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GOLDEN GROWERS COOPERATIVE - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 14, 2014

This report 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 could differ materially from those indicated. See the discussion of "Risk Factors" in the Cooperative's Annual Report for the 2013 fiscal year on Form 10-K.

Overview



Golden Growers Cooperative is a value added agricultural cooperative association governed under Minnesota Statutes Chapter 308B owned by 1,571 members in the business of providing value to our members by facilitating their delivery of corn to the corn wet-milling facility owned by ProGold Limited Liability Company ("ProGold"), a Minnesota limited liability company in which the Cooperative owns a 49% membership interest. ProGold leases its corn wet milling facility to Cargill Incorporated who uses the facility to process corn into high fructose corn syrup. We accomplish our business on behalf of our members through our contract relationships with all of the parties involved in the ownership and operation of the facility. From an income production perspective our membership interest in ProGold is our primary asset that, in addition to giving us the right to receive distributions from ProGold, also provides our members with additional value for the delivery of their corn for processing. Annually we are required to deliver approximately 15,490,480 bushels of corn to Cargill for processing at the ProGold facility.

Ownership of our membership units requires our members to deliver corn to the Cooperative for processing in proportion to the number of units each member holds. A member is required to deliver one bushel of corn for each of our units held by the member. Currently 15,490,480 of our units are issued and outstanding. Income and losses are allocated to our members based on the volume of corn they deliver. Subject to certain limitations, as long as a member patronizes the Cooperative by delivering corn equal to the number of units held by the member, the member will be allocated a corresponding portion of our income. In this way, we continue to operate on a cooperative basis.

To hold our units a member is required to execute a Uniform Member Agreement that obligates the member to deliver corn to us and an Annual Delivery Agreement by which each member annually elects the method the member would like to use to deliver corn - either Method A or Method B, or a combination of both. Under Method A, a member is required to physically deliver corn to us either at the facility or another location reasonably designated by us. Under Method B, a member appoints us as its agent to arrange for the acquisition and delivery of corn on the member's behalf. We appoint Cargill as our agent to arrange for the delivery of the corn by our members who elect to deliver corn using Method A, and we appoint Cargill as our agent to acquire corn on our behalf for our members who elect to deliver corn using Method B. If a member elects to deliver corn using Method B, the price per bushel paid to the member is equal to the price per bushel paid by Cargill to acquire the corn as our 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 $.05 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 us 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 our Board of Directors.

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A Method A member directly contracts with Cargill for the contract price agreed upon for the corn or, in the absence of an agreed upon price, the market price per bushel for corn delivered on the day on which the corn is delivered and accepted at the facility. With respect to all Method A corn that is delivered, Cargill pays to the Cooperative the aggregate purchase price for corn purchased from the member, and then, on the Cooperative's behalf, makes individual payments for corn directly to the member. In the event a Method A member delivers more than its delivery commitment to Cargill, any corn delivered in excess of that commitment is handled as a direct sale of corn to Cargill and is priced at the current closing delivery corn price established by Cargill at the facility on the day it is unloaded. In the event a Method A member delivers less than its committed amount of corn to Cargill, the quantity of the shortfall is then purchased and delivered by Cargill on the Cooperative's behalf, but this purchased corn is not credited to the Method A member's account. If a Method A member fails to fully satisfy the corn delivery requirement, Cargill purchases replacement corn for which we reimburse Cargill the amount by which the underlying contracted corn price is less than the price of buying the replacement corn that was due on the delivery date. The Method A member who fails to deliver corn is then invoiced for the price of the corn. In addition, if a Method A member fails to deliver all of the corn it was obligated to deliver, that member's allocation of our profit or losses and any cash distributions is proportionately reduced and we may terminate the member's membership.

According to the Cooperative's governing documents, income and/or losses are allocated and distributed to its members on a patronage basis based on each member's volume of corn deliveries. The governing documents establish a Method A delivery pool and a Method B delivery pool. Prior to January 1 of each new fiscal year, members are required to elect whether they will deliver corn using Method A or Method B. Regardless of the actual percentage allocation between members who deliver using Method A or Method B, the Cooperative's governing documents require the Cooperative to annually allocate at least 25% of its income and/or losses to the Method A pool. The amount of income and/or losses actually allocated to the Method A pool is a percentage equal to the greater of 25% or the actual percentage of corn delivered by members under Method A.

For the 2014 fiscal year, 28% of members elected to deliver corn by Method A and 72% elected to deliver corn by Method B. This election will result in 28% of the Cooperative's income and/or losses and 72% of any cash distributions being allocated to the Method A pool in fiscal year 2014, which reflects the actual percentage of members who elected to deliver corn using Method A and does not result in reallocation to meet the 25% requirement set forth in the Cooperative's governing documents.

Results of Operations



Comparison of the Six Months Ended June 30, 2014 and 2013

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. 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, required licensing and bonding expenses, and the service fee paid to Cargill.

For the six-months ended June 30, 2014, the Cooperative sold approximately 8.0 million bushels of corn compared to 8.6 million bushels of corn sold during the six-months ended June 30, 2013. For the six months ended June 30, 2014 and 2013, the Cooperative recognized corn revenue of $36,115,000 and $50,849,000, respectively, a decrease of 29%, due primarily to a decrease in the selling price per bushel of corn sold in 2014 compared to 2013. The Cooperative recognized corn expense of $36,157,000 and

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$50,891,000 in 2014 and 2013 respectively, a decrease of 29% due primarily to a decrease in the cost per bushel of corn purchased in 2014 compared to 2013. For the six-months ended June 30, 2014 and 2013, its members, on the Cooperative's behalf, delivered to Cargill for processing at the facility 2,329,000 and 2,848,000, bushels of corn respectively using Method A, and 5,718,000 and 5,730,000 bushels of corn respectively, using Method B. For the six-months ended June 30, 2014 and 2013, the Cooperative recognized expense of $46,000 and $46,000, respectively, in connection with costs incurred to Cargill in connection with the Cooperative's corn marketing operation.

The Cooperative derived income from ProGold for the six-months ended June 30, 2014, of $3,187,000 compared to $2,716,000 for the six-months ended June 30, 2013.

General and Administrative Expenses. The Cooperative's general and administrative expenses include salaries and benefits, professional fees and fees paid to our board of directors. The general and administrative expenses for the six-months ended June 30, 2014, was $409,000 compared to $551,000 for the six-months ended June 30, 2013, a decrease of 5%, primarily due to expenses incurred in connection with the Cooperative's Services Agreement with its former executive vice president and chief executive officer, Mark Dillon.

Interest Income. Interest income for the six-months ended June 30, 2014, was $6,000 compared to $5,000 for the six-months ended June 30, 2013.

Comparison of the Three Months Ended June 30, 2014 and 2013

Revenues. For the three months ended June 30, 2014, the Cooperative sold approximately 3.8 million bushels of corn compared to 4.2 million bushels of corn sold during the three months ended June 30, 2013. For the three months ended June 30, 2014 and 2013, the Cooperative recognized corn revenue of $15,261,000 and $24,676,000, respectively, a decrease of 38% due primarily to the difference in the selling price per bushel of corn sold in 2014 compared to 2013. The Cooperative recognized corn expense of $15,281,000 and $24,698,000 in 2014 and 2013 respectively, a decrease of 38% due primarily to the difference in the cost per bushel of corn purchased in 2014 compared to 2013. For the three months ended June 30, 2014 and 2013, its members, on the Cooperative's behalf, delivered to Cargill for processing at the facility 959,000 and 1,360,000, respectively, bushels of corn using Method A and 2,861,000 and 2,826,000, respectively, bushels of corn using Method B. For the three months ended June 30, 2014 and 2013, the Cooperative recognized expense of $23,000, in connection with costs incurred to Cargill in connection with the Cooperative's corn marketing operation.

The Cooperative derived income from ProGold for the three months ended June 30, 2014, of $1,832,000 compared to $1,434,000 for the three months ended June 30, 2013.

General and Administrative Expenses. The general and administrative expenses for the three months ended June 30, 2014, was $199,000 compared to $238,000 for the three months ended June 30, 2013.

Interest Income. Interest income for the three months ended June 30, 2014 and June 30, 2013 was $3,000.

Liquidity and Capital Resources

The Cooperative's working capital at June 30, 2014 was $1,929,000 compared to $1,587,000 at June 30, 2013.

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The Cooperative had no long-term debt as of June 30, 2014 or June 30, 2013.

The Cooperative used operating cash flows of $434,000 for the six-month period ended June 30, 2014 compared to $655,000 for the six-month period ended June 30, 2013.

The Cooperative received cash distributions from ProGold totaling $5,502,000 for the six-month period ended June 30, 2014 compared to $5,527,000 for the six-month period ended June 30, 2013.

The Cooperative paid cash distributions to its members totaling $6,507,000 for the six-month period ended June 30, 2014 compared to $6,198,000 for the six-month period ended June 30, 2013.

Management believes that non-cash working capital levels 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.

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. These amounts are accrued quarterly and then confirmed at the end of the fiscal year. The total annual Method B agency fee was determinable once the members completed their delivery method determination prior to January 1, 2014. 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 remainder of the Cooperative's significant accounting policies are described in Note 2, Summary of Significant Accounting Polices, of the Notes to the Financial Statements included in the Cooperative's Annual Report on Form 10-K for the fiscal year ending December 31, 2013. The Cooperative's critical accounting estimates are discussed in Item 7, Management's Discussion and Analysis of Financial Conditions and Results of Operations, included in the Cooperative's Annual Report Form 10-K for the fiscal year ended December 31, 2013. There has been no significant change in the Cooperative's significant accounting policies or critical accounting estimates since the end of fiscal 2013.


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Source: Edgar Glimpses


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