Special Edition - Farmers Cooperative Association and MKC

better together FARMERS COOPERATIVE ASSOCIATION AND MKC

February 2014 | Special Edition

A MESSAGE FROM DARIN

THE RIGHT PARTNER

By Darin Marti, Farmers Cooperative Association General Manager Over the last four years, Farmers Cooperative Association in Manhattan experienced record earnings in each of those years.

Although many cooperatives and other ag businesses have experienced the same results, we are certainly proud of our accomplishment.

There’s no doubt the recent announcement about merger discussions with MKC has prompted some questions. Some have asked, “If our cooperative is experiencing record earnings, why make the decision to pursue a merger with another cooperative?”

I was surprised though, when some commented, “I didn’t know the coop was experiencing financial problems.” Although that certainly is not the case, I didn’t even consider someone would think this, but I should have! After all, when was the last time two successful cooperatives in Kansas merged? There definitely have been some mergers, but usually one party involved in the merger was in trouble.

The proposed merger with MKC is certainly different. Neither coop is in a situation dictating they have to merge today. At the same time, however, neither entity ever wants to be forced to make this decision due to financial reasons.

First and foremost, your board’s goal is to insure service to our members will continue to improve, and that long-term sustainability and the equity you have in the company is protected.

Ten years ago the word “change” was used so often we got tired of hearing it. Today, the word is “relevance.”

The truth is, size and scope are very important in today’s market place. Whether we like it or not, standing in the way of being relevant will only get us run over and I don’t believe we can stop that freight train for very long.

Farmers Cooperative generates over $1 million in net income each year. From that income, we pay income taxes, some cash patronage, and some equity redemptions.

The remainder is used for capital expenditures. Today we have found we need at least $1 million each year to keep up with the facility and equipment improvements necessary to provide the best service to our patrons. This doesn’t leave extra funds to provide for any major expan-

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sion that could enhance long-term sustainability.

While we have good facilities today, generating enough capital for additional projects will be crucial in the future to maintain the level of excellence our member/producers expect. Partnering with someone of size like MKC will help to insure that required level of income in the future.

That level of income is generated through various means, including employee retention and recruitment, vendor relationships and operational efficiencies. We must hire and retain quality employees. The brightest and best people want to be employed by a company that is successful and offers opportunities to them. Your board made it a priority the merger partner had to be with someone that would be able to retain the entire current employee group. MKC has made that commitment.

Relationships with vendors are very important. No doubt it is more efficient for a vendor to deal with one large company versus several smaller companies. Vendors tend to offer the best programs to someone who can make the best use of their offer. MKC is large enough to garner that extra attention from vendors.

Other items that help enhance income include operational efficiencies with equipment, facility location and administration. The ability to hire more employees specialized in areas such as input financing, crop insurance, information technology, grain marketing, and precision farming will provide more value to our member/owners, thus making their operations more successful. Diversity in service offerings and diversity from the effects of weather are also important.

I certainly admire the foresight and courage of the board of directors for bringing this proposal to the members. They were very diligent in seeking out the best possible partner for your cooperative. The employees and I believe MKC is that right partner!

A MESSAGE FROM DAVE

BETTER TOGETHER

By Dave Christiansen, MKC President and CEO When the teams at MKC and Farmers Cooperative Association initially began discussions about a merger, a common question was,“What will be better for our members if we put our two companies together?”

Both companies are and have been successful. Often there is the notion one party within merger discussions must be suffering financially. If both companies are successful, why should we consider coming together now?

having location managers who actively participate in the decision making processes that determine how you are served makes us a better company. We also believe meeting as many of your needs at the farm gate helps eliminate some of the stress caused by the busy schedules we all have today.

Clearly we can accomplish this better together.

MKC takes great pride in our commitment to providing opportunities for the younger generation to stay local.

We encourage employees to participate in the communities where they live and work. We believe this builds a vibrant company as well as a vibrant community.

EMPLOYEES Employees, the group MKC believes ultimately drives the success of our company. We are fortunate both cooperative’s cultures are that everyday both employee groups wake up thinking how can they better serve their members and keep up with the change going on around us. This is the mission of Farmers Cooperative and has been the mission of MKC since 1964 when the first three cooperative boards met to form MKC. Benefits for members always begin with people. Innovative, creative and passionate employees are the key to creating successful organizations. MKC’s efforts to attract, retain and develop the best talent we can is robust. It is understood people today are seeking employment with larger, more progressive, technologically advanced, growth-oriented organizations. Today’s employees are seeking career opportunities, not simply a job. Whatever we can do to put ourselves in a better position to compete for talent will help our cooperative not just today but for years to come. Cultivating a deeper relationship with Kansas State University will benefit both cooperatives and members as well. We will certainly be better together when it comes to attracting talent.

RELEVANCE Relevance in our industry is becoming increasingly important when it comes to what a company can deliver to its customers. Whatever we can do to improve our industry relevance will benefit our customers in many ways. Just like prospective employees, suppliers are chasing companies who can deliver scale and growth. And that bar continues to rise.

Vendors provide earlier access to offers and better programs to larger organizations. Those offers, that smaller companies with less influence will not have access to, can be delivered right to our members and can directly impact the customer’s bottom line in a very positive manner. Together we can improve our relevance.

INFRASTRUCTURE Very few are as dedicated to the renewal of the infrastructure in our rural communities as the cooperative system.

It’s not just about keeping up with the changes of our producers and increasing our ability to serve them better and faster. We also do it so people like you, who want to live and raise a family in our rural communities, can have a career with facilities that are pleasant and safe.

Local control is important to our success. We believe

While we recognize growth of an organization certainly provides challenges, it brings with it greater opportunities and benefits for members. I think we would all agree that standing still, while it feels good temporarily, is not a good long-term strategy.

I want to thank the founders of Farmers Cooperative Association and MKC for their vision and courage they dedicated to continue growth. Even 50 years ago, those individuals recognized continued growth was good for their members. Just like our founders, we can’t predict the future and we don’t know what agriculture will look like 50 years from now. However, we do know we must continue to grow in order to attract and retain employees, replace our infrastructure, and develop supplier relationships that will be vital to the future success of our cooperatives and our members.

MKC truly believes in “Shared growth. Shared success.”

I truly believe Farmers Cooperative Association, MKC and all of our members will be much better together!

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by Nichole Gouldie, MKC Communications Specialist

GROWING WITH A PURPOSE What happens when something grows? It changes, doesn’t it? A wheat seed looks different after being in the ground for a month and livestock will someday reach an age of weaning.

“If our co-op was going to survive in today’s world, it was going to have to grow,” said Tom Hauschel, Heartland Co-op CEO. “We realized change was necessary for us to compete in the increasingly challenging marketplace.”

Since the early days of the 1900’s, Central Iowa farmers knew they needed a place to market their grain for a fair price. Now, over 100 years later, Heartland Co-op has evolved into the cooperative it is today with 63 locations with operations in grain handling and marketing, fertilizer and application, agriculture chemicals and application, livestock

feed and processing, agriculture energy products and propane.

At each benchmark during the past 100 years, Heartland looked at the future needs of its members and chose growth over stagnation. The old, original elevators served the needs of those turn-of-thecentury farmers who unified in order to put some clout in their grain marketing. “We’re still doing everything we can to give Heartland-area farmers a voice in the future of agriculture amongst the growth that was attributed to our success,” Hauschel said.

Heartland believes in differentiating themselves from the competition by providing unique, value-added and innovative solutions to customers. Currently they serve more than 5,300 members and conduct business with them and others in

“If our co-op was going to survive in today’s world, it was going to have to grow. We realized change was necessary for us to complete in the increasingly challenging marketplace.”

-- Tom Hauschel

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INDUSTRY NEWS

one of the 63 communities across the speed, space and equipment. “We spend more money at state of Iowa. an individual location than the prior cooperative had The “original” Heartland Co-op for a capital budget 10 years ago,” Hauschel added. was formed in 1987 with a merger of The geographic diversity has benefited Heartland as three cooperatives with facilities in well. “You aren’t so reliant on one location,” Hauschel Panora, Dallas Center, Minburn and said. The western region of Heartland had record yields Granger. this past year while the northern footprint had one of The Heartland Co-op that exists the worst years in history. “Not having all the eggs in today was formed in 1993 with a one geographic basket spreads out the cooperative’s merger of the “original” Heartland risk,” he said.

Co-op, Alleman Cooperative CompaMany of the earlier mergers were economically drivny, Mitchellville Cooperative, and the en for Heartland Co-op. Hauschel added the board then facilities previously owned by Avon witnessed and saw the difference in customer service, Grain Company at Carlisle and at East earnings and the difference in the talents they hired.

18th Street in Des Moines. Accord“They continued to see all of the things we were missing to Hauschel, ing before because 17 mergers and we were too small or acquisitions have didn’t have the capoccurred since ital to be a compet1993 creating the itive partner to our nationally recogmembers,” Hauschel nized cooperative said. they are today.

According to Hauschel, a fear A merger in 2007 truly changed regarding growth of the dynamics and earnings of the Heartland members cooperative. “It gave us much better has been there will market arbitrage, asset utilization, be no competition. access to capital, purchasing powBut in today’s marer, operating efficiency and much Tom Hauschel grew up on a family farm in northeast Kansas. He ket place, he said more,” Hauschel said. “All of those graduated from Kansas State University with a Bachelor of Science elements coming together improved degree in agricultural economics. He began his career at Ag Processing there is no lack of Inc. (AGP) in Omaha, Nebraska as a merchandiser and is in his 26th year competition. “The cash flows and allowed Heartland in the cooperative industry. Hauschel succeeded long-time CEO Larry bigger fear would be Co-op to make meaningful imPetersen in January 2013. not having a viable provements to serve the members.” cooperative system for the future,” he said.

In addition to increased earnings, Hauschel said While growth and change have been two constants mergers have allowed their cooperative to attract and for many cooperatives across the country, mergers, retain top-end talent. The ability to draw the attention consolidations and acquisitions have not been a strange of very talented people is a tremendous advantage. occurrence for cooperatives throughout Nebraska and People will make a significant difference in returns to members while allowing the cooperative to be competi- Iowa. In 1994, Iowa had 256 cooperatives. Today, they have 59 cooperatives. There are 55 agricultural cooperative in the market place, he said. tives across Nebraska today.

For Heartland members, growth has created a more Hauschel said there have been many changes as they viable, sustainable cooperative system. In addition, Hauschel believes it gives them better purchasing power reflect upon the past of Heartland Co-op. “We expect the trend of growth to continue, but growing with a and the ability to make meaningful improvements at purpose is more important than ever.” their locations for better member services including

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ABOUT MKC

Serving producers since 1965 MKC is a full-service farm cooperative offering a complete line of supplies and services for both farm and urban customers in 11 counties throughout central Kansas. With a current membership of more than 5,800 members, MKC was founded in 1965 by the merger of three neighboring cooperatives in Moundridge, Buhler, and Groveland. Since its founding, it has grown in size and territory through mergers and acquisitions. More than 225 employees play an important role in the growth and success of MKC. GRAIN With a dedication to getting producers back to the field as soon as possible, MKC continues to upgrade speed and space at a number of locations across its footprint. MKC currently has 34 locations and three new locations under construction that offer a combined space of more than 36 million bushels and are staffed by people who understand the producer’s needs.

Grain merchandising, logistics, e-commerce and accounting are handled through Team Marketing Alliance (TMA), an LLC owned by MKC and three other central Kansas cooperatives. Just like MKC, the expert staff at TMA is focused on helping producers maximize their revenue potential in today’s volatile markets.

AGRONOMY SERVICES With field marketers trained in agronomy science and six full-service agronomy centers equipped with applicators featuring the latest in technology and driven by professional and certified custom application drivers, MKC has what is needed to help producers succeed.

Matched with the professionalism producers have come to expect, MKC offers the highest quality crop inputs.

Featuring CropLan seeds along with DeKalb, Mycogen, Asgrow and NK, MKC brings forth the right seed for your acres. Offering premium products that are the choice product for Midwest farmers, MKC provides products from Winfield Solutions, Monsanto, Syngenta, Dow, Dupont, BASF and Bayer.

PRECISION AGRICULTURE The more producers know about their fields, the better chance they have of increasing profit margins. MKC’s precision ag program includes satellite and spectral imagery that provides base field mapping, site specific soil sampling and yield data analysis. Veris Mobile Sensor Platform, VRT prescriptions and other precision ag services are also available.

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ENERGY SERVICES MKC operates one of the top professional energy departments in the state of Kansas and is dedicated to the success of the customers’ operation. Our Certified Energy Specialists have the expertise and experience to recommend and provide top quality products for the intended application of the customer.

FEED SERVICES MKC partners with Countryside Feed, LLC to provide quality ingredients, balanced rations and formulations to meet the needs of the producer and his livestock. More than 150,000 tons of feed are produced annually at our feed mills located in Moundridge and Hillsboro. Many of MKC’s locations offer bagged feed for their customers’ convenience.

RISK MANAGEMENT SERVICES Today’s agriculture demands the understanding and utilization of many different types of risk management tools.

With expertise in grain marketing, crop insurance, forward grain and fertilizer contracts, MKC’s professional sales staff has a full range of tools designed to help the producer maximize his return on investment.

INPUT FINANCE Convenient, competitive and pre-established credit is vital for today’s producer to allow timely purchasing in order to take advantage of opportunities to extract profit from volatile markets.

All your needs for financing crop inputs can be handled in a single visit with people who are knowledgeable in production agriculture. The Cooperative Finance Association (CFA) Input Finance Program, available through MKC, offers a variety of loan products to fit your crop production and marketing needs.

ONLINE BUSINESS PLATFORM Being a good partner means being there when it’s important to the customer. MKC’s online business platform makes doing business convenient and allows you to review grain deliveries, existing contracts and create new offer contracts any time, day or night. Producers can also review agronomy invoices and input contracts to pay a bill online.

The direct deposit program at MKC means you no longer have to disrupt your work schedule to make a trip to the bank. Providing convenience for today’s busy ag producer is what MKC is all about.

MKC HISTORICAL DATA CASH DISTRIBUTIONS TO MEMBERS YEAR ENDED

EQUITY REDEMPTIONS

CASH PATRONAGE

TOTAL

2013

$ 650,512

$ 3,417,300

$ 4,067,812

2012

698,399

2,379,444

3,077,843

2011

746,339

2,296,816

3,043,155

2010

649,765

1,703,704

2,353,469

2009

714,116

2,673,170

3,387,286

2008

563,574

805,434

1,369,008

2013 PATRONAGE ALLOCATION PATRONAGE

RATE

Grain

20.02 cents/bushel

$3,557,062

Agronomy - Seed - Crop Protection

7.34% (avg. $44)/ton on fertilizer

$4,095,271

Petroleum - Lubricants

3.61% (avg. 13 cents)/gallon on fuel

$729,579

Feed - Merchandise

1.6%

$161,338

SALES

AMOUNT

RETURN ON EQUITY

$500,000,000

35.00%

$452,535,819

$439,983,079 $419,789,981

30.20%

30.00%

$400,000,000

25.00%

$337,611,406 $314,821,398

21.43%

$300,000,000

18.57%

20.00%

19.33%

17.22%

15.00% $200,000,000

10.00% 5.00%

$100,000,000

0 0

FYE 2009

FYE 2010

FYE 2011

FYE 2012

NET EARNINGS $15,000,000

FYE 2009

FYE 2010

FYE 2011

FYE 2012

FYE 2013

FYE 2013

PATRONAGE DISTRIBUTION $14,073,776

$10,000,000

$13,342,854

$8,543,250

$12,000,000

$8,000,000 $10,837,662

$6,682,924 $8,219,209

$9,000,000

$8,871,405

$6,000,000

$5,742,040

$5,948,610

FYE 2011

FYE 2012

$4,259,260

$6,000,000

$4,000,000

$3,000,000

$2,000,000

0

FYE 2009

FYE 2010

FYE 2011

FYE 2012

FYE 2013

0

FYE 2009

FYE 2010

FYE 2013

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ON THE GROUND

momentum on the ground MKC continues to invest in facilities across its trade territory, all part of a plan to meet the needs of customers not only today, but as they move into the future.

Construction has resulted in increased grain handling speed and more than 3.8 million bushels of storage space since 2009 through additional bins and bunkers. These reinvestments in infrastructure are keeping pace with agricultural advances and the growing needs of customers.

The Groveland expansion enabled MKC to create a facility to serve a larger territory and create additonal efficiencies for both the producer and the cooperative. The result was a 125,000 square foot warehouse, new scale office and two scales that span over 17 acres. The location was completed in 2011. This location was constructed through a key partnership with Winfield Solutions, LLC, a subsidiary of Land O’Lakes.

Four bulk seed bins installed in Walton doubled the location’s seed storage, meeting the need for a more efficient system for MKC customers.

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New grain facilities currently under construction at Canton, Lyons and Benton will add 6.3 million bushels of grain storage. The facilities are expected to be operational by the 2014 wheat harvest.

Addition of outbound scales in Moundridge and Walton improved traffic flow during peak harvest times and reduced wait times.

IN THE COMMUNITY

community stewardship MKC takes great pride in contributing to the quality of life in the communities throughout its territory. This commitment is reflected by their contributions and activities that focus primarily on alleviating hunger, leadership development, ag education and community safety. Over the past five years, MKC has donated more than $300,000 to communities throughout central Kansas.

• 4-H Leadership Development • • • • • • • •

Farm Safety Camps

Kansas FFA Foundation and local FFA Chapters Community Events and Festivals Ag in the Classroom

City and County Emergency Services Women in Agriculture

A total of $11,200 was donated to 10 area 4-H Leadership Development Funds in 2013.

Young Business Professionals Programs School Programs

Programs supporting ag education benefited from more than $5,000 in 2013.

Nine community food banks located throughout central Kansas benefited from donations totaling $11,200 this past year. In addition, MKC employees hosted a food drive, collecting more than 12,000 pounds of food.

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EDUCATION

Tax Deduction Secured for Members A private letter ruling approval results in tax deduction for members and MKC.

by Kerry Watson, MKC Director of Communications

Through a requested IRS Private Letter Ruling, MKC found a path to pass a significant tax deduction on to producers who are members through the Domestic Production Activities Deduction (DPAD). The ruling, while requiring certain changes to grain purchasing processes, allows MKC to significantly enhance the value of the DPAD (tax deduction) for members and the company.

Often referred to as Section 199 Deduction, DPAD is a special federal income tax provision allowing a cooperative to allocate to its members a tax deduction generated by “qualified production activities.”

As outlined by the IRS and as it relates to the DPAD, grain payments the cooperative makes to its members are considered qualified production activities by the cooperative, thus making the cooperative and its members eligible for the tax deduction.

The favorable ruling allows MKC and other partnered cooperatives within Team Marketing Alliance, Inc. (TMA) to utilize a $5M deduction previously not available to the cooperatives or their members. The ruling, which will require specific process and documentation changes by TMA and

the partnered cooperatives, will have a significant financial impact on their local communities and members.

“This could potentially result in several million dollars of tax deduction to the farmers,” said MKC’s Chief Financial Officer, Danny Posch. “Our rural communities will benefit significantly as the savings are injected back into the local economy.”

Similar to patronage, the deduction will be shared by members based on the amount of grain business each member does with the cooperative. Once the DPAD is calculated by each individual cooperative, the cooperative will pass through the deduction to its members, reporting the amount on Tax Form 1099. The member can utilize the deduction on their personal or corporate income tax return.

“Returning value to the members, our owners, is at the core of MKC’s mission, Shared growth. Shared success.,” said Posch. “MKC strives to provide value through grain marketing, insurance, energy and feed services in addition to the crop input services we offer to our members. We also strive to provide value through patronage and other economic value whenever possible.”

BE SURE TO PARTICIPATE IN THIS HISTORY-MAKING OPPORTUNITY! INFORMATIONAL MEETINGS

February 24 | 7:00 p.m.

Alta Vista Baptist Church | 402 Main | Alta Vista

YES

February 27 | 7:00 p.m.

Onaga Senior Center | 200 Bypass Rd. | Onaga March 3 | 7:00 p.m.

Houston Street Ballroom | 427 Houston St. | Manhattan 10

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MEMBERSHIP VOTE

March 6 | 7:00 p.m.

Houston Street Ballroom 427 Houston St. | Manhattan

Why better together?

“I believe a merger with MKC will provide producers in our area more opportunities in the market place. We have an opportunity to gain additional access to expertise in seed, crop protection products and risk management services and I’m excited to know these services will still come from my local facility.”

– Kenny Duncan, Pottawatomie County Producer and member of Farmers Cooperative Association

“At my age, worrying about the future might not seem so important. But when I think of what today’s younger farmers will need 10 or 15 years down the road, I think one of the biggest things our co-op needs to consider is growth. I believe being part of a larger cooperative such as MKC will provide better buying power, access to technology and more access to expertise.”

- Harold Bailey, Riley County Producer and member of Farmers Cooperative Association

“I’m extremely excited about the fact that the boards of directors and management teams of two very successful co-ops are considering this merger. I think there are a number of growth opportunities that will be provided for our employees and I’m excited about the leadership opportunities and career paths a larger cooperative can provide.”

– Doug Biswell, Grain Merchant for Farmers Cooperative Association

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