The road ahead

Written by Steve Fairchild on .

MFA faced a gambit of challenges in 2016. Some, like low commodity prices or consolidation among crop input manufacturers, affected all of Midwest agriculture. Others, like wholesale fertilizer prices that slid downward throughout the year or increased regulatory pressure, are more specific to agricultural input suppliers. These factors combined to create general headwinds affecting profitability.

As he took the podium to deliver MFA’s financial statement at the 2016 annual meeting in Columbia, Mo., MFA Incorporated CFO Jeff Raetz pointed out that these economic headwinds were blowing throughout the industry. “I pulled a few examples from recent news,” Raetz said, “CHS recently reported a year-over-year drop in profit of 46 percent. Mosaic has idled one of their potash mines in Canada for the remainder of 2016. Intrepid, a U.S. potash producer, laid off 300 employees in July and recently announced they are laying off another 57 employees,” he added.

Even with these broad challenges in the agricultural sector, MFA finished the year showing a modest profit. The financial results for 2016 demonstrate the kind of pressure that a relatively quick economic downturn can deliver. They also show that diversity and balance sheet management can help weather the storm.

“MFA has a long, proud tradition of serving our trade territory. While we faced challenges in 2016, we fought hard to maintain our market share and to provide you, our members, with quality products at competitive prices,” said Raetz.

Financial performance

Raetz reported a pretax profit of $4.5 million for fiscal year 2016. That figure comes from the performance of a combination of MFA business entities: MFA Incorporated, MFA Enterprises and several joint ventures.

Sales results for MFA Incorporated’s cooperative business reached $930 million. 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. For fiscal year 2016, it reached $196 million in sales.

Included in MFA earnings for the year were the company’s joint ventures. MFA has 50 percent ownership in these ventures. Cache River Valley Seed contributed $35 million in sales. AgriServices of Brunswick contributed $145 million in sales. Mid-State Seeds contributed $20 million in sales. Alliance Animal Care contributed $20 million in sales, and Central Missouri AgriService, in which MFA is a 45 percent owner, contributed $120 million in sales. Together, the joint ventures delivered $340 million in sales.

Total volume for MFA’s business entities, including joint ventures, was just less than $1.5 billion.

Grain sales

Grain sales fell in 2016 after several years of remaining near the $540 million mark. Current year’s sales numbers are based on the previous year’s harvest. The decrease in sales was due to a smaller harvest precipitated by some 1.7 million acres of prevented-planting acres. With that much idle land in the trade territory, MFA saw grain sales of $351 million on 58 million bushels in 2016. That represented a 34 percent decrease in sales and some 30 percent fewer bushels handled.

The decrease was felt industry-wide.

“If you compare the bushels of grain MFA handled to government data for acres planted and average yield, we consistently handle approximately 9 percent of the grain in our territory,” Raetz said.

Field crop sales

“As a commodity-based business, sales dollars really don’t tell the whole story. Volume shows a different trend,” said Raetz.

Total sales of plant food increased 1.8 percent to some 900,000 tons. Seed units sold increased 14.8 percent. Corn units sold rose 3.7 percent.

Raetz added that MFA’s seed offerings continue to provide excellent results in replicated plots and customer fields. As a result, MorSoy sales increased to 62 percent of total soybean seed sales compared to 53 percent the previous year. MorCorn sales increased to 37 of total corn units sold compared to 34 percent in 2015.

With acreage recovering from the previous year’s prevented planting situations, Crop Protection sales increased by 6 percent.

Livestock supply sales

Livestock supply sales (feed, farm supply and animal health) totaled $169 million in fiscal 2016, which is steady over the past few years.

Even at steady sales dollar figures, MFA increased tons of feed sold by 3.6 percent compared to a year earlier to total 356,000 tons.

“We are feeding a higher percentage of the animals in our trade territory,” said Raetz. “And MFA’s Feed Division has developed products with Shield Technology that continue to set us apart from our competition.”

Overall, animal health product sales increased by 17 percent in fiscal 2016. However, farm supply sales fell by 4 percent from last year’s record sales.

“A commodity-based business like ours will ebb and flow with the market,” Raetz said, adding that “These volume numbers show that we are growing or maintaining market share in our trade territory.”

Margins

Product margins, service revenues, joint venture earnings and patronage combined to total $205 million, an $11 million decrease compared to fiscal year 2015. Under the sluggish commodity price scenario and fewer bushels harvested, margins on grain decreased by $12 million compared to the previous year. As mentioned earlier, tighter margins on retail fertilizer margins were also a factor.

For fiscal year 2016, joint venture earnings, which tend to follow margins on agronomic offerings, were $2.5 million compared with $2 million for fiscal 2015.

Assets

Fixed assets (land, buildings, equipment and owned rolling stock) totaled $100 million, up $3 million from fiscal year 2015. This figure doesn’t account for leased equipment, which, if owned, would add $30 million to the fixed-assets column.

Total assets at the close of the fiscal year stood at $446 million up slightly over the last year, but within the trend of the past several years.

“With our strengthened balance sheet, we have been able to continue to dedicate significant resources to upgrade facilities, equipment and acquire assets in new geography,” said Raetz. “During the summer of 2016, we began construction of a 110-railcar grain loading facility in northwest Missouri. This project is a joint venture between MFA Incorporated and our good friends at MFA Oil Company. MFA Incorporated’s investment in this project is being funded by long-term debt.”

Raetz added, “I want to make sure everyone is clear—this project in no way impacts the amount that is allocated for capital expenditures each year. The biggest impact on our annual capital allocation is profits on our operations.”

Long-term debt

Raetz reported that MFA Incorporated had employed $74 million in long-term debt. It uses two primary sources of to fund it: a term loan with CoBank and the MFA Bond Program, which is unsecured debt.

“In recent years earnings on our operations have allowed us to finance acquisitions and capital items with working capital while paying down long-term debt,” said Raetz. “As I mentioned earlier, we are funding the northwest Missouri rail project with long-term debt. That project is the source of the increase in 2016. Our long-term debt will grow next year then begin to decrease as we pay down the loan.”

Total net worth increased to $157 million in fiscal year 2016. “The net worth from non-cooperative earnings or retained earnings is $102 million,” said Raetz. “Member equities are $55 million. Thanks to your support and continued patronage, MFA has built a strong balance sheet and a strong company,” he added.

Patronage

After adjusting for taxes, earnings for 2016 were $3.4 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. Member income was $1.4 million. While the cooperative has paid some $22 million to members since 2013, due to lack of profitability on MFA operations in fiscal year 2016, management recommended, and the MFA Incorporated board of directors voted, that there would be no patronage paid or equities retired this year.

Domestic production deduction

MFA will once again take advantage of a manufacturing deduction that falls under the IRS designation “Domestic Production Activities Deduction.”

Raetz said that preliminary calculations suggest that approximately $4.6 million in deductions are available and can be passed through to members on grain sales made to MFA during fiscal 2016.

As in years past, a notice will be sent to eligible members sometime in late spring 2017. Calendar-year taxpayers will be able to use the deduction on 2017 tax returns.

Looking forward

The challenges of 2016 are reflected in the financial report in pages following this story. “It’s not quite the year we had hoped for,” Raetz said. “But this harvest season, we were blessed with an abundant grain harvest, and as a company, we are optimistic going into fiscal year 2017 and beyond. Our plan for the coming fiscal year reflects net income after taxes of 11.9 million, but our expectations are always higher. We continue to set goals and develop operating plans to target growth and ensure the continued financial strength of your cooperative now and into the future.”

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