August 2013

August 2013

MKC patrons experience firsthand the cooperative advantage.

TABLE OF CONTENTS August 2013 “Like” us on Facebook: MidKansasCooperative

STRAIGHT TALK President’s Column ......................3

FEATURE The Cooperative Advantage ...........6

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Editorial Staff Kerry Watson Director of Communications Nichole Gouldie Communications Specialist Melissa Woeppel Communications Intern

Field Marketer, Jarod Jones, delivers patronage checks to MKC members Ben Schrag and Jim Schmidt. Both Schrag and Schmidt view patronage as a bonus for being loyal to the coop. See story on pages 6 and 7.

FROM THE FIELD Management Dave Christiansen President and CEO Danny Posch Vice President and CFO Dave Spears Vice President and CMO Erik Lange Director of Southern Area Operations Steve Peterson Director of Northern Area Operations Dave Sell Director of Energy Operations Kerry Watson Director of Communications Brett Myers Director of Human Resources and Development

MKC P.O. Box D Moundridge, KS 67107 620-345-6328 www.mkcoop.com

Annual Meeting Recap..................4 Director of Energy Announced ........4 Japanese Trade Team Tours MKC ....5

EDUCATION Understanding the Domestic Production Activities Deduction......8 Where Answers Grow....................9

Wanting to learn more about the grain sorghum industry, members of a Japanese delegation spent a week in the U.S. which included a tour of MKC’s facility in Groveland. Story on page 5.

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

STRAIGHT TALK

PRESIDENT’S COLUMN By Dave Christiansen

Building Momentum MKC’s vision and strategic objectives play a significant role in building momentum for your cooperative.

It was a pleasure having more than 750 guests in attendance at our annual stockholders’ meeting last month.

Each year a theme is selected for the meeting and this time we felt “building momentum” best represented our past year.

Not only this past year, but over the course of the past several years, the board of directors and staff have focused on how to build momentum. Admittedly, there were days when we took two steps forward only to take three steps back. The challenge we faced - and will continue to - is the world and progressive producers continue to build their own momentum and at an ever-increasing rate.

Significantly contributing to building momentum at MKC is our vision and strategic objectives. Once these elements became a part of everything we do at MKC, your cooperative began to achieve more. We became more focused and began communicating the same message to all of our stakeholders, customers, vendors and employees.

Establishing our vision wasn’t too challenging. We simply defined what we already knew this company had stood for the past 48 years. We stated our intention to be a highly valued, customer-focused business engaged in profitable relationships with high business ethics and employee satisfaction.

Developing our strategic objectives proved to be a little more challenging. We wanted them broad enough to allow for innovation and creativity, yet defined enough to provide clarity and structure. While we knew we could shift our objectives as the business climate and agricultural environment dictated, the real challenge would be how the decisions made today would impact this organization for many years to come.

I believe it is important to continue to communicate the objectives driving MKC today. I’ve shared them at a number of different meetings throughout the year, including the annual meeting, and I’d like to share them again now.

Improve profitablity Clearly, this builds momentum and really is not an option. While many things can impact your company’s profitability, there are some things we have little control over such as the weather, government regulations or interest rates. However, there are many areas in which we do have control and this is where we focus much of our efforts.

Being frugal is important. While it may sound silly as you watch us invest tens of millions of dollars, I assure you there is nothing that makes our employees more innovative and creative than not having enough money to do everything they would like to do. Being frugal can be a great catalyst to better expense management. It forces us to rationalize everything and ask, “What’s the good business reason for spending this money?” If we all agree, we move forward.

If not, it’s back to the drawing board.

Profitability is about more than expense management and building new facilities. It’s about making the investments and developing programs producers find valuable.

It’s about improving our forecasting and best management practices. It’s also selecting the right partners and identifying key market growth areas that exist inside and outside our current footprint. And it’s about clearly communicating our plans.

Profitability also dictates our ability to generate working capital and service debt. Without adequate working capital, we would never be able to execute a grain marketing strategy that can provide profitability for our producers and MKC. Increased volume and changes in marketing strategies have led us to need seven times the working capital we had almost 10 years ago. This is no different than your farming operation. Without profitability, having the resources to achieve any objective is not possible. There is no doubt profits help build momentum in our company.

Maintain growth orientation MKC and its leadership has always been growth oriented.

We’ve experienced both rapid growth and brief periods of relative calm. We’ve discovered growth has proven to be good in many ways for our customers, owners, employees and vendors.

Maintaining customer focus has led to the bulk of our growth. Since our last merger in 2008, the majority of our growth has come one customer at a time, averaging 100 new members every year.

Recently a person commented we gain customers because we are big. I told him it was quite the contrary.

We happen to be big and growing because we gain new customers. There is a huge difference.

Being a growth-oriented company has also allowed us to Continued on page 10

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FROM THE FIELD

Stockholders Re-elect Incumbents

By Kerry Watson, Director of Communications

Nearly 750 members, guests and employees were in attendance at the 48th annual stockholders’ meeting in Hutchinson on July 11. Re-elected by the membership to serve a three-year term on the board of directors were Cecil Wiebe, District 1; Jason Gaeddert, District 3; and Randy Ellwood, At Large. Wiebe will be serving his fourth term on the board and Gaeddert and Ellwood will be serving their third terms.

In addition to the elections, members of the board and management team reported the cooperative’s financial and operational performance for the past year. Board Chairman, CJ Blew, spoke of the strategic initiatives the directors and MKC staff has in place to insure the cooperative’s relevance in the ag industry. Blew also spoke of the importance of being different or the first to perform or perfect things.

“It’s not that MKC has re-invented the wheel,” Blew said. “But I think we have re-invented what a co-op means in terms of value to a producer.”

President and CEO, Dave Christiansen, spoke of the cooperative’s vision. Christiansen also spoke of the momentum today’s progressive producer is building and the strategic initiatives MKC has in place to keep pace with them.

Danny Posch, CFO, reviewed the coop’s financial performance, stating MKC ended the fiscal year with $14 million in overall net earnings.

“Another profitable and successful year for your organization,” Posch stated.

Guest speaker, Paul Mobley, concluded the evening with a presentation of photographs of the American farmer and stories behind each photo.

Nearly 750 members, guests and employees attend the 48th annual stockholders’ meeting.

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Dave Sell to Oversee Energy Division

By Kerry Watson, Director of Communications

MKC welcomed Dave Sell as the Director of Energy Operations in late June. In his role he will oversee all sales, marketing, delivery and billing activities for MKC’s energy division. He previously served as the energy manager for Farm Service Company in Council Bluffs, IA. A native of Iowa, Dave grew up helping with the family’s corn, soybean and livestock operation. Dave Sell He continued his career in agriculture, starting as an agronomist in 1972 and moving on to own a farrow-to-finish hog operation from 1978 to 1990. In 1990 he began teaching at Iowa Western Community College, advancing to Associate Professor and Department Chair until 2008.

After two months on the job, Dave commented his transition from Iowa to MKC has been a great experience. “The energy department has a great staff who truly cares about the customer,” Dave stated. “I look forward to working with our customers and expanding our products and services to meet their immediate and future needs.”

Japanese Trade Team Tours MKC

By Nichole Gouldie, Communications Specialist

Industry representatives from Japan visited MKC at Groveland on July 26 through a trip hosted by the Sorghum Checkoff and the U.S. Grains Council (USGC). The week-long trip was an effort to emphasize the quality of sorghum produced in the U.S. and the value it can provide in Japan.

“We enjoyed the unique opportuni-

The Japanese group, consisting of five individuals involved in livestock feed production, arrived to the U.S and traveled to several different locations in Texas before making their way to Kansas. The group began in the Ft. Worth area where they met with sorghum farmers and learned how it was produced. Representatives also

for groups of Japan representatives.

“Hosting internal trade teams continues to be an important effort by the USGC and the Sorghum Checkoff,” Tommy said. “The trips focus on international marketing, allowing other countries to see the U.S. sorghum industry first-hand while making purchasing decisions.”

Japan is the third largest importer of U.S. sorghum and primarily utilizes the grain in its livestock industry. The United Sorghum Checkoff Program works to improve the profitability of the sorghum industry through research, promotion and information.

MKC employee Nathan Eck visits with Japanese trade team members about mineral lick tubs similar to products produced in Japan.

ty to host the Japan delegation to MKC,” said Nathan Eck, Groveland Location Manager for MKC. “Our visitors were very interested to see how the commodities they purchase from the U.S. work their way through the supply chain from farm gate to our cooperative to port and then on to their facilities in Japan.”

Matt Long, Grain Operations Manager at Groveland for MKC, covered Groveland’s intake of wheat, corn, sorghum and other commodities. Japan representatives also learned about the need for speed and space MKC customers are looking for and how the Groveland location fits those needs.

The group also toured the warehouse and elevator facilities.

met with grain traders in the Texas Panhandle to learn about marketing sorghum and how sorghum is traded in the U.S. Their trip also included a feed lot tour learning about utilizing sorghum silage and flaked grain in beef production.

Their first stop in Kansas was in Wichita where they visited with animal nutritionists to learn more about the feeding value of sorghum. They also toured the Kansas Ethanol Plant in Lyons, and learned about the feeding value of sorghum distiller grains. The group also had the opportunity to visit Baldwin Farms near McPherson.

Tetsuo “Tommy” Hammoto, Japan Director for the U.S. Grains Council, said this was the third trip to Kansas

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MKC Field Marketer, Jared Jones (far right), personally delivers patronage checks to MKC members Jim Schmidt and Ben Schrag.

The Cooperative Advantage

By Nichole Gouldie, Communications Specialist

There are reward cards and punch cards. You may have coupons or store cash but very few businesses offer an incentive quite like your cooperative. MKC returns profits to customers, the members who use its services. That is the cooperative way of doing business.

“Doing business with MKC definitely has its rewards,” said Jim Schmidt, McPherson County producer. “Not only do we get quality and personal expertise, but facilities continue to be improved or new ones are being built, and at the end of the year we see a patronage check for our business.”

MKC Chief Financial Officer, Danny Posch, said the co-op is often asked what it does with its net earnings. “One of the primary uses is allocating a portion back to our members based on the business they did with the cooperative during that business year,” he said.

“Patronage dividends are unique to the cooperative system and are the result of the cooperative generating additional earnings for its members from products and services in a competitive market atmosphere,” Posch stated. “It is important to point out a cooperative functions just like any other business, but because it is a cooperative, it will return any savings back to its members at the end of each year.”

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Schmidt operates Emma Creek Farms along with his brother, Bruce, and his son-in-law, Ben Schrag. A member of the cooperative for many years, Schmidt recalls years when patronage checks were little to none. “Basically no money was able to be returned to members sometimes and you weren’t seeing changes to facilities,” he said.

Schrag, who started with the farm full-time nearly a year ago after balancing an off-the-farm job for 10 years sees patronage as a bonus for being loyal. “Patronage enforces the idea that we are member-owners of the co-op,” Schrag said.

“The more bushels we haul and the more we use the co-op’s services, the more kickback we get.”

Posch stated MKC ended fiscal year 2013 with $14 million in overall net earnings. “It was another profitable and successful year for our cooperative,” he stated.

According to Posch, MKC returned $4 million in cash back to its members in the form of equity redemptions and cash patronage in the 2013 fiscal year. “Clearly separating MKC and the cooperative business structure from our competition,” he said.

For the 2013 fiscal year, MKC allocated $8.5 million in patronage dividends to its members and more than $24 million for the past four years.

“This year’s allocation marks the highest level of patronage allocated back to the members of MKC,” Posch said. “It is a tremendous benefit to our members and local communities.”

Patronage distributions are based on the February 28 year- MKC directors have elected to pay 40% cash for the past 11 end results and the patronage checks are normally distributed years.

Both Schrag and Schmidt believe the MKC Board of in May. “Because individual patronage allocations are based Directors makes fair decisions when determining patronage on the amount of business each member did with the cooperallocation. “We are producers. We ative in that given year, a considerable amount of time is spent verify“We will drive a few more miles want large patronage checks but we want MKC to be profitable, ing the patronage distributions for approximately 3,500 members to get to a MKC location, knowing have efficient facilities and overall be successful. They have the probefore the checks are distributed,” the dividends have been better.” ducer’s and cooperative’s best Posch said.

– Ben Schrag, MKC Member interests in mind,” Schrag said.

MKC members routinely share in Posch added over the past ten the success of the cooperative years, the directors have elected through patronage dividends and to return $21.8M in cash back to its members - $6.2M in equity maintaining capitalization from profits. Schmidt says prices at redemptions and $15.6M in cash patronage MKC are always competitive. “Plus the opportunity stands for distributions. net earnings to be returned to our farm,” he said. ”MKC offers many benefits to me and the rest of the “We will drive a few more miles to get to a MKC location, knowing the dividends have been better.” Schrag commented. members, but patronage is unique because it is the portion of profits generated by and returned to cooperative patrons,” “It adds up.”

A portion of the patronage allocations are returned in cash, Schrag said. “Patronage is the icing on the cake.” the remaining amount is deferred patronage to be redeemed at a later date, Posch stated. “The deferred patronage portion allows MKC to fund growth and asset renewal of the organization,” he said. “This is fundamental to the survival of the cooperative system.”

As a producer, Schmidt agrees.

“MKC is doing a balancing act with improving facilities, locations and much more,” he said. “We have seen vast improvements in the last several years and seen record years.”

MKC takes a very deliberate approach in balancing the equity needs of the co-op and the expectations of its members. Posch said management and directors follow the guidelines established by the Internal Revenue Service (IRS) for computing patronage dividends. Under these guidelines, cooperatives are required to pay a minimum of 20% of the McPherson County producers, Jim Schmidt and Ben Schrag, visit with Jared Jones about the benefits of doing business patronage allocation in cash. The with MKC.

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EDUCATION

Understanding the Domestic Production Activities Deduction

By Nichole Gouldie, Communications Specialist

Through a requested IRS Private Letter Ruling (PLR), MKC has found a path to pass a significant tax deduction on to the producers who are members through the Domestic Production Activities Deduction (DPAD).

“I was very excited when MKC contacted me regarding the cooperative’s willingness to set up the Domestic Production Activities Deduction to give this great benefit to their members,” said Jim Graber, a local accountant. “Right away I saw a potential of several million dollars of tax deduction to farmers.”

DPAD, often referred to as Section 199 Deduction, is a special federal income tax provision allowing a cooperative to allocate to its members a tax deduction generated by “qualified production activities.” As outlined by the Internal Revenue Service, and as it relates to the DPAD, grain payments the cooperative makes to its members are considered qualified production activities by the cooperative, thus making the cooperative and its members eligible for the tax deduction.

“As of the first of the year, MKC has initiated a plan to fully capture the value of the Domestic Production Activities Deduction for our members,” said CJ Blew, MKC board chairperson. “This project further enhances the value of the cooperative to its members.”

The favorable ruling will allow the partnered cooperatives within Team Marketing Alliance, Inc. to utilize a $5M deduction previously not available to the cooperatives or their members. The ruling, which will require specific process and documentation changes by TMA and the partnered cooperatives, will have a significant financial impact on their local communities and members.

“Economic value of this kind of cash savings being injected into the local economy is a real boost for the area,” Graber said.

DPAD is a tax deduction established to benefit the U.S. manufacturers and oil companies for domestic production.

“Farmers are domestic producers as well. They are eligible for the tax deduction even though it is missed on many tax returns,” Graber said.

With the danger of oversimplifying what the deduction is and how it works, Graber explains it to his clients as an extra deduction that equals 9% of profit from domestic production.

Similar to patronage, this deduction will be shared by members based on the amount of grain business each member does with the cooperative. “Another benefit that separates your cooperative from other competition,” Blew said.

Once the Domestic Production Activities Deduction is calculated by each individual cooperative, the cooperative

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is allowed to pass through the deduction to its members.

Once reported to the members on a 1099 Tax Form, the member will be allowed to utilize the deduction on their personal or corporate income tax return.

Graber has personally seen the deduction save up to $10,000 on an individual tax return. He said most farmers he sees could see a savings of $1,000 to $6,000.

According to Graber, there are no disadvantages of DPAD to the members of MKC. “It doesn’t decrease dividends, it doesn’t cost any extra in products,” he said. “It is simply a win-win situation.”

“I have found over the past 40 years as a public accountant, some of the worst tax advice comes from the coffee shops, church parking lots and family,” Graber said. “Before you dismiss this golden opportunity for a tax deduction on the coffee shop chatter, seek the advice of a competent professional. It is a great deal.”

Writer’s note: The views in this article are not intended to replace the advice of your tax professional. MKC encourages members to address questions to their tax professional or accountant.

Where Answers Grow

By Nichole Gouldie, Communications Specialist

As crop values and input costs reach new heights, so does the value of solid, trusted agronomic advice. That’s exactly what MKC and WinField Solutions can provide.

MKC kicked off the 2013 Answer Plot® season on July 16 near Inman with more than 125 guests in attendance. The hands-on experience of an Answer Plot® plus the expertise of MKC field staff equals valuable insights for the producer.

“The Answer Plot® program has been one of the most beneficial learning tools for growers,” says Kent Nichols, MKC Agronomy Field Sales Manager. “These in-field classrooms are much more than the traditional test plot that only compares one hybrid or variety to another. Answer Plots® are about a total agronomic system.”

WinField employees were an instrumental piece of making this year’s Answer Plot® a success. In addition to coordinating the studies that are replicated in MKC’s local plot, WinField provided information to area producers in attendance. WinField employees kicked off the learning sessions by hosting a sprayer clinic for those present.

The sprayer clinic focused on many different aspects of both operating a sprayer as well as what types of adjuvants are available for both custom applied acres and those who spray their own fields. With new herbicide technologies coming soon, presenters illustrated different spray tips which are available. Many new herbicide technologies are requiring that producers and custom applicators use certain types of spray tips. Utilizing the correct spray tips in combination with recommended adjuvant products available from MKC, growers will be able to minimize chemical drift.

The field sales team of MKC also conducted a series of educational presentations. Growers were split into three different groups and rotated through the different sessions.

The first stop on the rotation focused on recent events which have occurred throughout the MKC trade territory, including Green Snap. MKC staff demonstrated the importance of large root systems in corn as well as other positive

characteristics.

Examples of plant diseases were also presented, providing growers a better understanding of what to look for in their own fields.

MKC Field Marketer, Jeremy Peterson, explains to The second producers how to get the best coverage from sprayers rotation explained by making the correct tip selection and using the correct adjuvant package. the NutriSolutions tools that are available to producers through WinField Solutions, LLC. NutriSolutions is a systems approach to nutrient management. The main component of the NutriSolutions program utilizes tissue sampling, a process that utilizes plant tissue from different stages of a plant’s life cycle. This allows growers to make changes to a fertility program part way through a season, if the tissue sample shows that a plant is in need of additional nutrients. Moving forward, there will be additional tools available such as digital imaging as well as technology which allows growers to know exactly how much nutrients are available from the soil within a field.

The final stop at this session illustrated the differences between WinField’s Gold and Silver management practices.

These different practices utilize multiple technologies such as seed treatments, in-furrow seed treatments, in-furrow growth promoters, as well as different levels of fertility.

Nichols stressed the importance of growers understanding the yield potential of their fields and managing it accordingly.

“MKC field marketers are well versed and professionally trained in developing management practices which incorporate many different technologies,” Nichols said. “But there’s nothing like attending an Answer Plot® Knowledge Event, which is based on the idea that seeing is believing.”

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Building Momentum

Continued from page 3

attract great employees and provide them with career opportunities. Because of our growth, vendors offer us unique programs that we can deliver to our customers. Very few, if any other businesses, has access to these same programs. Our growth has allowed us to attract partnership opportunities and will allow us to continue to attract additional merger partners. All of the things associated with growth have ultimately led to greater offerings for our customers. That is simply why we think growth is so important.

Employ the best people Not only do we try to hire the best people, we also offer career development opportunities for them. We do everything we can to retain them. This is so important because it is through our people that we are able to achieve.

Having knowledgeable people who can deliver programs you can actually understand and use helps us build trusting relationships. We want people on staff who can become trusted advisors to you and your operation. Much of our efforts are focused on delivering this knowledge to your farm gate through programs such as precision ag, crop insurance, input financing, equipment protection, and our industry-leading soybean revenue assurance program.

These programs are delivered by people who have built relationships with you based on trust. We know we earn trust slowly and we know we can quickly lose it should the trust be abused or taken for granted. These relationships aren’t built around one employee, but around our entire enterprise. They are built around the people who call on you in the field, those who unload your grain, spray your fields, make your bill, deliver your fuel and oil or answer the phone when you call. Each one of them builds a relationship with you, helping us build momentum every day.

I hope you can sense my excitement about the talent at MKC. They are second to none and will help both of us accomplish all of our objectives.

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Build the brand I’m not simply talking about the signage, advertising or equipment you may see when driving through our area. It’s much more than that. It’s more about the thoughts, the feelings, the experiences, and expectations our customers have when they think of or do business with MKC. It’s really about trust.

All of our efforts in renewing or replacing infrastructure, upgrading facilities, and hiring the best talent are grounded in building our brand. Major capital investments in facilities are helping us serve your needs better and faster and improving your overall customer experience. Our efforts to serve your needs better at the farm gate, attract the best talent, and help you manage your risk are about improving customer experience We know we must be focused on fulfilling the objectives of our members and customers, not ours. Focusing on your growth and helping you manage the risk you face every day will serve to make MKC better. Over the past couple years, we’ve intentionally added risk management to our list of core businesses. Our risk management group was formalized and expanded in response to input from you. The need for timely, accurate advice and a total farm perspective has replaced a singular focus to simply help our customers by supplying inputs or storing grain. Some of your risks today are clearly defined and manageable if we are diligent in our planning. Other risks are harder to define or anticipate and we must be prepared for them as well. In response to the many conversations with you, our risk management division will continue to be our fastest growth area in our company.

Thank you, again, for this opportunity to share the cooperative’s strategic initiatives. We believe they are the driving force behind the momentum your cooperative is building in membership growth, industry relevance and the value it provides to its members.