MKC 2014 Annual Report

BETTER TOGETHER 2014 ANNUAL REPORT

district 1

Officers & directors

Myron Voth

Cecil Wiebe

district 2

Vice chairman

Duane Johnson

David Mills

district 3

secretary

CJ Blew CHAIRMAN

1

Jason Gaeddert

OFFICERS AT LARGE

Neal Beam

Randy Ellwood

directors

Keith Becker

Kenny Carlton

Hal Mayer

Allan Wegner

associate director

appointed director

appointed director

Dave Christiansen CEO / President

2

Chairman’s report

cj blew

Thank you for your interest and support of MKC this past year. MKC’s 49th annual meeting theme, “Better Together”, is the perfect theme to define MKC and the cooperative system!

From the members of the three initial coops that made up MKC in 1965 to the 217 new members we added this year along with the members of Farmers Cooperative Association of Manhattan who approved a merger with MKC by an overwhelming 91%, farmers have realized the benefits of working with MKC. One of those benefits is the newly added Domestic Production Activities Deduction, often referred to as Section 199 Deduction. This deduction is only available to cooperatives and can be passed through to members. MKC members also saw a patronage distribution of $6.4 million this past year, all while adding 8.2 million bushel of additional grain storage space that includes three new green field sites.

Your board and management team continue to develop and implement strategic initiatives that leverage what working together can accomplish.

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MKC doesn’t have an end date or retirement date. We need to position our coop to be viable for generations to come. There will be opportunities for growth in the future and all stakeholders in the cooperative system will need to keep an open mind about what it will take to compete in an ever-changing market place.

In an effort to accommodate some of MKC’s past and future growth, your board of directors decided to implement the bylaw change that was passed in 2012, allowing membership to vote for director elections by mail. We hope this change will make participation in the governance of your cooperative easier.

Thank you again for your support and I hope that as a member of MKC you’ve found value in many ways by being “better together”.

President’s report

Dave christiansen Since the inception of what we know today as MKC, your cooperative has stood tall as an example of the good that can be gained by working together.

Collaboration in virtually all areas of our business continues to be our mission and drives many of our strategies. Finding ways to work with others is more of an expectation from our board of directors than it is a suggestion. This drives our leadership team to continually search for ways we can gain advantages or leverage our scale for the benefit of our members.

As you look back through our history, MKC is a collection of producers who decided they would be better off working together than insisting on operating independently. The notes from the first meeting held in 1965 laid out our path clearly and sent a powerful message. Since that meeting we have added over 6,000 members as a result of more than a dozen mergers and acquisitions. I’m proud to work for an organization whose board of directors continues to stay focused on benefiting its members.

One of the things I am most proud of is more and more producers each year are discovering the same advantage. Last year we had 217 new members join your cooperative. Many of these producers are just like you and see the value in working with each other through the cooperative. By doing so, they gain economy of scale and enhance their relevance in the market, something that is so vital today. Self-sufficiency is not now, and has never been, the path to prosperity. Helping our growers be more successful is about the exchange and the

specialization of labor to gain significantly more together than we can individually.

Cooperative success is more about multiplying our efforts than dividing them. As many of you know, MKC was fortunate to have Farmers Cooperative Association, based in Manhattan, join forces with us. This merger made all of us stronger and is a great example of producers deciding they would be better together. As discussed over the past few years, MKC will continue to prepare for partnerships and mergers as more producerled cooperatives seek to deliver more to their members. We believe we will continue to attract new members if we continue to do the things that provide for a positive customer experience.

This will also lead those cooperatives looking to provide that same value and experience to their members to seek collaboration with MKC. Our primary objectives have not changed. If the only measure of success was financial return, then we didn’t have the kind of year we planned for. Although virtually every business category we include in our portfolio experienced an inverse market this year, our performance actually would have to be considered successful. Just as we had planned for, we saw top line unit growth in all business units. This is a result of our overall focus on helping producers manage their risk and providing an overall positive customer experience.

Our efforts continue on renewing our infrastructure.

This past fiscal year we’ve made significant investments in grain, agronomy and energy facilities across our company. Our customers have really shown they appreciate our efforts over the past few years by increasing their volume at every location we’ve upgraded.

I sincerely thank you for all you’ve done to help your cooperative grow, prosper and serve our members better than ever before. We are proof it is better when we work together.

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project

updates

MKC continued its focus on renewing infrastructure this past year, investing more than $16 million. Our ability to do this, while still delivering a strong financial performance, is a clear reflection of well-developed strategies executed by our employees.

Continued investments in our facilities allow us to keep pace with the growing needs of our customers. By building state-of-the art facilities, we can provide not only speed and space, but also safety for our customers, employees and the environment.

CANTON

Construction of grain facilities in Canton, Rice County, Benton and Talmage resulted in an additional 8.2 million bushels of grain storage space.

In addition, Manhattan started construction on a 430,000 bushel grain facility, expected to be completed by August 2014.

BENTON

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A LeMar storage system was added at Groveland, increasing grain storage capacity by an additional 1.2 million bushels.

Groveland’s agronomy center also started offering 24-hour access to customers to pick up liquid fertilizer orders.

A seed warehouse in Abilene was completed, providing centralization for bagged seed storage.

The seed treater was also moved inside the warehouse, allowing for multiple applications of treatments in a timelier and more accurate manner.

New offices and scales were constructed in Longford and Talmage. The scales provide improved traffic patterns during peak harvest times.

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Consolidated

Balance sheets CURRENT ASSETS

2014

2013

$ 1,029,642

$ 2,275,645

1,190,796

1,324,891

Patrons and customers

7,075,330

7,152,181

Allowance for doubtful accounts

(100,000)

(135,000)

Grain shipments

4,294,986

2,475,804

Grain storage receivable

2,446,466

2,126,284

Commodity margin deposits

3,635,236

6,416,330

Other

5,471,728

6,223,340

142,828

199,907

Prepaid inventories

13,501,428

20,012,430

Inventories on hand

90,011,355

117,300,487

128,699,795

165,372,299

423,087

281,781

Equity in other cooperatives

23,052,165

20,459,795

Limited liability companies

11,792,641

7,872,829

1,091,442

976,747

36,359,335

29,591,152

78,487,762

69,695,379

(37,376,005)

(37,154,262)

41,111,757

32,541,117

$ 206,170,887

$ 227,504,568

Cash and cash equivalents Marketable securities, available for sale Accounts and notes receivable - trade

Deferred income taxes

TOTAL CURRENT ASSETS

OTHER ASSETS Notes receivable, net of current portion

Other TOTAL OTHER ASSETS

PROPERTY, PLANT, AND EQUIPMENT Cost Accumulated depreciation NET PROPERTY, PLANT, AND EQUIPMENT TOTAL ASSETS

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February 28, 2014 and 2013

CURRENT LIABILITIES

2014

2013

$ 33,498,414

$ 43,194,289

Customer forward contracts

10,534,608

8,581,907

Revolving bank notes

48,000,826

72,314,923

Patron demand certificates

1,811,771

1,779,624

Current maturities of long-term debt

5,887,449

5,666,531

Patronage dividends payable

2,566,204

3,417,300

970,308

1,788,769

103,269,580

136,743,343

17,759,002

10,732,057

3,935,329

3,793,943

249,297

710,294

Deferred income taxes

1,200,769

1,223,631

Other

1,841,651

1,508,108

24,986,048

17,968,033

4,487,169

4,354,700

934,215

931,975

Qualified patronage allocations

27,497,170

24,793,559

Retained earnings

39,476,626

36,722,565

Noncontrolling interests

5,749,976

6,119,938

Accumulated other comprehensive income (loss)

(229,897)

(129,545)

77,915,259

72,793,192

$ 206,170,887

$ 227,504,568

Accounts payable and accrued expenses

Income taxes payable TOTAL CURRENT LIABILITIES

LONG-TERM LIABILITIES, excluding current maturities Non-revolving bank notes Patron certificates of indebtedness Capital lease obligations

TOTAL LONG-TERM LIABILITIES

MEMBERS’ EQUITY Common stock Participating stock

TOTAL MEMBERS’ EQUITY TOTAL LIABILITIES AND MEMBERS’ EQUITY

Financial Statement Presentation The statements presented within do not contain all the 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.

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Consolidated statements of

Operations SALES

2014

2013

$ 381,168,847

$ 315,516,174

119,950,474

124,466,905

501,119,321

439,983,079

Grain

368,347,116

299,030,993

Farm supply

108,765,417

112,450,628

477,112,533

411,481,621

24,006,788

28,501,458

10,700,684

8,336,271

328,931

919,430

5,461,451

5,293,795

Interest income

248,129

275,726

Gain on disposal of property, plant and equipment

513,883

557,249

1,106,083

1,391,054

18,359,161

16,773,525

$ 42,365,949

$ 45,274,983

Grain Farm supply TOTAL SALES

COST OF SALES

TOTAL COST OF SALES

GROSS MARGINS ON SALES

OTHER OPERATING INCOME Grain storage and handling services Limited liability companies Agronomy services

Miscellaneous TOTAL OTHER OPERATING INCOME GROSS INCOME FROM LOCAL OPERATIONS

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For Years Ended February 28, 2014 and 2013

OPERATING EXPENSES

2014

2013

Personnel costs

$ 16,207,802

$ 15,695,798

Fixed expenses

7,152,631

8,090,342

13,435,642

12,041,551

36,796,075

35,827,691

5,569,874

9,447,292

Patronage dividends

6,221,171

7,576,782

Investment income

2,174,980

2,976,900

8,396,151

10,553,682

13,966,025

20,000,974

Current income taxes

(990,641)

(1,544,695)

Deferred income taxes

(102,525)

268,806

(1,093,166)

(1,275,889)

NET EARNINGS BEFORE NONCONTROLLING INTERESTS

12,872,859

18,725,085

NONCONTROLLING INTERESTS

(3,661,406)

(4,651,309)

NET EARNINGS

$ 9,211,453

$ 14,073,776

$ 6,415,511

$ 8,543,250

2,795,942

5,530,526

$ 9,211,453

$ 14,073,776

Other operating expenses TOTAL OPERATING EXPENSES EARNINGS FROM LOCAL OPERATIONS

OTHER EARNINGS

TOTAL OTHER EARNINGS NET EARNINGS BEFORE INCOME TAXES

PROVISION FOR INCOME TAXES

TOTAL PROVISION FOR INCOME TAXES

DISTRIBUTION OF NET EARNINGS Patronage dividends Retained earnings TOTAL

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Patronage distribution and

Equity redemptions 2014 PATRONAGE ALLOCATION

RATE

AMOUNT

Grain

12.00 cents / bushel

Agronomy - Seed - Crop Protection

5.35% or $26 / ton on fertilizer

Petroleum - Lubricants

1.30% or 5 cents / gallon on fuel

249,756

Feed - Merchandise

1.13%

110,896

$ 2,926,367 3,128,492

TOTAL PATRONAGE ALLOCATION

6,415,511

EQUITY REDEMPTIONS

1,052,323

TOTAL DISTRIBUTIONS

$ 7,467,834

Patronage Distribution and Equity Redemptions – $7,467,834 Patronage Distribution Equity Redemptions

85.91% 14.09%

CASH DISTRIBUTIONS TO MEMBERS - 10 YEAR HISTORY

YEAR ENDED

EQUITY REDEPMPTIONS

CASH PATRONAGE

TOTAL

2014

$ 1,052,323

$ 2,566,204

$ 3,618,527

2013

650,512

3,417,300

4,067,812

2012

698,399

2,379,444

3,077,843

2011

746,339

2,296,816

3,043,155

2010

649,765

1,703,704

2,353,469

2009

714,116

2,673,170

3,387,286

2008

563,574

805,434

1,369,008

2007

835,730

675,936

1,511,666

2006

558,727

1,263,906

1,822,633

2005

229,503

479,277

708,780

$ 6,698,988

$ 18,261,191

$ 24,960,179

TOTALS

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Net earnings and

Local benefits 40

60

30

10

20

10

Millions

20

NET EARNINGS

30

40 Millions

GRAIN BUSHELS RECEIVED

50

0

0 2009

2010

2011

2012

2013

2014

Grain Receipts Net Earnings

2014 local benefits - $26,305,850 MKC provides benefits to as many as 50 local communities in the form of personnel costs, local taxes and other expenses. These payments have a significant impact on the communities and help support the businesses and services we all utilize.

Personnel Costs Other Expenses

62% 3% 4%

31%

Income Taxes Property Taxes

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Historical data HISTORICAL NET EARNINGS $15,000,000

$14,073,776 $13,342,854

$12,000,000 $10,837,662

$9,000,000

$8,219,209

$9,211,453

$8,871,405

$6,000,000 $4,324,814

$3,000,000

0

$3,191,862

$3,033,082

2005

2006

2007

$3,674,858

2008

2009

2010

2011

2012

2013

2014

HISTORICAL RETURN ON EQUITY 35% 30.20%

30% 25%

21.43%

20.48%

20%

18.57% 16.31%

15%

13.80%

19.33% 17.22%

12.77%

11.82%

10% 5% 0%

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2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

community

stewardship At MKC, we’re committed to keeping our rural communities strong by giving back to our communities with our time, talent and resources. Over the past five years, MKC has invested more than $300,000 in our communities. The majority of these investments help develop future leaders of our communities, assist with community safety, alleviate hunger and support ag education.

We’re proud to play a role in the following programs: • 4- Leadership Development • Farm Safety Camps

A

• Women in Agriculture • Young Business Professionals Programs

• Kansas FFA Foundation and Local FFA Chapters

• Mennonite Relief

• Community Events and Festivals

• Community Food Drives

• Ag in the Classroom • City and County Emergency Services

• School Programs • Community Blood Drives • Community Angel Tree Programs

A: Each year MKC employees present educational programs to fourth grade students throughout our trade territory. Entitled, Ag in Our Every Day Lives, the program teaches students about different types of grains, how they are grown and the many products developed from the grains. In addition, programs supporting ag education benefited from more than $5,000 in contributions last year.

B

B: Community food banks located throughout central Kansas benefited from donations totaling more than $15,000. In addition, MKC employees collected more than 12,000 pounds of food.

C: We believe the leadership programs available through 4-H further develop the leadership skills of today’s youth – those same youth who will some day be the future leaders of our communities. To help strengthen these programs, MKC donated more than $11,000 to 10 area 4-H leadership development programs this past year.

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mkcoop.com

MKC | 307 West Cole | P.O. Box D | Moundridge, KS 67107 | 620.345.6328 | fax 620.345.6330