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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
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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