Post on 03-Jan-2016
Understanding Your Understanding Your Business EnvironmentBusiness Environment
Phil KenkelPhil Kenkel
Bill Fitzwater Cooperative Bill Fitzwater Cooperative ChairChair
Oklahoma State UniversityOklahoma State University
Co-ops were a part of Co-ops were a part of YESTERDAY’S food and YESTERDAY’S food and
fiber system…fiber system…
What will their role be in TOMORROW’S food and fiber
system?
Cooperative Board Members Cooperative Board Members Should be Aware of Issues Should be Aware of Issues
and Trends Involving:and Trends Involving: Their customer baseTheir customer base Ag Service Industry Ag Service Industry Cooperative industryCooperative industry Auditing and accounting standardsAuditing and accounting standards
Changing Customer BaseChanging Customer Base
Fewer but larger farmsFewer but larger farms
Farmers are getting larger equipment
More Differences Between Farms
21st Century Farms21st Century Farms
Commercial OperatorCommercial Operator
Traditional Traditional
LifestyleLifestyle
Commercial FarmsCommercial Farms 10,000 to 50,000 acres10,000 to 50,000 acres Multiple families/investorsMultiple families/investors Rent/lease/control assetsRent/lease/control assets Deal with large suppliersDeal with large suppliers
Traditional Family FarmsTraditional Family Farms $150,000 to $600,000 in revenue$150,000 to $600,000 in revenue Last generation of family farmLast generation of family farm Seeking economies of scaleSeeking economies of scale Focus shifting to transition Focus shifting to transition
managementmanagement
Lifestyle FarmsLifestyle Farms
Off farm employmentOff farm employment ““Sundowner” farmerSundowner” farmer
Also includes higher income
“work in town and live in country” customers
One Size May Not Fit AllOne Size May Not Fit All• Different locations have different Different locations have different
needsneeds• Volume discountsVolume discounts• ““discount version” or “full service”discount version” or “full service”• Bidding for businessBidding for business
Cooperative Retail Stores Cooperative Retail Stores Are ChangingAre Changing
Oklahoma Cooperatives Are Oklahoma Cooperatives Are Investing in New Retail Investing in New Retail
LocationsLocations
Changing Fertilizer IndustryChanging Fertilizer Industry
Shift to off-shore productionShift to off-shore production Increased price volatilityIncreased price volatility Emerging issues:Emerging issues:
WarehousingWarehousing Forward pricingForward pricing
Fertilizer EnvironmentFertilizer Environment
19801980 Domestic Domestic
productionproduction $2.50 natural gas$2.50 natural gas Continuous supplyContinuous supply Priced for the Priced for the
seasonseason $20/ton risk$20/ton risk
20052005 Offshore productionOffshore production $13.00 natural gas$13.00 natural gas Planned supplyPlanned supply Daily pricingDaily pricing Contract Contract
enforcementenforcement $200/ton risk$200/ton risk
OSU Fertilizer Warehousing OSU Fertilizer Warehousing and Application Researchand Application Research
$24/ton to cover warehouse cost$24/ton to cover warehouse cost $3.60/acre to cover application costs$3.60/acre to cover application costs Very significant economies of scale in Very significant economies of scale in
warehouse constructionwarehouse construction Applicator transport time may offset Applicator transport time may offset
economies of centralized warehouseeconomies of centralized warehouse
Cooperatives Operate in a Cooperatives Operate in a Rapidly Changing IndustryRapidly Changing Industry
Consolidation Consolidation Streamlining to increase efficiencyStreamlining to increase efficiency Investing to serve new customersInvesting to serve new customers
0
500
1000
1500
2000
2500
1st Qtr
1980198719962000
Number of Co-ops – CHS & Land O LakesNumber of Co-ops – CHS & Land O Lakes
Return on EquityReturn on Equity
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
Return on Equity
SuperLargeMediumSmall
5.8
4.5
2.3
-.7
Bigger Can Be BetterBigger Can Be Better
Other Ways to Improve Other Ways to Improve EfficiencyEfficiency
AlliancesAlliances Cost ControlCost Control Improved marketingImproved marketing Exiting unprofitable areasExiting unprofitable areas
Measuring Costs:Measuring Costs:Profit Center AnalysisProfit Center Analysis
Understand the profitability of each Understand the profitability of each product lineproduct line
Understand the profitability of each Understand the profitability of each customer groupcustomer group
Measure the returns against Measure the returns against benchmarksbenchmarks
Determine the challenges and Determine the challenges and opportunities across product lines and opportunities across product lines and locationslocations
Measure Costs and Returns Measure Costs and Returns at an Actionable Levelat an Actionable Level
AG SUPPLY STATIONGRAIN
Measure Costs and Returns Measure Costs and Returns at an Actionable Levelat an Actionable Level
AG SUPPLY
Feed FuelAgronomy
Measure Costs and Returns Measure Costs and Returns at an Actionable Levelat an Actionable Level
AG SUPPLY
Feed FuelAgronomy
Seed ServicesFertilizer Chemicals
Measure Costs and Returns Measure Costs and Returns at an Actionable Levelat an Actionable Level
AG SUPPLY
Feed FuelAgronomy
Seed ServicesFertilizer Chemicals
Anhydrous DryFertilizer
Liquid
Grain Total Expenses/ Gross Revenue
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
1 2 3 4 5
Expense Ratios by LocationExpense Ratios by Location
Profit Center Analysis Allows Profit Center Analysis Allows You to:You to:
Focus on your winnersFocus on your winners Cut costs and improve efficiencyCut costs and improve efficiency Outsource sub-performersOutsource sub-performers Shoot your dead horsesShoot your dead horses
OSU Financial Ratio OSU Financial Ratio AnalyzerAnalyzer
Focusing our Marketing Focusing our Marketing EffortsEfforts
20% of the customers account for 20% of the customers account for 80% of the volume80% of the volume
Focus on the customers that will be Focus on the customers that will be 80% of your business in 5 years80% of your business in 5 years
Determine the products and services Determine the products and services neededneeded
Become the least cost supplier for Become the least cost supplier for the products and services offeredthe products and services offered
Customer SegmentationCustomer Segmentation
Identify grower segment and characteristicsIdentify grower segment and characteristics Monitor volume trends by segmentMonitor volume trends by segment Product/Service bundle designed to meet Product/Service bundle designed to meet
grower needsgrower needs Differential pricing based on costs and price Differential pricing based on costs and price
sensitivitysensitivity Monitor account performance and Monitor account performance and
profitabilityprofitability
Example: Cooperative ABCExample: Cooperative ABC
Accepted just over 3,000,000 bushels Accepted just over 3,000,000 bushels of wheat from 307 customers.of wheat from 307 customers.
Sold 8,500,000 total pounds of Sold 8,500,000 total pounds of fertilizer from 167 customers.fertilizer from 167 customers.
Members hold $2,000,000 in equity Members hold $2,000,000 in equity in the cooperative.in the cooperative.
Who holds the largest share Who holds the largest share of cooperative sales of cooperative sales
Distribution of Distribution of Wheat IncomeWheat Income
Distribution of Distribution of Fertilizer IncomeFertilizer Income
2% 9%
20%
69%
Q1
Q2
Q3
Q4
4% 8%
17%
71%
Q1Q2Q3Q4
Customer AnalysisCustomer Analysis For the top quarter of wheat customers (76) For the top quarter of wheat customers (76)
51% do not buy fertilizer with the coop.51% do not buy fertilizer with the coop. 36% are in the top quarter of fertilizer 36% are in the top quarter of fertilizer
customers.customers. 14% buy fertilizer from the cooperative but are 14% buy fertilizer from the cooperative but are
not in the top quarter of fertilizer customers.not in the top quarter of fertilizer customers. Where is the rest of the fertilizer business Where is the rest of the fertilizer business
going?going? 36%
7%4%3%
50%
Top Quarter of Wheat Customers vs. their fertilizer quartile
Top quarter wheat customers that do not buy fertilizer from co-op
Top quarter wheat customers that are also top quarter fertilizer customers.
Customer AnalysisCustomer AnalysisAllows You to FocusAllows You to Focus
Contact 76 large producers an asked Contact 76 large producers an asked to win their businessto win their business
Recognize 51 loyal key members and Recognize 51 loyal key members and work to keep their businesswork to keep their business
Focused MarketingFocused Marketing
Fertilizer
Wheat
Supply
Key Accounts
Focus on your key accounts that hold the largest share of business volume.
OSU Market Share OSU Market Share CalculatorCalculator
Accounting Auditing IssuesAccounting Auditing Issues
Sarbanes – Oxley Act of 2002Sarbanes – Oxley Act of 2002 Active audit committeeActive audit committee At least one financial expertAt least one financial expert Independent directorsIndependent directors Internal controls to prevent fraudInternal controls to prevent fraud Code of ethicsCode of ethics Whistleblower protectionWhistleblower protection
Equity IssuesEquity Issues
Most cooperatives need additional Most cooperatives need additional equityequity
Equity supply: fewer young producersEquity supply: fewer young producers Equity demand: many aging membersEquity demand: many aging members Is your cooperative equity structure Is your cooperative equity structure
sustainable in the long-run?sustainable in the long-run?
Equity AlternativesEquity Alternatives
More timely equity redemptionMore timely equity redemption Alternative equity redemption Alternative equity redemption
systemssystems Outside equityOutside equity Dividends on owner capitalDividends on owner capital Shift to unallocated equityShift to unallocated equity Non-patronage Non-patronage
The Future Isn’t What it The Future Isn’t What it Used to BeUsed to Be
Success in today’s environment depends on the ability to envision the future and get there first! John E. Gherty CEO, Land O’Lakes
Change is optional.Survival is not mandatory! Peter DruckerBusiness Analysis and Author
Other hockey players skate to where the puck isI skate to where the puck will be.Wayne Gretsky, Hockey Star
Cooperatives Are ChangingCooperatives Are Changing
Redesigned systemsRedesigned systems
Measure and cut costsMeasure and cut costs
Entering new marketsEntering new markets
Cooperative Values Haven’t Cooperative Values Haven’t ChangedChanged
Democratic controlDemocratic control Customer Customer
owned/customer owned/customer benefitbenefit
Cooperation Cooperation among among cooperativescooperatives
Concern for Concern for communitycommunity
Successful CooperativesSuccessful Cooperatives
Vision and MissionVision and Mission Outstanding Management and Outstanding Management and
BoardsBoards EfficientEfficient Understand Changing Customer BaseUnderstand Changing Customer Base Alert to New OpportunitiesAlert to New Opportunities
It’s a Great Time to Be a Cooperative Board Member
Thank you for your attention
Cooperatives Matter