Feature

Time to roll

Written by Nancy Jorgensen on .

While producers are planning their 2017 crops, purchasing inputs and preparing equipment with the inherent optimism a new growing season brings, they’re also feeling the pinch from lower commodity prices and looking for ways to succeed, or at least survive, in the coming marketing year.

During this preseason prep, take some advice from three top farm financial experts—Kevin Gabbert, vice president of commercial lending, FCS Financial; Danny Klinefelter, Extension economist, Texas A&M University; and Raymond Massey, Extension economist, University of Missouri—who offer practical, real-world guidance based on what they’re hearing in the field. All three meet with farmers and farm bankers regularly, positioning them to provide sound business strategies for the challenging times ahead.

Lower your costs—including living expenses.

Massey: The Kansas City Federal Reserve recently asked bankers in our region how much their farm borrowers have increased or decreased capital and household spending. The survey reveals that farmers have cut farm capital expenditures substantially, but lowered household expenses by a much smaller percentage. For example, you might have a tough time telling your college-bound child that while older siblings were given a new car, the younger student will drive an older model. My advice: Get buy-in from your family on the need to reduce household spending.

Gabbert: During the prosperity of the recent past, some producers built a cost structure that may not be sustainable in a lower-margin environment. These overhead costs fall into three categories: land, equipment and labor. You can adjust land costs by reducing rents or stretching out amortizations on real estate notes. You can renegotiate equipment loan terms and liquidate nonessential equipment. Labor costs, including family living draws, have increased significantly in some operations; adjustments in this area can be challenging but necessary.

Sell when you can at least break even.

Massey: A lot of farmers failed to lock in prices when corn hit $4.50 a bushel last year. They wanted $6 like they got a few years ago and were disappointed when corn fell to $3 in the fall. In the coming year, lock in when the market reaches a price that covers your costs.

Gabbert: As margins are squeezed, marketing discipline becomes essential. Know your cost of production and pull the trigger when the market offers a profit. Price rallies in recent years have been short lived, making a defined marketing plan more critical than ever.

Build working capital.

Gabbert: Working capital is king. It provides the first line of defense against low profit margins and positions you to take advantage of marketplace opportunities. Ideally, you should build working capital through retained earnings, but you can enhance it by restructuring debt to longer terms or selling nonessential assets. In this environment, it is critical to weigh the risk/reward of any decision that draws down working capital.

Massey: Agricultural lenders tell me that some of their customers are running out of operating capital and lines of credit. Many are restructuring loans. Don’t wait until you run out of options—talk to your lender now.

Renegotiate rents.

Massey: We are seeing a visible decrease in land rental rates. Bankers are suggesting that borrowers renegotiate rental prices to reduce operating costs. Farmers are talking to their landlords, and some landowners are reducing rents by $25 to $50 an acre—in a few cases up to $75. On the other hand, a number of landlords are putting their land out to bid rather than lowering rents. For the working farmer, losing rented land can hurt if you’ve been spreading equipment costs over 2,000 acres, and you can now only spread it over 1,800. But if you can’t make a profit, you’re better off letting it go.

Improve communication.

Massey: Most farmers who rent land need to step up their communication with landlords. The farmers most likely to negotiate cash leases downward communicate with landlords on an ongoing basis. Provide regular financial reports to landlords throughout the year—not just when it’s time to negotiate the annual lease.

Gabbert: During adversity, there is a tendency to keep to oneself. But it’s now critical to communicate more frequently with key associates, including business partners, lenders and accountants. This applies to spouses, family members and partners as well. Too often, without good communication, negative assumptions fill the empty space. Financial stress often magnifies interpersonal relationship issues. Broken relationships can be devastating on a personal as well as a business level.

Boost your financial management capacity.

Gabbert: Financial management takes on more importance during times of economic stress. Regardless of your operation’s size, most farmers need more detailed and timely financial reporting to make good management and marketing decisions. The information will also improve communication with business partners, lenders, marketing advisors and accountants. Invest in resources to enhance your financial reporting. Purchase more robust off-the-shelf accounting systems, or ask your accountant for help beyond tax preparation.

Use accrual accounting.

Klinefelter: Every farmer should evaluate his or her business performance using an accrual-adjusted income statement. All it takes is a balance sheet for the beginning and end of the income period you’re evaluating and a cash basis income statement for the period between the balance sheet dates. Then it’s just a matter of making some adjustments to the cash basis income using changes in accrual assets and liabilities from the current section of the balance sheets. Most extension services and the risk management online library at the University of Minnesota have publications that guide you through the process. Cash basis income, while good for tax purposes, can lag behind accrual-adjusted income by two to three years in recognizing downturns or upturns in a business’s true profitability.

Don’t count on last year’s yields.

Massey: In 2016, farmers in Missouri and throughout the U.S. achieved the highest-ever yields for soybeans and the second-highest for corn. Don’t plan on this yield level for your 2017 crop. Base your forecast on average yields over the past five years.

Share costs and pool resources.

Klinefelter: To lower costs, consider joint business arrangements such as pooled input buying or shared machinery. Arrange with several farms to employ accounting or risk management personnel with a higher skill set at a much lower cost per farm. A good accountant can dig deeper than the typical bookkeeper. They can obtain real cost and return data on different enterprises and farms to learn which rental properties are making money and which aren’t. They can also find which zones perform better. Combining this information with soil data, application and seeding rates, you can use variable-rate technology to improve profitability. Too often, aggregated data on the whole operation just provide averages, which don’t differentiate between winners and losers.

Join forces with another operation.

Klinefelter: If your farm is in serious financial difficulty, consider merging with top operations that are looking for additional land and good employees. This helps you preserve what you have left in exchange for a minority interest in a larger operation. It can also preserve jobs for you and your family members. You can trade small or obsolete equipment for upgraded equipment and lease it back to the new entity to avoid the tax consequences of selling. Or, if you operate a traditional small farm with high costs and less up-to-date technology, collaborate with other small farmers. You’ll gain economies of scale while maintaining individual land ownership. Your operations could grow stronger as you better utilize different talents. This new, larger operation can afford to hire more specialized expertise. These arrangements can also be good for a farmer nearing retirement who wants to cut back and get to know potential tenants for when he finally retires. In addition, this approach helps assure the continuation of traditional-sized operators.

Add a second shift.
Klinefelter: Consider double-shifting equipment and labor to improve efficiency and lower overhead during busy seasons. Recruit retired farmers who want to work part time or young people who grew up on a farm but now work an off-farm job. The extra work can help them pay for a new vehicle, Christmas gifts, vacations or credit card debt.

Try something new.

Klinefelter: Do you have tillable land where you haven’t applied chemicals in the last few years because it’s been in pasture? Think outside the box, and try something new such as organic or specialty crops. These can often garner a premium price in the market as as compared to traditional commodity crops.

Limit your risk exposure.

Gabbert: As profit margins are squeezed, the entire industry feels the impact. Be aware of counterparty risk—the risk that the person or institution with whom you’ve entered a financial contract will default on the obligation. Limit your exposure to any one party at a level that your business could sustain the loss if that party does not perform according to your contract.

In this Feb 2017 Issue

Written by TF Web Editor on .

Who's buying farmland?

Written by Nancy Jorgensen on .

A pervading myth among some urbanites is that big corporations own most U.S. farms. This, despite USDA statistics showing that the vast majority of farmland is owned by a farmer, retired farmer or farm family member. But is this changing? Are non-farm corporations, such as institutional investors, buying up more land, and if so, what will it mean to farmers?

Bruce Sherrick, professor of agricultural and consumer economics at the University of Illinois, is known for his research in farmland ownership. “Nonfamily farms account for only about 1 percent of the farms and about 10 percent of production,” he said, citing a USDA study titled America’s Diverse Family Farms.

Daniel Bigelow, an agricultural economist with USDA and another leading farmland researcher, says his 2016 study, U.S. Farmland Ownership, Tenure and Transfer, shows a slightly lower farmer ownership share.

“Sixty-nine percent of all farmland is owned by current farm operators, while 31 percent is owned by non-operators who rent land out to farmers,” Bigelow said. When you consider that the huge share of these non-operator owners either previously farmed or acquired land from a family member, Bigelow added, a total of 83 to 94 percent of all farmland is owned by a current or former farmer or family member connected to agriculture.

While some farm families organize as corporations for legal purposes, they’re still considered family farms.

Looking at the numbers by state, Bigelow reported that Illinois has the highest percentage of non-operator ownership, with 50 percent. Arkansas, Indiana, Iowa and Kansas all report more than 40 percent. Missouri and Mississippi run quite a bit lower, at 27 percent and 29 percent, respectively. Bigelow is in the Farm Economy Branch of USDA-Economic Research Service’s Resource and Rural Economics Division.

Sherrick addressed the misconception that giant corporations dominate farming. “Judging by popular and fringe press headlines, there seems to be some impression that there is a large number of non-family corporate farms somehow increasingly controlling farmland, with public press references to factory farms and the like,” he said in a report titled Farmland Ownership: Trends and Future Implications. “Some also believe the livestock sector is owned by big corporations, but this fallacy fails to account for contract production with individual farmers,” he said.

Actually, according to Bigelow, non-farmer corporate ownership of farm acreage has declined over the past 17 years. “In 1999, corporate entities owned just under 42 million acres, which compares with 32 million in 2014,” he said. The non-farmer corporate share doesn’t add up to much when you consider that a total of 911 million acres are farmed in the contiguous 48 states.

Institutional investors take a look

It’s clear: Big corporations have not taken over farmland. Recent declines in farm profitability may slow non-farmer interest. But as Sherrick pointed out, institutional investors such as insurance companies and pension funds take a long-term view and could recognize rising global food demand and positive returns on farmland compared to other investments. 

Sherrick is director of the TIAA Center for Farmland Research. His relationship with TIAA is significant because this organization—which provides retirement services for academia, medicine and other industries—is one of the largest institutional investors in farmland. In 2015, TIAA raised $3 billion for its second global farmland investment partnership, on top of $2 billion raised for its first, which closed in 2012. Most of these investments involved overseas properties, but some investors are taking a look at the U.S.

NCREIF Total return—the average annual return on farmland owned by institutional investors—helps explain the interest in farmland investments. According to Sherrick, NCREIF Total provided a better return (12 percent) compared to equity funds from 1990 to 2015, including the S&P 500 (6.8 percent) and NASDAQ (9.2 percent). “Farmland returns are reasonably high and have low relative risk,” Sherrick said.

Tim Maverick, writing in Wall Street Daily in late 2015, predicted that institutional investors’ share of farmland ownership is sure to rise. “It’s the perfect investment for institutions with long-range investment goals, such as pension funds. It’s a real asset, not correlated with stocks and bonds. And it pays steady income, as farmers pay rent on the land.”

Real Estate Investment Trusts (REITs) have been around for years, offering retail investors the opportunity to buy shares of property that have been grouped and securitized. To date, only three REITs specialize in farmland, including Gladstone Land Corporation, the first to form in 2013, followed by Farmland Partners Incorporated and American Farmland Company. While they represent a small share of farmland today, Sherrick believes REITs may make an impact over the long run. “But it will take a while to get to scale,” he said.

Competing for available land

No matter who’s buying, there’s plenty of interest in purchasing farmland. “It’s certainly a competitive market, particularly in more productive ag regions of the U.S. such as the Midwest,” Sherrick said.
Ray Massey, an agricultural economist at the University of Missouri, keeps his ear to the ground as an Extension economist. He says farmland supplies seem tight, and farmers are competing to purchase land that may not be available in future years.

“I’ve heard of a few institutional investors looking for large tracts of land,” Massey said. “But with our high percentage of small farms, Missouri is probably not on their radar as much as other states.”
Sherrick doesn’t believe farmers should be concerned about outside interest in farmland. “Institutional investors provide an important source of liquidity, and the land still needs to be farmed by the tenant,” he said. “The seller sees no impact; the farmer often has a more stable relationship as a result.”

Still, Sherrick sees an increasing separation between operators and ownership. “That is the long-run force that is beginning to push the financialization of farmland forward,” he said.

As farmers age and retire, more land may come available. Bigelow’s study predicted that 10 percent, or 93 million acres, of all U.S. land in farms would be transferred during 2015-2019. “Most will change hands through gifts, trusts or wills,” the report said, adding that some of that land may be sold by the new owners, bolstering the supply of property available for purchase.

Renting farmland may still be a good deal

Many economists believe that farmland rental prices tend to lag behind changes in farmland purchase prices. But USDA Economist Daniel Bigelow says the agency’s recent national statistics don’t agree.

“Overall, in the past year, we’ve seen a 1 percent ($40) decline in cropland values and a 5.5 percent ($8) decline in cropland rents, so the percentage drop is actually bigger for rents,” Bigelow said. “Land values depend on expectations of the future stream of income from land, while rental values are based on net returns expected in the current year.”

The percentage of land rented in the U.S. has been relatively constant since 2002, he added, noting that cash agreements have grown more popular over the same period. Today, fixed cash rent payments make up more than 70 percent of all leases.

In 2014, about 35 percent of farmland in Missouri was operated by tenants, Bigelow said, compared to 32 percent of total U.S. farmland.

The average cash rent per acre paid by U.S. farmers in 2016 was $136 an acre, according to Bigelow. Crop acreage attracted much higher rents than grazing land. Bigelow illustrates rents values in Today’s Farmer country by comparing cash rents paid on irrigated versus non-irrigated Missouri cropland over the past five years:

 

Nutri-Track tunes up pasture

Written by Kerri Lotven on .

In the rolling hills of southwest Missouri, stands of forage can look dramatically different from one field to the next. Differences in soil quality, health and fertility can be even more dramatic. But on the inaugural MFA Forage Tour, attendees discovered what eight fields in this area have in common—precision practices and the MFA Nutri-Track program.

The Nutri-Track program manages soil fertility on an acre-by-acre basis, giving farmers the information needed and the application technology to adjust fertilizer application rates by zones. The seven-stop tour covered three fields at Wilmoth Ranch in Mount Vernon, Mo., and four fields at Gourley Land and Cattle near Crane, Mo.

Wilmoth Ranch

Rancher Greg Wilmoth sought advice from MFA area sales manager Travis Watson at a growers meeting in 2014. The Wilmoth family had purchased additional land over the previous ten years, and Greg knew the land’s fertility levels weren’t high enough for optimal forage production. Wilmoth enrolled 2,400 acres in the Nutri-Track program.

Alfalfa production

The first stop was Wilmoth Ranch’s alfalfa crop.

“Greg was tired of raising and feeding common fescue hay,” Watson said. “He wanted to increase his pasture, and if he was going to supplement hay in any way, he wanted to supplement using good quality forages and increased baleage.”

Wilmoth set a six-ton-per-acre yield goal for this field and intended to continue a build application for fertility.

“When we talk about fertility builds, we’re talking about getting levels in the soil built to optimum. For example, if phosphorus’s optimum level is 22 ppm (parts per million), but our soil test shows we are at 18 ppm, we are going to apply enough fertilizer in the first year to raise it from 18 to 19, the next year from 19 to 20 and so on. In a perfect scenario, we would leave enough fertilizer for the soil to build 25 percent every year for four years while still accounting for crop removal.

Wilmoth collected soil samples and planted alfalfa in 2014. Watson recommended two flat-rate applications of 18 pounds of nitrogen, 46 pounds of phosphorus and 155 pounds of potassium for this field. After the two flat-rate applications, a third, variable-rate application supplied remaining fertility needs.

Wilmoth averaged 5.8 tons per acre in 2015 and, in 2016, he exceeded his goal despite only receiving 6.8 inches of rain from May 1 to Aug. 1.

Baleage production

The Wilmoth’s purchased additional land for baleage production from a nearby farm in 2012. On the surface, this piece of land appeared to be one field, but results from soil sampling in February 2015 told a different story.

“We could tell there were two different fields here based on the P and K maps,” MFA Precision sales manager Eric Preston said. “Whoever owned it before managed it in two different ways. The far east side, I could tell was hay because the K levels were in the 60 to 80 [ppm] range. The west field was probably pasture most of its life because the K levels were in the 120 to 130 range.”

In spring 2015, both fields produced 2.8 tons per acre of wheat baleage. That summer, the east field produced 70 bushels per acre of soybeans, exceeding Wilmoth’s yield goal by 20 bushels. That extra production meant he would need to account for increased crop removal of potassium the next year.

“The soil is an ever-changing environment,” Preston said. “Ideally the K levels in this field would be in the 150 to 200 ppm range, but it will take more than one year to get there,” Preston said. “This field didn’t get to where it is in one year (60 to 80 ppm) and it’s not going to get back there in one year, which is why we develop four-year recommendations.”

Establishing Bermuda

Next stop: an underused pasture. Wilmoth previously used this field as a go-between from the main road to high-producing hay fields. He occasionally grazed cattle here, but never for extended periods of time due to the road access.

Sampling showed adequate soil fertility, so Wilmoth decided to switch the field to Bermuda hay production. To renovate, Wilmoth applied a herbicide burndown and planted soybeans in summer 2015 as a smother crop. In May 2016 he sprigged in Bermudagrass and took the first cutting in August.

Gourley Land and Cattle

Billy Gourley took over the management of Gourley Land and Cattle four years ago when he moved back from Colorado. A local grower previously leased this land from his family and used it for cattle pasture. He wanted to boost forage production.

“He knows where he wants to go and what direction he’s headed. His goal is to have the entire place be rotational grazing and to feed as little hay as possible,” Watson said.

But to do this required work. Sericea lespedeza and other invasive species had taken over the forage ground. Gourley wanted to knock out the endophyte-infected fescue and replace it with novel endophyte interseeded with clover. He also wanted to manage a broomsedge infestation. Gourley enrolled 1,500 acres in the Nutri-Track Program.

Sericea lespedeza management

Gourley knew one of the first steps of renovation required removal of the Sericea lespedeza. He also plans to interseed clover in this pasture. In early July 2016, Gourley applied a formulation of Pasturegard HL and Astute Xtra specifically targeting the Sericea. Once he had interseeded clover, there were few herbicides he could use without also killing the clover.

“Weed control needs to be at the front of your mind right along with fertility. There’s no sense of spending a bunch of money on fertility if all we’re going to do is keep feeding weeds,” MFA Field Crops ASM Ben Fizette said during the tour. “It can be an overwhelming task trying to figure out what chemical we need to use to kill which weeds and at what time of year. My advice is to find your worst weed or worst brush problem first and tackle it. There’s no definitive way to kill them all at one time.”

Clover interseeding program

Gourley began working with the NRCS in 2014 to interseed clover through a cost-share program. The program reimbursed him 75 percent of seed costs as long as minimal fertility requirements were met. Gourley had worked with MFA the past January to raise the pH levels in this field with a variable-rate lime application. When the soil was resampled for the NRCS, the lowest sample taken was 6.3, indicating the pH had been corrected, allowing him to get approval to begin seeding.

Novel endophyte fescue

Gourley settled in on Bar Optima as an endophyte-friendly fescue option.

“Fescue is what made Missouri cattle country,” Fizette said. “But the issue with the endophytes in something like Kentucky 31 is it’s a vasoconstrictor. It causes the blood vessels to constrict, especially in ruminants. But the endophytes are also what provides the fescue disease tolerance. The beauty of the novel endophyte fescue is it has virtually the same disease and drought resistance as Kentucky 31, but it’s not harmful to cattle.”

Gourley worked with NRCS again to establish the novel-
endophyte fescue stand. Like the clover interseeding program, he had to meet required minimum fertility levels. MFA’s precision specialists made a variable-rate recommendation using the University of Missouri’s formulations for cool-season grasses. In 2014 and 2015, like Wilmoth, he applied glyphosate burndowns followed by planting a smother crop for weed control. In spring of 2016, he did a final burndown followed by planting Bar Optima fescue.

Broomsedge management

Broomsedge, a native grass that thrives in soils low in phosphorus, covered the last field of the tour. In early 2016, Gourley applied variable-rate lime to correct pH levels. Because phosphorus tends to be less available in acidic soils, low pH can elevate the phosphorus issue allowing Broomsedge to take over. Often, a lime application will solve the Broomsedge issue, but that wasn’t the case for Gourley.

“This is a classic example of someone thinking they need more lime when what’s really missing is phosphorous,” Watson said. “Only 37 of the 90 acres needed a pH correction. Lime used to be the solution, but as we’ve gotten more aggressive with our haying equipment, what’s actually happening is we’ve taken out more phosphorous than we’ve put back in.”

Gourley began applying the recommended phosphorus and potassium in fall 2016.

The takeaway

The level of nutrients in your soils can strongly impact your livelihood. The University of Missouri and USDA both recommend soil be retested every 3 to 5 years for optimal performance. The Nutri-Track Program helps growers conduct these soil tests and conserve inputs by putting them precisely where they are needed for greatest yield potential.

“What the Nutri-Track program allows us to do is sit down with growers at least once a year and have conversations about soil fertility. We’ll talk about where we’re going, what the plan was, what we’ve done and where we’re headed. I think that’s the most valuable thing we get out of the Nutri-Track program,” said Jason Sutterby, AgChoice precision farming specialist. “Cattle prices have dropped, and fertilizer prices have dropped. But the most expensive forage we can feed is hay. What we need to think about now is maybe it’s time we invest in some fertility. If we can grow more grass on the same acres and utilize tools like rotational grazing we can be much more efficient overall.”

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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