Is bigger better for locally owned farm supply and grain marketing cooperatives?

Which co-ops perform better those who have consolidated, or those who go it alone?

Dave Spencer, Yankton, SD-based regional sales manager for Country Energy, LLC and a graduate student in Kansas State University's ag economics program, has been pondering these questions for the past two years. About the time we go to press, he'll be putting the final touches on his resulting thesis, part of the requirements for a Master's of Agribusiness degree. The thesis addresses the financial performance of co-ops in Nebraska, South Dakota and North Dakota, states that have seen significant consolidation. Spencer calculated seven financial ratios to measure profitability, efficiency, solvency and liquidity.

The study clearly demonstrates that consolidating co-ops can reap financial rewards. Tracking mergers from 1980 through 1999, Spencer found the number of Nebraska co-ops dropped by 67%, from about 225 to 75 administrative locations. Meanwhile, South Dakota co-op numbers decreased 46%, to 109 headquarters sites, while North Dakota numbers dropped only 18%, with 248 independent local co-ops still operating (Table 1).

Result? As local Nebraska and South Dakota co-op groups joined forces, sales and assets increased dramatically. Conversely, sales and assets for the North Dakota co-ops dropped 21% and 8%, respectively, from 1996 to 1999.

More important, Spencer says, are comparisons of earnings before interest, taxes and depreciation (EBITD). His statistical analysis of this variable shows that in Nebraska, where consolidation has occurred at the fastest rate, the four-year EBITD was at 10.77%, compared to 9.34% and 7.13% in South and North Dakota, respectively.

Local access to co-op services did not seem to suffer where mergers were numerous, Spencer notes. Husker State farmers still have their pick of 195 branch sites, in addition to the 75 main office locations, while the economies of scale have boosted the resulting co-ops' full-service offerings of agronomy, feed, energy and grain products and services. At last count, 86% of the Nebraska co-ops were considered full-service, compared to 19% in South Dakota and 14% in North Dakota, Spencer says.

Regional co-ops played a big role in driving Dakota consolidations, Spencer found (Table 1). In North Dakota, for example, 56 local co-ops have sold member equity to CHS Cooperatives and are operated as “country locations.” Local farmer-members earn equity in CHS, but the purse strings are somewhat controlled at the co-ops' headquarters in St. Paul. In South Dakota, regional co-ops now control 33 local grain or farm supply co-ops, while Spencer found only one Nebraska local co-op owned and operated by a regional.

Table 1. 1999 Cooperative Profile Comparison

1999	ND	SD	NE
No. of Co-ops	248	109	75
Fully diversified Co-ops	35/248	21/109	65/75
“Regionalized” locations	56	33	1
No. of farms/Co-op	123	298	733
Acres served/Co-op	159,000	404,000	619,000
Farm Assets/Co-op ($)	90,403,612	212,468,532	547,909,220
Cash receipts/Co-op ($)	11,124,540	32,468,532	114,067,160
Net farm income/Co-op ($)	1,823,133	10,916,926	22,008,613

Surprises? Some, Spencer concludes. “Interestingly, during the 20 years studied, the number of North Dakota farms dropped by 24%, compared to 19% and 15% losses in South Dakota and Nebraska. Logic would suggest that therefore North Dakota should show the greatest reduction in co-ops. Obviously, a lot of local pride and social philosophy influence co-op board decisions.”

Spencer hopes information gleaned for his thesis might be developed into an economic model to encourage boards of directors to more closely examine their companies' relative financial status. “There are still plenty of co-ops out there growing and doing the right thing without consolidating. But there are many other cases where talking to each other about combining assets and reducing costly duplications could lead to critical improvements in financial performance.”

For more information, contact Spencer at dspencer@countryenergy.com.

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© 2007 Penton Media, Inc.