FUTURE 2020 ANNUAL REPORT
To create customer, employee and partner success to provide a safe and sustainable food supply.
Partner with customers to successfully navigate the complexity of modern agriculture and industry.
The success of our business will be determined by our ability to focus on safety, courtesy, image and innovation.
2020 MKC ANNUAL REPORT
Building on a strong foundation for the future. Before you build anything in life, you first need to build a strong foundation that will hold the structure in place. Sometimes, the structure of a plant consists of a root system that goes deep into the soil before any grain can be produced. Lumber, brick and mortar provide critical bases to withstand the test of time. Our life is the same. In our personal lives we work to build a strong foundation that won’t get shaken up by the storms of life. We seek a foundation that will withstand the toughest of trials. A strong foundation that will help transition our losses to victory. For 55 years, MKC has built a foundation. We have built on a strong foundation that won’t get shaken up by the storms of business and life. The type of foundation that will withstand the toughest of trials.
Thank you to all of those who worked diligently, using their tools, their knowledge and experience, to build our foundation.
The loftier the building, the deeper must the foundation be laid. Thomas Kempis
STRONG FOUNDATION. STRONG FUTURE.
Dear Stakeholders, The strength of a building lies in its foundation. A well-built foundation provides the structure’s stability from the ground and keeps the building standing against the forces of nature. Likewise, laying a strong foundation of strategy, systems and leadership is vital for a business to flourish. Fiscal year 2020 was a year unlike many others. Like everyone else, we weren’t immune to the challenges and complexities that presented themselves, but the foundation built in years past was strong. “Strong Foundation, Strong Future.” is a powerful reminder of why the cooperative demonstrates continual improvement for our member-owners by investing in resources, talent, technology and assets. One definition of strong is the ability to withstand great force or pressure. The strong foundation of MKC has provided a base for the cooperative to remain relevant in the good times and in times when the economic environment in production agriculture is not as promising. Our past investments have prepared the cooperative for times like these and have propelled our company forward. We will continue to invest in areas that will bring value to our member-owners today and for generations to come. The 2020 fiscal year was recordbreaking for MKC in terms of volumes in our core business areas of grain,
agronomy, energy and feed. Our financial performance was strong as well, with total net earnings just short of $10 million. Our Board of Directors and leadership continue to discuss and make decisions about striking the right balance between returning those earnings to our members through patronage and reinvesting in resources and assets to continue to ensure we are serving producers’ needs well into the future. We thank you for your continued business and support. During the past year, we have had many opportunities to grow and make additional investments on behalf of our owners. We welcomed a merger with Plains Equity Exchange and Cooperative Union members in June. We worked together with their employees to integrate people, processes and assets over a few months. This additional geographic footprint spreads our services over a larger area and allows us to create synergies in our business, particularly in grain. This is an example of how our growth enables us to develop talent and create career path opportunities for our people. As we grow, this kind of example is important to attract and retain top talent across our region. We continue to find new markets in which to deliver grain, both foreign and domestic. The terminal in Canton has shipped out 278 trains since December 2014 and the Sumner County Terminal has shipped out 53 trains since July 2017.
These investments, as well as new investments like the additional grain storage at Moundridge in 2019, allow MKC to improve speed and space for local harvest times and create additional value for our members as we seek to market your grain around the country and globe. We have invested heavily in technology with the end goal in mind of making it easy to do business with MKC. With each investment in technology, we ask questions like “How will this help our owners?” and “Does this make doing business with MKC easier for our customers?” We will continue to get feedback from you to understand what future needs you have and then work with strategic partners to make decisions about bringing those investments to life. As the world and business continue to change at a rapid pace, please know that we are always looking for ways to help keep our members on the cutting edge of technologies to enhance their operations. From a new customer perspective, in 2020, MKC had another great year of member growth. This year we added 121 new member-owners, not including members of the former Plains Equity. New member growth is always fantastic news for our cooperative and affirms that people value what we offer and how we deliver products, programs and services. Growth is also impactful for our employees, customers and strategic partners. You also noticed a change in leadership shortly after our 2020 fiscal year ended. After 16 years with MKC and 46 years of cooperative leadership, Dave Christiansen made the decision to retire. His commitment to our tagline, “Shared growth. Shared success.”, is a significant reason why MKC is well prepared for the always uncertain times in agriculture. He left a longlasting mark on our culture and the growth mindset we continue to assume. We would be remiss to not reflect on the acquisition of Mid-West Fertilizer. In October 2019, Mid-West Fertilizer Inc. and MKC entered into a letter of intent for MKC to acquire MidWest Fertilizer, a full-service agricultural retailer headquartered in Paola, Kansas. In May 2020, the acquisition was finalized and announced as a wholly-owned subsidiary of MKC. This acquisition strengthens our position in the marketplace and
will allow us to expand our services to create additional value for our owners and customers. We see the growth of our footprint as a key part of our strategy. Mid-West Fertilizer is a strong ag retail organization with a great team. The synergies gained through this acquisition will allow both companies to continue to achieve greater success. As we progress and build on the past successes of MKC, we want to call out all of the hard work, dedication and enthusiastic mindsets our employees bring to work each day. They truly show up with our customers and owners in mind in all they do. Our keys to success are four simple terms: safety, courtesy, image and innovation. As simple as these words are, these internal and external facing objectives drive our business. We want to be a place where others want to work and that provides employees an opportunity to grow in their career. We also strive to be a business you want to do business with by maintaining a professional image and providing the tools you need in your operation. All the while, we make certain safety is at the forefront of all we do for our employees and our members. Thank you to our member-owners and customers for their continued business and support. From the foundation of the cooperative and into our future, our success is directly tied to our member-owners and our commitment is never to forget that. Sincerely,
Allan Wegner Chairman Board of Directors
Brad Stedman President and Chief Executive Officer
STRONG FOUNDATION. STRONG FUTURE.
Moundridge Expansion Project Started 2019
DISTRICT 2 DAVID MILLS Secretary
JASON GAEDDERT Vice Chairman
ALLAN WEGNER Chairman
J. DANIEL EAKES
BRAD STEDMAN President & CEO
board of directors
Elected by their peers, these individuals collectively leverage their expertise to provide important direction and ensure the safety and soundness of the finances of the cooperative. Board members are farmers and ranchers themselves and have a deep understanding of the challenges their fellow member-owners face each and every day. The Board of Directors consists of 11 members. Three directors represent a district, six directors are at-large, and two directors are appointed. Detailed biographical information on the MKC Board of Directors is available at mkcoop.com.
KEYS The success of our business will be determined by our ability to focus on safety, courtesy, image and innovation.
Since their induction in 2015, the MKC 4 Keys have served as the foundation for company culture. At MKC, safety, courtesy, image and innovation have transformed from four words to a statement of company values. These values lead how employees interact with peers and member-owners. The MKC 4 Keys clearly define how quality service is to be achieved for both internal customers, our employees, and external customers, our stakeholders. What are core values and what do they mean to MKC? Core values establish what the organization believes in and the kind of behavior it wants to reinforce. Values create a moral compass for decision making and influence the actions we take in everyday situations; both inside and outside the workplace. Core values are at the root of the organization. They form the strong, sprawling, interconnected belief system for our entire employee group; including board members, leadership, front- and back-of-the-house employees as well as team members working within our partnering entities. MKC’s approach to the 4 Keys is sequential in that “safety” will always come first. This doesn’t imply the others are less important. Courtesy, image, and innovation are extremely significant to the organization as well. We want every employee and member-owner to feel safe, encourage kindness, have pride in their cooperative and take initiative to learn and grow with new ideas. Research shows, companies that can align their culture to their strategic objectives are simply more successful than the competition. Employees are more productive and customers more satisfied. There is more agility toward change and motivation to create the next best thing.
2020 MKC ANNUAL REPORT
GRAIN BIN SAFETY WEEK To commemorate Grain Bin Safety Week, an initiative proclaimed by U.S. Secretary of Agriculture Sonny Perdue as the week of February 16-22, MKC hosted a grain bin safety training in partnership with ProValue Insurance and Nationwide at the Groveland location. The initiative raises awareness of the lifethreatening dangers of grain handling and provides first responders with the necessary equipment and training needed to save lives from grain bin entrapments.
SHARP PROGRAM PARTICIPANTS PANDEMIC AWARENESS At MKC, we continuously monitored the changes to our company in light of Coronavirus (COVID-19) and its effects on our employees, member-owners and the communities we live and work. We closely followed the guidelines set by public health authorities and government agencies, and formed a COVID-19 task force to create social distancing standard operating procedures and monitor and communicate the changes made at our locations. Throughout the pandemic, we utilized technology to effectively meet the needs of our employees and safely hired and on-boarded employees to the team.
TRAINING CENTER With a focus on safety and development, a new training center was built by MKC. Located in Moundridge, the MKC Training Center will provide a site to train employees and farmers in a classroom setting using simulated items for hands-on training in anhydrous safety, grain bin entry, electrical and more. The training center includes a large meeting space, board conference room, furnished kitchen and maintenance shop.
Safety for our employees and producers is always our top priority. Eight MKC locations have â&#x20AC;&#x153;taken it up a notchâ&#x20AC;? and received certification through Occupational Safety and Health Administration (OSHA) and the Safety and Health Achievement Recognition Program (SHARP). SHARP recognizes small companies who operate an exemplary safety and health management system. Qualifying for the award takes time and effort and includes participation from all employees and management. The locations that are SHARP certified are: Abilene, Alta Vista, Bennington, Benton, Groveland, Manhattan, Onaga and Talmage.
S A F E T Y
STRONG FOUNDATION. STRONG FUTURE.
CUSTOMER SATISFACTION SURVEY
In February 2020, MKC sent out a survey to segment of customers to better understand and meet their needs, and find out how we are tracking in terms of providing real value. The results were extremely positive, reaffirming the cooperative is heading in a direction to meet our customers needs’. Member-owners completed the surveys with an overall satisfaction rate of 84%. Areas of our business where positive reinforcement was shared include: The friendly, trustworthy and knowledgeable people that make up the talent of our organization. The investments made by the cooperative continue to improve services and programs. The value the strategic account managers provide to producer’s operation. The convenience of the products, programs and services.
BETTER TOGETHER WITH PLAINS EQUITY After a series of informational meetings, the owners of Plains Equity Exchange and Cooperative Union approved the merger with MKC by a super majority of 95% 95% at a special vote meeting on April 4, 2019. On June 1, 2019, the merger was official. This merger expanded MKC’ MKC’s footprint into southwest Kansas and added Plains, Kismet, Wildhorse, Liberal and Hobart to the list of locations to provide products, programs and services to customers. While members experienced numerous changes, MKC was focused daily on making sure it was easy as possible during the transition. Since the merger, MKC focused on rebuilding and improving the image of the locations including the rebuilding of bunker assets in Plains and adding a new conveyor in Hobart. In addition, new roads were constructed and a new scale and portable office were put in place in Kismet.
SPEED AND SPACE Recognizing the importance of speed and space allows MKC to keep pace with the growing needs of the producer. MKC has made significant asset investments in the past decade to better serve customers bringing their crops to MKC elevators. MKC has and will continue to show that we are committed to reinvesting in our infrastructure. The cooperative has speed and space strategically across its footprint and will continue to do that to meet the demands of the farmer-owners. Construction of three new concrete bins began in Moundridge in June 2019 and was completed in June 2020, providing a total of 1.2 million bushels of additional storage. The expansion included a 1,200-bushel dump pit and a 20,000 bushels per hour leg and receiving equipment. It also included a bi-directional drag to take grain to and from the existing elevator and a new 5,000-bushel overhead load-out bin was added. MKC continues to look for and evaluate the next round of projects in addition to evaluating existing facility upgrades and potential green field sites for all grain, feed, agronomy and energy needs.
2020 MKC ANNUAL REPORT
IMPOSSIBLE PROBLEM In partnership with Winfield United, MKC produced “The Impossible Problem,” a video revealing the challenges and triumphs farmers face every day through a collegiate business class project. Students were presented with a case study of challenges and were instructed to make a business plan that solved the situation. After a time of collaboration and confusion, a panel of MKC member-owners explained to the students they had been stumped by everyday farming challenges. The goal of the video was to elevate farmers and bring to light the troubles they face each day. While it may seem impossible to achieve profitability as a farmer, our member-owners and customers constantly find innovative solutions to address the many challenges they face to continue their legacy for future generations. The video was released on Earth Day and has since reached over 7,000 people through MKC’s social media platforms and been viewed over 1,000 times on YouTube.
IMAGE STEWARDS OF OUR COMMUNITIES MKC is committed to helping our rural communities prosper and prepare for tomorrow. Developing leaders within our communities, alleviating hunger and enhancing ag education and community safety are just some of the programs that we are proud to support. Over the past five years, more than $500,000 has been donated to these types of programs, including the following: 4-H Leadership Development Mennonite Relief Community Food Banks Kansas FFA and local FFA chapters Community Festivals Ag in the Classroom Farm Safety Camps Walton Rural Life Ag Charter School Women in Agriculture Emergency Services
NO PLANET B When a farmer or consumer looked at the new marketing campaign from MKC and Land O’ O’ Lakes this fall, they couldn’ couldn’t help but be captivated by the image while the simple statement left them thinking. The print ads were just the beginning of the campaign with intentions to educate influencers and the general public about the commitment of farmers and bring attention to the commitment farmers and ranchers have to the land that supports their livelihood. The “No Planet B” B” campaign was launched as full-page ads in six major newspapers across Kansas, including the The Hutchinson News, The Salina Journal, The Manhattan Mercury, The Wichita Eagle, Lawrence Journal World and The Topeka Capital-Journal. The total circulation was over 85,000. STRONG FOUNDATION. STRONG FUTURE.
ATLAS PORTAL The long-term e-business vision of MKC brings operational, transactional, and agronomic data together, then utilizes artificial intelligence and machine learning to bring insight, efficiency and profitability to our member-owners. The ATLAS Portal, available to MKC customers at mkcoop.com, is the most effective means to monitor and execute on a threelegged stool strategy. Some key values of the ATLAS Portal for customers are: Convenience: anytime, anywhere Digital transactions: improved accountability and traceability Provide transparency: logistics and orders Timeliness and responsiveness Improved operational efficiency and customer experience
TMA MOBILE APP The TMA Mobile App puts farmers in the driverâ&#x20AC;&#x2122;s seat. Users can easily access their TMA account information, such as live tickets and contracts, from wherever they are. Features include bid sheets, wait times at local TMA partner elevators and much more. New features for the 2020 wheat harvest will be increased sorting capabilities, additional delivery account information and quick-view color indicators to determine if a ticket will have a discount. The TMA Mobile App can be downloaded from Google Play or the Apple App Store.
2020 MKC ANNUAL REPORT
DIGITAL SIGNATURES As part of digital transformation, electronic signatures are now a reality. MKC and TMA will use digital signatures for grain marketing, crop insurance and next generation programs. The adoption of e-signatures allows producers to better manage contracts and quickly sign and return documents on the go from places like the field or on the tractor. Digital signatures allow for greater transparency in seeing contracts immediately and increases the ease of doing business for the customer.
COVER CROPS The goal to improve soil health while maintaining or improving profitability is becoming more of a focus on many farms. Cover crops are an innovative approach that can be a component of achieving that goal, and MKC brought the knowledge and assets to make that happen. The MKC cover crop plant has capabilities to custom mix to create a combination to fit an individual producersâ&#x20AC;&#x2122; needs. Cover crop mixes are blended into bulk bags or tender trucks. The cover crop market has been growing and is an area MKC continues to meet the needs of our farmers and help educate them about the value of cover crops. The MKC cover crop facility is an opportunity to provide cover crop seed and blends to customers across our entire footprint. We source in different seed, make the blend and source directly to the grower.
STRONG FOUNDATION STRONG
Strong financials are foundational to a successful business. Just as a building can’t stand without a well-built foundation, a business will fall if not financially stable. We continued to perform well in all business units including grain, agronomy, energy and feed. In addition, the cooperative is well-positioned for the future, carrying over 67 million bushels of grain. We have three financial metrics identified which we use to measure success of our financial performance: net earnings, net fixed assets and working capital. We also measure the value DANNY POSCH brought to our member-owners with two primary metrics: Executive Vice President & customer satisfaction and customer retention. Chief Financial Officer Net earnings measure the level of success or profitability achieved. Net fixed assets measure MKC’s commitment to growing and upgrading the infrastructure of the cooperative for future generations and working capital measures the strength and stability of the cooperatives’ balance sheet and overall financial position. Our net earnings for the fiscal year were $9.7 million, an increase over our 2019 financial performance. All of our business units performed at or above expected levels, with record volumes in many categories. MKC’s net fixed assets of the organization have grown from $31 million to $160 million in the past ten years. We are often reminded that the cooperative has no end date and that we must provide future generations with a company that can serve them as well as it has served previous generations. Our commitment to future generations is demonstrated in the growth of our net fixed assets. At fiscal year-end, our cooperative had a very strong working capital position of over $53 million, an increase of $6.2 million over 2019. A strong working capital position is critical to our organization because it provides a platform for growth and allows the cooperative to execute its strategic goals, strengthen relationships with creditors, and allows the cooperative to maintain adequate lines of credit with lenders. One of the more challenging events this past year was the patronage allocation to our members. We were unable to allocate patronage in the areas of agronomy, energy and feed in fiscal year 2020 due to a one-time interest limitation deduction correction from the Tax Cuts and Jobs Act of 2017. Under the Tax Cuts and Jobs Act, our interest deduction was adversely limited in 2019 and a one-time election was made for 2020 to get out from under this burdensome limitation permanently. The result of this election was a one-time reduction of patronage dividends in FY2020. Going forward, there will be no significant impact to deductions or patronage for MKC from the Tax Cuts and Jobs Act of 2017. It is also worth repeating that some of the greatest value delivered to our memberowners is not measured by a financial plan, ratio or target. Most often it is through our commitment to investing in the most talented employees, technology, innovative products, services and financing. We strongly believe those investments help the member-owner be more successful on the farm and ranch. A customer satisfaction metric measures how well our products and services meet or exceed our memberowners’ expectations, while a customer retention metric measures the ability of a business to retain customers. We are proud to report our customer satisfaction and customer retention metrics were 96% and 84%, respectively this past year. Both of those metrics are considered very strong in any industry. We are pleased to share our success with our member-owners, as well as our commitment to be a financially sound company that adds value for our member-owners today and for future generations to follow.
Patronage Allocation and Cash Distribution to Members 2020 Patronage Allocation
Total Patronage Allocation Non-qualified Patronage Redemption Non-qualified Patronage
Total Patronage Allocation
$ 1,527,861 $
MKC was unable to allocate patronage in the areas of agronomy, energy and feed in fiscal year 2020 due to a one-time interest limitation deduction correction from the Tax Cuts and Jobs Act of 2017. Under the Tax Cuts and Jobs Act, our interest deduction was adversely limited in 2019 and a one-time election was made for 2020 to get out from under this burdensome limitation permanently. The result of this election was a one-time reduction of patronage dividends in FY2020. Going forward, there will be no significant impact to deductions or patronage for MKC from the Tax Cuts and Jobs Act of 2017.
Section 199A Tax Deduction Section 199A is a tax deduction that applies to proceeds from agricultural goods produced and/ and/or marketed by farmers cooperatives, and is most commonly passed down to individual farmers. This tax deduction allows farmers to reinvest these dollars into their operations and communities. MKC recognizes the value of the Section 199A pass-through to our member-owners and will continue to work on ways to maximize the deduction on their behalf. Patronage and the pass-through deductions allocated to our members have been of great value and will continue to be a focus and strategy of management and the Board of Directors going forward. When passed under the Tax Cuts and Jobs Act of 2017, the Section 199 legislation became highly scrutinized by non-cooperative grain companies. As a result, a section 199A “fix fix”” was included in the Omnibus Government Spending Bill in 2018. Under the final legislative language contained in the Omnibus Government Spending Bill, section 199A was restored to former cooperative Section 199 benefits, thus allowing the cooperative to pass through excess 199A to our member-owners. MKC History of the Section 199 Deduction Pass-through The Section 199 Deduction was initially passed through by MKC cooperative in 2013 and allows farmers, our member-owners, to receive a deduction that will reduce all of their taxable income. The impact of Section 199 has been influential and has had a significant positive impact on local communities and MKC members. Below is the 7-year history of the Section 199 pass-through to member-owners from MKC: MKC: FYE 2020 – $8.2M (21 cents per bushel) FYE 2019 – $3.2M (10 cents per bushel) FYE 2018 – $3.2M $3.2M (10 cents per bushel) FYE 2017 - $5.5M (15 cents per bushel) FYE 2016 - $3.9M (13 cents per bushel) FYE 2015 - $3.8M (14 cents per bushel) FYE 2014 - $3.1M (12 cents per bushel) STRONG FOUNDATION. STRONG FUTURE.
Consolidated Balance Sheets Current Assets
Cash and cash equivalents
Marketable securities, available for sale
Patrons and customers
Allowance for doubtful accounts
Grain storage receivable
Inventories on hand
Equity in other cooperatives
Investments in affiliates
Accounts and notes receivable - trade
Commodity margin accounts
Total Current Assets
Other Assets Other
Total Other Assets
Property, Plant and Equipment Cost Accumulated depreciation
Net Property, Plant and Equipment
Total Assets Assets Total
2020 MKC ANNUAL REPORT
February 29, 2020 and February 28, 2019
Current Liabilities Accounts payable and accrued expenses Customer prepaid sales contracts
Patronage dividends payable
Income taxes payable
Revolving bank notes Patron demand certificates Current maturities of long-term debt
Total Current Liabilities
Long-term Liabilities, excluding current maturities Non-revolving bank notes
Patron certificates of indebtedness
Capital lease obligations
Total Long-term Liabilities
Accumulated other comprehensive income (loss)
Total Members’ Equity Total Liabilities and Members’ Equity
Financial Statement Presentation | The statements presented within do not contain all necessary disclosures to be considered in conformity with accounting principles generally accepted in the United States of America. A report containing the required disclosures is on file at the general office. STRONG FOUNDATION. STRONG FUTURE.
Consolidated Statements of Operations Sales
Limited liability companies
Gain on disposal of property, plant and equipment
Total Other Operating Income
Gross Income from Local Operations
Other operating expenses
Total Operating Expenses
Earnings from Local Operations
Grain Farm supply
Cost of Sales Grain Farm supply
Total Cost of Sales Gross Margins of Sales
Other Operating Income Grain storage and handling services
2020 MKC ANNUAL REPORT
For Years Ended February 29, 2020 and February 28, 2019
Gain on business acquisitions
Total Other Earnings Net Earnings Before Income Taxes
Provision for Income Taxes Current income taxes Deferred income taxes
Total Provision for Income Taxes Net Earnings Before Non-Controlling Interests
Non-Controlling Interests Net Earnings Attributable to Parent Before Other Comprehensive Income
Other Comprehensive Income Unrealized holding gain of marketable securities Unrealized gain on fair value of interest rate swaps
Total Other Comprehensive Income (Loss) Total Comprehensive Income
Distribution of Comprehensive Income Patronage dividends Retained earnings Other comprehensive income
STRONG FOUNDATION. STRONG FUTURE.
Financial Performance Total assets of the company are at $570,288,779. Total assets increased this past year due to an increase in the company owned grain position (inventory) as well as the merger with Plains Equity Exchange.
Total Assets $600,000,000
570,288,779 519,165,314 493,701,186
Net earnings for FY20 were $9,728,280. Net earnings are important to the organization because it allows the company to attract talented employees, redeem past patronage, retire debt and reinvest in infrastructure.
Net Earnings $20,000,000
$18,000,000 $16,000,000 14,073,776
$6,000,000 $4,000,000 $2,000,000 $0
2020 MKC ANNUAL REPORT
Financial Performance and Community Investment MKCâ&#x20AC;&#x2122;s working capital position is at $53,055,415. Working capital is a good indicator of a companyâ&#x20AC;&#x2122;s ability to meet upcoming debt obligation.
Working Capital $60,000,000
$20,000,000 $10,000,000 $0
MKC provides benefits to over 95 communities in the form of personnel costs, local taxes and other expenses. These payments have a significant impact on communities and help support the businesses and services we utilize.
37,635,917 35,335,447 32,862,108
STRONG FOUNDATION. STRONG FUTURE.
Growth in Net Fixed Assets Growth in MKC Net Fixed Assets
Local net fixed assets reflect the ending balances of cumulative investments in property, plant and equipment of the company.
Growth in Combined Net Fixed Assets
Net overall fixed assets reflect the ending balances of cumulative investments in property, plant and equipment of MKC and its affiliates â&#x20AC;&#x201C; Producer Ag, FarmKan, A+ Aviation Services and Countryside Feed.
2020 MKC ANNUAL REPORT