Understanding Your Understanding Your Business EnvironmentBusiness Environment

Phil KenkelPhil Kenkel

Bill Fitzwater Cooperative Bill Fitzwater Cooperative ChairChair

Oklahoma State UniversityOklahoma State University

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

fiber system…fiber system…

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

system?

Cooperative Board Members Cooperative Board Members Should be Aware of Issues Should be Aware of Issues

and Trends Involving:and Trends Involving: Their customer baseTheir customer base Ag Service Industry Ag Service Industry Cooperative industryCooperative industry Auditing and accounting standardsAuditing and accounting standards

Changing Customer BaseChanging Customer Base

Fewer but larger farmsFewer but larger farms

Farmers are getting larger equipment

More Differences Between Farms

21st Century Farms21st Century Farms

Commercial OperatorCommercial Operator

Traditional Traditional

LifestyleLifestyle

Commercial FarmsCommercial Farms 10,000 to 50,000 acres10,000 to 50,000 acres Multiple families/investorsMultiple families/investors Rent/lease/control assetsRent/lease/control assets Deal with large suppliersDeal with large suppliers

Traditional Family FarmsTraditional Family Farms $150,000 to $600,000 in revenue$150,000 to $600,000 in revenue Last generation of family farmLast generation of family farm Seeking economies of scaleSeeking economies of scale Focus shifting to transition Focus shifting to transition

managementmanagement

Lifestyle FarmsLifestyle Farms

Off farm employmentOff farm employment ““Sundowner” farmerSundowner” farmer

Also includes higher income

“work in town and live in country” customers

One Size May Not Fit AllOne Size May Not Fit All• Different locations have different Different locations have different

needsneeds• Volume discountsVolume discounts• ““discount version” or “full service”discount version” or “full service”• Bidding for businessBidding for business

Cooperative Retail Stores Cooperative Retail Stores Are ChangingAre Changing

Oklahoma Cooperatives Are Oklahoma Cooperatives Are Investing in New Retail Investing in New Retail

LocationsLocations

Changing Fertilizer IndustryChanging Fertilizer Industry

Shift to off-shore productionShift to off-shore production Increased price volatilityIncreased price volatility Emerging issues:Emerging issues:

WarehousingWarehousing Forward pricingForward pricing

Fertilizer EnvironmentFertilizer Environment

19801980 Domestic Domestic

productionproduction $2.50 natural gas$2.50 natural gas Continuous supplyContinuous supply Priced for the Priced for the

seasonseason $20/ton risk$20/ton risk

20052005 Offshore productionOffshore production $13.00 natural gas$13.00 natural gas Planned supplyPlanned supply Daily pricingDaily pricing Contract Contract

enforcementenforcement $200/ton risk$200/ton risk

OSU Fertilizer Warehousing OSU Fertilizer Warehousing and Application Researchand Application Research

$24/ton to cover warehouse cost$24/ton to cover warehouse cost $3.60/acre to cover application costs$3.60/acre to cover application costs Very significant economies of scale in Very significant economies of scale in

warehouse constructionwarehouse construction Applicator transport time may offset Applicator transport time may offset

economies of centralized warehouseeconomies of centralized warehouse

Cooperatives Operate in a Cooperatives Operate in a Rapidly Changing IndustryRapidly Changing Industry

Consolidation Consolidation Streamlining to increase efficiencyStreamlining to increase efficiency Investing to serve new customersInvesting to serve new customers

0

500

1000

1500

2000

2500

1st Qtr

1980198719962000

Number of Co-ops – CHS & Land O LakesNumber of Co-ops – CHS & Land O Lakes

Return on EquityReturn on Equity

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Return on Equity

SuperLargeMediumSmall

5.8

4.5

2.3

-.7

Bigger Can Be BetterBigger Can Be Better

Other Ways to Improve Other Ways to Improve EfficiencyEfficiency

AlliancesAlliances Cost ControlCost Control Improved marketingImproved marketing Exiting unprofitable areasExiting unprofitable areas

Measuring Costs:Measuring Costs:Profit Center AnalysisProfit Center Analysis

Understand the profitability of each Understand the profitability of each product lineproduct line

Understand the profitability of each Understand the profitability of each customer groupcustomer group

Measure the returns against Measure the returns against benchmarksbenchmarks

Determine the challenges and Determine the challenges and opportunities across product lines and opportunities across product lines and locationslocations

Measure Costs and Returns Measure Costs and Returns at an Actionable Levelat an Actionable Level

AG SUPPLY STATIONGRAIN

Measure Costs and Returns Measure Costs and Returns at an Actionable Levelat an Actionable Level

AG SUPPLY

Feed FuelAgronomy

Measure Costs and Returns Measure Costs and Returns at an Actionable Levelat an Actionable Level

AG SUPPLY

Feed FuelAgronomy

Seed ServicesFertilizer Chemicals

Measure Costs and Returns Measure Costs and Returns at an Actionable Levelat an Actionable Level

AG SUPPLY

Feed FuelAgronomy

Seed ServicesFertilizer Chemicals

Anhydrous DryFertilizer

Liquid

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 LocationExpense Ratios by Location

Profit Center Analysis Allows Profit Center Analysis Allows You to:You to:

Focus on your winnersFocus on your winners Cut costs and improve efficiencyCut costs and improve efficiency Outsource sub-performersOutsource sub-performers Shoot your dead horsesShoot your dead horses

OSU Financial Ratio OSU Financial Ratio AnalyzerAnalyzer

Focusing our Marketing Focusing our Marketing EffortsEfforts

20% of the customers account for 20% of the customers account for 80% of the volume80% of the volume

Focus on the customers that will be Focus on the customers that will be 80% of your business in 5 years80% of your business in 5 years

Determine the products and services Determine the products and services neededneeded

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

Customer SegmentationCustomer Segmentation

Identify grower segment and characteristicsIdentify grower segment and characteristics Monitor volume trends by segmentMonitor volume trends by segment Product/Service bundle designed to meet Product/Service bundle designed to meet

grower needsgrower needs Differential pricing based on costs and price Differential pricing based on costs and price

sensitivitysensitivity Monitor account performance and Monitor account performance and

profitabilityprofitability

Example: Cooperative ABCExample: Cooperative ABC

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

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

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

Who holds the largest share Who holds the largest share of cooperative sales of cooperative sales

Distribution of Distribution of Wheat IncomeWheat Income

Distribution of Distribution of Fertilizer IncomeFertilizer Income

2% 9%

20%

69%

Q1

Q2

Q3

Q4

4% 8%

17%

71%

Q1Q2Q3Q4

Customer AnalysisCustomer Analysis For the top quarter of wheat customers (76) For the top quarter of wheat customers (76)

51% do not buy fertilizer with the coop.51% do not buy fertilizer with the coop. 36% are in the top quarter of fertilizer 36% are in the top quarter of fertilizer

customers.customers. 14% buy fertilizer from the cooperative but are 14% buy fertilizer from the cooperative but are

not in the top quarter of fertilizer customers.not in the top quarter of fertilizer customers. Where is the rest of the fertilizer business Where is the rest of the fertilizer business

going?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-op

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

Customer AnalysisCustomer AnalysisAllows You to FocusAllows You to Focus

Contact 76 large producers an asked Contact 76 large producers an asked to win their businessto win their business

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

Focused MarketingFocused Marketing

Fertilizer

Wheat

Supply

Key Accounts

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

OSU Market Share OSU Market Share CalculatorCalculator

Accounting Auditing IssuesAccounting Auditing Issues

Sarbanes – Oxley Act of 2002Sarbanes – Oxley Act of 2002 Active audit committeeActive audit committee At least one financial expertAt least one financial expert Independent directorsIndependent directors Internal controls to prevent fraudInternal controls to prevent fraud Code of ethicsCode of ethics Whistleblower protectionWhistleblower protection

Equity IssuesEquity Issues

Most cooperatives need additional Most cooperatives need additional equityequity

Equity supply: fewer young producersEquity supply: fewer young producers Equity demand: many aging membersEquity demand: many aging members Is your cooperative equity structure Is your cooperative equity structure

sustainable in the long-run?sustainable in the long-run?

Equity AlternativesEquity Alternatives

More timely equity redemptionMore timely equity redemption Alternative equity redemption Alternative equity redemption

systemssystems Outside equityOutside equity Dividends on owner capitalDividends on owner capital Shift to unallocated equityShift to unallocated equity Non-patronage Non-patronage

The Future Isn’t What it The Future Isn’t What it Used to BeUsed to Be

Success in today’s environment depends on 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 ChangingCooperatives Are Changing

Redesigned systemsRedesigned systems

Measure and cut costsMeasure and cut costs

Entering new marketsEntering new markets

Cooperative Values Haven’t Cooperative Values Haven’t ChangedChanged

Democratic controlDemocratic control Customer Customer

owned/customer owned/customer benefitbenefit

Cooperation Cooperation among among cooperativescooperatives

Concern for Concern for communitycommunity

Successful CooperativesSuccessful Cooperatives

Vision and MissionVision and Mission Outstanding Management and Outstanding Management and

BoardsBoards EfficientEfficient Understand Changing Customer BaseUnderstand Changing Customer Base Alert to New OpportunitiesAlert to New Opportunities

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

Thank you for your attention

Cooperatives Matter