Forward Looking Statements
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto included in Item 1 of Part I of this
Quarterly Report on Form 10-Q and the audited consolidated financial statements
and related notes thereto and Item 7, Management's Discussion and Analysis of
Financial Conditions and Results of Operations, included in the Cooperative's
Annual Report Form on 10-K for the fiscal year ended December 31, 2022. This
Quarterly Report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties. Such forward-looking statements include, among others,
those statements including the words "expect", "anticipate", "believe", "may"
and similar expressions. The Cooperative's actual results or actions could and
likely will differ materially from those anticipated in the forward-looking
statements for many reasons, including but not limited to: (i) the impact of the
Cooperative's joint ownership interest in ProGold LLC following Cargill's
acquisition of a 50% interest in ProGold LLC; (ii) fluctuations in the market
price per bushel of corn; (iii) the impact of the war in Ukraine; (iv) the
effect of inflation as well as general economic conditions; and (v) other
factors described from time to time in the Cooperative's Securities and Exchange
Commission filings. The Cooperative does not intend to update the
forward-looking statements contained in this Quarterly Report on Form 10-Q other
than as required by law and qualifies all of its forward-looking statements by
these cautionary statements.
Overview
Golden Growers Cooperative is a value-added agricultural cooperative association
governed under Minnesota Statutes Chapter 308B owned by 1,472 members in the
business of providing value to its members by facilitating their delivery of
corn to the corn wet-milling facility owned by ProGold Limited Liability Company
("ProGold LLC"), a Minnesota limited liability company in which the Cooperative
and Cargill Incorporated ("Cargill") each own a 50% membership interest. The
Cooperative accomplishes its business on behalf of its members through its
contractual relationships with all of the parties involved in the ownership and
operation of the facility. Annually, the Cooperative is required to deliver
approximately 15,490,480 bushels of corn to Cargill for processing at the
ProGold LLC facility.
Ownership in ProGold. From an income production perspective, the Cooperative's
membership interest in ProGold LLC is its primary asset that, in addition to
giving the Cooperative the right to receive distributions from ProGold LLC, also
provides the Cooperative's members with additional value for the delivery of
their corn for processing. Prior to March 1, 2022, the Cooperative and American
Crystal Sugary Company ("American Crystal") owned a 49% interest and 51% in
ProGold LLC, respectively. In connection with its interest in ProGold LLC, the
Cooperative has the right and obligation to deliver corn to be processed at the
wet-milling facility. On April 4, 2017, the Cooperative, Cargill, and American
Crystal entered into a Consent Agreement, effective on January 1, 2018 (the
"Consent Agreement"), relating to the lease of ProGold LLC's wet-milling
facility to Cargill and the Cooperative's interest in ProGold LLC. On the same
day, Cargill and American Crystal entered into an Option Agreement, effective on
January 1, 2018 (the "Option Agreement"), detailing the price, term and other
conditions under which American Crystal granted to Cargill an exclusive option
(the "Option") to purchase a 50% interest in ProGold LLC from American Crystal
during the first four years of the lease. Under the Consent Agreement, the
Cooperative approved and consented to the transfer of the 50% interest in
ProGold LLC from American Crystal to Cargill in the event Cargill exercised its
option. The Cooperative also secured the right to purchase American Crystal's
remaining 1% interest in ProGold LLC for a base price ranging from $1.3 million
to $1.7 million, depending on when Cargill notified American Crystal of its
intention to exercise its option. The Cooperative would also be required to pay
to American Crystal a capital adjustment in an amount equal to 1% of the portion
of costs that had not been paid by Cargill to ProGold LLC through additional
rent with respect to certain projects at the facility.
Cargill exercised its Option under the Option Agreement to purchase a 50%
interest in ProGold LLC from American Crystal. Simultaneously with the exercise
of the Option, the Cooperative, pursuant to the Consent Agreement, elected to
purchase American Crystal's remaining 1% interest in ProGold LLC. As a result of
these transactions, effective March 1, 2022, the Cooperative and Cargill each
own a 50% interest in ProGold LLC.
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In connection with the Option exercise, the Cooperative, Cargill and ProGold LLC
entered into that certain ProGold Limited Liability Company Agreement (the
"Operating Agreement"), effective March 1, 2022, in order to set forth the
structure, governance and operation of ProGold LLC according to certain
operational principles and other guidelines described in the Consent Agreement.
Beginning March 1, 2022, the Cooperative will be allocated 50% of the profits
and losses of ProGold LLC and will be entitled to receive 50% of any cash that
is distributed to ProGold LLC's members.
For more information relating to the Cooperative's ownership interest in ProGold
LLC, please refer to Part I, Item 1 of the Cooperative's Annual Report on Form
10-K for the fiscal year ended December 31, 2022.
ProGold Facility Lease. ProGold LLC leases its corn wet milling facility to
Cargill, which uses the facility to process corn into high fructose corn syrup.
In connection with the Option exercise, ProGold LLC and Cargill entered into
that certain First Amendment to Second Amended and Restated Facility Lease,
effective March 1, 2022, which extended the term of the Facility Lease through
December 31, 2026.
Membership and Delivery Obligations. Any person residing in the United States
can own membership units of the Cooperative ("Units") as long as that person
delivers or provides for the delivery of corn for processing at the ProGold LLC
facility. Ownership of Units requires members to deliver bushels of corn to the
Cooperative for processing in proportion to the number of Units each member
holds. Currently, 15,490,480 Units are issued and outstanding. The Cooperative's
income and losses are allocated to its members based on the volume of corn they
deliver. Subject to certain limitations, as long as a member patronizes the
Cooperative by delivering one (1) bushel of corn for each Unit held by the
member, the member will be allocated a corresponding portion of the
Cooperative's income (or loss). In this way, the Cooperative operates on a
cooperative basis.
To hold Units, a member is required to execute a Uniform Member Agreement that
obligates the member to deliver corn to the Cooperative and an Annual Delivery
Agreement by which each member annually elects the member's method to deliver
corn - either Method A or Method B, or a combination of both. Under Method A, a
member is required to physically deliver the required bushels of corn to the
Cooperative either at the facility or another location designated by the
Cooperative. Under Method B, a member appoints the Cooperative as its agent to
arrange for the acquisition and delivery of the required bushels of corn on the
member's behalf. The Cooperative appoints Cargill as its agent to arrange for
the delivery of the corn by members who elect to deliver corn using Method A,
and the Cooperative appoints Cargill as its agent to acquire corn on the
Cooperative's behalf for members who elect to deliver corn using Method B. If a
member elects to deliver corn using Method B, the price per bushel the
Cooperative pays to the member is equal to the price per bushel paid by Cargill
to acquire the corn as its agent. Members who deliver corn under Method A are
paid the market price or contracted price for their corn at the time of
delivery. Members who deliver corn under Method A receive from the Cooperative
an incentive payment of $.10 per bushel on the corn that they deliver while
members who elect Method B to deliver corn pay to the Cooperative a $.02 per
bushel agency fee for the cost of having the Cooperative deliver corn on their
behalf. The incentive payment for Method A deliveries and the agency fee
for Method B deliveries are subject to annual adjustment at the sole discretion
of the Cooperative's Board of Directors. While the Cooperative is financially
responsible for the various payments to the members for corn, Cargill, serving
as the Cooperative's administrative agent, issues payments to members for corn
on the Cooperative's behalf.
Annually, the Cooperative notifies Cargill of the number of bushels of Method A
corn to be delivered by each member who has elected to deliver corn by Method A.
Once the Cooperative provides notification to Cargill of the number of bushels
of corn, Cargill then confirms the amount of corn with each member and notifies
that member with respect to quality specifications, allowances, deductions and
premiums to be applicable to that corn. The member with a Method A corn
commitment then directly contracts with Cargill for corn delivered by Method A.
At the end of each month, Cargill reports the number of Method A bushels
delivered and the average daily price paid for corn that Cargill purchased from
members on the Cooperative's behalf. The product of the number of bushels
delivered multiplied by the average monthly market price is reported as Method A
corn expense. In the event a member who has elected to deliver corn by Method A
delivers to Cargill more than its delivery commitment, any corn delivered in
excess of that commitment is handled as a direct sale of corn to Cargill. In the
event a member who has elected to deliver corn by Method A delivers to Cargill
less than its committed amount of corn, the quantity of the shortfall is then
purchased and delivered by Cargill on our behalf. The purchase price is equal to
the average price reported for Method A corn for the final month of the year. In
addition, the Method A member with a shortfall will be charged a purchased corn
fee and agency fee determined by the Cooperative's Board of Directors.
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Cargill then purchases the remainder of the corn to be delivered by the
Cooperative on behalf of the Method B delivering members at such time and in
such quantities as it deems appropriate and in the best interest of the
Cooperative and Cargill. The Cooperative notifies Cargill of the number of
Method B bushels to be purchased during the quarter. Cargill will certify to the
Cooperative that it has purchased the necessary Method B bushels. The price paid
will be the weighted average price for Method A corn during the quarter
multiplied by the number of Method B bushels. Method B corn revenue will be
equal to the price paid.
The Cooperative's Third Amended and Restated Bylaws ("Bylaws") establish a
Method A delivery pool and a Method B delivery pool. Generally, the
Cooperative's income and/or losses are allocated annually based on the
percentage of bushels of corn the members elect to deliver using either Method A
or Method B. Regardless of the actual percentage allocation between the members
who deliver bushels of corn using Method A or Method B, the Bylaws require the
Cooperative to annually allocate at least 15% of its income and/or losses to the
Method A pool. The amount of our income and/or losses actually allocated to the
Method A pool is a percentage equal to the greater of 15% or the actual
percentage of bushels of corn delivered by members using Method A.
For fiscal year 2023, members elected to deliver 27.5% of their corn by Method A
and members elected to deliver 72.5% of their corn by Method B. This election
will result in 27.5% of the Cooperative's income and/or losses and 27.5% of any
cash distributions being allocated to the Method A pool in fiscal year 2023,
which reflects the actual percentage of corn members elected to deliver using
Method A and does not result in reallocation to meet the 15% requirement set
forth in the Cooperative's Bylaws.
Results of Operations
Revenues. The Cooperative derives revenue from two sources: operations related
to the marketing of members' corn and income derived from the Cooperative's
membership interest in ProGold LLC. The corn marketing operations generate
revenue for the Cooperative equal to the value of the corn that is delivered to
Cargill. The Cooperative recognizes expense equal to this same amount, which
results in the corn marketing operations being revenue neutral to the
Cooperative, except for revenue from the Method B agency fee and expenses
related to the Method A incentive payments and the service fee paid to Cargill.
For the three-month period ended March 31, 2023, the Cooperative sold
approximately 4.7 million bushels of corn compared to approximately 4.6 million
bushels of corn sold during the three-month period ended March 31, 2022. For the
three-month period ended March 31, 2023, the members, on the Cooperative's
behalf, delivered to Cargill for processing at the facility approximately 1.9
million bushels of corn using Method A and 2.8 million bushels of corn using
Method B. In the same period in 2022, its members, on the Cooperative's behalf,
delivered to Cargill for processing at the facility 1.8 million bushels of corn
using Method A and 2.8 million bushels of corn using Method B.
For the three-month period ended March 31, 2023, the Cooperative recognized corn
revenue of $31,283,000 compared to $30,302,000 during the same period in 2022,
an increase of 3% for the first quarter due primarily to an increase in the
price per bushel of corn sold year to date in 2023 compared to 2022.
Expenses. The Cooperative recognized corn expense of $31,297,000 and $30,317,000
for the three-month period ended March 31, 2023 and 2022 respectively, an
increase of 3% for the first quarter due primarily to an increase in the price
per bushel of corn purchased in 2023 compared to 2022.
The Cooperative recognized expense of $15,000 for the three-month periods ended
March 31, 2023 and 2022 in connection with costs incurred to Cargill related to
the Cooperative's corn marketing operation.
Income from ProGold LLC. The Cooperative derived income from ProGold LLC for the
three-month periods ended March 31, 2023 and 2022 of $1,605,000 and $2,796,000,
respectively, a decrease of 43% for the first quarter. The decrease is primarily
due to a decrease in ProGold's lease revenue related to ProGold's amended lease
agreement with Cargill dated March 1, 2022.
General and Administrative Expenses. The Cooperative's general and
administrative expenses include salaries and benefits, professional fees and
fees paid to its Board of Directors. The general and administrative expenses for
the three-month period ended March 31, 2023 was $210,000, compared to $202,000
during the same respective period in 2022. The increase in administrative
expenses is primarily due to timing of payments.
Other Income. Interest income for the three-month period ended March 31, 2023
was $92,000 compared to $27,000 during the same period in 2022. The increase in
other income relates to increased interest rates on investments.
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Liquidity and Capital Resources
The Cooperative's working capital at March 31, 2023 was $6,556,000 compared to
$7,836,000 at March 31, 2022. The decreased working capital at the end of the
first quarter of fiscal 2023 as compared to the end of the first quarter of 2022
is primarily related to placing more reserves into longer term investments. The
Cooperative received cash distributions from ProGold LLC totaling $1,929,000 for
the three-month period ended March 31, 2023 compared to $4,303,000 for the
three-month period ended March 31, 2022. The decrease in ProGold cash
distributions were related to assets distributed from ProGold as the result of
the change in ownership of ProGold in the first quarter of 2022.
In fiscal year 2018, the Cooperative invested a portion of its cash reserves in
bonds. To ensure that the Cooperative would have access to cash if needed before
the maturity of the bonds, the Cooperative also established a $2,000,000 line of
credit at a variable interest rate based on the prime rate. The line of credit
will terminate on October 16, 2024. The line of credit is secured by the
investment management agency account for the Cooperative maintained by Bell
Bank. There was no outstanding balance as of March 31, 2023 or December 31,
2022.
The Cooperative had no long-term debt as of March 31, 2023 and March 31, 2022
and used operating cash flows of $118,000 for the three-month period ended March
31, 2023 compared to used operating cash flows of $168,000 for the three-month
period ended March 31, 2022. The decrease in use of operating cash flows for the
three-month period ended March 31, 2023 compared to the three-month period ended
March 31, 2022 is primarily due to increased interest earnings on investments.
Management believes that non-cash working capital levels, together with the
Cooperative's cash and cash equivalents, are appropriate in the current business
environment and does not expect a significant increase or reduction of non-cash
working capital in the next 12 months. Management expects that the Cooperative's
cash and cash equivalents, together with available borrowings under the line of
credit, will be sufficient to fund its operations for the foreseeable future,
including at least the next twelve months.
Significant Accounting Estimates and Policies
The Cooperative generally does not pay out Method A incentive payments or
collect Method B agency fees until the end of its fiscal year. The total annual
Method B agency fee was determinable once the members completed their delivery
method determination prior to January 1, 2023. The quarterly Method B bushel
delivery and agency fee revenue is calculated by allocating the portion of the
total annual agency fee for that particular quarter or cumulating it for the
particular period. The Cooperative tracks Method A corn deliveries throughout
the year so it can report the bushels of corn delivered by its members as well
as the corresponding Method A incentive fees earned. The final amounts owed by
or due to Cargill and/or the Cooperative's members who elect to deliver using
Method A is not calculated until after December 31 in order to account for any
failures to deliver, or over-deliveries, of corn.
The Cooperative's significant accounting policies are described in Note 2,
Summary of Significant Accounting Policies, of the Notes to the Financial
Statements in the Cooperative's Annual Report on Form 10-K for the fiscal year
ended December 31, 2022. The Cooperative's critical accounting estimates are
discussed in Item 7, Management's Discussion and Analysis of Financial
Conditions and Results of Operations, in the Cooperative's Annual Report on Form
10-K for the fiscal year ended December 31, 2022. There have been no other
significant changes in the Cooperative's significant accounting policies or
critical accounting estimates since December 31, 2022.
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