Abstract

Analysis of Income Statements

of Local Farm Supply and Marketing Cooperatives

David S. Chesnick and E. Eldon Eversull

Rural Development Administration-Cooperative Services

U.S. Department of Agriculture

This study analyzed income statement variables of local farm supply and

marketing cooperatives by looking at trends and current values. The study drew

comparisons between different types, sizes, and profitability levels of cooperatives. The major areas studied were income and expenses. Expenses were

divided into four categories; administrative, general, labor, and other.

Key words: Cooperatives, income statement, expenses, sales, and net

income.

RDA-Cooperative Services Research Report 134

November 1994

Price: domestic-$4.00; foreign-$4.50
Preface

This study presented and evaluated revenues and expenses of local cooperatives. Trends of different cooperative sizes, types, and profitability levels

were illustrated. The main focus was on revenues, sources of expenses, and

how these expenses changed over time. This study should provide cooperative

managers and directors with comparative values to help analyze their operations.

Operating statements from 1,336 local farm supply and marketing cooperatives were analyzed in this report. On average, from 1983 to 1990, information

from 596 respondent cooperatives in each of the years was studied.

The authors wish to thank the cooperatives that provided financial statements to RDA Cooperative Services. Without the detailed information, this

report would not be possible. Special thanks are given to Charles A. Kraenzle

and Marc W. Warman, both of RDA Cooperative Services, for their review of the

initial draft of this report.

i
Contents

Highlights . . . . ..~...............................................~................................................. iv

Profile of Respondent Cooperatives ............................................................... 1

Cooperative Size ..................................................................................... 2

Cooperative Type ................................................................................... a

Cooperative Profitability .......................................................................... 3

Description of income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..*.................4

Analysis of the Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Net Sales ................................................................................................. 6

Farm Supply Sales .......................................................................... 7

Marketing Sales .............................................................................. 7

Cost of Goods Sold ................................................................................. 7

Gross Margins ......................................................................................... 8

Service and Other Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Operating Expenses ................................................................................ 9

General ............................................................................................ 9

Administrative ................................................................................ 12

Labor ............................................................................................. 13

Other ............................................................................................. 15

Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Interest and Other Income .................................................................... 18

Interest .......................................................................................... 18

Other ............................................................................................ .18

Income From Own Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Income From Other Cooperatives .......................................................... 19

Income Taxes ........................................................................................ 20

Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Appendix 1 ................................................................................................... 23

Appendix 2 .................................................................................................... 29

Appendix 3 .................................................................................................... 33

. . .

ill
Highlights

Operating statements from 1,336 local farm supply and marketing cooperatives were analyzed in this report. On average, from 1983 to 1990, information

from 596 respondent cooperatives in each of the years was studied. For this

study, cooperatives were divided into four groups based on their mix of net

sales between supplies sold and farm products marketed. They were also divided into four size categories, based on their total sales volume. Analysis was

also made on whether the cooperative was profitable or unprofitable based on

income from own operations.

Net sales for all respondent cooperatives decreased throughout the early

1980s but rebounded in the late 1980s. In 1990, the average net sales for all

cooperatives studied were $6.7 million. More than 50 percent were small cooperatives with sales of less than $5 million during the 8 years studied.

Cost of goods sold for farm supply cooperatives was typically lower, hence

higher gross margins. As a percent of net sales, gross margins averaged 8.2

percent for all cooperatives and 17.1 percent for farm supply cooperatives.

Small cooperatives, most often selling farm supplies, had the highest gross

margin for cooperative size, at 10.8 percent.

Operating expenses were separated into four main categories: general,

administrative, labor, and other. General expenses averaged about 4.7 percent

of net sales for all respondent cooperatives. Depreciation was by far the largest

general expense and accounted for more than a third of general expenses

throughout the 1980s. Insurance expenses increased nearly 60 percent, from

an average $29,000 in 1983 to $46,000 in 1990. Marketing cooperatives, with

high grain drying expenses, spent four times as much on utilities than farm sup

ply cooperatives did.

Administrative expenses as a percent of net sales fluctuated from a low of

0.9 percent in 1983 to 1.9 percent in 1986. In 1990, the rate was 1.2 percent of

net sales. Most farm supply cooperatives had higher administrative expenses

than marketing cooperatives. The largest increase in administrative expenses

occurred in store and warehouse supplies. They nearly doubled throughout the

1980s. Bad debt expense, which averaged 0.4 percent of net sales from 1983

to 1986, had been reduced to just over 0.1 percent in 1990 for all cooperatives.

However, unprofitable cooperatives continued to be plagued by bad debt

expense.

By far, the largest expense to cooperatives was labor. Labor expense for

all cooperatives increased from 3.9 percent of net sales in 1983 to 5.6 percent

in 1990. On average, farm supply cooperatives had higher labor expenses than

marketing cooperatives. Benefits expense for all cooperatives grew 3.2 percent

per year. On average, these cooperatives employed nearly 15 workers each.

Even the smallest cooperatives averaged 8 people.

iv
Interest expenses for cooperatives declined from 1 .l percent of net sales

in 1983 to 0.8 percent by 1990. The interest expense decline reflected cooperative efforts in recent years to reduce debt levels. While the use of short-term

debt fluctuated, the use of long-term debt steadily declined. Long-term debt fell

from an average of $495,571 in 1983 to $230,923 in 1990. Because the average amount of assets for all cooperatives was fairly constant throughout the 8

years studied, it was evident that equity financing has replaced term-debt.

Income from own operations as a percent of net sales averaged 1.5 percent for all cooperatives. Farm supply and smaller cooperatives tended to have

higher profit margins. About 17.5 percent of the cooperatives were unprofitable

during the years of this study. Income from regional cooperatives and CoBank

were important. They allowed 1 in 7 of the unprofitable cooperatives (based on

income from own operations) to have an overall positive net income.
Analysis of Income Statements of Local Farm

Supply and Marketing Cooperatives

David S. Chesnick and E. Eldon Eversull

Cooperative managers, faced with the responsibility of controlling operating expenses, needed

some “standard” benchmark with which to compare their performance. This report provides averages and trends for operating expenses by cooperative sizes, types, and profitability levels to help

cooperative managers analyze their operations.

Local farm supply and marketing cooperatives studied in this report had a combined average

net sales of $7,177,774 and net income of $125,429.

Comparing net income to sales, cooperatives had a

return to sales of only 1.8 percent. With small net

income, cooperative managers need to be aware of

and try to control operating expenses that are

above normal levels.

For whatever the reason, operating expenses

relative to net sales were excessive for 17.5 percent

of the respondent cooperatives. These cooperatives

were unprofitable. Additionally, from 1983 to 1990,

121 local cooperatives or 9.1 percent of respondents

within this study lost their individual identities,

either through mergers, acquisitions, or business

failure. For all agricultural cooperatives during this

same time, nearly 4.5 percent per year or 22 percent

of all cooperatives lost their individual identities,

either through mergers, acquisitions, or business

failure. This appeared to indicate that farm supply

and marketing cooperatives within this study were

more stable. Table 1 shows the total number of all

cooperatives that lost their identities and what happened to them. Using this as a proxy for cooperatives in this study, around 48 respondent cooperatives have gone out of business.

PROFILE OF RESPONDENT COOPERATIVES

Agricultural Cooperative Service (ACS) (now

Rural Development Administration-Cooperative

Services) conducted annual surveys of farmer

cooperatives which were the basis for the Farm

Supply and Services (FSS) database used for this

study. The annual surveys used in this report were

from 1983 through 1990. The years 1983,1987,1989,

and 1990 were census years for ACS data collection. In census years, all agricultural cooperatives

were queried. In the other years, only a random

Table l- Disposition of U.S. agricultural cooperatives no longer operating.

Year

Agricultural

cooperatives Dissolved Merged Acquired Other Total

Percent

of total

1983 5,989 8 6 5 7 1 7 5 4 214 3.57

1984 5,782 5 9 4 9 5 3 5 6 217 3.75

1985 5,625 8 6 41 3 8 5 3 218 3.88

1986 5,369 139 5 7 61 2 3 280 5.22

1987 5,109 116 4 7 4 6 71 280 5.48

1988 4,937 8 2 3 2 2 4 51 189 3.83

1989 4,799 107 5 5 3 3 3 6 231 4.81

1990 4,663 120 41 2 7 3 4 222 4.76

Source: USDA, Agricultural Cooperative Service, Statistical and Technical Services Staff, unpublished statistics.

1
sample of the local agricultural cooperatives were

sent a questionnaire. Each year, cooperatives were

asked to report the dollar volume of agricultural

products marketed and farm supplies sold. Basic

balance sheet items (total assets, total liabilities,

and net worth) and an income statement item (net

income) were also requested.

This basic information has been augmented in

the Farm Supplies and Services database by including more income statement and balance sheet items

from annual and audit reports sent along with the

annual survey. By combining this information with

the ACS annual survey data, a more detailed analysis of these cooperatives’ income statements and

their financial strength was possible. The data

included 1,336 cooperatives; however, not all cooperatives responded in each year. Table 2 lists the

number of cooperatives entered in the database

each year.

To obtain a more complete understanding of

the local cooperatives’ business, cooperatives were

divided into four sizes and four types. The cooperatives were also divided into profitable and

unprofitable groupings.

Cooperative Size

Cooperatives were grouped into sizes by sales

volumes. The sales volume figures used were actual; no attempt was made to deflate sales volume.

Appendix table Al provides the number of size

and type of cooperatives entered each year. Sales

groupings used were:

1) Small cooperatives, $5 million or less;

2) Medium cooperatives, more than $5 million to

$10 million;

3) Large cooperatives, more than $10 million to $20

million; and

4) Super cooperatives, in excess of $20 million.

The size groupings and names assigned to

them were somewhat arbitrary. Clearly, a $9 million cooperative that exclusively marketed grain

was small compared with most grain marketing

organizations. However, a strictly farm supply

cooperative with sales of $9 million was quite substantial. In classifying by only net sales, product

mix was ignored.

Cooperative Type

To account for differences in operations and

orientation based on product mix, cooperatives

were grouped into one of four descriptive categories. These types were chosen to represent business operations of these cooperatives as closely as

possible. The products marketed and sold were

presented in appendix table A2. Categories were:

1) Specialized marketing cooperatives had more

than 75 percent of their sales volume from marketing member and nonmember farm products.

Up to 25 percent of their sales volume could be

from selling farm supplies to their members.

2) From 50 to 75 percent of net sales of mixed marketing cooperatives were derived from products

marketed. The remaining 25 to 50 percent of revenues came from farm supply sales.

Table 2-Agricultural cooperatives in the farm supplies and services database.

1963 1964 1965 1986 1967 1966 1989 1990

Cooperatives Surveyed

by ACS’

Cooperatives Included

in FSS Database

5,989 2,418 3,601 2,286 5,109 2,200 4,799 4,663

402 390 465 753 870 611 744 535

1 A stratifiidrandom sample of cooperativeswassurveyedin 1964,1965,1966and1966.

2
3) Mixed farm supply cooperatives derived 50 to 90

percent of their sales volume from selling farm

supplies to members and nonmembers. Between

10 and 50 percent of these cooperatives’ sales

volume came from marketing farm products.

4) Specialized farm supply cooperatives had more

than 90 percent of their sales volume from selling to members and nonmembers. Few of these

cooperatives marketed any farm products.

Of the average 596 cooperatives in every year

of this report, 25 percent were specialized marketing cooperatives, 27 percent mixed marketing

cooperatives, 10 percent mixed farm supply cooperatives, and 38 percent specialized farm supply

cooperatives (table 3). More than half were small,

25 percent medium, 13 percent large, and 7 percent

super. Both types of marketing cooperatives tended

to be larger while the specialized farm supply

cooperatives were most often small.

There were variations in the number of

respondents over the 8-year period. Most responses

(870) were received in 1987 (Appendix table Al),

while the fewest (390) were received in 1984. It

must also be noted that few cooperatives responsed

every year. Because of this, even though an average

of 596 responded every year, the data between

years may not be completely comparable. The data

in the FSS database were not randomly selected

and may not be statistically valid to draw industrywide conclusions. However, the sample was large

and included a diversified selection of cooperatives

throughout the United States. Therefore, the data

provided a unique look at cooperative operations.

Cooperative Profitability

Income from own operations was used in this

study to determine profitable and unprofitable cooperatives. A profitable cooperative, in this study, had

to have income for at least 50 percent of the years

data was provided. Using this method neutralized

the magnitude of profits and losses and concentratTable 3- Profile of respondent cooperatives’ types by size, average of 1983-90.

Mixed

Size Specialized Mixed Fan-n

Marketing Marketing SUPPlY

Number

Small 50 6 1 31

Medium 41 54 18

Large 35 28 9

Super 20 19 3

Total 146 162 61

Percent

Small 34.25 37.45 49.80

Medium 28.08 33.51 29.76

Large 23.97 17.14 15.18

Super 13.70 11.89 5.26

Average 24.50 27.18 10.23

Specialized

Farm

SuPPly

184

37

5

1

227

81.05

16.14

2.26

0.55

38.09

Total

326

150

77

44

596

Averege

54.70

25.17

12.92

7.21

100.00

3
ed on whether the operations of the cooperative

were sufficient to cover expenses every year. Of the

596 cooperatives, 82.5 percent of the cooperatives

were profitable and 17.5 were unprofitable.

DESCRIPTION OF INCOME STATEMENT

The income statement showed the result of

operations for the past year. Usually this statement

included both the current and the prior year for

comparison purposes. This statement included all

sources of revenue and expenses. The income statement measures the profitability of the cooperative

for a given period of time. Although it does not

show timing of cash flows, the income statement

best describes the status of the business.

In the analysis of financial statements, it was

often instructive to find out the proportion that a

Table 4- Average common size income statement

for all cooperatives, 1983-90.

Percent of net sales

Net sales 100.00

Cost of goods sold 91.81

Gross margins 8.19

Service income

Operating expenses

General expenses

Administrative expenses

Labor expenses

Other

Total operating expenses 11.69

Interest expense 1.07

Interest and other income

Interest income

Other income

Income from own operations

Income from other cooperatives

Income tax

Net income

5.13

4.65

1.25

5.29

0.50

0.43

0.56

1.54

0.37

0.17

1.75

single item represented of a total group or subgroup. In the income statement, net sales were set

at 100 percent. Every other item was expressed as a

percent of net sales. Because the income statement

variables were expressed as a percent of net sales,

comparisons were possible between different sizes

and types of operations. Thus, the statement used

in this report became known as a “common size”

income statement. This statement was provided for

the average cooperative respondent in table 4. The

first item listed on the income statement was the

primary source of revenue-farm supplies sold and

products marketed.

Cost of goods sold (COGS) was the amount a

cooperative paid for the products it sold and marketed. This included the payments to farmers for

their products marketed through the cooperative

and cost to the cooperative for the supplies sold to

farmers. Sales less COGS represented the gross

margins on sales.

Service or operational income came from providing services to cooperative patrons. Service

included delivery, chemical and fertilizer application, grain drying, and storage. Although substantial for some cooperatives, service income was not

considered a primary source of operating revenue.

Operating expenses were those incurred in the

course of conducting normal business. They were

usually classified by function like general, administrative, labor, and other.

Interest was paid to creditors for the use of

their financial capital. This does not, however,

include interest paid on past-due accounts payable

unless they were converted to notes payable. The

interest on the notes would then be included in

interest expense.

Interest and other income was acquired by the

cooperative through nonoperational activities like

interest on cash and cash equivalents; sale of property, plant, and equipment; and other extraordinary

gains and losses.

Income from own operations resulted from

operations before taxes and income from other

cooperatives. In this report, it was the measure of

profitability for the cooperative. Income from other

cooperatives represented patronage refunds. This

income was based on volume of business conduct4
Table 5- Average common size income statement by size and type, 1983-90.

Item Small Medium Large Super

Percent

Net sales

Cost of goods sold

Gross margins

Service income

Operating expenses

General expenses

Administrative expenses

labor expenses

Other

Total operating expenses

Interest expense

Interest and other income

Interest income

Other income

Income from own operations

Income from other cooperatives

Income tax

Net income

100.00 100.00 100.00 100.00

89.18 89.88 91.85 92.56

10.82 10.14 8.15 7.44

8.20 4.41 4.31 4.17

5.62 4.78 4.46 4.26

2.05 1.51 1.11 0.93

7.67 6.01 4.82 4.13

0.52 0.50 0.45 0.52

15.86 12.80 10.85 9.83

0.99 0.97 0.97 1.13

0.73 0.51 0.37 0.30

0.89 0.50 0.45 0.49

1.79 1.79 1.47 1.43

0.56 0.34 0.28 0.28

0.13 0.16 0.15 0.17

2.22 1.98 1.59 1.54

Specialized Mixed Mixed Specialized

marketing marketing farm supply farm supply

Net sales 100.00

Cost of goods sold 96.10

Gross margins 3.90

Service income

Operating expenses

General expenses

Administrative expenses

Labor expenses

Other

Total operating expenses

4.12

3.14

0.65

2.61

0.33

6.72

Interest expense

Interest and other income

Interest income

Other income

0.82

Income from own operations

Income from other cooperatives

Income tax

Net income

0.32 0.38 0.63 0.78

0.49 0.67 0.75 0.75

1.30 1.57 1.61 1.69

0.28 0.32 0.39 0.72

0.14 0.18 0.19 0.15

1.43 1.71 1.82 2.25

Percent

100.00 100.00

93.37 89.49

6.63 10.51

4.68 5.27

4.09 5.28

0.93 1.47

4.36 6.91

0.49 0.65

9.88 14.31

0.91 1.23

100.00

82.86

17.12

3.68

6.11

2.71

10.08

0.53

19.44

1.20

5
ed with the other cooperative and was dependent

on the other cooperative’s net income. Usually,

income from other cooperatives was allocated equity and not actual cash coming into the respondent

cooperatives.

Net income was the end result of operations

for that year. Distribution of net income was not

part of the income statement. The board of directors decides how to distribute net income or allocate a net loss.

ANALYSIS OF THE INCOME STATEMENT

The income statement displays the net results

of cooperative operations. Because most managers’

performance is judged by net income, members

attach great importance to the income statement.

This report looks at some underling values of the

income statement and provides some comparisons

to help cooperative managers analyze the effect on

their cooperative’s earnings. Table 5 presents a common size income statement averaged for the 8 years

by size and type for the various mix of cooperatives.

Appendix tables Bl through B4 provide a complete

breakdown of the common size income statement

for all types of cooperatives based on size.

Figure 1- Average Net Sales

Millions of dollars

10

8

6

1983 84 85 86 87 88 89 90

Table 6- Average net sales by co-op size and year.

Year Small Medium Large Super

Million $

1983 2.76 6.86 13.20 29.29

1984 2.25 6.86 13.85 35.55

1985 2.36 6.50 13.25 32.66

1986 2.23 6.55 12.87 28.97

1987 2.12 6.58 13.16 27.71

1988 2.28 7.07 13.20 33.96

1989 2.29 7.10 13.39 35.16

1990 2.34 7.03 13.20 29.57

Table 7- Average net sales by co-op type and year.

Specialized Mixed Mixed Specialized

Year Marketing Marketing FarmSupply Farm Supply

Million $

1983 9.14 a.71 7.86 3.70

1984 15.38 11.25 7.84 3.68

1985 11.31 9.31 6.61 3.36

1986 9.46 7.80 5.60 2.85

1987 8.26 7.60 5.05 2.54

1988 13.01 11.39 7.42 3.02

1989 13.35 11.60 6.96 3.43

1990 9.05 8.64 6.30 3.75

Net Sales

The first item of the income statement analyzed in this report was net sales determined by

subtracting sales discounts and returns and

allowances from gross sales. The average net sales

for the 535 cooperatives in 1990 was $6.7 million,

down $1.7 million from the 744 cooperatives in

1989 (figure 1). The highest average net sales of all

cooperatives during the study period-$8.4 million-was achieved in 1989.

Net sales by cooperative size were presented

in table 6. Since 1986, all sizes of cooperatives

demonstrated some increases in sales, albeit slightly. During that 4-year period, the average rate of

growth in net sales for all sizes of cooperatives was

less than 2 percent. However, super-sized coopera-
tives fluctuated substantially during that period but

their overall growth rate was less than 2 percent.

Table 7 shows sales by cooperative type. Both

mixed and specialized marketing cooperatives in

general had higher net sales than mixed farm and

specialized farm supply cooperatives. While specialized farm supply cooperatives tended to have

substantially less sales than both types of marketing cooperatives, their sales were not subject to the

fluctuations in grain prices and yields and therefore considered more stable.

Farm Supp/y Sales-The cooperatives in this

report sold six major types of farm supplies (figure

2). Because these cooperatives were divided into

four types, the level of farm supply sales varied in

terms of their importance to net sales. During this

study period, farm supply sales relationship to net

sales went from 37 percent in 1983 to 58 percent in

1990 (figure 3). Of farm supply products sold,

petroleum was the highest, averaging 27 percent

during the study period (Appendix table A2).

Fertilizer and feed were next.

Marketing Sales-Grain and oilseed cooperative

sales made up the vast majority of marketing sales.

Grains marketed varied by region but were generally

Figure 2- Sources of Farm Supply Sales

Millions of dollars

-Other

-Petroleum

-Chemicals

-Fertilizer

- $eecJ

0’ ’

I 1 I I I I I- Feed

1983 84 85 86 87 88 89 90

corn and wheat. Soybeans had the largest amount of

oilseed sales. Cooperatives studied also marketed

cotton and rice. The breakdown of marketing sales by

all cooperatives was presented in appendix table A3.

Cost of Goods Sold

Cost of goods sold (COGS) represented the

largest single component of expenses, usually

expressed as a percent of net sales. For this study,

COGS includes the beginning inventory plus purchases and freight costs, minus purchase returns

and allowances, purchase discounts, and ending

inventory. So, for these cooperatives, COGS was the

purchase price of the farm supplies sold or products

marketed. Table 8 shows COGS as a percent of net

sales for the different types of cooperatives. Both

types of marketing cooperatives had a relatively

high COGS, which was to be expected because they

were generally marketing grain for their patrons

with only a few cents per bushel margin.

For all types except mixed farm supply cooperatives, COGS as a percent of net sales was lower

in 1990 than in 1983. Mixed farm supply cooperatives remained fairly constant over that period.

Specialized farm supply cooperatives made the

greatest effort at lowering COGS, from 85.2 percent

in 1983 to 81.5 percent in 1990.

Figure 3- SOUrCeS of Revenue

Percent

-Marketing

-Services

-Farm

Supplies

1983 84 85 86 87 88 89 90

7
Table 8- Cost of goods sold as a percent of net

sales by type of cooperative and year.

Year Specialized

marketing

Mixed

marketing

Mixed Specialized

farm farm

SUPPlY SuPPlY

1983 98.00 94.90 87.99 85.19

1984 97.81 94.26 90.43 83.84

1985 94.24 91.56 91.21 84.56

1988 94.52 91.98 86.10 81.54

1987 94.45 92.38 88.38 81.71

1988 97.02 92.34 92.63 82.60

1989 97.15 95.22 90.07 81.45

1990 95.89 93.60 87.99 81.54

Average 96.10 93.37 89.49 82.88

Percent

Gross Margins

Gross margins were the excess of net sales

over the cost of goods sold. It is commonly

expressed as a percent of net sales. Stated as such,

the gross margin averaged 8.2 percent for all cooperatives. The gross margin or gross margin percentage is a very important operating ratio. A small

change in the gross margin has a tremendous

impact on income from own operations. A cooperative manager must maintain a gross margin near

industry averages. Thus, least cost sources of supplies need to be developed and marketing cooperatives cannot pay over market rates on the products

they purchase.

Cooperatives are often characterized as businesses that provide goods and services “at cost.”

However, a cooperative cannot operate at cost on a

day-to-day basis. Therefore, unless a cooperative

has an adequate gross margin, it can neither be

profitable nor afford to finance essential futuredirected discretionary expenditures such as expansion and advertising.

Because by definition, gross margin equals net

sales less cost of goods sold, those cooperatives

with higher COGS had lower gross margins. COGS

were higher for marketing cooperatives and larger

cooperatives, so gross margins as a percent of net

sales were highest for farm supply and small cooperatives. Specialized farm supply cooperatives17.1 percent- had the highest gross margin.

Although both types of farm supply cooperatives

had less business volume than cooperatives that

performed marketing activities, their gross margin

percentage was from 4 to 10 percentage points

higher. Small cooperatives, most often selling farm

supplies, had the highest gross margin by size, at

10.8 percent.

When analyzing gross margins, particular

attention needs to be paid to factors that account

for the changes in and the relationship between

sales and COGS and management’s ability to control this relationship. A detailed analysis of

changes in gross margins can generally only be

performed internally by management. The data

required includes the number of physical units

sold, unit sales prices, and unit cost. Because the

data needed to breakdown gross margins by physical units of products sold was not available for this

study, a detailed analysis of cooperative gross margins is not included. However, an example is provided in appendix 3 for those who want to perform

such an analysis.

Table 9 illustrates gross margins by size and

type for both profitable and unprofitable cooperatives. On average, the more profitable cooperatives

had a slightly higher gross margin percentage than

Table 9- Average gross margins as a percent

of net sales by size and type and profitability levels,

1983-90.

Size/type

Small

Medium

Large

Super

Profitable Unprofitable Difference

_____ ____ Percent ____ _____ %poin ts

11.32 8.55 2.77

10.38 8.21 2.17

8.18 7.97 0.21

7.38 6.44 0.94

Specialized marketing 3.94 3.24 0.70

Mixed marketing 7.01 3.72 3.29

Mixed farm supply 10.91 8.69 2.22

Specialized farm supply 17.67 14.59 3.08

8
the less profitable ones. When separated by size,

there was a difference of more than 2 percentage

points between profitable and unprofitable operations among the small- and medium-sized cooperatives. Small profitable cooperatives, usually farm

supply cooperatives, had the highest gross margin

percentage (11.3 percent) based on size. Although

the large- and super-sized cooperatives showed a

difference between the profitable and unprofitable

cooperatives, the magnitude of the difference was

smaller. Appendix tables A4 and A5 present gross

margins for profitable and unprofitable cooperatives by size and type for the entire &year period.

Specialized marketing cooperatives did not

exhibit a substantial difference between profitable

and unprofitable cooperatives while the other three

types differed considerably- between 2.2 and 3.3

percentage points. There are several explanations

for their differences. Unprofitable cooperatives

may be in more competitive markets and forced to

operate with lower margins. Profitable cooperatives with higher margins might indicate that the

cooperative has access to more suppliers and can

shop for a better price.

Service and Other Operating Income

Service and other operating income, for the

most part, consisted of trucking services (both

delivery of purchases to patrons and transfer of

their products to market), custom application of

fertilizers and agricultural chemicals, and drying

and storing of grains and oilseeds. Local cooperatives provided many other services to their

patrons, but these were the primary ones of the

respondent cooperatives. Service and other operating income averaged between 3 and 5 percent of

net sales for all sizes and types except small and

mixed farm supply cooperatives (table 5).

Operating Expenses

Operating expenses were divided into four

main categories-general, administrative, labor,

and other. General expenses included many of the

fixed expenses directly related to revenue production. Administrative expenses included many variable and overhead costs associated with a cooperative and indirectly related to revenue production.

Table 10 illustrates the percent of total operating

expenses that each of the four main categories comprised. Labor and general expenses made up the

bulk of total expenses, each at least 37 percent in

every year. Labor expenses appeared to be heading

upward although all other operating expenses were

either flat or declining.

Genera/ expenses-General expenses were

usually fixed in the short run and associated with

the production of income. Management usually

does not have direct control over these expenses.

Depreciation was by far the largest general

expense.

General expenses, at 3.1 percent of net sales,

were the lowest for specialized marketing cooperatives (table 5). For all types and sizes of cooperatives, general expenses averaged between 3.1 and

6.1 percent of net sales from 1983 to 1990. When

compared with total operating expenses, general

expenses have hovered around 40 percent of total

expenses for all respondent cooperatives.

There have been substantial changes in the

makeup of general expenses, except depreciation

which consisted of roughly a third of general

expenses (figure 4). The amount of expense allocated to rent and lease and utilities declined from 1983

to 1990. Simultaneously, insurance costs nearly

doubled.

Table 1 0- General, administrative, labor, and other

expenses as a percent of operating expenses, by

year.

Year General Administrative Labor Other

1983 41.70 10.01 43.26 5.03

1984 38.88 12.09 45.03 4.00

1985 40.29 11.96 43.04 3.91

1986 39.54 11.93 44.18 4.35

1987 40.33 10.23 45.25 4.19

1988 40.80 9.32 45.40 4.40

1989 39.22 9.76 46.69 4.33

1990 37.32 10.52 47.97 4.19

Average 39.76 10.72 45.22 4.30

9
Figure 4- Average General Expenses as a Percent of Total Expense

Percent

5 0

40

30

20

10

0

I I I I 1 I 1 I

1983 84 85 86 87 88 89 90

Utilities and Dryer

Repair and Maintenance

Property Taxes and Fees

insurance

Rent/Lease and Truck

Depreciation

Figure !&-Average Administrative Expenses as a Percent of Total Expense

Percent

14 r

8

6

I I I I I I I I

1983 84 85 86 87 88 89 90

Other

Professional Fees

Store Supplies

Office Supplies

Bad Debt

Advertising

10
Table 1 I- Average general expenses as a percent of

net sales by size and type, 198340.

item Small Medium Large Super

Pmen t

Depreciation 1.05 1.63 1.58 1.37

Rent or lease 0.23 0.19 0.21 0.33

General insurance 0.80 0.56 0.46 0.41

Property tax 0.38 0.37 0.40 0.33

Other taxes and fees 0.16 0.17 0.16 0.15

Repair and maintenance 0.72 0.61 0.55 0.58

Auto and truck 0.83 0.67 0.53 0.49

Utilities and dryer 0.64 0.56 0.57 0.61

Total general 5.62 4.70 4.46 4.26

Specialized Mixed Mixed Specialized

marketing marketing farm farm

slJPPfY =JPPfY

Depreciation 1.11 1.37 1.73 1.91

Rent or lease 0.23 0.23 0.26 0.16

General insurance 0.32 0.44 0.59 0.78

Property tax 0.29 0.33 0.39 0.36

Other taxes and fees 0.08 0.13 0.12 0.46

Repair and maintenance 0.37 0.56 0.72 0.77

Auto and truck 0.26 0.51 0.89 1.14

Utilities and dryer 0.48 0.53 0.57 0.51

Percent

Total general 3.14 4.09 5.28 6.11

Table 12- Average general expenses as a percent of

net sales for profitable and unprofitable

cooperatives, 1983-90.

Profitable Unprofiiable Difference

. . . . . . percent . . . . . .

Depreciation 1.56 1.55 0.01

Rent or lease 0.26 0.35 -0.09

General insurance 0.51 0.57 -0.06

Property tax 0.36 0.37 -0.01

Other taxes and fees 0.15 0.34 -0.19

Repair and maintenance 0.60 0.57 0.03

Auto and truck 0.61 0.61 0.00

Utilities and dryer 0.58 0.59 -0.01

% points

Total general 4.64 4.94 -0.30

Listed in table 11 are the categories included

in general expenses by size and type along with the

average percent of net sales that each general

expense represented. When comparing general

expenses by cooperative size, the main difference

from small- to super-sized cooperatives appeared

to be the decrease in depreciation, insurance, and

auto and truck expense (Appendix tables Bl

through B4). Depreciation decreased from 1.9 percent of net sales for small cooperatives to 1.4 percent for super-sized cooperatives.

By cooperative type, depreciation, insurance,

repairs and maintenance, other taxes and fees, and

auto and truck expenses were higher for the farm

supply cooperatives (Appendix tables Bl through

B4). Rent and lease expenses declined greatly for

both types of marketing cooperatives. Much of this

rent and lease expense incurred in the early 1980s

was for long-term leases on railroad grain hopper

cars. The shortage of hopper cars in the 1970s

encouraged marketing cooperatives to lease them

to assure a supply. That shortage seemed to have

been abated by the mid 1980s and rent and lease

expenses declined. Also, the Commodity Credit

Corporation (CCC) grain storage program was

scaled back by 1988, further reducing the need to

rent or lease additional temporary facilities.

Depreciation expense for marketing cooperatives was larger than for farm supply cooperatives

in dollar terms due to higher investments in property, plant, and equipment-probably grain storage

facilities. Also, marketing cooperatives had higher

levels of utility and dryer expenses in some years,

mainly due to grain drying expenses. However,

when expressed as a percent of net sales, depreciation expenses and utilities and dryer expenses were

generally less for marketing cooperatives.

In every category of general expense except

investment in capital equipment (depreciation and

repairs and maintenance), the profitable cooperatives had a smaller percent of net sales used for

general expenses than unprofitable cooperatives

(table 12). When comparing profitable and unprofitable cooperatives, the largest differences were

other taxes and fees, rent and lease, and insurance

(Appendix table A6).

11
Administrative Expenses-Administrative comprising almost a third of the total. Bad debts

expenses (table 13) were those indirectly involved declined from 0.5 percent of net sales in 1985 and

with generating income. Managers usually had

more control over administrative expenses than

1986 to 0.1 percent by 1990. Store and warehouse

over any other cost. In years when revenues were

supplies made up the bulk of administrative

expenses as a percent of net sales in 1990, at 0.3

down for whatever reason, managers could reduce

expenses in this area more easily than in other

percent, while advertising made up 0.2 percent,

office supplies 0.2 percent, and professional fees 0.2

categories. percent (Appendix tables Bl through B4).

Figure 5 shows administrative expenses as a

percentage of operating expenses for all cooperatives included in the study. Bad debts were the

largest administrative expense in the early 198Os,

By cooperative size, administrative expenses

as a percent of net sales were highest for smallsized cooperatives at 2.1 percent and dropped to

0.9 percent for super-sized cooperatives (table 13).

Table 13- Average administrative expenses as a percentage of net sales by size and type, 1983-90.

Item Small Medium Super

Advertising 0.29 0.21 0.14 0.11

Contributions and donations 0.02 0.01 0.01 0.02

Dues and subscriptions 0.05 0.03 0.03 0.02

Bad debt 0.46 0.32 0.23 0.15

Office supplies and postage 0.26 0.20 0.15 0.12

Store and warehouse supplies 0.28 0.26 0.20 0.18

Telephone and marketing service 0.14 0.12 0.09 0.10

Travel and meetings 0.12 0.10 0.07 0.06

Annual meeting 0.06 0.04 0.04 0.04

Board of directors 0.08 0.05 0.03 0.02

Professional fees 0.29 0.18 0.13 0.11

Total administrative 2.05 1.51

Percent

1.11 0.93

Specialized

marketing

Mixed

marketing

Mixedfarm

SUPPlY

Specialized

farmsupply

Advertising 0.06 0.12 0.20 0.44

Contributions and donations 0.00 0.02 0.01 0.07

Dues and subscriptions 0.02 0.02 0.02 0.06

Bad debt 0.13 0.17 0.39 0.56

office supplies and postage 0.09 0.13 0.19 0.31

Store and warehouse supplies 0.10 0.15 0.20 0.48

Telephone and marketing service 0.06 0.08 0.13 0.18

Travel and meetings 0.04 0.06 0.10 0.15

Annual meeting 0.02 0.03 0.04 0.09

Board of directors 0.02 0.03 0.04 0.08

Professional fees 0.09 0.12 0.14 0.30

Percent

Total administrative 0.65 0.93 1.47 2.71

12
Administrative expenses were highest for specialized farm supply cooperatives at 2.7 percent of net

sales and lowest for specialized marketing cooperatives at 0.7 percent.

There were a few major differences when

administrative expenses were compared between

profitable and unprofitable cooperatives (table 14).

The biggest differences were bad debt expense and

professional fees. For the 8 years studied, the nonprofitable cooperatives averaged 51 percent higher

bad debt expenses than profitable cooperatives

(Appendix table A7).

Bad debts as a percent of administrative

expenses were especially high during 1983-86

when the prime interest rate was near or higher

than 10 percent. Farmers were borrowing money

for operating loans at even higher rates and often

were financing some of their purchased supplies

(feed, seed, fertilizer, and agricultural chemicals)

on credit at their local cooperative. As farmers

found they could no longer stay in business, many

defaulted on loans and could not repay credit purchases. Because of the downturn in the farm economy, many cooperatives’ accounts receivable

Table 14- Average administrative expenses as a

percent of net sales for profitable and unprofitable

cooperatives, 1983-90.

item Profitable Unprofitable Difference

Advertising

Contributions and donations

Dues and subscriptions

Bad debt

Office supplies and postage

Store and warehouse

supplies

Telephone and marketing

service

Travel and meetings

Annual meeting

Board of directors

Professional fees

0.17 0.19 -0.02

0.01 0.01 0.00

0.03 0.04 -0.01

0.23 0.47 -0.24

0.16 0.18 -0.02

0.21

0.10 0.11 -0.01

0.08 0.08 0.00

0.04 0.04 0.00

0.04 0.05 -0.01

0.15 0.21 -0.06

0.22 -0.01

Total administrative 1.22 1.60 -0.38

became bad debts. But as farm income increased

through the late 1980s and interest rates declined,

both profitable and unprofitable cooperatives

reduced their bad debt expenses by 10 percentage

points.

Professional fees for the more profitable cooperatives averaged 0.15 percent of total net sales

with a high in 1986 of 0.2 percent. The less profitable cooperatives had professional fees averaging

around 0.2 percent with a high in 1986,1987 and

1990 of nearly 0.3 percent. In many cases with

unprofitable cooperatives, this professional fee constituted fees paid to lawyers and accountants for

help in restructuring debt. Cooperatives also

turned to the legal system for help in collecting

overdue accounts.

Labor Expense-Labor expenses- salaries and

wages, benefits, payroll taxes, and pensionsaveraged 4.4 percent of net sales for all respondent

cooperatives throughout the 8-year period. They

had the highest increase in operating expenses

during the study period, rising from 3.9 percent of

net sales in 1983 to 7 percent in 1986, but declined

to 5.6 percent in 1990.

Table 15 lists the average of all labor expenses

as a percentage of net sales for each category during the 8 years. Labor expense divided by sales is

also a good indication of labor efficiency. It illustrates how labor is used to generate an amount of

sales. If this number increases over a period of

years, it indicates marginal use of labor is becoming more expensive.

As a percent of net sales, labor expenses

decreased as the cooperative size increased. The

average labor expenses decreased from 7.7 percent

of net sales for small cooperatives to 4.1 percent for

super cooperatives. By type, total labor expenses as

a percent of net sales increased from 2.6 percent for

specialized marketing cooperatives to 10.1 percent

for specialized farm supply cooperatives.

Farm supply cooperatives tended to be more

labor intensive and many operated several stores.

Operating a feed mill or service station, applying

chemicals and fertilizers, and selling hardware

required the use of several employees. The smaller

marketing cooperatives used fewer employees,

13
often having only a manager, bookkeeper, and two

or three employees.

Salaries and wages decreased from 6.3 percent

of net sales to 3.5 percent as cooperative size

increased from small to super. Salaries and wages

as a percent of net sales increased - ranging from

Table 15- Average labor expenses as a percentage

of net sales by size and type, 1983-90.

Item Small Medium Large Super

Percent

Salaries & wages 6.30 4.94 3.97 3.46

Benefits 0.59 0.45 0.37 0.29

Payroll tax 0.58 0.43 0.31 0.26

Pension 0.20 0.19 0.18 0.12

Total labor 7.67 6.01 4.82 4.13

item Specialized Mixed Mixed farm Specialized

marketing marketing supply farm supply

Percent

Salaries 8 wages 2.13 3.63 5.59 8.34

Benefits 0.22 0.32 0.55 0.70

Payroll tax 0.17 0.27 0.51 0.72

Pension 0.08 0.14 0.24 0.32

Total labor 2.61 4.36 6.91 10.08

2.1 percent for specialized marketing to 8.3 percent

for specialized farm supply.

Benefits expense for all sizes and types of

cooperatives averaged between 0.2 and 0.7 percent

of net sales (table 15). The dollar value of benefits

offered employees increased 3.2 percent per year.

This rate of increase was 1 percent faster than the

growth in total labor expenses. Employee benefits

included health, life, and disability insurance; educational assistance; use of transportation; and uniforms. The major proportion of benefits expense

was health insurance.

Payroll taxes ranged from 0.2 to 0.7 percent of

net sales. Payroll taxes were fixed by law and

directly proportional to wages and salaries.

Because of this, payroll taxes in dollar terms were

higher for larger cooperatives. Because wages and

salaries were a higher proportion of net sales for

farm supply cooperatives, payroll taxes were also

higher.

Pension plans included both established

retirement plans with employer contributions and

profit sharing plans. A recent survey by ACS (now

RDA-Cooperative Services) found that cooperatives used numerous types of pension plans [Rotan,

p. lo]. Twenty-two percent of the cooperatives in

the Rotan survey had no pension plan and 20 percent had a defined plan where the cooperative paid

Table 16 Average number of full-time employees and labor expense, net sales, and income from own

operations per employee, 1983-90.

Average Average Average Average income

Size/type number of labor expense net safes from ovin operations

employees per employee per employee per employee

Number ___________________ ___________________ D&,~ ____________ _________________ _ _______

Small 7.8 21,808 346,121 5,277

Medium 14.3 25,196 626,317 8,435

Large 21.2 26,450 816,598 8,950

Super 50.8 27,364 824,714 8,717

Specialized marketing 14.0 24,693 960,420 $979

Mixed marketing 19.1 24,693 585,331 7,679

Mixed farm supply 21.7 23,961 398,520 4,812

Specialized farm supply 11.6 21,908 257,424 5,055

Average 14.7 23,892 538,486 7,359

14
Table 17- Labor efficiency, average labor expense

to net sales for profitable and unprofitable

cooperatives, by size and type.

Size/type

Small

Medium

Large

Super

Profitable Unprofitable Difference

------- /Jemnt _______ % points

7.55 7.85 -0.30

5.96 5.81 0.15

4.69 5.28 -0.59

4.06 3.45 0.61

Specialized’marketing 2.50 3.12 -0.62

Mixed marketing 4.41 3.94 0.47

Mixed farm supply 6.88 6.98 -0.10

Specialized farm supply 9.86 10.19 -0.33

100 percent of the cost. Eighteen percent of the

cooperatives matched up to 5 percent of employees’ salaries and 10 percent used a form of profit

sharing program and 401 (k) plans.

In this study, on average, 402 cooperatives

provided labor expense information that broke out

this expense into more than just a summary category of all labor-related expenses. Of these 402 cooperatives, 176 or 44 percent had some form of pension plan. The average total pension plan expenses

for these cooperatives was $10,859. Pension

expense was 0.17 percent of net sales and 7.1 percent of income from own operations. Because pension plans were often related to profitability, pension expenses and income from own operations

were lower in the early 198Os, but started to rise in

1988 as income from own operations increased.

Cooperatives had an average of nearly 15 fulltime employees. Table 16 lists the average number

of employees for each size and type of cooperative

and labor expense, net sales per employee, and

income from own operations each employee generated. By cooperative size, the number of employees

and labor expenses relative to both net sales and

income from own operations were mostly as

expected. Smaller cooperatives have fewer employees, lower salaries, less sales per employee, and

smaller income from own operations per employee.

The only exception was in super-size cooperatives

where income from own operations per employee

was $200 less than in large cooperatives.

On average, marketing cooperatives paid

from $700 to $3,000 more per employee for labor

than farm supply cooperatives did. However, the

amount of net sales each employee generated

ranged from $200,000 to $700,000 greater than for

farm supply cooperatives. Income from own operations per employee was also $3,000 to $5,000 higher

for marketing cooperatives than for farm supply

cooperatives.

Table 17 illustrates the labor efficiency for different sizes and types of cooperatives, based on

profitability (Appendix table A8). It is interesting

to note that there appears to be no distinct relationship between profitability and efficient use of labor.

Other Expenses-Other expenses were those the

cooperative considered insignificant when

considered individually. That is, they were not

directly allocated to a specific account and were

lumped together in a general account called other

expenses. For all sizes and types of cooperatives,

other expenses were less than 0.7 percent of net

sales. It also must be noted that what some

cooperatives consider insignificant, others may

consider significant.

Figure 6- Average Interest Expense

Thousands of dollars

120

100

80

60

40

20

0

1983 84 85 86 87 88 89 90
Interest Expense

Interest expenses resulted from borrowing

funds for both short and long-term needs. Shortterm borrowing of funds (short-term debt) was

often for operational expenses and both the principal and interest of the loan were due within 1 year.

Long-term borrowing (long-term debt) financed

investments in property, plant, and equipment and

the principal and interest were due in periods in

excess of a year.

Interest expenses among these cooperatives

have been declining (figure 6). The decline was

attributable to both carrying less debt and lower

interest rates. During the time period of this study,

the rate of interest on 6-month Treasury bills fell

more than 1 percentage point (table 18). The prime

interest rate also fell by nearly 0.8 points. Interest

expenses for all cooperatives fell from a high of 1.4

percent of net sales in 1985 to a low of 0.8 percent

in 1987. With interest rates rising, interest expenses

rebounded to 0.83 percent of net sales in 1990.

Average effective interest rate is a proxy for

the cooperatives’ cost of borrowed money. Here’s

how the average effective interest rate paid is calculated:

total interest cost

average total indebtedness subject to interest

The average effective interest rate paid can be

compared over the years and with other cooperatives. Table 18 compares short-term (6-month

Treasury bill rate) and long-term (prime) rates as

well as the effective interest paid by different sizes

of cooperatives. The effective interest rate for both

large and small cooperatives was 11.3 percent

while the rate was 12 percent for medium and 12.2

for super-size cooperatives. The effective rate only

fell below 10 percent in 1987 (9.6 percent) and 1988

(9.1 percent). The calculation of the effective interest rate somewhat overstates the real rate of interest for cooperatives, due in part to some loans

being paid off during the year and not being facTable 19- Use of short-term debt compared with

long-term debt, by year.’

Year Small Medium Large Super Average

Ratio

1983 1.06 1.18 0.93 0.62 0.95

1984 1.40 1.25 1.21 0.98 1.21

1985 1.21 0.93 0.93 0.66 0.93

1986 1.02 0.73 0.79 0.68 0.81

1987 1.00 1.10 1.00 0.94 1.01

1988 1.48 1.98 2.32 2.63 2.10

1989 1.38 1.87 1.64 1.40 1.57

1990 1.40 1.48 1.91 1.37 1.54

Average 1.24 1.32 1.34 1.16 1.27

l Ratioofshort-termdebtdividedbylong-termdebt If the ratiois

greaterthan 1, more short-term debtisbeing used.

Table 18- Market interest rates and interest paid by cooperatives.

Year g-month

Treasury bill Prime rate

Averageeffectiveinterestratepaidbycooperatives~

Super t-a&w Medium Small

Percent

1983 8.75 10.79 12.86 11.31 12.14 12.02

1984 9.80 12.04 12.16 12.86 13.32 12.49

1985 7.66 9.93 13.00 13.11 14.68 12.52

1986 6.03 8.33 11.62 10.70 12.73 11.79

1987 6.05 8.21 9.47 8.91 9.94 10.14

1988 6.92 9.32 9.13 9.03 8.49 9.89

1989 8.04 10.87 16.79 13.77 12.76 11.67

1990 7.47 10.01 12.29 10.92 11.94 9.80

1 The average effective interest rate = total interest cost/average total indebtedness subjecttointerest.

16
Figure 7- Types of Debt

Thousands of dollars

10001

600

-t debt

L-1 debt

1983 84 85 86 87 88 89 90

tored into the calculation of total debt while the

interest paid on these loans is included in interest

expense.

A short-term versus long-term debt ratio has

been developed in table 19. A number higher than

1 indicates more short-term debt was being used

while a number lower than 1 indicates greater use

of long-term debt. Short-term loans usually carry

lower interest rates than long-term loans. The average medium and large cooperatives used more

short-term debt than small- and super-size cooperatives. But, small cooperatives always used more

short-term than long-term debt. Short-term debt

was used more often by all sizes of cooperatives

from 1987 to 1990 than from 1983 to 1986.

With the exception of 1988, cooperatives have

been using less debt (figure 7). Along with declining debt, cooperatives decreased their financial

leverage. Cooperatives used less debt and more

equity to finance their assets. Table 20 shows the

percentage of assets financed by debt. Financial

leverage is defined here as the ratio of debt to

assets, which indicates the percent of assets

financed by debt. The lower the percentage, the

more conservative the financial structure of the

cooperative. Leverage benefited the cooperative

and its members when the return on the cooperative’s assets was greater than the fixed interest payments on the debt, thereby giving a greater return

to member equity. However, if the return on assets

was less than the interest payments, members had

a lower return on their equity.

Leverage peaked in 1983 and 1984 when an

average of all cooperative sizes and types had at

least 24 percent of their assets financed through

long-term debt. By cooperative size, leverage

increased from 16.8 percent on average for small

cooperatives to 25.3 percent for super-size cooperatives. Interestingly, mixed farm supply cooperatives

had the highest leverage at 23.4 percent while specialized farm supply cooperatives were the lowest at

Table 20- Percent of assets financed by debt

(financial leverage), by size, type and year.

Year Small Medium Law Super

Percent

1983 20.37 22.82

1984 21.15 24.56

1985 19.54 19.72

986

987

988

989

990

5.49 19.63

4.27 17.22

3.65 19.78

4.45 14.63

5.28 15.02

Average 16.78 19.17

27.54 27.17

28.09 34.27

23.21 32.20

22.97 25.79

19.48 21.94

21.38 25.47

15.65 18.38

19.88 16.99

22.28 25.28

Year

Specialized Mixed Mixedfarm Specialized

marketing malketing SUPPlY farm supply

1983

1984

1985

1986

1987

1988

1989

1990

Average 18.31 20.24 23.39 17.36

19.53 24.68 28.67 24.43

25.32 27.16 30.04 21.39

21.59 21.13 26.76 19.23

18.12 19.23 23.16 15.62

12.71 17.71 18.73 13.98

18.86 20.07 20.37 14.45

14.26 16.63 19.84 14.21

16.11 15.30 19.51 15.57

Percent

17
Figure 8- Average nonoperating income

Thousands of dollars

‘O0K

80

60

Other

income

Interest

income

1983 84 85 86 87 88 89 90

17.4 percent. Because the level of cooperative assets

exhibited little change, the implications of lower

leverage showed that cooperatives were paying off

their debts while increasing their equity investment.

Interest and Other Income

Interest and other income were from sources

not directly related to the cooperatives’ day-to-day

operations, or to nonoperating income. Other

income mainly included interest on short- and

long-term investments and other sources such as

sales of property, plant, and equipment for either a

gain or loss.

Werest Income-Income included interest on

cash equivalents and interest charged on accounts

receivable. Interest income averaged less than 1

percent of net sales for all cooperative sizes and

types (table 21). By size, the importance of interest

income relative to net sales decreased as size

increased, from 0.7 percent (small) to 0.3 percent

(super). By type, interest income relative to net

sales was greater for farm supply cooperatives (0.6

to 0.8 percent) than marketing cooperatives (0.3 to

0.4 percent).

Average interest income for all cooperatives

declined from $35,000 in 1983 to $25,000 in 1990

(figure 8). The decline was due in part to both the

decrease in interest rates and the apparent tightening of credit sales reflected by cooperatives’ lowering of accounts receivable levels. Appendix table

A9 illustrates the interest income for each size and

type of cooperative.

Other Income-Other income came from the sale

of property, plant, and equipment, rental income,

and extraordinary items. Sometimes property,

plant, and equipment was sold to generate income,

but usually the sale was a disposal where the asset

was either fully depreciated or the market value of

that asset was greater than the book value. Because

a fully depreciated asset might cost the cooperative

money to dispose of it, there is sometimes a loss in

disposal. Rental income from unused facilities or

equipment provides income flows. Extraordinary

items might be either a gain or a loss. A gain might

be a fire loss where the insurance payment was

greater than the book value of the asset.

Other income as a percent of net sales averaged from 0.9 percent for small cooperatives to 0.5

percent for large cooperatives. It was highest at 0.8

percent for both types of farm supply cooperatives

and was lowest at 0.5 percent for specialized marketing cooperatives.

Income From Own Operations

Income from own operations (income before

taxes and income from other cooperatives) was the

Table 21- Average interest income as a percent of

net sales, by size and type, 1983-90.

Size/type interest income

Small 0.73

Medium 0.51

Large 0.37

Super 0.30

Specialized marketing 0.32

Mixed marketing 0.38

Mixed farm supply 0.83

Specialized farm supply 0.78

18
best indicator of the profitability of local cooperatives’ operations. Income from other cooperatives

was important to local cooperatives net income but

because this income was beyond the control of the

local’s manager and the board of directors it was

not used in determining profitability. Income from

own operations was used to define profitability for

local cooperatives in this study.

Average income from own operations as a

percent of net sales by type was the highest for specialized farm supply cooperatives (1.7 percent) and

the lowest for specialized marketing cooperatives

(1.3 percent) (table 22). Interestingly, small- and

medium-size cooperatives tended to have a higher

income from own operations percentage than larger cooperatives. The higher income percentage

based on size was probably due more to the small

cooperatives’ tending to be farm supply cooperatives which had higher margins-per-sales-dollar

than the larger marketing cooperatives with lower

margins. Income from own operations, in dollar

terms, was generally the strongest for all cooperative sizes and types in 1987 and 1988.

Income From Other Cooperatives

Income from other cooperatives resulted from

the local cooperatives doing business with other

Table 22-Average income from own operations and

income from own operations as a percent of net

sales, by cooperative size and type, 1983-90.

Size/type income from

own operations

Income from

own operations/

net sales

Small 41,765

Medium 122,382

Large 194,751

Super 453.393

Specialized marketing 144,102 1.30

Mixed marketing 149,985 1.57

Mixed farm supply 108,249 1.61

Specialized farm supply 59,559 1.69

All cooperatives

Dollars

110,882

Percenl

1.79

1.79

1.47

1.43

1.54

cooperatives. Income from other cooperatives “permit cooperatives to operate as typical businesses,

earning income in excess of expenses, while still

operating ‘at cost.’ By permitting cooperatives to

retain a portion of the margins designated as

patronage refunds, members provide needed equity without having to write checks to the association

[Frederick, p.i].” Income from other cooperatives in

this study was generally from regional cooperatives and CoBank. The income from regionals was

based on business volume with some of the

refunds in cash and the rest in equity stock. The

equity stock was usually revolved back to the local

cooperative on a set schedule. Many respondent

cooperatives also borrowed funds from CoBank

and the Bank for Cooperatives and received both

cash and noncash patronage income. The noncash

patronage from CoBank was from investing in the

bank that was usually required in proportion to the

funds borrowed.

Income from other cooperatives was lowest at

0.3 percent of net sales for the larger cooperatives

and specialized marketing cooperatives and highest for specialized farm supply at 0.7 percent (table

23). The importance of patronage income to.net

sales tended to decline as cooperative size

increased. By cooperative type, income from other

cooperatives as a percent of net sales was higher

for farm supply cooperatives than for marketing

cooperatives.

Table 23- Average income from other cooperatives

by size and type, 1983-90.

Size/type Income from other cooperatives

Percent

Small 0.56

Medium 0.34

Large 0.28

Super 0.28

Specialized marketing 0.28

Mixed marketing 0.32

Mixed farm supply 0.39

Specialized farm supply 0.72

19
Figure &Average Income from Other Co-ops

Thousands of dollars

1001

60

40

20

r\“I

1983 84 85 86 87 88 89 90

Income from other cooperatives was a reflection of the business operations of regional cooperatives and could be a loss (figure 9). In both 1986

and 1987, several regionals wrote down allocated

equity held by local cooperatives. Local cooperatives subtracted the allocated losses from income

from own operations. With the exception of 1986

and 1987, most regionals increased net income

throughout the late 1980s and increased income

distribution [Staiert, pp.4-51.

With net income of less than 2.5 percent of net

sales for all respondent cooperatives, income from

others made a difference between a profit or a loss

for 20 cooperatives each year (table 24). On average, 125 or 21 percent of total respondents had

yearly losses. When both cash and noncash income

from other cooperatives was considered, one in

every seven cooperatives with a loss from own

operations had positive net income. The exception

was in 1986 when 24 cooperatives which had

income from own operations lowered because

regional cooperatives wrote down their equity.

Subtracting the regionals allocated loss from the

local’s income from own operations resulted in a

loss for the local cooperative.

Income Taxes

Cooperatives paid income taxes on earnings

not allocated to members (retained earnings) and

on dividend payments. The decision as to what

amounts were allocated to retained earnings and to

members was made by the board of directors. The

treatment of nonmember business has an impact on

retained earnings because the cooperative could

allocate the earnings to nonmembers or retain the

income. In terms of net sales, income tax paid was

always less than 0.2 percent of sales (table 25).

Income tax paid by cooperatives varied by

size. The calculated tax rate was determined by

dividing income tax paid by taxable income (sum

of dividend payments and increased retained earnings). There was an apparent problem in the calculated tax rate in this table though, because the actual income tax rate should not have exceeded 34

percent, the highest corporate rate. One explanation was the difference between the determination

of net income for tax or book purposes. Another

error in the calculation could center around the tax

Table 24-Cooperatives with losses from

own operations where income from other

cooperatives made a difference between a loss

and gain, by year.1

Year

cooperatives

with a loss from

own operations

Cooperatives

with losses

COOpEdiVeS

where income from

other co-ops made

a difference2

1983 94 77 17

1984 126 112 14

1985 140 119 21

1986 159 183 -24

1987 132 125 7

1988 70 55 15

1989 160 101 59

1990 118 69 49

Average 125 105 20

1 Income from other cooperatives either increased or decreased net

income or losses.

* The negative number means local cooperatfves applied regional

cooperatives’ writedown of equity to their income from own

operations resulting in a loss for those cooperatives.

20
Table 25-Average income tax as a percent of net

sales, tax paid, and calculated tax rate, by size and

type, 198380.

Size/type

Percent of Calculated

net sales Income tax tax rate

Percent Dollars Percent

Small 0.13 3,125 21.29

Medium 0.16 11,025 23.37

Large 0.15 20,512 34.94

Super 0.17 55,248 54.13

Specialized marketing 0.14 15,044 20.44

Mixed marketing 0.18 17,300 40.93

Mixed farm supply 0.19 12,471 36.72

Specialized farm supply 0.15 5,924 54.10

or book treatment of bad debts and depreciation. In

any case, the calculated tax rate increased from 21.3

percent for small cooperatives to 54.1 percent for

super-size cooperatives. Analysis by type was less

apparent, as specialized farm supply cooperatives

that were usually small had the highest calculated

tax rate. These cooperatives had a high proportion

of petroleum sales relative to other farm supply

sales. Much of these petroleum sales might be to

nonmembers and taxable, thus a higher calculated

tax rate.

Net Income

Net income is the profit shown on the cooperative income statements. Net income was distributed five ways - income taxes, dividends on

patron’s equity, cash patronage refunds, non cash

patronage allocations, and retained earnings.

Net income increased by size. Small cooperatives had net income of $51,644 while super-size

cooperatives had $487,456 (table 26). But, as a percent of net sales, small cooperatives (2.2 percent)

had 0.7 percentage points greater return than

super-size cooperatives (1.5 percent). By cooperative type, farm supply had returns of 1.8 percent or

better while specialized marketing cooperatives

were at 1.4 percent and mixed marketing cooperatives had returns of 1.7 percent.

CONCLUSIONS

The agricultural recession in the early to mid

1980s forced many local cooperatives to evaluate

business operations. Interest rates on loans were in

double digits; many farmers were leaving agriculture. Bad debts were becoming more common and

by 1983 they approached 0.3 percent of net sales.

Those local farm supply and marketing cooperatives that weathered the economic storm survived

as stronger business entities.

Even with tough economic conditions, cooperatives maintained income from own operations of

1.5 percent of net sales. Maintenance of income

from own operations was achieved in a number of

ways. Efforts to lower COGS were made, especially

by specialized farm supply cooperatives. They lowered COGS as a percent of net sales by 3 percentage

points. Administrative expenses, those over which

managers have the most control, were lowered for

a majority of cooperatives. Interest expenses were

lowered because less debt was being financed.

Better management of bad debts reduced accounts

receivable. Cooperatives also reduced employee

numbers.

Some of the operating expenses might have

been lowered by the demise of the local cooperative. Initially, there were 1,336 cooperatives in this

study. That number dwindled to 1,215 through

Table 26-Average net income and net income as a

percent of net sales, by size and type, 198340.

Size/type Net income

Percent of

net sales

Small 51,644 2.22

Medium 134,885 1.98

Large 211,125 1.59

Super 487,456 1.54

Specialized marketing 159,240 1.43

Mixed marketing 163,008 1.71

Mixed farm supply 122,133 1.82

Specialized farm supply 74,161 2.25

Dollars PeIcent

21
mergers, acquisitions, and cooperatives going out

of business. In prior studies, when asked who their

principal competitors were, many local cooperatives cited other local cooperatives. While competition was healthy, when there was more than one

local cooperative serving a market area, farmer

members were supporting duplicate facilities.

Duplicate facilities and services might also be

reflected in income from own operations.

Throughout the &year span of this report, about

17.5 percent of the cooperatives had an overall loss.

Net losses suggests there might be overcapacity in

some markets that cooperatives serve.

Overcapacity will prompt additional mergers,

acquisitions, and failures among local cooperatives.

Local cooperatives may consider specializing in

these competitive markets. Cooperatives with overlapping trade territories might consider joint ventures, for example, one cooperative might provide

feed to both cooperatives’ members and the other

one would provide agronomy products.

Information in this report does not suggest

that one size or type of local cooperative has a cost

or operating expense structure superior to that of

another. Rather, by combining the information

from many similar, yet diverse cooperatives, management and the board of directors will be able to

compare their operations with those of other cooperatives.

To remain viable, local cooperatives need to

continue monitoring their operating expenses. This

study provided average operating expenses as a percent of net sales by cooperative size and type, which

should be valuable for comparative purposes.

Bibliography

Dunn, John R., Beverly L. Rotan, and E. Eldon

Eversull, Agronomy Operations of Local Cooperatives,

U.S. Department of Agriculture, Agricultural

Cooperative Service, RR 109, January 1993.

Eversull, E. Eldon, and David S. Chesnick, Analysis

of Balance Sheets of Local Cooperatives Farm Supply

and Marketing Cooperatives, U.S. Department of

Agriculture, Rural Development AdministrationCooperative Service, RR 138, November 1994.

Frederick, Donald A., and John D. Reilly, Income

Tax Treatment of Cooperatives: Patronage Refunds, U.S.

Department of Agriculture, Agricultural

Cooperative Service, CIR 44, Part 2, December

1993.

Richardson, Ralph M., et al., Farmer Cooperative

Statistics 1992, U.S. Department of Agriculture,

Agricultural Cooperative Service, SR 39, November

1993.

Rotan, Beverly L., Cooperative Employee

Compensation, U.S. Department of Agriculture,

Agricultural Cooperative Service, RR 114, March

1993.

Staiert, Jim J., “Higher Net Income Improves

Growth of largest Co-ops”, U.S. Department of

Agriculture, Agricultural Cooperative Service,

Farmer Cooperatives, Volume 59, No. 7, October

1992.

Wissman, Roger A., Working with Financial

Statements-Guide for Cooperative Members, U.S.

Department of Agriculture, Agricultural

Cooperative Service, CIR 43, November 1991.

22
Appendix table Al- Sample size of respondent cooperatives by size, type, and year.

TypdSi29 1963 1964 1965 1966 1967 1966 1969 1990 Average

Number

Small 186 194 265 453 533 325 362 264 326

Medium 113 106 102 190 221 138 203 164 150

Large 72 54 65 67 76 90 109 82 77

Super 31 36 33 43 40 58 70 25 43

Total 402 390 465 753 870 611 744 535 596

Specialized marketing 154 78 110 162 197 143 189 135 146

Mixed marketing 149 91 108 199 231 168 199 152 162

Mixed farm supply 31 41 53 78 95 60 77 56 6 1

Specialized farm supply 68 180 194 314 347 242 279 192 227

Total 402 390 465 753 870 611 744 535 596

Percent

Small 46.27 49.74 56.99 60.16 61.26 53.19 48.66 49.35 53.20

Medium 28.11 27.18 21.94 25.23 25.40 22.59 27.28 30.65 26.05

Large 17.91 13.85 13.98 8.90 8.74 14.73 14.65 15.33 13.51

Super 7.71 9.23 7.10 5.71 4.60 9.49 9.41 4.67 7.24

Specialized marketing 38.31 20.00 23.68 21.51 22.64 23.40 25.40 25.23 25.02

Mixed marketing 37.06 23.33 23.23 26.43 26.55 27.17 26.75 28.41 27.37

Mixed farm supply 7.71 10.51 11.40 10.36 10.92 9.82 10.35 10.47 10.19

Specialized farm supply 16.92 48.15 41.72 41.70 39.89 39.81 37.50 35.89 37.42

Appendix table A2- Average percent farm supply sales by cooperative type, 1983-90.

Item

Specialized Mixed

marketing marketing

Mixed

farm supply

Specialized

fam supply

Percent

Feed 20.14 19.84 20.31 16.16

Seed 4.54 3.38 2.59 4.15

Fertilizer 25.41 18.54 16.30 16.00

Chemicals 16.75 12.13 8.73 9.01

Petroleum 19.58 24.29 27.25 30.15

Other 13.58 21.82 24.82 24.53

23
!s Appendix table A3-Average farm supplies sold and farm products marketed for all cooperatives, 1983-90.

Item 1983 1984 1985 1986 1987 1988 1989 1990

Feed 735,602 1,083,413 871,603 837,218 749,566 981,862 930,980 742,626

Seed 124,643 191,640 129,926 115,015 127,563 148,534 149,273 118,076

Fertilizer 708,990 868,345 843,718 748,487 670,092 894,061 877,391 763,377

Chemicals 378,734 485,166 483,097 451,358 430,960 570,669 566,412 496,243

Petroleum 1,409,210 1,626,399 1,576,486 1,258,725 1,135,135 1,323,567 1,372,223 1,337,480

Auto'accessories 115,530 162,038 149,985 141,639 138,305 165,023 170,646 188,900

Machinery 124,608 139,230 158,560 184,407 147,907 172,506 315,763 453,403

Building materials 197,082 223,502 145,230 131,161 139,210 186,956 263,724 303,098

Containers 49,987 47,613 37,420 60,050 35,181 62,170 81,552 50,588

Food 265,428 279,714 75,446 112,471 114,476 146,932 163,680 170,788

Other 178,906 324,257 304,786 317,826 297,619 341.893 392,562 418.192

Grain

Rice

Cottonandcotton seed

6504,105

126,883

9,287,386 6,953,179 6,086,468 5,391,653

178,571 89,286 272,056 270,012

335,054 278,034 203,039 202,062

8,251,734 8,139,021 5,671,970

364,195 296,159 408,865

_ __-_ _ -- _ ___--
Appendix table A4a- Gross margin for profitable

cooperatives as a percent of net sales, by size.

Year Small Medium Large Super

Percent

1983 5.95 7.62 7.39 6.58

Appendix table A5a- Gross margin for profitable

cooperatives as a percent of net sales, by type.

Mixed Specialized

Specialized Mixed farm farm

Year marketing marketing supply SUPPlY

Percent

1984 11.18 10.73 7.79 5.96 1983

1985 10.77 11.12 8.03 6.78 1984

1986 12.39 10.97 8.80 7.64 1985

11.03 9.32 8.63 1986

1987

1988 14.53 10.94 8.02 7.07 1988

1989 12.55 10.28 7.73 7.10 1989

1990 11.59 10.40 8.38 9.95 1990

3.80 6.13 12.00 16.25

1.47 5.71 9.09 16.71

5.74 8.66 7.76 15.70

5.53 8.11 14.16 18.99

5.47 8.29 12.35 18.80

4.13 7.59 9.99 17.49

3.17 5.52 11.14 18.82

3.94 6.92 11.90 18.60

Appendix table A4b- Gross margin for unprofitable

cooperatives as a percent of net sales by size.

Year Small Medium Large Super

Percent

1983 -2.80 8.38 10.54 5.62

Appendix table A5b- Gross margin for unprofitable

cooperatives as a percent of net sales, by type.

Mixed Specialized

Specialized Mixed farm farm

Year maketing marketing SUPPlY SUPPlY

Percent

1984

1985

1986

11.79 8.46 8.45 6.28

11.70 10.01 6.85 9.03 1983 5.28 -2.67 12.01 11.00

10.02 10.23 8.22 7.25 1984 4.48 5.63 10.10 14.43

1987 10.16 9.67 8.50 6.94 1985 5.26 6.14 11.81 14.53

1988 11.13 5.94 7.82 1 1986 3.04 7.34 12.50 15.66

1989 7.76 6.15 6.46 6.62 1987 5.83 2.19 7.18 15.71

1990 11.00 7.55 6.87 5.12 1988 -4.01 8.37 -3.73 16.90

1 This value is not provided due to minimal observations. 1989 0.74 -1.26 2.64 16.06

1990 4.76 2.15 10.99 16.90

25
K Appendix table A6a- General expenses for profitable cooperatives as a percentage of net sales.

Item Depreciation Rent or lease

General

insurance Property tax Othertax

Percent

Repair and

maintenance Auto and truck

Utilities

and dryer Total

1983 1.34 0.31 0.33 0.29 0.12 0.42 0.47 0.58 3.87

1984 1.33 0.25 0.31 0.31 0.14 0.47 0.58 0.47 3.86

1985 1.78 0.31 0.45 0.42 0.12 0.63 0.72 0.77 5.22

1986 2.13 0.31 0.61 0.49 0.16 0.80 0.78 0.96 6.23

1987 2.03 0.34 0.74 0.47 0.15 0.82 0.71 0.75 6.01

1988 1.59 0.26 0.58 0.37 0.18 0.67 0.60 0.48 4.73

1989 1.26 0.17 0.53 0.30 0.17 0.55 0.51 0.39 3.87

1990 1.36 0.15 0.64 0.33 0.15 0.57 0.61 0.44 4.25

Average 1.56 0.26 0.51 0.36 0.15 0.60 0.61 0.58 4.64

Appendix table A6b- General expenses for unprofitable cooperatives as a percentage of net sales.

Item Depreciation Rent or lease

General

insurance Property tax Other tax

Percent

Repair and

maintenance Auto and truck

Utilities

and dryer Total

1983 1.19 0.27 0.33 0.29 0.17 0.38 0.46 0.49 3.59

1984 1.38 0.31 0.36 0.31 0.53 0.49 0.63 IO.51 4.50

1985 1.73 0.63 0.52 0.41 0.53 0.61 0.79 0.74 5.96

1986 2.10 0.38 0.76 0.49 0.40 0.77 0.87 0.97 6.75

1987 1.97 0.48 0.85 0.52 0.19 0.82 0.73 0.81 6.36

1988 1.42 0.38 0.65 0.31 0.26 0.55 0.45 0.46 4.49

1989 1.32 0.17 0.61 0.31 0.29 0.47 0.43 0.41 4.01

1990 1.65 0.25 0.79 0.39 0.23 0.68 0.59 0.56 5.14

Average 1.55 0.35 0.57 0.37 0.34 0.57 0.61 0.59 4.94
Appendix table A7a- Administrative expenses as a percent of net sales for profitable cooperatives.

Duesand Sad Office Storeand Telephone, Travel, Annual Board of Professional

Year Advertising Donations subscriptions debt supplies warehouse markets meetings meetings directors fees Total

Pwcent

1983 0.12 0.01 0.02 0.22 0.11 0.10 0.06 0.06 0.02 0.03 0.11 0.85

1984 0.15 0.01 0.03 0.31 0.14 0.14 0.08 0.07 0.06 0.03 0.11 1.12

1985 0.18 0.05 0.03 0.42 0.17 0.23 0.11 0.08 0.05 0.04 0.15 1.51

1986 0.21 0.01 0.04 0.42 0.21 0.37 0.14 0.10 0.06 0.05 0.20 1.83

1987 0.20 0.01 0.04 0.25 0.22 0.25 0.14 0.10 0.05 0.05 0.20 1.50

1988 0.16 0.01 0.03 0.11 0.17 0.19 0.11 0.07 0.04 0.03 0.14 1.06

1989 0.15 0.01 0.02 0.09 0.15 0.19 0.09 0.07 0.03 0.03 0.13 0.96

1990 0.19 0.01 0.03 0.12 0.18 0.26 0.09 0.08 0.04 0.04 0.16 1.20

Average 0.17 0.01 0.03 0.23 0.16 0.21 0.10 0.08 0.04 0.04 0.15 1.21

Appendix table A7b- Administrative expenses as a percent of net sales for unprofitable cooperatives.

Duesand Bad Office Store and Telephone, Travel, Annual Boardof Professional

Year Advertising Donations subscriptions debt supplies warehouse markets meetings meetings directors fees Total

Percent

1983 0.15 0.01 0.01 0.46 0.14 0.14 0.07 0.07 0.02 0.03 a.13 1.24

1984 0.21 0.01 0.04 0.65 0.16 0.26 0.10 0.09 0.03 0.04 0.18 1.76

1985 0.19 0.02 0.05 0.69 0.17 0.28 0.13 0.09 0.04 0.05 0.23 1.94

1986 0.23 0.01 0.06 1.03 0.24 0.24 0.14 0.09 0.07 0.07 0.27 2.47

1987 0.24 0.01 0.07 0.35 0.26 0.23 0.18 0.10 0.06 0.08 0.27 1.84

1988 0.17 0.01 0.06 0.17 0.19 0.22 0.11 0.06 0.04 0.05 0.18 1.25

1989 0.14 0.01 0.03 0.14 0.14 0.18 0.10 0.06 0.03 0.04 0.20 1.08

1990 0.19 0.01 0.05 0.23 0.21 0.22 0.13 0.09 0.04 0.05 0.27 1.48

Average 0.19 0.01 0.04 0.47 0.18 0.22 0.11 0.08 0.04 0.05 0.21 1.60
Appendix table A8a-Labor expenses for profitable

cooperatives as a percentage of net sales.

Salalies Payroll Total

Year andwagss Benefits tax Pension labor

Percent

1983 3.19 0.32 0.23 0.16 3.90

1984 3.67 0.30 0.29 0.14 4.40

1985 4.74 0.39 0.38 0.17 5.67

1986 5.79 0.46 0.50 0.18 6.93

1987 5.57 0.48 0.48 0.17 6.70

1988 4.36 0.38 0.37 0.13 5.24

1989 3.83 0.36 0.31 0.14 4.63

1990 4.52 0.46 0.36 0.16 5.49

Average 4.35 0.39 0.35 0.16 5.25

Appendix table A8b-Labor expenses for

unprofitable cooperatives as a percentage of net

sales.

Salaries Payroll Total

Year andwagss Benefits tax Pension labor

1983 3.46 0.33 0.24 0.28 4.31

1984 4.56 0.44 0.33 0.19 5.52

1985 5.39 0.49 0.43 0.17 6.48

1986 6.54 0.49 0.54 0.25 7.81

1987 6.17 0.59 0.51 0.19 7.47

1988 4.35 0.50 0.34 0.10 5.29

1989 3.73 0.43 0.31 0.10 4.57

1990 5.05 0.64 0.40 0.13 6.22

Percent

Average 4.76 0.48 0.37 0.19 5.79

Appendix table AS-Interest income by size, type,

and year.

Item Small Medium Super

1983 18,591 35,980 59,009 116,495

1984 17,108 40,770 76,759 80,978

1985 16,766 52,276 57,173 120,132

1986 18,763 44,288 49,248 105,816

1987 15,127 32,208 36,563 82,289

1988 15,610 27,610 35,679 70,627

1989 15,714 26,979 35,435 79,179

1990 16,339 27,852 40,627 72,277

Average 16,752 35,995 48,812 90,974

Dollars

Item

Mixed Specialized

Specialized Mixed farm farm

marketing marketing suPPly supply

1983 30,387 37,385 54,223 30,058

1984 34,344 34,626 50,101 33,653

1985 38,028 45,975 36,406 30,153

1986 35,140 33,855 40,128 28,436

1987 25,337 26,383 26,994 22,196

1988 26,526 27,686 33,107 23,982

1989 26,897 27,888 34,253 24,901

1990 26,781 24,310 34,764 22,585

Average 30,430 32,264 38,747 26,996

Dollars

28
APPENDIX 2

Appendix table Bl- Average common size income statement for specialized marketing cooperatives based on

size, 1983-90.

Item Small Medium Large Super

Percent

Net safes

Cost of goods sold

Gross margins

Service income

General expenses

Depreciation

Rent or lease

General insurance

Property tax

Other taxes and fees

Repair and maintenance

Auto and truck

Utilities and dryer

Total general

Administrative expenses

Advertising

Contributions and donations

Dues and subscriptions

Bad debt

Office supplies and postage

Store and warehouse supplies

Telephone and marketing service

Travel and meetings

Annual meeting

Board of directors

Professional fees

Total administrative

Labor expenses

Salaries and wages

Benefits

Payroll tax

Pension

Total labor

100.00 100.00 100.00 100.00

94.29 94.40 94.75 94.28

5.71 5.60 5.25 5.72

7.38 4.23 4.14 3.88

1.77 1.27 1.33 1.30

0.21 0.18 0.22 0.35

0.80 0.44 0.38 0.33

0.43 0.34 0.37 0.32

0.14 0.13 0.15 0.07

0.73 0.40 0.44 0.44

0.54 0.29 0.30 0.28

0.86 0.55 0.55 0.60

5.48 3.59 3.75 3.68

0.12 0.08 0.08 0.07

0.02 0.01 0.00 0.00

0.05 0.02 0.02 0.02

0.23 0.17 0.19 0.09

0.17 0.11 0.11 0.12

0.20 0.14 0.13 0.11

0.08 0.06 0.06 0.06

0.10 0.07 0.06 0.08

0.05 0.03 0.02 0.04

0.06 0.03 0.02 0.01

0.21 0.14 0.11 0.10

1.28 0.87 0.81 0.70

3.75 2.64 2.59 2.46

0.40 0.26 0.25 0.22

0.33 0.21 0.21 0.18

0.15 0.10 0.10 0.08

4.63 3.21 3.14 2.93

Other 0.63 0.50 0.42 0.51

Total operating expenses 12.02 8.18 8.12 7.83

Interest expense 0.73 0.73 0.79 1.14

Interest income 0.54 0.32 0.29 0.24

Other income 0.81 0.28 0.41 0.35

Income from own operations 1.68 1.53 1.19 1.22

Income from other cooperatives 0.59 0.21 0.21 0.31

Income tax 0.12 0.13 0.10 0.15

Net income 2.15 1.61 1.30 1.38

29
Appendix table B2- Average common size income statement for mixed marketing cooperatives based on size,

1983-90.

Item Small Medium Large Super

Net safes

Cost of goods sold

Gross margins

Service income

General expenses

Depreciation

Rent or lease

General insurance

Property tax

Other taxes and fees

Repair and maintenance

Auto and truck

Utilities and dryer

Total general

Administrative expenses

Advertising

Conttibutions and donations

Dues and subscriptions

Sad debt

Office supplies and postage

Store and warehouse supplies

Telephone and marketing service

Travel and meetings

Annual meeting

Board of directors

Professional fees

Total administrative

Labor expenses

Salaries and wages

Benefits

Payroll tax

Pension

Total labor

100.00 100.00 100.00 100.00

93.17 92.22 91.55 91.74

6.03 7.78 8.45 8.26

6.28 4.75 4.77 4.34

1.62 1.53 1.70 1.37

0.19 0.19 0.20 0.30

0.70 0.50 0.46 0.47

0.39 0.39 0.40 0.33

0.10 0.14 0.17 0.13

0.62 0.55 0.64 0.69

0.54 0.50 0.53 0.63

0.67 0.58 0.63 0.59

4.83 4.37 4.72 4.51

0.14 0.15 0.14 0.13

0.01 0.01 0.01 0.05

0.04 0.03 0.04 0.02

0.40 0.19 0.15 0.16

0.17 0.18 0.17 0.12

0.19 0.19 0.18 0.24

0.08 0.09 0.07 0.07

0.10 0.08 0.09 0.11

0.06 0.04 0.03 0.03

0.06 0.04 0.04 0.02

0.21 0.16 0.13 0.11

1.45 1.15 1.03 1.07

4.29 3.99 4.16 3.98

0.38 0.38 0.39 0.30

0.37 0.31 0.32 0.29

0.13 0.18 0.14 0.14

5.16 4.86 5.01 4.71

Other 0.66 0.58 0.62 0.66

Total operating expenses 12.11 10.96 11.39 10.94

Interest expense 0.89 0.88 0.96 1.07

Interest income 0.53 0.42 0.35 0.32

Other income 0.79 0.58 0.40 0.62

Income from own operations 1.43 1.69 1.63 1.54

Income from other cooperatives 0.31 0.32 0.36 0.27

Income tax 0.12 0.15 0.14 0.19

Net income 1.61 1.85 1.87 1.61

Percent

30
Appendix table ES- Average common size income statement for mixed farm supply cooperatives based on

size, 1983-90.

Item Small Medium Large Super

Percent

Netsales

Cost of goods sold

Gross margins

Service income

General expenses

Depreciation

Rent or lease

General insurance

Property tax

Other taxes and fees

Repair and maintenance

Auto and truck

Utilities and dryer

Total general

Administrative expenses

Advertising

Contributions and donations

Dues and subscriptions

Bad debt

Office supplies and postage

Store and warehouse supplies

Telephone and marketing service

Travel and meetings

Annual meeting

Board of directors

Professional fees

Total administrative

Labor expenses

Salaries and wages

Benefits

Payroll tax

Pension

Total labor

100.00 100.00 100.00 100.00

85.76 88.00 87.07 86.26

14.24 12.00 12.93 13.74

7.02 4.58 4.51 5.38

2.40 1.75 1.90 1.98

0.61 0.21 0.22 0.27

0.96 0.62 0.59 0.63

0.50 0.38 0.45 0.46

0.14 0.13 0.12 0.45

1.15 0.73 0.68 1.01

1.14 0.98 0.86 1.21

0.93 0.60 0.52 0.70

7.62 5.37 5.35 6.73

0.30 0.24 0.19 0.24

0.02 0.01 0.01 0.00

0.06 0.03 0.01 0.02

0.68 0.46 0.25 0.40

0.31 0.24 0.20 0.18

0.37 0.26 0.38 0.18

0.13 0.10 0.11 0.07

0.15 0.18 0.15 0.14

0.06 0.06 0.10 0.05

0.08 0.05 0.05 0.04

0.29 0.18 0.13 0.11

2.46 1.81 1.57 1.41

7.65 6.14 6.02 8.28

0.69 0.56 0.54 0.50

0.64 0.56 0.52 0.61

0.28 0.20 0.26 0.18

9.26 7.46 7.34 7.56

Other 1.15 0.64 1.06

Total operating expenses 20.69 15.28 15.32

Interest expense 1.13 1.13 1.52

Interest income 0.72 0.72 0.50

Other income 1.07 0.57 0.62

Income from own operations 1.22 1.46 1.72

Income from other cooperatives 0.44 0.31 0.39

Income tax 0.17 0.13 0.19

Net income 1.49 1.65 1.92

0.95

16.65

1.68

0.72

0.50

2.03

0.57

0.10

2.49

31
Appendix table B4- Average common size income statement for specialized farm supply cooperatives based

on size, 1983-90.

Item Small Medium Large Super

Percent

Net sates

Cost of goods sold

Gross margins

Service income

General expenses

Depreciation

Rent or lease

General insurance

Property tax

Other taxes and fees

Repair and maintenance

Auto and truck

Utilities and dryer

Total general

Administrative expenses

Advertising

Contributions and donations

Duesandsubscriptions

Bad debt

Office supplies and postage

Store and warehouse supplies

Telephone and marketing service

Travel and meetings

Annual meeting

Board of directors

Professional fees

Total administrative

Labor expenses

Salaries and wages

Benefits

Payroll tax

Pension

Total labor

100.00 100.00 100.00 100.00

82.74 81.88 83.54 81.37

17.26 18.12 16.46 18.63

3.47 3.03 3.06 4.09

1.93 1.96 1.70 1.81

0.16 0.18 0.14 0.31

0.82 0.74 0.74 0.79

0.35 0.34 0.44 0.46

0.23 0.42 0.41 1.18

0.75 0.83 0.68 0.71

1.11 1.21 1.27 0.45

0.49 0.51 0.44 1.06

5.85 6.19 5.81 6.78

0.44 0.44 0.39 0.43

0.04 0.07 0.01 0.02

0.05 0.04 0.04 0.04

0.56 0.54 0.56 0.29

0.35 0.29 0.24 0.25

0.37 0.38 0.65 0.40

0.16 0.15 0.11 0.12

0.19 0.18 0.16 0.22

0.08 0.06 0.08 0.07

0.10 0.07 0.05 0.05

0.37 0.22 0.20 0.23

2.69 2.44 2.51 2.11

8.39 8.25 7.96 9.21

0.75 0.65 0.66 0.89

0.80 0.73 0.59 0.70

0.24 0.25 0.35 0.39

10.18 9.87 9.55 11.19

Other 0.71 0.82 0.53 0.85

Total operating expenses 19.43 19.32 18.40 20.93

Interest expense 1.14 1.20 1.20 1.45

Interest income 0.79 0.73 0.68 0.38

Other income 0.82 0.62 0.68 1.02

Income from own operations 1.77 1.98 1.29 1.74

Income from other cooperatives 0.70 0.65 0.35 0.36

Income tax 0.12 0.16 0.26 0.26

Net income 2.35 2.47 1.37 1.84

32
APPENDIX 3

Gross Margin Analysis

When analyzing gross margins, pay particular

attention to yearly changes. If they increase, is this

related to changes in the sales price, the cost of the

goods, the volume, or a combination of the three?

An analysis of variation will help the manager pinpoint areas that produce the variance.

The variance analysis is based on the principle

of focusing on one variable at a time while holding

all others constant. These six steps will help in analyzing the variance:

1) Focus on the year-to-year volume change while

assuming the selling price remains unchanged.

2) Focus on the year-to-year selling price change

while assuming the volume did not change.

3) Focus on the combined effect on the changes in

price and volume-the change in price times the

change in volume.

4) Focus on the year-to-year volume change while

assuming the cost of the product remains

unchanged.

5) Focus on the year-to-year change in the cost of

the product while assuming the volume did not

change.

6) Finally, focus on the combined effect on the

changes in costs and volume.

For example, assume the following values for seed

corn sales.

year 1 year 2 chmge

Net sales 240,000 244,900 4,900

COGS 228,000 229,100 1,100

Gross margins 12,000 15,800 3,800

Units sold 4,000 3,950 -50

Selling price/unit 60 62 2

COGS per unit 57 58 1

a U.S. GOVERNMENT PRINTING OFFICE: 1994 386-126/00350

step 1

change in volume times the

prior year selling price (50) x 60=

step 2

change in selling price times prior

year volume 2x4000 =

step 3

combination of the two effects

2 x (50) =

net effect on the price and volume

step 4

change in volume times the prior

year COG (50) x57 =

step 5

change in COGS times prior

year volume 1 x 4,000 =

step 6

combination of the two effects

1x(50) =

(3,000)

8,000

(100)

4,900

(2,850)

4,000

(50)

net effect on the cost and volume 1,100

total effect on gross margin 3,800

To interpret these results, determine the major

influencing factors. Such an analysis of gross margins can focus on the most feasible improvements

and the likely results of them. For example, if a

decline in the cooperative’s gross margin caused by

a decline in unit sales prices reflects a situation of

overcapacity in a competitive market, management

won’t have much influence over the decline. On the

other hand, if the decline in gross margins is

caused by an increase in the cost of the goods sold,

then management might have some influence on

the decline by finding a lower cost supplier. In this

example, we see the main cause for an increased

gross margin is a change in the selling price.

33
U.S. Department of Agriculture

Rural Development Administration

Cooperative Services

Ag Box 3200

Washington, D.C. 20250-3200

RDA Cooperative Services provides research, management, and educational assistance

to cooperatives to strengthen the economic position of farmers and other rural residents.

It works directly with cooperative leaders and Federal and State agencies to improve

organization, leadership, and operation of cooperatives and to give guidance to further

development.

Cooperative Services (1) helps farmers and other rural residents develop cooperatives to

obtain supplies and services at lower cost and to get better prices for products they sell;

(2) advises rural residents on developing existing resources through cooperative action

to enhance rural living; (3) helps cooperatives improve services and operating efficiency;

(4) informs members, directors, employees, and the public on how cooperatives work

and benefit their members and their communities; and (5) encourages international

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Cooperative Services publishes research and educational materials and issues Farmer

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