.9 percent to 6 percent in 2004. These two commodity groups had the largest average decline. Sugar fell from 5.6 to 4.8 percent.

There was a substantial jump in the average return on assets for cotton and poultry/livestock cooperatives. Cotton cooperatives increased from an average of 13.3 percent to 17.3 percent, while poultry/livestock cooperatives increased from 0.7 percent to 7.4 percent.

Return on member equity measures the return only to equity investors. In other words, interest and taxes are deducted from net margins. The difference between the return on assets and return on member equity illustrates the effect of leverage.

For example, the average return on assets in 2004 was 6.3 percent while the average return on member equity was 11.8 percent. This 5.5 percent difference represents returns to members for using outside financing where the cost of borrowed funds was less than the returns generated from those funds. The average return on member equity fell from 13.3 percent in 2003 to 11.8 percent in 2004.

Co-ops in good shape

Overall, the largest agriculture cooperatives are in good shape. There has been some decline in their gross margins, but efficiencies have been able to keep net margins from sliding too far. The level of debt has been reduced.

However, the use of credit and member payables helped fund operations. This leverage has given most members of the largest agriculture cooperatives higher returns on their investment than they would have received if they had been able to invest the total amount. Nevertheless, it is important to keep in mind that much of the outside funding is located in the current account. As long as operations continue to show improvement, this should not be too much of a concern.

However, if operations should fall short for some cooperatives within the next year or two, there could be a further shake up in the top 100 agriculture cooperatives.

By David Chesnick, Ag Economist USDA Rural Development
Table 1--Selected ratios, 2003-04, Top 100 Cooperatives

 2004 2003

Current Ratio 1.35 1.35
Quick Ratio 0.73 0.73
Debt-To-Assets 0.64 0.63
Long-Term Debt-To-Equity 0.69 0.81
Times Interest Earned 3.85 3.31
Local Assets Turnover 3.48 3.24
Fixed Assets Turnover 17.89 16.19
Gross Profit Margin Percent 13.89% 14.72%
Net Margin Percent 1.63% 1.75%
Return On Total Assets 6.28% 5.97%
Return On Members Equity 11.83% 13.29%
COPYRIGHT 2006 U.S. Department of Agriculture, Rural Business - Cooperative Service
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2006 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Top 100
Author:Chesnick, David
Publication:Rural Cooperatives
Date:Jan 1, 2006
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