The fiscal year ended Aug. 31, 2005, was one of the best ever for MFA Incorporated. In large part, the record results came from the previous year's bin-busting yields and well-managed joint ventures. MFA's president and CEO detailed MFA's performance to the 863 people attending the cooperative's annual meeting Nov. 29, 2005.

We just completed an excellent year as it relates to profitability on our own operations. A lot of things worked in our favor. The fall of 2004 was one of the best crop harvests our trade area has ever experienced. Two-hundred-bushel corn was common. Soybean yields were outstanding as well.

The grain side of our business reflected these results. Unfortunately this past fall's harvest (which will be reflected in this current fiscal year) will not be as rewarding. A large part of our trade territory experienced very dry conditions, so we will handle fewer bushels during our 2006 fiscal year.

We also enjoyed outstanding results from our joint ventures. When those joint ventures were entered, there was some concern about MFA taking money away from traditional locations. History has proven the wisdom of these decisions. The profit generated has allowed us to make improvements to traditional facilities. A good example is the $6 million we spent this past year upgrading several grain-handling facilities.

Cooperatives finance themselves by generating profit or by taking on debt. Given a choice, I would rather rely on profitability, especially in a rising interest-rate environment like today.

We enjoyed a very good gain on the sale of our CF Industries stock. CF was an interregional fertilizer manufacturing cooperative created by MFA and seven other regional cooperatives scattered across the United States. Over the years, we enjoyed good revenue from that investment, but about eight years ago, CF started losing money because of off-shore competition and rising natural gas prices. They lost about $350 million during those eight years. As a result, the $36 million investment reflected on our balance sheet was not generating return.

MFA had a seat on the board of directors as well as a stockholder representative. I was that board member. Lester Evans, chairman of the corporate board for MFA, was MFA's stockholder representative.

A year ago, the CF board explored putting CF on the market.

Fortunately, the newly appointed chief executive officer of CF convinced the board to take the company public. Our timing was perfect. The initial public offering was $16 per share. Our portion netted MFA $39.5 million. Keep in mind our investment was $36 million. We realized a gain of $3.5 million.

The MFA board of directors voted to pay a patronage dividend on current year earnings, as well as retire the balance of the 1975 equity. The current year patronage will be based on paying 60 percent in cash and the balance in equity. Our cash outlay will total $9.6 million. Of that, $3.8 million of cash will go to Uncle Sam for taxes on non-member income, primarily from our share of earnings on our joint ventures. IRS does not allow us to pay patronage on non-member business. We are required to take that revenue to retained earnings and pay income taxes on that amount.

No doubt, some of you will wonder why more current year patronage was not paid based on the level of earnings we enjoyed this past year. Again, it relates to the high levels of earnings generated from our joint venture operations that are considered by the IRS as being non-member earnings and not available for distribution. At the March delegate meetings we will spend more time on this process.

The new fiscal year is setting itself up to be challenging. Fertilizer prices are being driven by high natural gas prices and transportation costs. These extremely high values on fertilizer are causing us to think carefully on how much fertilizer we commit to. There is tremendous downside risk. Given the tonnage we move annually (1.5 million tons), we cannot wait until the last minute. We simply have to lock in a portion of our needs early to have it in position for spring. But how much do we lock in not knowing what you, the customer, will do come spring?

Before all the consolidation among the fertilizer manufacturers, we would line up a supply and pay for the product at time of delivery. In many cases, we would have price protection. If the price fell before we took delivery, we would get the lower price. Those days are gone. Now we must pay for the product before we take delivery and without the advantage of price protection. We stand all the risk.

If we were to decide to fill our available space of 350,000 tons at today's values, we would tie up nearly $100 million in working capital. To give you an idea of the tremendous downside risk, assume the price would go down an average of $100 per ton between the time we pay for it and spring application. If my math is right, that equates to a $35 million loss. That is too much risk for MFA to assume.

So I hope you understand the dilemma. Do we fill a substantial portion of our space now and assume the downside risk, or do we simply fill a small portion and risk not being able to supply all needs next spring?

From a logistical standpoint, we cannot move our fertilizer volume if we wait until spring to book it. Today's transportation modes are unreliable and costly. Service has been horrible, and rate structure ridiculously high. That leaves us dependent on truck freight and the resulting fuel surcharges.

Increased gasoline and diesel fuel prices affect us just like they affect you. MFA uses approximately 1.5 million gallons of fuel on an annual basis in our vehicles and equipment. We use a significant amount of propane and natural gas to dry grain and to heat our facilities. Assuming fuel stays at these price levels, our annual cost will increase by some $1.7 million.

Our theme for this year is Vision, Growth, Success. Last year we shared our vision for the company with you. We continue to focus on that vision. We, as employees of this organization, know why MFA was formed in the first place—to provide economic benefit for member-owners.

We have grown the company through joint ventures and through acquisitions that have produced positive results. We will continue to look for opportunities to grow the company in a prudent and responsible manner.

Our balance sheet is in good shape. It allows us to take advantage of opportunities. The fact we have been around for nearly 92 years speaks volumes for our success. Our financial performance exemplifies success. As employees of this company, we are committed to build on our success.

Thank you for your continued support and for allowing us to serve you. We cannot be successful without it.

If achievement and success are measured by bottom line results, then 2005 was a successful year with net income of $15 million. A record grain harvest in the fall of 2004, improved margins on the sale of supply products, good profitability in our swine marketing division and a gain on the sale of a major investment all contributed to this profit improvement.

The numbers include the combined activity of MFA Incorporated, our wholly owned subsidiary MFA Enterprises, our finance company Agmo Corporation, and a 100-percent-owned limited liability company, West Central AGRIServices.

It all starts with sales volume. Sales and service revenue dollars totaled $969 million, an increase of $110 million. A 50 percent improvement in grain unit volume and record high plant food prices were the main factors for the increase.

Grain bushels sold increased from 43 million last year to 65 million this year. The 2004 harvest produced record and near record yields for corn and soybeans. Missouri soybean production was up 52 percent, and corn production was up 54 percent.

Dollar sales of grain sold totaled $258 million, about a 13 percent increase. With increased production levels, unit prices were lower. So, even though unit volumes were up over 50 percent, dollar volumes only increased by 13 percent.

The additional grain volume did have a positive impact on storage and drying revenue. Combined, these two revenue items were up nearly $2 million over last year.

Field crops

Field crop sales produced revenues of $531 million, an increase of $79 million. Of the $531 million, plant food sales represent $385 million, up $71 million from last year. Wholesale tonnage totaled 1.6 million, up about 6 percent. Crop protection volume is $108 million, up $7 million from last year. Most of this increase was at the wholesale level and concentrated in the Delta area and the Mid-South.

Seed sales were $38 million, up $1 million from last year. A decline in wheat seed due to the wet fall was offset by a 15 percent increase in corn units and a modest increase in soybean units.

Livestock supply

Livestock supply sales totaled $131 million, up slightly from last year. Feed was the largest contributor at $84 million. Dollar sales were identical to last year; however, unit volume increased by 28,000 tons. Lower ingredient prices kept dollar sales flat. Beef feed tons increased 12 percent. Cattle Charge led all other beef feeds in tons sold, and after 10 years on the market, Cattle Charge had sales of more than 56,000 tons. Dairy feed, minerals and specialty feeds, particularly poultry and goat, had unit increases.

Farm supply sales were $32, up $1 million from last year. Again, the dollar increase were the result of higher prices, particularly steel products. Unit volume was down in wire and steel products as well as twine.

These declines were offset by increases in livestock equipment,in particular portable cattle feeders.

Animal health sales were $15 million in both years. Unit volume showed some increase, with lower prices per unit due to the increased usage of generic products.

MFA's total operating margin (gross margins on products sold and the income from service revenues) stood at $145 million this year, up from $129 million last year. 

Expenses were $130 million, up $9 million or 7 percent. Employee costs (payroll and fringe benefits) comprise 56 percent of all expenses. These costs increased 4 percent to $73 million. On a percentage basis, the most significant expense increases were car and truck and interest expense, both up 23 percent. Revenues of $145 million, less expenses of $130 million, result in a profit of $15 million.

The balance sheet

Current assets (primarily receivables and inventory) are $227 million, an increase of $31 million. Record high prices of plant food products caused an increase in inventory and accounts receivable of $20 million. Crop protection product inventories are up nearly $7 million.

Investments, our ownership in interregional cooperatives and joint ventures, were $33 million, down from $67 million. See Don Copenhaver's article on page 8 for more information on the sale of our investment in CF Industries.

Fixed assets (land, buildings, equipment and rolling stock) are $73million, an increase of $3 million. New and replacement asset additions totaled $15 million. This was offset by depreciation expense of $12 million.

During the year, the MFA board of directors approved expenditures of $6.3 million to improve and upgrade grain receiving, storing and handling capacity at strategic grain locations.

Total assets are $333 million in both years. The reduction in investments due to the sale of CF stock is offset by the higher values for plant food and crop protection inventories.

Net worth is the equity allocated to members and the after-tax income on non-member, non-patronage business—$120 million, an increase of $5 million.

For 2005, the MFA board of directors approved cash distributions to the members of $5.8 million. This amount is broken down into patronage on current year business of $5.3 million, of which 60 percent, or $3.2 million, will be paid as a cash distribution. An additional $2.6 million will also be paid to complete the retirement of 1975 allocated equities.

Working capital, or current assets minus current liabilities, increased$33 million to $97 million. Proceeds from the CF investment were usedprimarily to pay short-term debt, creating an improvement in working capital. The percentage of assets owned by the members increased from 35 percent to 36 percent.

The financial strength of the organization is at an all-time high. The achievements and results of this past year will, however, be difficult to duplicate in 2006.

Grain yields this fall were down considerably from those of the previous year. Record high fertilizer prices are causing producers to take a wait and see attitude toward planting intentions for next spring. High-cost diesel is also impacting this decision. The availability of transportation to move product remains uncertain. I expect interest rates to continue to increase throughout 2006. Despite these challenges, MFA expects to have another profitable year.