MKC 2016 Annual Report

FACING

CHALLENGES TOGETHER

2016 ANNUAL REPORT

OUR MISSION

To be our customers leading supplier of quality inputs and services and marketer of our customers products, thus enabling our current and emerging stakeholders to achieve their goals, while improving the profitability of all.

OUR VISION

MKC will be a highly-valued, customer-focused business, engaged in profitable relationships, with high business ethics and employee satisfaction.

OUR STRATEGIC INTENT

MKC will grow employing the highest quality talent working with progressive producers as trusted advisors delivering knowledge-based technology and risk management services through modern assets.

DISTRICT 2

DISTRICT 1

OFFICERS AND DIRECTORS

MYRON VOTH

CECIL WIEBE

CJ BLEW

JASON GAEDDERT

KEITH BECKER

HAL MAYER

DUANE JOHNSON

DAVID MILLS Secretary

APPOINTED

DISTRICT 3

Vice Chairman

ALLAN WEGNER Appointed Director

AT-LARGE

Chairman

RANDY ELLWOOD

DAVE CHRISTIANSEN

ASSOCIATE

President & CEO

KENNY CARLTON Associate Director

BEN SCHRAG

Associate Director

Detailed biographical information on the MKC Board of Directors is available at www.mkcoop.com.

SARAH HASTY Associate Director

2016 MKC ANNUAL REPORT

3

LEADERSHIP LETTER DEAR STAKEHOLDERS

H

ere we are again in interesting times. This past fiscal year, we found ourselves coming down from a high of some of the best times in agriculture only to find the challenges that come with tougher times right around the corner.

Interestingly enough, many of our young producers and employees are experiencing the challenges that accompany falling farm revenues for the first time. When you find yourself in an environment that every day, regardless of your investment, grain prices fall, and a ton of fertilizer or a gallon of gas is worth less than the day before, generating income is challenging, to say the least.

One of the roles of your cooperative is to be a trusted advisor through these challenging times.

These are the days we continue to prepare for as we know they will be there. Sometimes the challenges will be great and sometimes no more than a speed bump.

Sometimes there will even be great opportunities disguised as challenges. You will never know until you face the challenges, and there is no doubt we can face them more successfully together.

Throughout the year we focused on the continued development of our mission of “Shared growth. Shared success.” Our commitment to being a purpose driven organization has many benefits. We believe as long as we continue to stay focused on our objectives then we can take a long-term point of view for your cooperative. We

can make the investments we believe are going to pay off for our members over time.

At the top of our investments this year for the benefit of our members revolved around talent. Investing in the kind of people who have the skills it takes to help our members through challenging times. We specifically added expertise to our grain marketing team.

This group is searching daily for new markets via the market access we have gained with our new shuttle loader at Canton. With the ability to hit the world markets came new opportunities for our members.

Adding additional talent to our precision agriculture has paid dividends for many of you in times that call for proper placement and the proper amount of inputs.

Providing talented staff to help you manage the risk you face in financing your inputs, making crop insurance and marketing decisions, we see as just as critical as having the right facilities in the right place.

In addition, we continue our efforts on renewing our infrastructure. This past fiscal year we’ve made significant investments in grain, agronomy and energy facilities across our company. Rather than continuing to place BandAids on our assets or infrastructure, we continue to spend more time evaluating the future needs of the producer and making our investments there. If you’re not investing in a growth industry,

Sometimes there will even be great opportunities disguised like challenges.

You will never know until you face the challenges, and there is no doubt we can face them more successfully together.

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2016 MKC ANNUAL REPORT

you are clearly falling behind.

Focusing on growth and making investments takes courage. A primary challenge always present is balancing short-term financial performance with investing for the future. We believe building capability for the long haul, in every facet of our business, has to remain a priority.

When your success drives our business, when it gets tough on you, it’s tough for your cooperative. Cooperatives, however, are there for the members and communities in the best of times and the worst of times. We expand and change, we evolve and we merge. We will continue to provide many services to meet your needs today and in the future; what we don’t do is branch off into other businesses, or pull up stakes and leave.

We sincerely thank you for all you have done to help your cooperative grow, prosper and serve our members better than ever before. Through this next year, we are committed--as we always have been--to facing the challenges ahead so your cooperative and your operation can be successful.

Sincerely,

CJ Blew Chairman Board of Directors

Dave Christiansen President and Chief Executive Officer

2016 MKC ANNUAL REPORT

5

FACING CHAL TOGETHER There is no doubt we will face challenges in this next year. In 2017, MKC promises to work with you to face the challenges together by focusing on value, investing in growth, providing a talented team, having a commitment to technology and keeping relevance in the forefront of our minds.

Focus on Value

Our strategy is to create a brand in the market place that has value. We do this through our actions everyday, that become part of our culture, and then instantly becomes recognizable and relatable. Our commitment to grain, agronomy, energy, feed and risk management focus on delivering value to the customer through a diverse portfolio. Through patronage payments, continued and competitive market access, strong Section 199 deductions, powerful advocacy and more, support for our members is an everyday pursuit.

Commitment to Technology

We will continue to focus on productivity, new decision tools and sustainability to make choices that could mean the difference between profit and loss in tough times. Through our precision ag platform, we provide greater access to data and insights to optimize input efficiency and bushels per acre for your operation.

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2016 MKC ANNUAL REPORT

LLENGES Investing in Growth

Construction of Sumner County Terminal

In the environment we are in today, it’s critical we continue to grow both within and outside our current footprint.

Increased size and scale allows us to be competitive while continuing to deliver the best products and services to support the success of our member-owners and customers.

In this highly competitive environment, you’re either growing or getting left behind.

A Talented Team

+

Our strategy continues to focus on hiring the best talent to build upon our high-performing culture. We will continue to invest in our existing talent to deepen and extend their knowledge and professional development. From the continuing expansion of our student internship programs to providing specialists in all areas of our business, our team will work with you.

Remaining Relevant

Canton Terminal

We have chosen the path of continued growth through mergers, acquisitions and partnerships. On behalf of our members, we will need to join together to gain the edge needed to complete in this global market we find ourselves in today. Partnerships such as the Canton Terminal and Sumner County Terminal with CHS have provided our customers with new opportunities.

FISCAL YEAR 2016

BY THE NUMBERS

8,322

TOTAL MEMBERSHIP

OVER THE PAST FIVE YEARS, MKC HAS INVESTED MORE THAN $300,000 IN OUR COMMUNITIES THROUGH LEADERSHIP DEVELOPMENT, AG EDUCATION , COMMUNITY SAFETY, ALLEVIATING HUNGER AND MORE.

349 EMPLOYEES SERVING living in + 11,000 CUSTOMERS 81 DIFFERENT

communities

GROSS REVENUE

$33,231,723

GROSS REVENUE

$18,905,532

ENERGY

GROSS REVENUE

$3,104,232

FEED

GROSS REVENUE

$2,497,221

GRAIN AGRONOMY

DETAILED FINANCIAL REPORTS FOR 2016 CAN BE FOUND ON PAGES 9-15.

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2016 MKC ANNUAL REPORT

$3.5M CASH RETURNED TO MEMBERS

$5.9M

PATRONAGE EARNINGS

HISTORICAL

DATA

HISTORICAL NET EARNINGS

HISTORICAL TOTAL ASSETS

$400,000,000 $346,645,094 $347,370,074

$350,000,000 $301,951,776

$300,000,000 $250,000,000

$222,184,457

$209,411,086

$227,504,568 $206,170,887

$200,000,000 $155,832,307 $150,000,000

$125,441,587

$115,285,794 $100,000,000 $50,000,000 $2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

HISTORICAL NET EARNINGS $16,000,000 $14,000,000

$14,073,776

$13,342,854

$12,000,000

$10,837,662

$10,000,000 $8,219,209

$9,111,101

$8,871,405

$9,800,584 $7,944,596

$8,000,000 $6,000,000 $4,000,000

$3,191,862

$3,674,858

$2,000,000 $0 2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2016 MKC ANNUAL REPORT

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CONSOLIDATED

BALANCE SHEETS CURRENT ASSETS

2016

2015

$ 3,477,482

$ 2,355,298

2,834,554

2,950,489

10,306,281

10,125,809

Allowance for doubtful accounts

(100,000)

(100,000)

Grain shipments

3,459,949

669,515

Grain storage receivable

4,395,512

3,664,956

Commodity margin accounts

8,907,664

9,025,004

13,238,873

9,015,300

Prepaid inventories

14,021,875

12,771,071

Inventories on hand

164,625,251

184,040,691

150,123

99,650

225,317,564

234,617,783

44,197

89,201

Equity in other cooperatives

35,219,620

27,949,211

Limited liability companies

15,136,911

17,483,787

1,462,434

1,359,899

51,863,162

46,882,098

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

Other

Deferred income taxes

TOTAL CURRENT ASSETS OTHER ASSETS Notes receivable, net of current portion

Other

TOTAL OTHER ASSETS PROPERTY, PLANT AND EQUIPMENT Cost

111,721,154

103,516,273

Accumulated depreciation

(41,531,806)

(38,371,060)

70,189,348

65,145,213

$ 347,370,074

$ 346,645,094

NET PROPERTY, PLANT AND EQUIPMENT TOTAL ASSETS

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2016 MKC ANNUAL REPORT

For Years Ended February 29, 2016 and February 28, 2015

CURRENT LIABILITIES Accounts payable and accrued expenses Customer prepaid sales contracts

2016

2015

$ 43,386,950

$ 39,262,476

9,841,038

12,245,016

125,154,185

136,397,558

Patron demand certificates

3,531,096

3,858,032

Current maturities of long-term debt

5,172,651

4,461,756

Patronage dividends payable

2,342,642

2,371,493

721,153

919,013

190,149,715

199,515,344

38,514,048

34,089,941

Patron certificates of indebtedness

4,858,804

4,828,025

Capital lease obligations

1,292,360

365,427

Deferred income taxes

2,557,645

2,230,313

Other

1,510,965

2,211,952

48,733,822

43,725,658

5,321,600

5,214,250

Revolving bank notes

Income taxes payable

TOTAL CURRENT LIABILITIES LONG-TERM LIABILITIES, excluding current maturities Non-revolving bank notes

TOTAL LONG-TERM LIABILITIES MEMBERS’ EQUITY Common stock Participating stock

1,669,900

2,201,934

34,978,318

32,626,430

9,352,344

8,877,894

Retained earnings

45,441,179

43,230,705

Non-controlling interests

12,180,990

11,538,269

(457,794)

(285,390)

108,486,537

103,404,092

$ 347,370,074

$ 346,645,094

Qualified patronage allocations Contributed capital

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.

2016 MKC ANNUAL REPORT

11

CONSOLIDATED STATEMENTS OF

OPERATIONS SALES

2016

2015

$ 335,571,232

$ 266,423,608

123,065,168

136,630,651

458,636,400

403,054,259

Grain

316,433,807

250,652,375

Farm supply

106,655,790

119,604,965

423,089,597

370,257,340

35,546,803

32,796,919

12,383,810

11,472,795

Limited liability companies

3,089,786

328,931

Agronomy services

7,687,359

6,830,608

272,927

314,370

Gain on disposal of property, plant and equipment

1,421,568

345,254

Miscellaneous

1,943,963

1,978,027

TOTAL OTHER OPERATING INCOME

26,799,413

22,523,917

GROSS INCOME FROM LOCAL OPERATIONS

62,346,216

55,320,836

Personnel costs

23,417,977

20,596,569

Fixed expenses

11,541,586

9,612,949

Other operating expenses

19,680,501

17,018,297

54,640,064

47,227,815

7,706,152

8,093,021

Grain Farm supply

TOTAL SALES COST OF SALES

TOTAL COST OF SALES GROSS MARGINS OF SALES OTHER OPERATING INCOME Grain storage and handling services

Interest income

OPERATING EXPENSES

TOTAL OPERATING EXPENSES EARNINGS FROM LOCAL OPERATIONS

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2016 MKC ANNUAL REPORT

For Years Ended February 29, 2016 and February 28, 2015

OTHER EARNINGS Patronage dividends Investment income Gain on business acquisitions

TOTAL OTHER EARNINGS NET EARNINGS BEFORE INCOME TAXES

2016

2015

6,069,638

5,520,044

47,000

901,775

-

2,298,353

6,116,638

8,720,172

13,822,790

16,813,193

PROVISION FOR INCOME TAXES Current income taxes

(690,761)

(906,573)

Deferred income taxes

654,885

(1,109,717)

(35,876)

(2,016,290)

13,786,914

14,796,903

(5,669,914)

(4,941,965)

8,117,000

9,854,938

(69,509)

54,493

(102,895)

(108,847)

TOTAL OTHER COMPREHENSIVE LOSS

(172,404)

(54,354)

TOTAL COMPREHENSIVE INCOME

7,944,596

$ 9,800,584

Patronage dividends

5,856,606

$ 5,928,736

Retained earnings

2,260,394

3,926,202

Other comprehensive loss

(172,404)

(54,354)

$ 7,944,596

$ 9,800,584

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 (LOSS) Unrealized holding gain (loss) of marketable securities Unrealized loss on fair value of interest rate swap

DISTRIBUTION OF COMPREHENSIVE INCOME

TOTAL

2016 MKC ANNUAL REPORT

13

PATRONAGE DISTRIBUTION AND

EQUITY REDEMPTIONS 2016 PATRONAGE ALLOCATION

RATE

AMOUNT

Grain

8.00 cents/bushel

$ 2,468,296

Agronomy - Seed - Crop Protection

3.86% or $18/ton on fertilizer

Petroleum - Lubricants

1.95% or 4.3 cents/gallon on fuel

315,422

Feed - Merchandise

3.77%

431,193

2,641,694

TOTAL PATRONAGE ALLOCATION

5,856,606

EQUITY REDEMPTIONS

1,160,622

TOTAL DISTRIBUTIONS

$ 7,017,228

PATRONAGE DISTRIBUTION AND EQUITY REDEMPTIONS - $7,017,228

83.46%

Patronage Distribution

16.54%

Equity Redemptions

CASH DISTRIBUTIONS TO MEMBERS - 10 YEAR HISTORY YEAR ENDED

EQUITY REDEMPTIONS

CASH PATRONAGE

TOTAL

2016

$ 1,160,622

$ 2,342,642

$ 3,503,264

2015

2,885,510

2,371,493

$ 5,257,003

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

$ 9,956,890

$ 21,232,143

$ 31,189,033

TOTALS

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2016 MKC ANNUAL REPORT

BUSINESS UNIT REVENUE AND

COMMUNITY SUPPORT GROSS REVENUE BY BUSINESS UNIT Energy $3,104,232

Feed $2,497,221

Grain Agronomy Energy Feed

Agronomy $18,905,532 Grain $33,231,723

2016 RURAL COMMUNITY SUPPORT - $35,335,447 MKC provides benefits to more than 75 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 utilize.

2.77%

62.27%

.10%

Personnel Costs Other Expenses

30.85%

Income Taxes Property Taxes

2016 MKC ANNUAL REPORT

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