The Changing Dynamics of Grain Cooperatives in Eastern Washington
By: Jason Monson, Ken Duft, Ken Casavant, and Eric Jessup
EB1985E - The complete Extension Bulletin is available in pdf format.
The
grain cooperative managers were very helpful in providing the confidential
information requested. We sincerely appreciate their time, efforts,
and comments provided. This analysis would not have occurred, nor
been completed, without the annual financial statements provided by
our grain cooperatives and the high level of participation from the
grain industry. It was a privilege to meet, visit, and learn from
their experiences. Their comment and ideas were very insightful and
beneficial to this study. We hope this extension bulletin becomes
a tool to aid their business, management and financial decisions.
The grain cooperative study was funded with a research grant provided by the Washington State Department of Transportation entitled, “Strategic Freight Transportation Analysis.”
Summary and Conclusions
The industrialization and globalization of agriculture has led cooperatives to a crossroads.
Grain cooperatives are vanishing in the Pacific Northwest as they struggle to remain economically viable. The number of grain cooperatives in eastern Washington has decreased by 59% in the past 55 years, but the total cooperative storage capacity has increased 312%. There are many forces impacting cooperative-owned county elevators operations such as globalization, industrialization, excess storage capacity, government policies, high fixed costs, and reduced patron loyalty. The analytical model of structure, conduct, and performance is used to investigate the grain industry as it evolves to meet the demands of the global economy. The purpose of the research is to explain the historical importance of grain cooperatives and to identify structural changes in the grain industry and impacts on financial performance.
In 2002, twenty-two cooperatives comprised 42% of the 52 grain companies operating warehouses in eastern Washington. Total 2002 commercial grain storage in eastern Washington was 211,592,000 bushels in 2002, which is an increase in total commercial storage of 258% since 1947. Cooperatives represent 81% of Washington’s licensed storage capacity, which marks a 15% increase in their market share since 1947. Similarly, cooperatives operate 309 houses (75%) of the 413 total commercial houses in eastern Washington. The average number of houses and locations per cooperative is 14.05 and 9.27 respectively. Cooperative storage capacity is highly concentrated, with the top four firms controlling 47% of the volume and 49% of the houses.
Financial ratios and cost analysis for the grain industry were constructed from 1997-2002 financial statements of grain cooperatives. Responses were received from 20 of 22 cooperatives in eastern Washington in 2001/2002, corresponding to 94.1% of cooperative capacity and 76% of all capacity in eastern Washington. Medium sized cooperatives maintained the highest average current ratio of 7.2, followed by small and large cooperatives at 6.0 and 2.0 respectively. The average profit margins for small, medium and large cooperatives were $0.017, $0.013 and $0.014 per dollar of gross revenue. (From this point forward profitability refers to net operating margin). Solvency improved for small and medium cooperatives with a reduction in the ratio of total debts to patron equity by 57% and 17% respectively. Large cooperatives became less solvent with a 28% increase in the debt ratio and 62% increase in the ratio of total debt to patron’s equity.
The average total cost curve shows the existence of economies and diseconomies of size in the eastern Washington grain industry. The level of grain volume corresponding to the minimum point for concentrated grain firms is 10,119,976 bushels, at an average total cost per bushel of $0.0478. Finally, the U.S. government influences the economic and financial performance of cooperatives through warehousing laws, the Conservation Reserve Program, and actions by the Commodity Credit Corporation. The approximate annual impact of these three programs is $10.3 million dollars.
Cooperatives are consolidating to achieve economies of size by securing an ever-greater volume of grain. A competitive grain industry exists, and is comprised of cooperative and private firms. Cooperatives depend on local producer support and must not be taken for granted. They add value to rural areas, provide high quality service to their members, and most importantly, guarantee healthy competition. Farmers benefit when competing firms bid for their grain and a few organized buyers do not control prices. A strong independent system of cooperatives can be maintained and encouraged by producers. With government policies of support, a cooperative’s role is still to provide high quality products and services to its members and patrons. Remaining economically viable is essential to providing those benefits and opportunities to members.
Cooperatives continue to play a critical role in marketing grains, legumes and oilseeds and in providing producers with inputs and supplies. The function of storing grain does not afford management many options to alter their cost structure, and there is a limit to operational efficiency. The agriculture industry continues to change and innovate. Cooperatives have succeeded by conquering the economic and social challenges of the past and are poised to reap the opportunities of tomorrow. Cooperatives cannot wait to see what the future will bring, but must be aggressive in serving their members. They must be dedicated to leadership in the field of agricultural opportunities.
To read the entire extension bulletin be sure to download it from this page. Top
Jason Monson is a WSU graduate with an MA in Agribusiness, Ken Duft (emeritus) and Ken Cassavant are professors in the School of Economic Sciences, Eric Jessup is an assistant professor in SES, Washington State University, Pullman, WA 99164-6210.
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