Connection Summer 2014 | Page 12

end era FEATURE SALE OF AGRONOMY The of an Sanders purchases agronomy, fertilizer divisions o ver the years we have seen many changes in the way business is conducted. What we once knew as the way it should have been, has changed. Suppliers have been fewer and larger. Your management and board of directors have been trying to keep your cooperative competitive, yet avoid unusual risk. This letter will focus on United Ag’s agronomy business and changing atmosphere. United Ag happens to be one of the largest agronomy dealers who is not a distributor of major lines of agricultural chemicals and fertilizer. What this means is that our competitors who are distributors for all major chemical manufacturers are able to buy their chemicals at wholesale prices, whereas United Ag cannot. This leads to selling our ag chemicals at or below cost to remain competitive with distributors. In the end, we hope to get some kind of rebate from the manufacturer to realize a small profit. As most of you know, the prices of inputs, especially ag chemicals and fertilizer, are very expensive, and therefore, your cooperative accepts a huge accounts receivable risk with little to no return. Fertilizer is even more risky. In order to secure a supply for our producers, we have to pay for fertilizer months in advance of the season with no price protection. We may buy 20-25,000 tons of liquid fertilizer in August or September in order to guarantee we have product for our growers. There is no way to hedge this product, and if for some reason prices were to drop $100-$200 per ton, your coop would suffer a more than $2 million to $5 million loss. This is exactly what happened during our 2010 fiscal year when we suffered a $2 million loss. If our operations were spread from the East Coast to the West Coast, we would have the opportunity to move fertilizer or ag chemicals from areas of drought or crop distress to areas where these products are being used. Because this is not an option for us, this just adds to the risk of price deterioration and loss. Your board and management have always wanted to provide our customers with the best service, expertise, and problem resolution. We have seen many of our loyal agronomy customers go elsewhere, and when we inquire why, it is never service, but always price. We 12 Your board and management felt like the time was right for our cooperative to sell those assets to protect the vitality of our core business. have worked hard to be efficient in our recommendations and have the integrity to not sell a product if it is not needed or if the growers will not get a return on their investment. We have struggled with solutions to the obstacles we are encountering in our agronomy department as a whole. I am confident that we have the best team, who understands if it isn’t good for the producer, then don’t recommend or sell it. A few months ago your cooperative was approached by an agronomy company new to this area about purchasing our agronomy assets, offering all our agronomy employees jobs, and running this agronomy business more aggressively. The company is well known throughout the Mid-South featuring our type of agricultural crops. Your board of directors struggled through many facts and spent hours doing their due diligence. Letters of confidentiality were signed by all parties during this time. Attorneys met with us and answered many questions that came up. One of the first was should the members vote. After consulting with our attorney and auditors, it was a consensus that out of our 1,150 members, there was a small percentage who supported our agronomy department and therefore the best representation of the membership who fully knew all the risks associated with agronomy was the board of directors and that your board should make the decision. We also considered the fact that over the last 10 years, which represent all the years of outstanding stock, adding all the profits and SALE OF AGRONOMY FEATURE subtracting all the losses left a new profit of $390,000 on $144,000,000 of sales or a return of .002 percent. We concluded that our risk was too much for such a small return and one bad year could put our whole cooperative in jeopardy. One of the primary concerns for management and directors was to take care of our existing employees and the employees of Winfield who had worked so closely with us the last few years. In our negotiations, they would all be offered jobs with the new company with raises and better benefits than they had with United Ag. Another part of the negotiations was that they would lease offices at El Campo with an option to buy these offices and the old gin buildings that we use as warehouses for chemicals and seed. They would also lease office space and warehouse space at Danevang, Edna and maybe Eagle Lake. After running the numbers, it was clear that agronomy department supporters would share $3,700,000. To decide how to allocate this, we looked back at all the agronomy sales done by a member over all the years of stock outstanding and what percentage their purchases were of all the agronomy