The year in perspective
By Allen Floyd
MFA Senior Vice President
Chief Financial Officer, Treasurer

Although a pre-tax profit of $700,000 is less than ideal, MFA remains financially strong. That strength softens the effects.

The 2006 fiscal year was disappointing from a bottom-line perspective. The following numbers explain why the year did not meet expectations. The numbers include the combined activity of MFA Incorporated, MFA Enterprises (our wholly owned subsidiary) and Agmo Corporation (our finance company).

Sales and service revenues were $931 million, down $38 million. Reductions in grain bushels and plant food tons were offset by higher prices, particularly the fertilizer product line.

Grain bushels sold decreased from 65 million last year to 55 million this year. The harvest of 2004 was a record, followed by the reduced yields of the 2005 harvest. Soybean production in Missouri was down 18 percent. Corn production was 29 percent below 2004 levels. Lack of rainfall contributed to the short crop. Our decline in sales matched these declines in production.

Dollar sales of grain sold totaled $212 million, or about an 18 percent decrease. This percentage decrease is comparable with the drop in unit sales.

Field crops
The field crop product line totaled $538 million, an increase of $7 million. Of the $538 million, plant food represents $394 million of the total. This is up $9 million from last year. This dollar increase is entirely the result of higher prices. Unit sales were down from last year. Wholesale tons sold were down about 13 percent, while retail tons declined 6 percent. High unit prices, dry weather and changes in planting intentions contributed to the tonnage decline.

Crop protection chemical volume is $105 million, down $3 million from last year. A $6 million decline in sales at the wholesale level was offset by a $3 million improvement at retail. Wholesale volume was impacted by the large return of fungicide product from the 2005 growing season.

Seed sales were $39 million, basically flat with last year. Increases in wheat seed were offset by a decline in corn and soybean seed sales.

Livestock supply
Livestock supply sales were up $2 million to $133 million. Feed is the largest contributor to this category at $85 million. Dollar sales are up slightly from last year; however, tons sold are down about 1 percent. Poultry and dairy tons both had small declines, while beef feed was down almost 9,000 tons from last year. Again, dry conditions and a lack of rainfall contributed to forage and water shortages. Producers sold calves early and culled herds to compensate. A mild winter also contributed to the decline in beef feed.

Farm supply sales were $33 million, up $1 million from last year. Wire and steel, livestock equipment, and salt increased. Higher prices did account for some of the gain, but unit growth also occurred in many of the farm supply product lines.

Animal health sales were $15 million in both years. Feed additives had good growth, offset by declines in biologicals and pharmaceuticals.

Other sales represent mostly the activity of our swine marketing division, but include sales of hardware and miscellaneous products, as well as miscellaneous revenue items—$48 million this year, $49 million last year. The decline is from lower production in livestock marketing. A tornado destroyed our Marshall swine complex and put us out of business for the last part of the fiscal year.

Bottom-line numbers
Total operating margin (gross margins on products sold and the income from service revenues) is $134 million compared to $145 million last year, a decline of $11 million. Grain bushels sold were down 16 percent. That equates to a $1.5 million reduction in grain margins as compared to last year. Plant food tons were down 12 percent. Margins per ton sold at wholesale were half of last year’s total.

The combination of these two factors resulted in a $7 million decline in fertilizer margins. Feed and livestock marketing margins were also lower due to declines in feed tons and fewer animals marketed. On the positive side, margins in the crop protection product line were up from last year over $1 million.

Expenses were $133 million, up $3 million or slightly above 2 percent. On a percentage basis, the most significant expense increases were car and truck, up 17 percent, and interest expense, up 5 percent. Almost half of the increase in car and truck or $1.4 million is cost of fuel. Interest expense is up due to an average increase of 110 basis points in our interest cost. Average borrowings during the year were actually down by about $16 million.

Lower revenues and slightly higher expenses result in pre-tax profits of $700,000. This amount is down from $15 million last year.

The balance sheet
Current assets are comparable between the 2006 fiscal year and the 2005 fiscal year. However, the mix has changed. Receivables and grain inventory are up $10 million each this year. But that is offset by a $19 million reduction in supply inventory, primarily in the plant food and crop protection product lines.

Investments, our ownership in interregional cooperatives and joint ventures, are $31 million, down $2 million. This decline results from lower earnings by our joint venture partners. Lower grain volumes and reductions in plant food tons and margins limited profitability for our LLCs.

Fixed assets (land, buildings, equipment and rolling stock) totaled $79 million, an increase of $6 million. Capital expenditures for the year totaled $19 million. Major capital improvements include upgrades to selected grain facilities; the addition of a 700,000-bushel grain bin at Adrian, Mo.; rebuilding of the tornado-damaged swine buildings at Marshall, Mo.; upgrades to fertilizer terminals at Palmyra and Caruthersville, Mo.; automation improvements at selected feed mills and the construction of a backup disaster recovery site for our computer operations.

Total assets are $338 million, $5 million higher than last year. Net worth equals $119 million. Income taxes and the retirement of deceased-member equity more than offset the current year earnings, resulting in a slight decline in net worth.

Working capital (current assets minus current liabilities) decreased $10 million to $87 million. Most of this decline is simply the result of lower earnings and cash flows generated from operations. The lack of profitability eats into the working capital number.

The percentage of assets owned by the members also decreased from 36 percent to 35 percent. Again, the lower earnings and cash flows were the main contributors to the decline.

The 2007 fiscal year is off to a good start. We’ve seen an improved grain harvest, with higher prices for the producer. Spring planting intentions for corn look very promising, which should help our plant food volume in 2007.

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