Cooperatives and CHS Nate Gieseke, CHS Aligned Solutions 2014 CHS Inc.
WHAT IS A COOPERATIVE? The United States Department of Agriculture (USDA) defines a cooperative as: a user-owned, user-controlled business that distributes benefits to its member-owners on the basis of use
A COOPERATIVE S KEY PRINCIPLES The User-Owner principle: The cooperative is owned by the people who use it. The User-Control principle: The cooperative is controlled by the people who use it. The User-Benefits principle: The benefits generated by the cooperative accrue to its users on the basis of their use.
TYPES OF COOPERATIVES Marketing Co-ops: owned by and benefit members who use the cooperative to sell their products 54% of all co-ops 31% of total co-op memberships Ex: Sunkist, Ocean Spray, CHS Supply Co-ops: supply members with the materials needed to operate 41% of all co-ops 67% of total co-op memberships Ex: Southern States Cooperative; Tennessee Farmers Cooperative, CHS Service Co-ops: provide specialized services related to the owner s business of operations 5% of all co-ops 2% of total co-op memberships Ex: Basin Electric Power Cooperative; Pioneer Telephone Company, CHS
COOPERATIVE CONSOLIDATION BY 2020 Number of U.S. Cooperatives 3000 2835 Total U.S. Cooperatives 2500 2000 1500 1000 500 2476 2002 1691 1302 997 762 0 1990 1995 2000 2005 2010 2015 2020 Consolidation will impact the cooperative landscape
PREDICTED CONSOLIDATION BY 2020 State 1975 1990 2005 2009 2015 est. 2020 est. % Decrease Indiana 96 68 37 31 23 17 26% Illinois 252 235 139 121 88 67 24% Iowa 404 278 128 100 73 56 23% Kansas 256 199 120 93 68 52 24% Miss./Kent. 182 109 81 81 59 45 24% Minnesota 545 343 207 167 121 93 23% Mont./Wyo. 192 76 42 40 29 22 24% Nebr./Colo. 374 212 102 78 57 43 24% Ohio/Mich. 263 149 81 61 44 34 23% North Dakota 500 292 192 153 111 85 23% South Dakota 267 188 103 80 58 44 24% Texas/Okla. 234 411 258 234 170 129 24% Wisconsin 244 162 124 71 52 39 25% PNW 155 113 77 63 46 35 24% TOTAL 3,964 2,835 1,691 1,373 999 762 24% Source: USDA and CHS Business Solutions
CATALYST FOR CHANGE ERAS Consolidation in last five years in actuality is faster than projected from U.S. Department of Rural Development. Consolidation is taking place at more rapid paces among mega coops and midsize cooperatives. Historically, lower returns for farms and challenged cooperative have been the catalyst for change among cooperatives. Agriculture currently in soft cycle. We will experience an era of change in the next five years and it has already started
COOPERATIVES IN THE UNITED STATES Oak Brook, Illinois Hardware store chain St. Paul, MN Largest bank in Farm Credit System New York, NY Global news network Austin, Texas Pub and brewery Inver Grove Heights, MN Energy, grains and foods company Cabot, VT Dairy farm and products Lakeville-Middleboro, MA Cranberry and grapefruit producer Portland, OR Produce retailer Kent, WA Outdoor gear and clothing
WHO IS CHS? Nation s leading cooperative, owned by farmers, ranchers and co-ops Global energy, grains and foods business Helping producers, co-ops and customers grow their businesses
SERVING PRODUCERS IN THEIR COMMUNITIES 1,100 member cooperatives and more than six dozen CHS Service Centers across the U.S. and Canada Crop inputs, energy, technology, grain marketing and business support Connecting local owners to global markets
TELLING THE COOPERATIVE STORY OUR LOCATIONS
CONNECTING GLOBALLY
CHS MEMBERSHIP Individual Members Individual producers of agriculture products Cooperative Associations Associations of agriculture producers Must operate under the provisions of Capper-Volstead Act
CHS OWNERSHIP 1,100 locally owned cooperatives serving more than 500,000 producers 75,000 individual producers (through company-owned facilities) Preferred stockholders (CHSCP, CHSCO, CHSCM, CHSCN, CHSCL) on NASDAQ Exchange Voting equity 70% Voting equity 30% Voting equity 0%
GOVERNANCE 17 directors represent 8 CHS regions Full-time producers Elected by member-owners by region Three-year terms Board annually determines the amount of cash to be distributed to members
CHS MEMBERSHIP AREA BY REGIONS 1 3 2 4 1 3 1 2 Region 1 Region 3 Region 5 Region 7 Region 2 Region 4 Region 6 Region 8
RECENT HIGHLIGHTS Fiscal 2014 net income $1.1 billion Fiscal 2014 net revenues $42.7 billion Number 69 on 2015 Fortune 500 list A 2015 Minnesota Top Workplace fourth consecutive year!
CASH RETURNS $ in millions 637.0 237.0 227.3 430.9 598.9 518.0 2010 2011 2012 2013 2014 2015* *Estimated based on FY2014
COMPETING WITH A COOPERATIVE STRATEGY CHS is owned by the producers who actually use its products and services All decisions made within CHS are guided by the producer members on the board CHS does business as a globally competitive company, focusing on growth, efficiency, and returning profit to owners
LEVERAGING COOPERATIVE POWER We are a cooperative, and we are: Profitable Competitive Successful
RETURNING PATRONAGE TO MEMBERS Patronage is based on earnings for products members buy from, grain they sell, or the services they use from cooperatives Income is not taxed at the corporate level, but passed to members income tax CHS currently distributes patronage as 40% cash and 60% capital equity certificates Patronage distributions are set and redeemed at the discretion of the cooperative s board of directors Equity payments vary by cooperative. Options include: Equity retirement by age of patron Equity retirement by year of purchase
LOCAL GOVERNANCE Board of Director roles and responsibilities: - Establish mission, vision, values - Set strategy and structure - Delegate to management - Exercise accountability to shareholders Benefits of serving on a board of directors: - Exposure to advanced business ideals - New learned processes of thinking - Local involvement - Compensation - Balance Sheet Management
BEYOND PATRONAGE: COOPERATIVE MEMBER BENEFITS Cooperatives provide members: Dependable sources of supply and markets for products Democratic control in procuring and marketing products High economies of scale and efficiencies High-quality products and customized services Market competition on local prices Improved farm management with expert advice Rural economic benefits But, no guarantees for farmer profitability