Looking at 2019 with 'realism'
"Unique" was the best way to describe the 2019 fiscal year for both MFA and its members, said MFA’s Chief Financial Officer Karen White during the cooperative’s annual meeting Dec. 3 in Columbia. More than 550 delegates, employees and special guests attended the meeting, which featured exhibits by MFA’s operating divisions, Missouri Department of Agriculture and MFA Oil.
From weather extremes to trade disruptions, agriculture has faced a long list of challenges over the past 18 months, White said. In particular, severe swings from drought to flooding are to blame for reduced yields, prevented planting and delayed harvests—all of which negatively impacted sales for MFA in the fiscal year that ended Aug. 31, 2019.
Consolidated sales reached $1.1 billion, but the overall result was a pre-tax loss of $10.1 million for 2019. Despite the loss, White pointed out, MFA’s balance sheet remains strong, and the cooperative has a favorable budget for the 2020 fiscal year.
“Yes, this was a unique year, but as a company, we weathered the storm,” White said. “It dinged us up a little bit, but we are prepared and excited about fiscal 2020. Our plan reflects earnings returning to 2018 levels, a goal we believe we can achieve, if Mother Nature gives us the opportunity.”
Reviewing financial performance by category, White reported that 63 million bushels of grain were sold in 2019, a 23% decrease from the previous fiscal year and a direct result of below-normal harvest in the fall of 2018. She pointed out that grain volume was similar to 2016 when the region also experienced drought.
“Harvest reports for this fall have been encouraging, with yields in most areas better than expected,” White said. “Unfortunately, the number of prevented planting acres this past spring means we will likely not see grain bushels returning to 2018 levels.”
Field crop sales—which include plant foods, seed and crop protection—were $565 million, an 8% decrease from fiscal 2018. White said each of these product areas had reduced sales in 2019, with fertilizer tonnage especially impacted by wet conditions. MFA locations that service river bottom areas where much of the prevented planting acres occurred experienced the largest drop in field crop sales, she added.
Livestock supply sales also decreased by 13%, totaling $151 million in fiscal 2019. This category includes feed, animal health and farm supply sales.
“The negative effects of the 2018 drought on livestock sales included a reduction in the beef herd in parts of MFA’s trade territory and a shortage of hay, which pushed producers to sell calves off the cow,” White explained. “In addition, many producers trended toward lower-priced alternatives with commodity blends and away from our branded feeds.”
Total margins and operating revenues were $203 million, a decrease of 9% directly correlated to lower sales volumes, White said. Joint venture earnings were $1.1 million compared to $2.3 million last year. Working capital was $67 million at fiscal year end, down $16 million from 2018.
Total assets at the end of August were up slightly to $510 million, due mainly to an increase in inventory levels driven by lower sales volume. White also reported that MFA Incorporated has long-term debt of $77 million, including a term loan with CoBank and the MFA Bond Program. Total net worth decreased by approximately $10 million to $155 million, which is still a healthy number, White said.
“Over the last several years we have worked hard to build a strong balance sheet so that when we have unfortunate circumstances like this year, we can weather the losses,” she said.
White concluded her report by announcing that MFA will return 100% of its Domestic Production Activities Deduction (DPAD) this year, estimated at $7.5 million for fiscal 2019. This deduction is available for farmers who sold grain to MFA. In prior years, MFA has retained part of the DPAD dollars to reduce taxes.
RISING TO THE CHALLENGE
In his address to the membership, MFA Board Chairman Wayne Nichols also acknowledged the challenges farmers and the agricultural industry continue to face but expressed optimism that MFA is positioned for a more positive financial year ahead.
“Management presented the board with a very detailed business plan for this coming year. The plan reflects positive earnings for MFA,” Nichols said. “The board believes it is essential that MFA Incorporated remains profitable for today’s farmers and those of tomorrow.”
The Pomona, Mo., cattleman who represents District 13 on the MFA board also commended the company’s employees for their efforts to serve customers during trying times.
“The excessive rains and floods compressed delivery of products and services into a tight window,” Nichols said. “It was wait, wait, wait and then run for long hours to try to catch up. It took some creativity at times, but MFA employees put in the hours and teamwork to get things done.”
MFA Chief Executive Officer Ernie Verslues reinforced the importance of serving members, even under such extreme circumstances. He pointed out that the biggest challenges farmers face—trade and weather—are outside their control, and said he expected the audience’s attitudes during the annual meeting presentations to range from pessimism to optimism and perhaps settle on “realism.”
“Throughout our long history, MFA has enjoyed the peaks and endured the valleys associated with agriculture and its cycles,” Verslues said. “That experience has trained us to strengthen the organization in good times and be prepared for difficult times. I don’t have to remind you that we are currently in the valley, but our goal of building the balance sheet has paid off during the last down cycle. Our balance sheet is solid despite this year’s loss.”
Verslues said the adversity of the past year shouldn’t overshadow MFA’s positive accomplishments in 2019. He praised employees for getting product applied when conditions allowed, keeping business going even when weather tried to derail sales, finding alternative options for unloading and transporting plant food and helping with sandbagging efforts during flooding in many parts of the trade area.
MFA’s organizational restructuring also was a key highlight of 2019, Verslues said, with initiatives to intensify the company’s sales focus, improve operational efficiencies and strengthen relationships with members and customers. In 2020 and beyond, he said, MFA will continue providing innovative products and services, making investments in rolling stock and facilities and giving employees opportunities for training and education.
“I don’t question our efforts during fiscal 2019. Unfortunately, the opportunities just weren’t there,” Verslues said. “Our trade area was hit by more challenges than most anywhere in the United States. It would have been easy to sit back and feel sorry for ourselves. But we didn’t. We looked for opportunities, because of our customer focus and because we care about more than just selling you products and services. Isn’t that what a cooperative is all about?”
Uncertainty in global markets was the topic tackled by guest speaker Seth Meyer, associate director of the Food and Agriculture Policy Institute at the University of Missouri, who delved deeper into the trade dispute between the U.S. and China. Soybean sales are most affected, he said, with total U.S. soybean exports to China falling by 22.8 million tons from 2017 to 2019. During that time, the average farm price also decreased nearly $1 per bushel.
Even if a trade deal is reached, uncertainty about exports will continue into 2020, he predicted. A drastic reduction in China’s hog production due to African swine fever has reduced overall demand for soybeans but could open up the market for the U.S. to increase pork exports.
“A trade agreement doesn’t instantly mean we go back to large volumes of Chinese trade in soybeans,” Meyer said. “It isn’t clear that there’s a quick way out of this. Maybe a deal will bring some pork sales back, but the bottom line is that we have a lot of demand uncertainty.”
While estimated national 2019 yields for corn and soybeans are the lowest since 2013, FAPRI’s projected 2020 acreage is similar to March 2019 intentions. A return to “normal” production also brings its challenges, Meyer said. CLICK TO VIEW MEYER'S SPEECH AT MFA
“If we have normal planting progress and normal yields, we’re going to have big supplies,” he said. “Sure, there’s an opportunity to provide inputs for that additional production. But bigger grain stocks can push down prices. We have to figure out what to do with it. And under current situations, it’s hard to envision not building stocks without a trade deal.”
Trade was among the challenges addressed by the Missouri Department of Agriculture during 2019, according to Director of Agriculture Chris Chinn, who also spoke at the annual meeting. She was personally involved with trade missions to England and Mexico this past year, while other department personnel traveled to China and Taiwan to discuss export opportunities.
“There’s a lot of good news on the forefront,” Chinn said. “The relationship we have with Mexico is strong, and I’m excited to have Missouri products continue going across the border. The Taiwan market is also strong, and they have a lot of faith in the products you’re providing.”
Chinn updated MFA members on the department’s “MORE” campaign’s initiatives to provide food for families in need, share agriculture’s story through social media, connect rural areas with high-speed internet and trim the state’s rules and restrictions on farmers. She reinforced that farmers can reach out to the department with questions or for assistance, such as crisis counseling. Free, confidential help is available by texting TalkWithUs to 66746 or calling 1-800-985-5990. More resources are available online at agriculture.mo.gov/more/resources.php.
“While you may have heard a lot of depressing news today, there’s also a lot of hope and optimism,” Chinn said. “When we have bad years, there are always good years ahead. I realize the amount of stress has been tremendous, but I want you to know that you’re not alone. We’re all in this together.” CLICK TO VIEW CHINN'S SPEECH FROM MFA'S ANNUAL MEETING
The afternoon’s guest speaker was Damian Mason, described as “a talk show host mixed with an agricultural economist and a healthy dose of comedian.” His entertaining presentation focused on the future of U.S. agriculture, hitting the audience with humor as well as realism.
In his view, Mason said, the farmer of the future will need to adopt autonomous equipment, use less tillage, plant more cover crops and place inputs judiciously.
“We must do better by the land. It’s one of our most valuable assets,” Mason said. “Being better about placing our fertilizer and herbicides gets the job done and is good for the environment.”
While mid-sized farming operations are dwindling, Mason pointed out, very large and very small operations are growing. He said that trend opens opportunities for more value-added products, alternative crops and niche farming to meet the desires of today’s consumers.
“Only 1% of Americans farm, which means our customers outnumber us 99 to 1,” Mason said. “They are in the driver’s seat, but they don’t understand what we do. Moving forward, food production will be more about feelings, food production will be more about feelings, stories that make consumers feel good about their purchases—not how cheap it is. That’s our challenge. Reinvent or become extinct.” CLICK HERE TO VIEW MASON'S SPEECH.
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