Understanding Your Business Environment Phil Kenkel Bill 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: Their customer base Their customer base Ag Service Industry Ag Service Industry Cooperative industry Cooperative industry Auditing and accounting standards Auditing and accounting standards

Changing Customer Base Fewer but larger farms Fewer but larger farms Farmers are getting larger equipment More Differences Between Farms

21st Century Farms Commercial Operator Commercial Operator Traditional Traditional Lifestyle Lifestyle

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

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

Lifestyle Farms Off farm employment Off farm employment “Sundowner” farmer “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 Different locations have different needs Volume discounts Volume discounts “discount version” or “full service” “discount version” or “full service” Bidding for business Bidding for business

Cooperative Retail Stores Are Changing

Oklahoma Cooperatives Are Investing in New Retail Locations

Changing Fertilizer Industry Shift to off-shore production Shift to off-shore production Increased price volatility Increased price volatility Emerging issues: Emerging issues: Warehousing Warehousing Forward pricing Forward pricing

Fertilizer Environment Domestic production Domestic production $2.50 natural gas $2.50 natural gas Continuous supply Continuous supply Priced for the season Priced for the season $20/ton risk $20/ton risk Offshore production Offshore production $13.00 natural gas $13.00 natural gas Planned supply Planned supply Daily pricing Daily pricing Contract enforcement Contract enforcement $200/ton risk $200/ton risk

OSU Fertilizer Warehousing and 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 warehouse construction Very significant economies of scale in warehouse construction Applicator transport time may offset economies of centralized warehouse Applicator transport time may offset economies of centralized warehouse

Cooperatives Operate in a Rapidly Changing Industry Consolidation Consolidation Streamlining to increase efficiency Streamlining to increase efficiency Investing to serve new customers Investing to serve new customers

Number of Co-ops – CHS & Land O Lakes

Return on Equity

Bigger Can Be Better

Other Ways to Improve Efficiency Alliances Alliances Cost Control Cost Control Improved marketing Improved marketing Exiting unprofitable areas Exiting unprofitable areas

Measuring Costs: Profit Center Analysis Understand the profitability of each product line Understand the profitability of each product line Understand the profitability of each customer group Understand the profitability of each customer group Measure the returns against benchmarks Measure the returns against benchmarks Determine the challenges and opportunities across product lines and locations Determine the challenges and opportunities across product lines and locations

Measure Costs and Returns at an Actionable Level AG SUPPLY STATION GRAIN

Measure Costs and Returns at an Actionable Level AG SUPPLY FeedFuelAgronomy

Measure Costs and Returns at an Actionable Level AG SUPPLY FeedFuelAgronomy SeedServices FertilizerChemicals

Measure Costs and Returns at an Actionable Level AG SUPPLY FeedFuelAgronomy SeedServices FertilizerChemicals Anhydrous Dry Fertilizer Liquid

Expense Ratios by Location

Profit Center Analysis Allows You to: Focus on your winners Focus on your winners Cut costs and improve efficiency Cut costs and improve efficiency Outsource sub-performers Outsource sub-performers Shoot your dead horses Shoot your dead horses

OSU Financial Ratio Analyzer

Focusing our Marketing Efforts 20% of the customers account for 80% of the volume 20% of the customers account for 80% of the volume Focus on the customers that will be 80% of your business in 5 years Focus on the customers that will be 80% of your business in 5 years Determine the products and services needed Determine the products and services needed Become the least cost supplier for the products and services offered Become the least cost supplier for the products and services offered

Customer Segmentation Identify grower segment and characteristics Identify grower segment and characteristics Monitor volume trends by segment Monitor volume trends by segment Product/Service bundle designed to meet grower needs Product/Service bundle designed to meet grower needs Differential pricing based on costs and price sensitivity Differential pricing based on costs and price sensitivity Monitor account performance and profitability Monitor account performance and profitability

Example: Cooperative ABC Accepted just over 3,000,000 bushels of wheat from 307 customers. Accepted just over 3,000,000 bushels of wheat from 307 customers. Sold 8,500,000 total pounds of fertilizer from 167 customers. Sold 8,500,000 total pounds of fertilizer from 167 customers. Members hold $2,000,000 in equity in the cooperative. Members hold $2,000,000 in equity in the cooperative.

Who holds the largest share of cooperative sales Distribution of Wheat Income Distribution of Wheat Income Distribution of Fertilizer Income Distribution of Fertilizer Income

Customer Analysis For the top quarter of wheat customers (76) 51% do not buy fertilizer with the coop. For the top quarter of wheat customers (76) 51% do not buy fertilizer with the coop. 36% are in the top quarter of fertilizer customers. 36% are in the top quarter of fertilizer customers. 14% buy fertilizer from the cooperative but are not in the top quarter of fertilizer customers. 14% buy fertilizer from the cooperative but are not in the top quarter of fertilizer customers. Where is the rest of the fertilizer business going? Where is the rest of the fertilizer business going? 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 Analysis Allows You to Focus Contact 76 large producers an asked to win their business Contact 76 large producers an asked to win their business Recognize 51 loyal key members and work to keep their business Recognize 51 loyal key members and work to keep their business

Focused Marketing Fertilizer Wheat Supply Key Accounts Focus on your key accounts that hold the largest share of business volume.

OSU Market Share Calculator

Accounting Auditing Issues Sarbanes – Oxley Act of 2002 Sarbanes – Oxley Act of 2002 Active audit committee Active audit committee At least one financial expert At least one financial expert Independent directors Independent directors Internal controls to prevent fraud Internal controls to prevent fraud Code of ethics Code of ethics Whistleblower protection Whistleblower protection

Equity Issues Most cooperatives need additional equity Most cooperatives need additional equity Equity supply: fewer young producers Equity supply: fewer young producers Equity demand: many aging members Equity demand: many aging members Is your cooperative equity structure sustainable in the long-run? Is your cooperative equity structure sustainable in the long-run?

Equity Alternatives More timely equity redemption More timely equity redemption Alternative equity redemption systems Alternative equity redemption systems Outside equity Outside equity Dividends on owner capital Dividends on owner capital Shift to unallocated equity Shift to unallocated equity Non-patronage Non-patronage

The Future Isn’t What it Used 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 Drucker Business Analysis and Author Other hockey players skate to where the puck is I skate to where the puck will be. Wayne Gretsky, Hockey Star

Cooperatives Are Changing Redesigned systems Redesigned systems Measure and cut costs Measure and cut costs Entering new markets Entering new markets

Cooperative Values Haven’t Changed Democratic control Democratic control Customer owned/customer benefit Customer owned/customer benefit Cooperation among cooperatives Cooperation among cooperatives Concern for community Concern for community

Successful Cooperatives Vision and Mission Vision and Mission Outstanding Management and Boards Outstanding Management and Boards Efficient Efficient Understand Changing Customer Base Understand Changing Customer Base Alert to New Opportunities Alert to New Opportunities

It’s a Great Time to Be a Cooperative Board Member Thank you for your attention Cooperatives Matter