2007 fiscal year in perspective

This fiscal year in perspective
By Allen Floyd
MFA Incorporated Chief Financial Officer and Treasurer

Higher volume and a bolstered agricultural economy show in MFA's bottom line. But increased volatility will provide future challenges.
As you’ve already heard, 2007 was a successful year for MFA. That success is reflected by net income of $16.3 million. This compares to last year’s income at just above a break even. Increased corn acres played a major part in the improved results. Demand for seed and fertilizer created opportunities for increased volume and margin contribution to the bottom line. But there were other factors that played a part in the improvement.

To delve into those factors, let me start with sales. For the first time ever, total sales, after the elimination of all inter-company and inter-divisional transactions, exceeded $1 billion. Sales of nearly $1.1 billion were up $195 million or 22 percent. Higher selling prices for base commodities certainly contributed to the increase, but growth in unit volume for grain, plant food, seed, crop protection chemicals and feed were also factors contributing to the higher levels.

Grain sales were $340 million, compared to $208 million last year. This increase is a combination of both price and additional bushels handled.

The average per bushel sales price for corn was 56 percent higher this year, wheat was 33 percent higher and soybeans were 17 percent above last year’s average prices. All contributed to the large increase in sales dollars.

Bushels sold were also up (66 million compared to 55 million). A more favorable growing season and better yields increased production and allowed MFA to handle and market more bushels through our system.

Field crops
Plant food, seed and crop protection chemicals, sales of $583 million, showed an increase of $67 million or 13 percent. We all know what has happened to fertilizer prices during the past 12 to 18 months. We have seen year over year increases in N, P and K in the 25 to 40 percent range. Fewer manufacturers, tight supplies and, most important, increased demand are the main factors contributing to the price creep. Higher prices do have a positive impact on dollar volume.

Like grain, plant food unit growth is also up. Tons sold at wholesale are up 8 percent, while retail tons are up 15 percent. Increased corn and wheat acres also contributed.

Crop protection chemicals, volume is also higher with overall growth around 10 percent. Again, additional corn acres account for some of the volume increase. Fungicide sales for treatment of plant health and a late season outbreak of Asian rust in our southern market were also higher than last year.

Seed sales were up 10 percent over last year with some 72,000 units of seed corn sold, an increase of 47 percent. Acre shifts to corn resulted in an 11 percent decline in seed bean sales. Wheat seed sold was up over 30 percent.

Livestock supply sales
Feed, farm supply, animal health products and our livestock marketing operation saw sales of $147 million, down $5 million from last year.

The decline from last year is entirely concentrated in the Livestock Marketing area. A tornado in March of 2006 at our Marshall swine complex put us out of business at that facility for most of 2007. It was not until early summer that the rebuilt facility was back operating at full production.

It was a difficult year for the feed business, particularly beef and dairy. Water and forages were in short supply over much of our trade territory. We experienced a severe winter ice storm and a late spring freeze. These weather factors coupled with high commodity prices caused many producers to wean calves early and cull herds in response. Despite all this, feed tons sold did increase by 2 percent. Minerals and specialty feeds led the way.

Farm Supply sales were down this year. Producers were forced to spend more on feed, hay and pasture fertilizer, and spent less on farm supply items.

Finally, animal health product sales were even with last year, despite the early weaning and culling experienced in the beef and dairy herds. Generics continue to impact this product line.

A look at margins
For the fiscal year, total margin (gross margin on products sold and the income from service revenues) stood at $164 million, an increase of $30 million.

Grain margins were 41 percent higher than last year. More bushels and improved marketing were factors in the improvement.

Increased unit volume, intensive logistics and transportation management and price appreciation throughout the planting season allowed MFA to capture more fertilizer margin. This is after the 2006 year in which our margins from plant food were very narrow due to in-season price reductions. Application revenues also increased as of result of additional corn acres.

Margins in the seed and crop protection chemical product lines were up from last year, primarily due to increased volume.

Expenses were up some $15 million to total $148 million. Expenses are higher generally as a result of increased volume. Fuel, supplies, repairs and maintenance, utilities and payroll are all higher as a result of moving more product to market.

The balance sheet
Note the large increase in current assets, $303 million this year, compared to $228 million last year. I have already talked about the high values as they relate to sales volume. Those same values impact the carrying costs of inventory and receivables, the main components of current assets. We did have an early corn harvest in the Bootheel this year that created an increase in corn inventory quantities over last year.

We took a prepay position on anhydrous ammonia in August this year that we did not have in 2006. These both created inventory values that were higher than last year. But by far the biggest reason for the increase in current assets is the higher cost per unit for most of the products we handle.

Investments, our ownership in interregional cooperatives and joint ventures, were $31 million in both years. In October of 2006 we sold our 50-percent investment in Hyman Farm Service for $1.6 million. Increased earnings from our remaining LLCs offset this investment sale.

Fixed assets (land, buildings, equipment and rolling stock) totaled $84 million, an increase of $5 million. Capital expenditures for the year totaled $18 million. Major additions include the acquisition of two retail facilities. One is a fertilizer, chemical and seed facility at Rock Port, Mo.; the other is a 700,000-bushel grain facility at Clark, Mo. We also completed the rebuild and upgrade of the swine complex at Marshall, Mo, and added a state-of-the-art feed tub manufacturing facility at the Centralia feed mill.

Total assets are $418 million, $80 million higher than last year, most of which relates to higher product values.

Net worth is $126 million, an improvement of $7 million. Of the $16 million in current year profit, approximately $3 million was paid to Uncle Sam in income taxes on non-member, non-patronage business. $6 million has been transferred to a liability account to be paid to members, leaving $7 million as an addition to net worth.

Of the $6 million to be paid to members, approximately $2.4 million will be paid in current year cash patronage. This represents a 50 percent cash distribution. The remaining 50 percent will be issued in the form of allocated equity.

An additional cash distribution of $3.7 million represents the retirement of allocated equity that was issued in 1976. These cash payments were made in late December and January.

Years like 2007 do not come along very often. We are certainly appreciative when they do. But we also recognize that difficult challenges remain. With high commodity values comes the need for more borrowed capital, resulting in higher interest costs. High commodity values also increase the operating costs for our livestock producers. That has the potential to impact the business they transact with us. Fuel and energy costs remain high and increase our costs. Transportation logistics are difficult at best and impact our ability to position product.

With these factors in place, it will be difficult to repeat the 2007 results. Our plan does indicate another strong year for 2008.