MFA – Aiming at Tomorrow
By Don Copenhaver
President and CEO of MFA Incorporated

Despite the 2006 fiscal year challenges, MFA Incorporated is financially sound and poised for a good year. The reasons reflect your business as well: increasing corn acres, fertilizer demand and balance-sheet management.

This past year was disappointing from a profitability standpoint. There is an outdated belief that farmer-owned cooperatives were not meant to make a profit. With a pre-tax profit of only $700,000, MFA came very close to meeting that expectation. But I can assure you that I take a completely opposite view. Farmer-owned cooperatives should meet the same financial performance standards as any other business structure. This, however, was a challenging year for all of us in agriculture.

What a difference a year makes. The previous year was one of the best years in profitability MFA has ever achieved, despite a dismal fall harvest. The drought that accounted for the 2005 harvest continued in most of our market area. And, of course, the 05 harvest is reflected in our just completed fiscal year. Grain is a big piece of our business. When we have fewer bushels to handle, our bottom line is affected.

Last year, we at MFA were concerned about the fertilizer environment. Extremely high values were driven by rising energy prices. Prices for natural gas (90 percent of the cost in nitrogen-based fertilizers) and diesel fuel were rising quickly. That made locking in fertilizer inventory for spring a large financial gamble. With an annual volume of nearly 1.5 million tons, MFA has to commit early and take positions in order to have product in place and staged for the farmers we serve. Traditionally (and logistically), we cannot wait until the last minute. 

Further complicating the situation was the loss of the Missouri River and its barge traffic. Railroad service was less than ideal because of the disruption caused by hurricanes. As a result, agriculture’s fertilizer market was dependent on truck. That increased everyone’s cost—yours and MFA’s.

The unstable fertilizer market, in turn, affected planting decisions.

All of the above added to market volatility. Today, unlike years past, fertilizer suppliers demand upfront payment with no price protection.

Distributors like MFA used to be able to pay for product when it was delivered versus when it was ordered. Those days are gone.

As a result, the extremely high fertilizer values of last spring caused many farmers to shift corn acres to soybeans. Farmers also cut back on application rates. And lack of spring rain in the southwestern part of our territory caused others to cut back on fertilizer altogether.

Those dynamics, as well as the market working against all of us, made for a frustrating year. It seemed like every time we purchased a ton of fertilizer, the price went down before we even got it in our inventory.

Despite all that, I am optimistic about the upcoming spring season. Agriculture demands optimism. Will MFA take a different approach this season? Probably. The buzz-phrase in today’s fertilizer industry is “just-in-time inventory.” The downside is the possibility of product not being available at all times. I can tell you we will try very hard not to let that happen.

MFA’s agronomists as well as our sales force anticipate increased corn acreage because of ethanol demand and current corn prices. That means more demand for fertilizer. With current prices, using 150 pounds of NH3, 50 pounds of phosphate and 60 pounds of potash, the cost per acre will be about what it was two years ago, which is approximately 23 percent less than one year ago.

If the reduced harvest of last fall and the volatile fertilizer market weren’t enough, the swine facilities at MFA’s research farm were hit by a tornado last spring, causing more than $4 million in damage. Not only did the tornado destroy most of the buildings, it interrupted the swine production cycle. The buildings were insured. Production was not.
In addition, the extremely dry conditions most of the year in the southwestern part of MFA’s territory forced many livestock producers to sell their calves early because of poor pasture conditions. That adversely affected our feed tonnage as well as MFA Health Track.

What’s ahead? As our theme suggests, MFA will aim at tomorrow. All of us must keep pace with the ever-changing dynamics of agriculture. Technology is a huge driver of that change. Technology touches almost everything, from products to equipment to our offices and homes.

All of us in agriculture have witnessed glyphosate’s effects on the crop protection business. The evolution of chemistry has brought about changes at every level from the laboratory to the farm.

Think how technology has changed the seed industry. Three major players now control the business. All three are developing high-yielding genetics with special traits for every condition. I read an article comparing corn production in 1966 to corn production in 2005. In 1966, corn production was 4.17 billion bushels; in 2005, it was 11.1 billion bushels. Eighty percent of that increase can be attributed to improved genetics.

If we are to meet the demands of the ethanol industry, the livestock industry and export markets, technology enhancements must continue to evolve.

As with the fertilizer industry, the seed industry has continued to consolidate. When only a few have control, farmers have fewer options. Fortunately, MFA has established brands with outstanding reputations: MorSoy soybeans and MorCorn seed corn varieties.

What about the dynamics in the livestock sector in today’s environment? The run up in corn and soybean prices has been welcomed by crop producers. But the livestock producer buys this grain. Many are not enthusiastic about these price increases. Poultry producers are starting to curtail production because of grain prices.

Current corn prices have raised the cost of producing a hog by $5. Feeder cattle prices have declined by $12 to $15 since early September. In a perfect world, as grain prices rose, so too would milk and meat prices. That’s not the case. And today, dairy producers, cattle producers and swine producers are hurting.

Dried distillers grains produced by the ethanol plants are affecting the feed industry. All feed companies have experienced the effects. It’s no secret that MFA’s tonnage is down as a result of the competition from DDGs. To help our livestock customers make use of DDGs, MFA has introduced a supplement designed specifically for the DDG market. DDGs are a good product, properly used. But they require supplementation. We hope to tap into that market.

To better use DDGs, MFA has modified a feed mill in Centralia, Mo., to manufacture cattle feed tubs with DDGs as a primary protein source. We are marketing these tubs in Missouri and several other states.

I’ve used all of the above to illustrate there is uncertainty in the marketplace. There always has been and will be. Opportunities also exist. How can MFA adapt? How can our member/owners?

From my perspective, we must continually rationalize everything we do, every facility we operate, every service we offer. We must operate those facilities and provide those services at reasonable returns.

As a centralized cooperative—one that owns and operates a majority of its own retail facilities—MFA ties up a tremendous amount of capital, both in fixed assets as well as working capital. It is management’s responsibility to make sure our facilities and services are generating adequate returns. You as a farmer or rancher make the same decisions on your operations.

We at MFA will continue to focus on our responsibility to you, the owner, to make sure everything we do is justified and that we are striving to generate the necessary returns on capital we have invested.

Every year brings new challenges. Just as you do in your individual farming operations, you find ways to adapt. We do as well. In fact, MFA has been adapting for nearly 93 years. What’s more, we’ll continue to adapt to the changing dynamics of our industry.

Click here to respond to this article
Back to Top