Tuesday, June 9, 2020
Maintaining Internal Confidence In Chs Inc Finance Essay - Free Essay Example
For centuries food and grain markets have continued to grow not only in terms of demand, but moreover in competition. As the global population has continued to build, so has the need for resources to feed such inhabitants. In a short period of time, the United States has unquestionably emerged as a major contender in the exporting market with much of the credit belonging to companies such as Cargill, ADM and St. Paul based CHS. These companies have supported domestic farming by providing tools and resources necessary for farm owners to sell their products on a global scale. Particularly over the past 10 years, the influx in demand growth and sharp rise in commodity values have proven international market participation be lucrative, with new possibilities growing exponentially in nearly all directions. Over the past decade, the international growth trend has been significant for many companies, including the privately owned Cargill and publicly traded ADM. However, for a smaller farmer owned cooperative, CHS, expanding and acquiring global assets initially had the potential to create a large ripple within the foundation of its member owners. If CHS chose to follow the footsteps of the leading global companies, it would also chose to face many challenges as well as opportunities in such expanding markets. For instance, investing in new international production could create added competition for the goods produced by the companys member owners in the open marketplace. This is the strategizing dilemma that the executive team at CHS has been commissioned to consider over the past 7 years. How could they convince member owners and board members that the best way to realize the highest return on equity would be to invest in and promote further market competition of the same products their member owners already produce? This was the delicate task they were charged with, while remaining cognitive of the core set of values and virtues the companys rich history was built upon. A Brief History Founded in 1931, the company planted its initial roots as the Farmers Union Central Exchange at which point the Cenex energy brand was first created. Meanwhile, a few states away, a merger between Idaho based North Pacific Grain Growers and the Farmers Union Grain Terminal Association created what would later grow into Harvest States by 1983. From 1983 to 1998 both Cenex and Harvest States continued to develop as separate entities, while continuing to grow by member addition and acquisitions. By 1998, both St. Paul based cooperatives recognized an opportunity to come together to create Cenex Harvest States Cooperative. By 2000, the cooperative tale was dropped and left the company with its current name CHS Inc. From its inception in 1998, the company has made several attempts to diversify its business units (outside of grain) including the acquisition of two petroleum refineries. The first of which CHS owns and operates in Laurel, Montana in addition to a joint venture (holding the majority stake) in McPherson, Kansas. Furthermore, CHS owns and operates a total of 1,200 miles of refined fuels pipelines and 1,600 convenience stores throughout the country. Beyond the growth in refined fuels, CHS has also reached out to acquire assets in the foods, financial, feed and crop nutrients industries. However, as the company continued to grow, not all of the growth and opportunity came from outside of grain. With a team lead by John Johnson, President and CEO, the company slowly searched for new opportunities for its grain business. By the early 2000s, it appeared as though the worlds demand for grains such as corn and soybeans was exponentially outpacing what producers were able to provide. Quickly, it became clear through concerns of shortages, in addition to the governments continual pressure for higher standards in corn based renewable fuels; the grain industry was heading in a new direction. Johnsons team recognized that with a vast majority of the farmable land already tapped in the U.S., the next logical step would be to expand internationally. And CHS certainly wasnt alone in its quest for new endeavors. With a wide array of opportunities, CHS watched as key competitors started to sign agreements and develop land to meet their subsequent needs. One particularly strong area for growth was in Brazil. Brazil and its agriculture were seen as the land of golden opportunity. It was a great location to build infrastructure, create jobs and extend an otherwise lacking production CHS faced in an environment of growing demand. For a scope of what these companies were seeing: in 1998 Brazil harvested 31.3 million metric tons of soybeans, while just ten years later they are approaching 60 million metric tons. Maintaining Internal Confidence As the situation presented itself, Mr. Johnson along with his executive team realized that they were dealt a difficult hand. On one end, it was becoming clear that the next logical step to capture growth would be to suggest an acquisition and investment in new international production. Yet, from a second view, it would be vastly difficult to gain support of those whose company stake they were asking to invest, as it would unquestionably be directed toward a venture that could directly compete with their grain. As the topic was considered, the executive team at CHS took the approach that reflected openness and optimism. There was no sense in delaying the agenda, as the topic was a serious one as well as inarguably time sensitive. As one can imagine, the executive team was initially met with concern and frustration. The member owners found it hard to believe that funding a competing South American venture could be in their best interest. For quite some time, South American producers had frustrated domestic farmers as lower costs aided them in providing similar goods at a cheaper price. Therefore, such resistance had been expected and the team had put together a pre-emptive response plan accordingly. As frustration and confusion mounted, the team led by Mr. Johnson rounded up a select few board members and representatives of member owners to take on a trip. The unexpected trip took all invited directly to Brazil in an effort to help them discover and understand the type of opportunity that they were facing. Throughout the process said representatives learned more about the abundance of land in Brazil, potential for return on their investment and an inability for CHS to meet forward demand. Soon enough the idea of international expansion quickly gained momentum. Johnson was quoted, Early on, we explained why we needed to get positioned in order to be a preferred supplier to customers around the world to represent North American Farmers in a way that we felt we could to create value for them, and they got it. Before they knew it, they were on their way to opening the first of many international offices. CHS Sao Paulo (Brazil) opened its doors in 2003, followed by later additional offices in China, Japan, Russia and Switzerland. The international growth and diversification were an incredible piece of the unexpected growth CHS would ensue over the following 5 years. With the foundation of a cooperative, CHS was able to grow exponentially with immense member satisfaction. A main reason falling on the assumption that the increase in company revenue and net income would present greater returns to its owners through patronage. In 2004, member owners cash returns equaled roughly $60 million dollars from revenue of roughly $11 billion. By 2008, that cash return quadrupled to a staggering $240 million dollars from an increase in revenue of over $32 billion. As you can see below the company has continuously recognized staggering growth: Summary Consolidated Financial Data                         2008   2007*   2006*   2005*   2004*    (Dollars in thousands)   Income Statement Data:                     Revenues  $ 32,167,461   $ 17,215,992   $ 14,383,835   $ 11,926,962   $ 10,969,081  Cost of goods sold   30,993,899    16,129,233    13,540,285    11,438,473    10,525,746                       Gross profit   1,173,562    1,086,759    843,550    488,489    443,335  Marketing, general and administrative   329,965    245,357    231,238    199,354    202,455                       Operating earnings   843,597    841,402    612,312    289,135    240,880  Gain on investments   (29,193 )   (20,616 )       (13,013 )   (14,666 ) Gain on legal settlements                   (692 ) Interest, net   76,460    31,098    41,305    41,509    42,758  Equity income from investments   (150,413 )   (109,685 )   (84,188 )   (95,742 )   (79,022 ) Minority interests   72,160    143,214    91,079    49,825    34,184                       Income from continuing operations before income taxes   874,583    797,391    564,116    306,556    258,318  Income taxes   71,538    40,668    59,350    34,153    30,108                       Income from continuing operations   803,045    756,723    504,766    272,403    228,210  (Income) loss on discontinued operations, net of taxes           (625 )   16,810    5,909                       Net income  $ 803,045   $ 756,723   $ 505,391   $ 255,593   $ 222,301                       Balance Sheet Data (August 31):                     Working capital  $ 1,738,600   $ 821,878   $ 848,344   $ 766,807   $ 500,315  Net property, plant and equipment   1,948,305    1,728,171    1,476,239    1,359,535    1,249,655  Total assets   8,771,978    6,754,373    4,994,166    4,748,654    4,047,710  Long-term debt, including current maturities   1,194,855    688,321    744,745    773,074    683,818  Total equities   2,955,686    2,475,455    2,053,466    1,778,879    1,643,491    * Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see Note 2 of the Notes to Consolidated Financial Statements Sustaining Identity As many leaders of todays businesses will testify the type of growth CHS has sustained over the last 5 years is nothing short of incredible. It reflects remarkable leadership and strong commitment by not only employees, but congruently through stable member ownership. The company is slowly gaining the attention it deserves, but the question we might pose is this: at what cost? From its beginning, CHS has always followed the cooperative mentality that promotes low risk, sustainable growth and underlying strategies which have purposefully been set in place in an effort to avoid risk. However, could one make the argument that the this new path for continued growth is leading the CHS and its brand down a path that challenges and rewrites those values and virtues which have been the blocks and foundation the company has been built upon? I would suggest we first define what we mean by brand. As defined by Merriam Webster a brand is a class of goods identified by name as the product of a single firm or manufacturer. CHS has long built its brand by identifying with the needs and values of the domestic farmer. The name CHS is synonymous in many cases with the very identity of its member owners. The opportunity for the company to take new risks over the past 5 years has undoubtedly created a value for those owners far beyond that which they recognized as possible, however, does such success at some point run the risk of destroying the internal connection that has proved to be the glue that has long held the organization together? Can the risk that the company is taking lead them down a path that creates a new identity and lessens the very sense of citizenship that keeps the foundation in tact? CHS OF TOMORROW What I have proposed is the adherent risk with change in any organization. By changing the culture in which the business operates, it subsequently will endure the chance of resistance. The greatest risk of all is for its member owners to feel as though management has loss sight of what the organization has been entrusted to protect. Will its members continue to sustain the high level of risk tolerance moving forward? Will the executive team face a severe backlash as commodity prices fall and these new operating costs hinder more than help? That is yet to be determined, but moving forward it seems very clear the executive management team has some very difficult choices to make. In one scenario, the executive team could continue to move forward with continued plans of international growth. The company undoubtedly will continue to stand out and receive attention on an international level. To this scenario there are many risks and of course rewards. The ideal reward scenario assumes that all decisions are made correctly; the company moves forward and prospers which entitles the member owners to their growing piece of the pie. However, with that scenario also comes an adherent risk. The risk that must be considered pertains to what the large-scale publicity might mean for those member owners. It certainly seems plausible the CHS brand could far outgrow the members who identify with it. With such a disconnect could come frustration and discomfort as the members feel as though they are no longer involved in where the company is going, merely taking a back seat position for the ride. It may also be possible that further growth decisions could unhook the congruence within the organization and in turn lead to dissemination of role perceptions, low citizenship and an eventual dismembering from within. In a second scenario, the executive team could continue to move forward as they have for nearly a century. They could involve the members in all of the decision-making processes and push forward at a much slower and protective rate. The reward in doing so would be the act of protecting its internal congruent structure while maintaining citizenship from within. By maintaining operations as usual, the company should be able to maintain the family-feel within the organization that all of the members will continue to identify with. Adversely, the risk of course is falling behind the competition. By failing to act in a timely fashion as opportunities arise, CHS could dramatically lag the curve and miss substantial opportunities that could have brought a higher level of return. As I said earlier, the executive team at CHS has been presented a very difficult and delicate task. The idea of maintaining a low risk, conservative mentality in an ever growing and competitive commodities world simply doesnt seem plausible. The decisions the company has made thus far certainly have seemed to pay off and accordingly the members have been rewarded handsomely. What needs to be considered is this; the executive team must continue to focus on a few key aspects of their business. First, brand holds a lot of meaning in the farming communities that CHS serves. The member owners and they customers are the backbone of the company and therefore brand preservation must be a priority. A disconnect with its members could lead to an inevitable dismantling moving forward. Secondly, to this point the executive team has done a tremendous job taking risks that have produced high rewards. They must not lose site of what they have done and work to replicate it moving forward. The questi on I see doesnt ask if they should they be taking risks, moreover, what is the risk tolerance of their community and those whom they serve. By making cognitive choices which are congruent with the values, virtues and responsibilities of its past, there is no reason the company cannot continue to sustain growth and maintain its identity moving forward. In my opinion CHS is and will be a company that domestic farmers will continue to take pride in and identify with for generations to come. There is little doubt in my mind that the company and its leaders will ever forego the internal ideals of citizenship and congruence in any type of scenario. Citation Von Glinow, Mary Ann, and Steven Lattimore McShane. Organizational Behavior : Emerging Realities for the Workplace Revolution. New York: McGraw-Hill/Irwin, 2006. www.chsinc.com https://www.sec.gov/ www.merriamwebster.com Howard. F. (March 2009). St. Paul to Sao Paulo. Twin Cities Business. 42.
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