Jeff Stroburg, CEOWest Central Cooperative

Ralston , Iowa

Executing

Difficult Strategies

Sixth Annual Farmer Cooperative ConferenceOctober 30, 2003

Lower margins and increased costs are forcing restructuring

to maintain healthy profitability.

Healthy Profitability should result in value creation

“Value Creation is not necessarily just generating

a positive net margin on the CPA audit.”

Roger GinderISU Economist

Accounting Profit vs. Economic Profit

CPA Audit Profit = Surplus over Expenses - including Debt Expense

Economic Profit = Surplus over Risk Adjusted Cost of All Capital

Employed by the Cooperative – including the Equity Capital

For Value to be created there must be enough profit to give a fair return to equity

i.e. Economy profit must be > to zero

The viability of a business unit or location

should be considered using a return on – ALL –

invested capital (ROIC)

Fertilizer Total Expenses/Gross Revenue

0%

20%

40%

60%

80%

100%

120%

140%

160%

A B C D E F G H I J K L M N O P Q R S

Location Company

Fertilizer Total Expenses/Tons

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

A B C D E F G H I J K L M N O P Q R S

Location Company

Fertilizer Total Expenses/Gross Revenue

0%

20%

40%

60%

80%

100%

120%

1 2 3 4 5 6

Region Company

Fertilizer Total Expenses/Tons

$0

$20

$40

$60

$80

$100

1 2 3 4 5 6

Region Company

Grain Total Expenses/Gross Revenue

0%

20%

40%

60%

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100%

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160%

A B C D E F G H I J K L M N O P Q R S

Location Company

Grain Total Expenses/Bushels

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

A B C D E F G H I J K L M N O P Q R S

Location Company

Grain Total Expenses/Gross Revenue

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

1 2 3 4 5 6

Region Company

Grain Total Expenses/Bushels

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

1 2 3 4 5 6

Region Company

Lack of Confidence in Equity Redemption

Unwillingness to Invest In the Cooperative

Insufficient Cash Patronage to Cover Patron Tax Liabilities

Inefficiencies in Operations That Hurt Competitiveness

Symptoms of Value Creation Problems In Some Cooperatives

Educate Stockholders

Return on Invested Capital – including equity capital

Break even or marginal profits = value destruction

Capital investment decisions must be based on ROI (not IOT)

There is not enough margin in agriculture to support some “Legacy Locations”

Determine Minimum ROIC (Equity capital is not free)

Establish return requirement on assets – Accounts ReceivableInventories Property Plant Equipment

Establish competitive return requirements on equity

Summary

If stockholders know howinvestment decisions are made

on a consistent basis they are more likely to “buy in.”

Thank You

Are there any questions?