Perspectives on
Cooperative Finance
Observations, Comments and Musings
Tom Houser, Vice President, CoBank
Farmer Cooperatives Conference
November 19, 2008
St. Paul, Minnesota
DISCUSSION ISSUES
 General
Perspective
 Importance
of Permanent Retained
 Non-Qualified Allocations
 Working
 Source
2
Capital “Rules”
/ Use of Funds Analysis
FINANCIAL ISSUES (past 5 years)

Strategic Expenditures / Investment Profile
– Initiatives to replace inefficient and depreciated
asset base
– Straight-trucks vs. Semi’s and Spreaders vs.
Floaters
– Cycle Time
– Fewer, Bigger – Build + Close / Speed + Space

3
Equity Demands – Demographic and Other
◦
Cash Patronage Rates
◦
Equity Revolvement Schedules
FINANCIAL ISSUES (continued)

Companies overall financially sound, BUT
– with leveraged balance sheets
– (only) adequate working capital/liquidity

4
THEN CAME NOW
◦
Record grain prices compounded by skyrocketed crop input costs (for inventory)
◦
Need for 2 – 3x operating capital

Will we go back to “the way we were”??

Must Assume Escalated Volatility and Risk
FINANCIAL ISSUES (continued)

“You’re Using my Balance Sheet” !!!
– Suppliers demanding Pre-payments
– Members for grain contracting
– Members for “Hired Man” Facilities and
Services


5
Expect Continued Evolution of Risk
Management Practices
◦
Grain contracting options, terms, and funding
◦
Crop-input purchasing (supply, price, payment)
Profitability Is Essential to Cope with
Risk/Volatility AND to Access Capital
RETAINED SAVINGS / PERMENANT
CAPITAL

Historically Not Viewed as the “Co-op” Way
– Co-op “Not for Profit” Mind Set of Members
* Co-op Profit is My Loss
– Tax Stigma


Equity Retirement Perceptions and Challenge
◦
“Got’ta Die to Get Your Money
◦
Long Lag = Little Value
More Later OR Less Sooner
– Use of Retains, especially w/non-liquid “Income”
– Additional Permanent Retained
6
NON-QUALIFIED ALLOCATIONS

Something “New” (not well understood)
– By Boards
– By Members
– By Auditors


7
Co-op vs. Member Tax Rate
◦
Stigma / “Shell Game”
◦
Self-Employment Tax
Times Have Changed
– Cash Patronage Pay-out Rates
– Co-op Patronage Rate vs. Tax Rate
– Position Member to Only Pay Tax on “Cash” ??
WORKING CAPITAL (per GAAP)
 FASB
Change
 “Schedule
of Changes in Financial
Position” vs. “Statement of Cash Flows”
 “Working
 Board
9
Capital” vs. “Cash”
Understanding
 “Balance
Sheet” Management Tool
“FUNDS FLOW”

Sources of Funds
◦ Local Operating Savings (Profit) $1,000,000
◦ Regional Patronage Income
1,000,000
◦ Less: Non-Cash “Paper” (@ 60%) (600,000)
◦ Depreciation
◦ Term Debt
◦ Regional Redemptions
◦ Miscellaneous
10

Total Sources
1,000,000
-0-
100,000
-0-
$2,500,000
“FUNDS FLOW”

Uses of Funds
◦ PP&E / Fixed Assets
$1,200,000
◦ Term Debt Repayment
400,000
◦ Cash Patronage Paid* (@ 40%)
400,000
◦ Income Taxes (@ 40%)
400,000
◦ Equity Retired* to Members


11
50,000
Total Uses of Funds
$2,500,000
Net Change Working Capital + $50,000
 * “Residual” Subject to Other Priorities
General Conclusions and “Suggestions”
13

Build liquidity (working capital) and deleverage to boost financial strength and riskbearing capacity

Payments to Members from “residual” C/F

Allocate less (a/k/a permanently retain
more) so positioned to revolve faster

Allocate net positive cash flow to members

Strongly consider benefits of Non-Qualifieds

Being profitable is a GOOD thing !!!!!