Printer Friendly

Measuring top 100 co-op performance.

He can take a closer look at what the numbers in the preceding article (page 25) reveal about the financial performance of the nation's 100 largest agricultural cooperatives by using table 1 (page 29). In this analysis, average performance measurements are used. This "averaging" will, in effect, lower the influence of the largest cooperatives of the top 100 and reflect less "swing" between commodity groups. The average ratio generated gives equal weight to all cooperatives and provides an additional perspective on the performance of the nation's largest farmer cooperatives.

Average liquidity rose in 2003 for the largest cooperatives. While the average current ratio for all the top 100 edged up from 1.37 in 2002 to 1.38 in 2003, the average quick ratio jumped from .74 to .78. This indicates better inventory, control by cooperatives. An increase in cash balances helped reduce the amount of debt and reliance on outside sources for working capital.

However, not all commodity groups were able to generate higher liquidity. The better performers were concentrated among diversified and poultry./ livestock cooperatives, which showed a tremendous increase in both their average current and quick ratios. Both commodity groups showed a broad decrease in debt and an increase in cash balances.

On the other hand, cotton cooperatives had a build-up of inventory. This inventory appears to he financed mostly by working capital loans, since there was a net outflow of cash from operations. Thus, the average liquidity ratios for cotton cooperatives were down.

Leverage ratios examine the use of debt. One of the most important is the debt-to-assets ratio, which illustrates outside ownership in a business' assets. The average debt-to-asset ratio for the top 100 co-ops remained fairly stagnant in 2003, at 61.4 percent.

The highest leveraged commodity groups were sugar, poultry/livestock and diversified, with ratios of more than 65 percent. The least leveraged commodity groups were cotton and rice cooperatives. Rice cooperatives had a debt-to-asset ratio of 47.5 percent, the only group to have a debt-to-asset ratio of less than 50 percent.

Long-term debt-to-equity fails, but still too high

Long-term debt-to-equity examines the long-term stability of a business. The average long-term debt-to-equity ratio fell from .87 to .78 in 2003. This signals less reliance on debt and more equity for long-term financing.

However, a long-term debt-to-equity ratio of .78 is still relatively high compared to the ratio between .5 and .6 recorded from 1999 to 2001. Cotton and rice cooperatives do not use much long-term debt in their capital structure.

Due to a reorganization of one cooperative, the fruit/vegetable group saw its average long-term debt-to-equity ratio decline from 2.74 to .65. Excluding that one cooperative, the average ratio still improved, from .75 to .69.

Poultry/livestock had a tremendous jump, from 3.12 to 7.20 in average long-term debt-to-equity. Much of this jump resulted from a transfer of short-term to long-term debt. Sugar cooperatives are also highly leveraged, with an average long-term debt-to-equity ratio of 1.18.

Being leveraged, in and of itself, isn't a problem. It becomes a problem when the operations do not generate enough margins to cover interest expense, resulting in default on the loans.

Times-interest-earned is a ratio that looks at how many times margins can cover interest expense. In 2003, the largest agriculture cooperatives had an average times-interest-earned ratio of 12.45, down from 14.32 in 2002. Much of this decline can be attributed to the dairy sector. However, the dairy, cooperatives fall from an average of 68.06 to 56.27 in 2003 should not be a cause for concern.

What may be a cause of concern for some sugar and poultry/livestock coops is having both low times-interest-earned values and high long-term debt-to-equity" values. Poultry/livestock cooperatives had an average ratio of .72 while sugar co-ops had a ratio of 2.14. On a positive note, sugar cooperatives have shown improvement on this score in each of the past five years.

Efficiency ratios examine how a business uses its assets to generate sales. The average local asset turnover for the top 100 increased from 3.10 to 3.14 times in 2003. Most of the commodity groups had a ratio of between 2 and 3. Cotton, dairy and sugar co-ops were the exception. Both cotton and dairy cooperatives had a declining local-asset-turnover ratio. However, both were above the average.

Cotton cooperatives fell from 4.69 to 3.91 and dairy cooperatives fell from 6.01 to 5.49. Sugar cooperatives operate in a heavily capitalized industry., so their turnover ratios reflect this with average lower values. This will be more evident in their fixed-asset-turnover ratio. The average total-asset-turnover for sugar cooperatives was .96 in 2003.

The average fixed-asset turnover for all of the top 100 was up slightly from 2002, from 14.57 to 14.66. Most commodity groups had a turnover rate that ranged from 10 to 15 times. The more processing a cooperative performed, generally the lower the turnover rate.

As mentioned earlier, sugar cooperatives are highly capitalized and their average fixed-asset turnover was 1.92 in 2003. Despite the low value, they showed a strong improvement from 2002, when the ratio was 1.75. Other commodity groups which do less processing--such as poultry/livestock cooperatives--have higher fixed asset turnover ratios. In 2003, poultry/livestock co-op turnover ratio was 31.43, up from 30.30 in 2002.

Dairy cooperatives also had a high turnover value of 29.21 in 2003. However, there was a high variation level between dairy cooperatives, which ranged from a high of 175.28 times to a low of 4.83 times.

Gross margins reflect pricing strategy

While most cooperatives do not have profit as their primary objective, they still must generate margins in order to continue operations. Profitability. ratio trends indicate whether a cooperative is headed for failure.

Gross margin percent generally measures pricing strategy of the cooperative. In other words, it looks at margins generated after the cost of goods sold is subtracted from total operating revenues. If a marketing cooperative is paying too much to its members up front for their commodities, the gross margins left may not be enough to cover expenses. So, looking at changes in gross margins as a percent of total revenue can help determine a co-op's pricing strategy.

The average gross margin percent for the largest agriculture cooperatives in 2003 was 14.29. This value has been declining steadily from a high in 1999 of 16.48. Most of the commodity groups tend to have a ratio between 10 and 20. However, co-ops that perform more processing tend to generate higher expenses and will require higher gross margins to cover those expenses.

Changes in gross margin percent are only half the story. If cooperatives are becoming more efficient in their operations by lowering operating expenses, they will not need higher gross margins. Therefore, members can benefit directly on the front end by receiving higher prices for their commodities they market through the cooperative or pay lower prices for inputs. The gain in efficiencies will manifest itself in net margins. This is where net margin percent will show the other half of the picture.

The average net margin percent for the largest agriculture cooperatives was up from 1.36 in 2002 to 1.68 in 2003. Leading the increase were cotton, fruit/vegetable, rice and sugar cooperatives. Fruit/vegetable cooperatives enjoyed the largest jump in their average net margin percent, which increased from 1.52 to 3.99 in 2003. Poultry/livestock cooperatives, on average, had the largest decline, falling from 2.23 to .56 in 2003.

Return on assets

The return on assets (ROA) looks at net margins before interest and taxes are deducted. This attempts to look at all returns for interested parties. In 2003, ROA increased from 5.62 to 5.98 for the top 100.

Due to a major co-op reorganization, fruit/vegetable cooperatives showed a surprising jump in their ROA, increasing from 7.91 to 13.38. Cotton and rice cooperatives also had ROA of over 10 percent in 2003. All other commodity groups had ROA between 5 and 6 percent. Poultry/livestock cooperatives were an exception, with ROA falling from 4.95 percent in 2002 to 2.69 percent in 2003.

Return on member equity (ROME) measures returns attributed only to equity investment. This excludes interest and taxes from net margins. The difference between ROA and ROME illustrates the benefit or curse of leverage. ROME for the top 100 co-ops jumped from 5.28 percent, to 13.09 percent.

With the exception of dairy and grain cooperatives, all other commodity groups shared in the higher returns to their members in 2003. The largest increase in ROME occurred in the fruit/vegetable and poultry/livestock cooperatives. In 2002, both of these commodity, groups had a negative ROME while both had positive ROME in 2003. Fruit/vegetable cooperatives had the most dramatic increase, jumping from -11.43 percent to 38.84 percent in 2003. Declining values were felt in both the dairy and grain commodity groups in 2003.

--By Dave Chesnick, USDA Rural Development
Table 1--Average selected ratios by commodity
group, Top 100 Cooperatives, 2002-03

 Current Quick Debt to
 Ratio Ratio Assets

Top 100 2002 1.37 0.74 61.27%
 2003 1.38 0.78 61.35%

Cotton 2002 1.50 0.71 47.92%
 2003 1.44 0.55 51.84%

Dairy 2002 1.32 0.95 59.78%
 2003 1.32 0.94 60.82%

Diversified 2002 1.19 0.81 68.92%
 2003 1.38 0.93 68.00%

Fruit/Vegetable 2002 1.60 0.72 68.50%
 2003 1.59 0.76 61.72%

Farm Supply 2002 1.32 0.71 56.51%
 2003 1.31 0.77 58.15%

Grain 2002 1.26 0.58 61.24%
 2003 1.26 0.63 62.48%

Poultry/Livestock 2002 1.77 1.34 65.78%
 2003 2.14 1.70 68.28%

Rice 2002 1.67 1.03 50.42%
 2003 1.69 0.76 47.46%

Sugar 2002 1.35 0.60 65.33%
 2003 1.35 0.59 66.62%

 Long-Term Times Local
 Debt to Interest Assets
 Equity Earned Turnover

Top 100 2002 0.87 14.23 3.10
 2003 0.78 12.45 3.14

Cotton 2002 0.28 6.35 4.69
 2003 0.27 6.47 3.91

Dairy 2002 0.44 68.06 6.01
 2003 0.41 56.27 5.49

Diversified 2002 0.75 2.83 2.02
 2003 0.94 2.66 2.22

Fruit/Vegetable 2002 2.47 2.69 2.32
 2003 0.65 4.64 2.42

Farm Supply 2002 0.44 2.64 2.35
 2003 0.47 3.61 2.48

Grain 2002 0.40 3.89 2.58
 2003 0.45 2.49 2.87

Poultry/Livestock 2002 3.12 1.08 2.78
 2003 7.20 0.72 2.92

Rice 2002 0.38 7.87 2.26
 2003 0.38 9.34 2.44

Sugar 2002 1.17 1.55 0.94
 2003 1.18 2.14 0.96

 Fixed
 Assets Inventory A/R
 Turnover Turnover Turnover

Top 100 2002 14.57 70.90 16.41
 2003 14.66 46.31 17.41

Cotton 2002 16.81 15.01 23.64
 2003 15.36 9.87 24.96

Dairy 2002 32.85 273.82 24.53
 2003 29.21 134.43 22.82

Diversified 2002 8.97 11.66 7.40
 2003 9.02 12.42 9.48

Fruit/Vegetable 2002 10.37 46.72 11.94
 2003 11.64 31.96 12.57

Farm Supply 2002 10.40 9.47 10.56
 2003 10.94 10.55 11.04

Grain 2002 9.38 8.95 18.35
 2003 10.58 12.37 21.28

Poultry/Livestock 2002 30.30 217.50 13.85
 2003 31.43 251.70 13.31

Rice 2002 4.92 11.37 10.31
 2003 5.34 9.28 12.39

Sugar 2002 1.75 5.79 10.05
 2003 1.92 5.74 9.83

 Gross Net
 Profit Operating
 Margin Margin

Top 100 2002 14.65% 1.36%
 2003 14.29% 1.68%

Cotton 2002 17.72% 4.02%
 2003 17.83% 4.73%

Dairy 2002 9.43% 1.26%
 2003 9.55% 1.17%

Diversified 2002 12.09% 1.61%
 2003 12.92% 1.43%

Fruit/Vegetable 2002 20.00% 1.52%
 2003 21.17% 3.99%

Farm Supply 2002 15.99% 1.21%
 2003 15.19% 1.63%

Grain 2002 12.71% 0.87%
 2003 11.42% 0.54%

Poultry/Livestock 2002 7.99% 2.23%
 2003 7.58% 0.56%

Rice 2002 34.00% 2.86%
 2003 36.11% 4.19%

Sugar 2002 26.18% 2.28%
 2003 25.41% 3.19%

 Return on Return on
 Total Members
 Assets Equity

Top 100 2002 5.62% 5.28%
 2003 5.98% 13.09%

Cotton 2002 10.76% 18.33%
 2003 10.90% 20.53%

Dairy 2002 5.94% 15.40%
 2003 4.75% 10.27%

Diversified 2002 5.73% 10.74%
 2003 6.38% 11.54%

Fruit/Vegetable 2002 7.91% -11.43%
 2003 13.38% 38.84%

Farm Supply 2002 4.64% 6.22%
 2003 5.61% 10.10%

Grain 2002 4.53% 8.19%
 2003 3.30% 5.63%

Poultry/Livestock 2002 4.95% -25.44%
 2003 2.69% 1.58%

Rice 2002 7.62% 14.30%
 2003 10.89% 23.39%

Sugar 2002 4.83% 5.39%
 2003 5.62% 8.42%
COPYRIGHT 2005 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 2005 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Chesnick, David
Publication:Rural Cooperatives
Date:Mar 1, 2005
Words:2260
Previous Article:Upswing continues: despite loss of Farmland & Agway, revenue, income climb for top 100.
Next Article:Perils & pleasures of partnerships: key issue for co-ops in business partnerships: who do you trust?

Terms of use | Privacy policy | Copyright © 2019 Farlex, Inc. | Feedback | For webmasters