Sixth Annual Farmer Cooperative Conference
October 30, 2003
Executing
Difficult Strategies
Jeff Stroburg, CEO
West Central Cooperative
Ralston , Iowa
Lower margins and
increased costs are
forcing restructuring
to maintain
healthy profitability.
Healthy Profitability should
result in value creation
“Value Creation is not necessarily
just generating a positive net
margin on the CPA audit.”
Roger Ginder
ISU Economist
Accounting Profit
vs. Economic Profit



CPA Audit Profit =
Surplus over Expenses - including Debt Expense
Economic Profit =
Surplus over Risk Adjusted Cost of All Capital Employed
by the Cooperative – including the Equity Capital
For Value to be created there must be enough profit to give
a fair return to equity
i.e. Economy profit must be > to zero
The viability of a
business unit or location
should be considered using a
return on – ALL –
invested capital (ROIC)
Fertilizer Total Expenses/Gross Revenue
160%
140%
120%
100%
80%
60%
40%
20%
0%
A
B
C
D
E
F
Location
G
H
I
J
K
L
M
N
O
P
Company
Q
R
S
Fertilizer Total Expenses/Tons
$140.00
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
$0.00
A
B
C
D
E
F
Location
G
H
I
J
K
L
M
N
O
P
Company
Q
R
S
Fertilizer Total Expenses/Gross Revenue
120%
100%
80%
60%
40%
20%
0%
1
2
Region
3
4
5
Company
6
Fertilizer Total Expenses/Tons
$100
$80
$60
$40
$20
$0
1
2
Region
3
4
5
Company
6
Grain Total Expenses/Gross Revenue
160%
140%
120%
100%
80%
60%
40%
20%
0%
A
B
C
D
E
F
G
Location
H
I
J
K
L
M
N
O
P
Company
Q
R
S
Grain Total Expenses/Bushels
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$0.00
A
B
C
D
E
F
G
Location
H
I
J
K
L
M
N
O
P
Company
Q
R
S
Grain Total Expenses/Gross Revenue
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
1
2
Region
3
4
5
Company
6
Grain Total Expenses/Bushels
$0.25
$0.20
$0.15
$0.10
$0.05
$0.00
1
2
Region
3
4
5
Company
6
Symptoms of Value Creation
Problems In Some Cooperatives

Lack of Confidence in Equity Redemption

Unwillingness to Invest In the Cooperative


Insufficient Cash Patronage to Cover Patron Tax
Liabilities
Inefficiencies in Operations That Hurt
Competitiveness
Educate Stockholders




Return on Invested Capital – including equity
capital
Break even or marginal profits = value destruction
Capital investment decisions must be based on ROI
(not IOT)
There is not enough margin in agriculture to
support some “Legacy Locations”
Determine Minimum ROIC
(Equity capital is not free)

Establish return requirement on assets –
Accounts Receivable
Inventories
Property
Plant Equipment

Establish competitive return requirements on equity
Summary
If stockholders know how
investment decisions are made
on a consistent basis they are more likely
to “buy in.”
Thank You
Are there any questions?