1

Understanding Your Business Environment

Phil KenkelBill Fitzwater Cooperative Chair

Oklahoma State University

Co-ops were a part of YESTERDAY’S food and fiber

system…

What will their role be in TOMORROW’S food and fiber

system?

Cooperative Board Members Should be Aware of Issues and

Trends Involving:

n Their customer basen Ag Service Industry n Cooperative industryn Auditing and accounting standards

2

Changing Customer Base

n Fewer but larger farms

Farmers are getting larger equipment

More Differences Between Farms

21st Century Farms

n Commercial Operator

n Traditional

n Lifestyle

Commercial Farmsn 10,000 to 50,000 acresn Multiple families/investorsn Rent/lease/control assetsn Deal with large suppliers

3

Traditional Family Farmsn $150,000 to $600,000 in revenuen Last generation of family farmn Seeking economies of scalen Focus shifting to transition management

Lifestyle Farms

n Off farm employmentn “Sundowner” farmer

Also includes higher income “work in town and live in country” customers

One Size May Not Fit All• Different locations have different needs• Volume discounts

• “discount version” or “full service”• Bidding for business

4

Cooperative Retail Stores Are Changing

Oklahoma Cooperatives Are Investing in New Retail

Locations

Changing Fertilizer Industry

n Shift to off-shore productionn Increased price volatilityn Emerging issues:

n Warehousingn Forward pricing

5

Fertilizer Environment

n 1980

n Domestic productionn $2.50 natural gas

n Continuous supply

n Priced for the seasonn $20/ton risk

n 2005

n Offshore productionn $13.00 natural gas

n Planned supply

n Daily pricingn Contract enforcement

n $200/ton risk

OSU Fertilizer Warehousing and Application Research

n $24/ton to cover warehouse costn $3.60/acre to cover application costsn Very significant economies of scale in

warehouse constructionn Applicator transport time may offset

economies of centralized warehouse

Cooperatives Operate in a Rapidly Changing Industry

n Consolidation n Streamlining to increase efficiencyn Investing to serve new customers

6

0

500

1000

1500

2000

2500

1st Qtr

1980198719962000

Number of Co-ops – CHS & Land O Lakes

Return on Equity

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Return on Equity

SuperLargeMediumSmall

5.84.5

2.3

-.7

Bigger Can Be Better

7

Other Ways to Improve Efficiency

n Alliancesn Cost Controln Improved marketingn Exiting unprofitable areas

Measuring Costs:Profit Center Analysis

n Understand the profitability of each product line

n Understand the profitability of each customer group

n Measure the returns against benchmarksn Determine the challenges and

opportunities across product lines and locations

Measure Costs and Returns at an Actionable Level

AG SUPPLY STATIONGRAIN

8

Measure Costs and Returns at an Actionable Level

AG SUPPLY

Feed FuelAgronomy

Measure Costs and Returns at an Actionable Level

AG SUPPLY

Feed FuelAgronomy

Seed ServicesFertilizer Chemicals

Measure Costs and Returns at an Actionable Level

AG SUPPLY

Feed FuelAgronomy

Seed ServicesFertilizer Chemicals

Anhydrous DryFertilizer

Liquid

9

Grain Total Expenses/ Gross Revenue

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

1 2 3 4 5

Expense Ratios by Location

Profit Center Analysis Allows You to:

n Focus on your winnersn Cut costs and improve efficiencyn Outsource sub-performersn Shoot your dead horses

OSU Financial Ratio Analyzer

10

Focusing our Marketing Efforts

n 20% of the customers account for 80% of the volume

n Focus on the customers that will be 80% of your business in 5 years

n Determine the products and services needed

n Become the least cost supplier for the products and services offered

Customer Segmentation

n Identify grower segment and characteristics

n Monitor volume trends by segmentn Product/Service bundle designed to meet grower

needs

n Differential pricing based on costs and price sensitivity

n Monitor account performance and profitability

Example: Cooperative ABC

n Accepted just over 3,000,000 bushels of wheat from 307 customers.

n Sold 8,500,000 total pounds of fertilizer from 167 customers.

n Members hold $2,000,000 in equity in the cooperative.

11

Who holds the largest share of cooperative sales

n Distribution of Wheat Income

n Distribution of Fertilizer Income

2% 9%

20%

69%

Q1Q2Q3Q4

4% 8%

17%

71%

Q1Q2Q3Q4

Customer Analysisn For the top quarter of wheat customers (76) 51% do

not buy fertilizer with the coop.n 36% are in the top quarter of fertilizer customers.n 14% buy fertilizer from the cooperative but are not in

the top quarter of fertilizer customers.n Where is the rest of the fertilizer business going?

36%

7%4%3%

50%

Top Quarter of Wheat Customers vs. their fertilizer quartile

Top quarter wheat customers that do not buy fertilizer from co -o p

Top quarter wheat customers that are also top quarter fertilizer customers.

Customer AnalysisAllows You to Focus

n Contact 76 large producers an asked to win their business

n Recognize 51 loyal key members and work to keep their business

12

Focused Marketing

FertilizerWheat

Supply

Key Accounts

Focus on your key accounts that hold the largest share of business volume.

OSU Market Share Calculator

Accounting Auditing Issues

n Sarbanes – Oxley Act of 2002n Active audit committeen At least one financial expert

n Independent directorsn Internal controls to prevent fraud

n Code of ethics

n Whistleblower protection

13

Equity Issues

n Most cooperatives need additional equityn Equity supply: fewer young producersn Equity demand: many aging membersn Is your cooperative equity structure

sustainable in the long-run?

Equity Alternatives

n More timely equity redemptionn Alternative equity redemption systemsn Outside equityn Dividends on owner capitaln Shift to unallocated equityn Non-patronage

14

The Future Isn’t What it Used to Be

Success in today’s environment dependson the ability to envision the future and get there first! John E. Gherty CEO, Land O’Lakes

Change is optional.Survival is not mandatory! Peter DruckerBusiness Analysis and Author

Other hockey players skate to where the puck isI skate to where the puck will be.Wayne Gretsky, Hockey Star

Cooperatives Are Changing

n Redesigned systems

n Measure and cut costs

n Entering new markets

Cooperative Values Haven’t Changed

n Democratic control

n Customer owned/customer benefit

n Cooperation among cooperatives

n Concern for community

15

Successful Cooperatives

n Vision and Missionn Outstanding Management and Boardsn Efficientn Understand Changing Customer Basen Alert to New Opportunities

It’s a Great Time to Be a Cooperative Board Member

Thank you for your attention

Cooperatives Matter