MFA's 90th year was another profitable one for the Midwestern coopertive. The fiscal year brought strength to the balance sheet and a position for growth and opportunity.

In March of 2004, MFA Incorporated celebrated its 90th anniversary. But far from being fixated on the past, MFA’s leaders were focused on the future at this year’s annual meeting Nov. 30 in Columbia. “How do we position, build and structure this company to make sure it lasts at least another 90 years?” asked Don Copenhaver, president and CEO of MFA Incorporated.

Despite the threat of snow, attendance at MFA’s annual meeting exceeded 800. Representatives from the cooperative’s many divisions and affiliates operated information booths. In addition, the meeting featured booths operated by MFA Oil Company, Missouri Beef Industry Council, Missouri Dairy Association, Missouri Pork Association and Missouri Soybean Association.

Attendees heard presentations on the cooperative’s financial numbers, on MFA’s pre-tax earnings of $8 million, and on the company’s vision and commitment to ethical business practices.

“Our earnings this year (after backing out last year’s vitamin settlement) were nearly the same as the year before, despite low grain yields from the fall of 2003,” said Copenhaver. “Obviously, the bumper crops of this fall will be reflected in the 2005 fiscal year.” More importantly, said Copenhaver, the majority of the profitability resulted from earnings on MFA’s own operations without significant patronage from interregional investments.

Those $8 million earnings, explained Allen Floyd, senior vice president and chief financial officer of MFA, “were reduced by income taxes payable of $2 million, deceased equity payments of $1 million and the accrual of $3 million which will retire 50 percent of the remaining 1975 member equity balances.”

Each year, the MFA board of directors considers various options for distributing earnings. “The company’s bylaws require that patronage distribution be paid on a taxable income basis rather than on a book basis,” said Copenhaver. “The resulting taxable income was not sufficient to justify paying patronage on current year earnings. However, the board did elect to retire 50 percent of the remaining 1975 equities—$3 million in total.”

Floyd outlined MFA’s fiscal year against a background of events. (See the accompanying section on fiscal year numbers.) “We had a short crop in the fall harvest of 2003,” he said. Those reduced yields, in turn, led to higher grain prices. Also higher were prices for fertilizer and steel, with livestock prices also remaining above average.

As usual in a weather-dependent industry, the business of Midwestern agriculture reflects climate. A wet fall kept record grain yields from overwhelming the grain handling system for the most part. But the U.S. transportation industry frustrated all involved. “We did not have the Missouri River available this year because of the ongoing battle with the upper river states and the environmentalists,” said Copenhaver.

The other pieces of the transportation puzzle, he noted, were not without problems. “Rail transportation has been pathetic. A couple of our locations had ordered 80 railcars each for October and received only six.” Truckers MFA has relied on no longer haul grain when they can make more money hauling for more high-margin businesses.

The wet fall also dampened fall application of plant foods and herbicides. Those two phenomena will show up on next fiscal year’s balance sheets, said Copenhaver. “Unfortunately, we prepaid a significant amount of fertilizer early on counting on a good fall movement; however, as it stands we will carry that inventory until next spring. Total dollar value of that inventory is in excess of $30 million more than a year ago.”

Fertilizer prices, he said, in his address to the membership, have been dramatically affected by world supply and demand. “China is buying millions of tons of fertilizer as are Brazil and India. Demand for all fertilizer products is simply outstripping supply. We have nitrogen products up 25 percent, phosphate up 25 percent and potash up nearly 50 percent.”

Those prices concern many people in the industry, said Copenhaver. Will farmers cut back on application rates? How will that affect fields that have provided record yields? Those questions make supply management more difficult than usual.

Answering those questions and responding to the challenges and opportunities of the market in general have been MFA’s strengths in the past. “We have been around for a long time,” said Copenhaver. “We have outlasted other very large regional cooperatives. But today’s business environment requires us to analyze everything we do. We must continue to streamline our business units and figure out how to take costs out of the system.”

Joint ventures have allowed MFA to achieve many of those objectives in the past by gaining access to markets. Today, the cooperative is heavily invested in assets, whether feed manufacturing capacity or retail locations. What needs to happen now, said Copenhaver, is a strategic look at how to make assets with a common geographic area complement each other. “Many of you are aware we have recently made changes whereby we have grouped some locations into what we refer to as operating units,” he said. “We hope to end up with a more efficient unit by eliminating costs, sharing equipment and improving service to our owner/customers.”

The same focus is being applied to grain-handling facilities. “We must invest in larger rail-loading facilities that can accommodate unit trains,” he said. “Not only would these facilities be capable of loading outbound grain, they would be capable of receiving unit trains of fertilizer.”

MFA’s core strengths, he said, continue to be in the crop and livestock sectors. MFA will capitalize on these strengths and will align with leaders in research and technology to provide the cooperative’s members with leading-edge products.

“Like any business,” said Copenhaver, “we must continue to add to our bottom line. But unlike investor-owned businesses, we also must be cognizant of the need to enhance the bottom line of our owner/customers. Anything we do must return not only a profit to the cooperative, but also a profit to our owner/customers.”

A review of MFA's fiscal year as presented at the 2004 annual meeting. 
By Allen Floyd, Chief Financial Officer, MFA Incorporated

Crop and livestock numbers

Total sales and revenues ended the year at $859 million, an increase of 15 percent. Of that, $19 million resulted from acquisition of Central Cooperatives, Inc., of Pleasant Hill, Mo. Central Cooperatives was MFA’s partner in the West Central Agri Services joint venture. MFA is now the sole owner of that joint venture.

Grain bushels sold were unchanged from last year at 43 million. Dollar volume of grain sold, however, increased $37 million to total $229 million. Reserve stocks of corn and soybeans approached near record lows.

Field crop sales (plant foods, seed, crop protection products) totaled $452 million, a 16 percent increase. Plant foods represent $314 million of the total, up $64 million from last year. Fertilizer tons were a record 1.5 million.

Despite comparable unit sales to last year, crop protection volume stood at $101 million, slightly down from last year, largely because of generic products.

Seed sales were up $5 million to total $37 million, reflecting slightly higher prices but mainly because of record unit sales in both corn and soybeans. Soybean units, combined with MFA’s Cache River LLC joint venture sales, totaled more than 1.4 million units system-wide.

Livestock supply sales (feed, farm supply and animal health) ended the fiscal year at $130 million, up 12 percent. Feed, at $84 million, is the largest volume contributor to this category. Feed tonnage was down 11 percent due in part to drought-related animal marketing in 2003, excellent pasture conditions in 2004, fewer dairy cows and the decline in swine producers. Farm supply sales stood at $31 million, a record volume for this product line. Barbed wire, steel posts and wire panels all had double digit unit increases. Livestock equipment sales were up more than 12 percent. Animal health sales were stable at $15 million.

MFA’s total operating margin (gross margins and income from service revenues) stood at $129 million, up $1 million from last year. Expenses were up 5 percent to total $121 million. The largest expense increase is the cost of employee benefits, primarily retirement plan funding and workers’ compensation insurance expense. Also factoring into the increase were higher fuel costs system-wide.

The balance sheet

Current assets (primarily receivables and inventory) increased $27 million to total $196 million. Most of the increase is plant foods inventory resulting from amounts prepaid to vendors under forward pricing programs to guarantee supply and availability. The prepayments require increased levels of borrowed capital.

Investments include MFA’s ownership in interregional cooperatives and joint ventures. That figure is $67 million, up $1 million from last year and represents non-cash patronage and undistributed earnings of the joint ventures. Fixed assets total $70 million, down $2 million. New and replacement asset additions totaled nearly $11 million. This was offset by depreciation expense of $12 million. Total assets are up $26 million to total $333 million. Most of this increase can be attributed to the higher plant food inventory balances.

MFA’s net worth at the end of the fiscal year totaled $115 million, an increase of $2 million. That number reflects equities allocated to members of $62 million and the after-tax income on non-member, non-patronage business of $53 million. Earnings of $8 million were reduced by income taxes payable of $2 million, deceased equity payments of $1 million and the accrual of $3 million which will retire 50 percent of the remaining 1975 member equity balances.

Working capital (current assets minus current liabilities) increased $11 million to total $64 million. The biggest single factor in the improvement was refinancing MFA bonds from a current liability to a long-term debt.

The percentage of assets owned by the membership declined from 37 percent to stand at 35 percent. Although net worth increased, the increase in assets was greater, resulting in a lower ownership percentage.

In summation, despite a volatile operating environment and a competitive market, MFA’s profitability was good, the balance sheet grew stronger and the company is positioned for continued growth and opportunity.