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, 2021. 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 could differ
materially from those indicated in the forward-looking statements for many
reasons, including events beyond the Cooperative's control and assumptions that
prove to be inaccurate or unfounded. 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 ProGod LLC; (ii)
fluctuations in the market price per bushel of corn; (iii) the continued impact
of the novel coronavirus (COVID-19); and (iv) 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 1,489 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.
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-mining 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 $1.7 million to $1.3 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.
7Cargill 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.
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, 2021.
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.
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. 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. Annually, the Cooperative is required
to deliver approximately 15,490,480 bushels of corn to Cargill for processing at
the ProGold LLC facility.
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 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 corn
equal to the number of Units 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 $.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 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.
8
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.
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 25% 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 25% or the actual
percentage of bushels of corn delivered by members using Method A.
For fiscal year 2022, members elected to deliver 27% of their corn by Method A
and members elected to deliver 73% of their corn by Method B. This election will
result in 27% of the Cooperative's income and/or losses and 27% of any cash
distributions being allocated to the Method A pool in fiscal year 2022, which
reflects the actual percentage of corn members elected to deliver using Method A
and does not result in reallocation to meet the 25% requirement set forth in the
Cooperative's Bylaws.
Impact of COVID-19
The Cooperative continues to monitor the global outbreak of the novel
coronavirus (COVID-19) and its impact on the Cooperative's results of operations
and financial condition. Corn millers are reporting that demand for high
fructose corn syrup in food service and entertainment sectors has improved.
Starch demand continues to be strong and ethanol demand improved as COVID-19
restrictions were lifted regionally. The ProGold facility currently continues to
operate in the ordinary course and the Cooperative's overall business has not
been impacted. Although demand for products from the corn milling sector have
stabilized or improved, the Cooperative is unable to predict the impact of
COVID-19 on the future operations of the ProGold facility.
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.
9
For the three-month period ended March 31, 2022, the Cooperative sold
approximately 4.6 million bushels of corn compared to approximately 4.6 million
bushels of corn sold during the three-month period ended March 31, 2021. For the
three-month period ended March 31, 2022, the members, on the Cooperative's
behalf, delivered to Cargill for processing at the facility approximately 1.8
million bushels of corn using Method A and 2.8 million bushels of corn using
Method B. In the same respective periods in 2021, 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, 2022, the Cooperative recognized corn
revenue of $30,302,000 compared to $23,501,000 during the same period in 2021,
an increase of 29% for the first quarter due primarily to an increase in the
price per bushel of corn sold year to date in 2022 compared to 2021. The
increase in price of corn was driven by strong demand and the impact of the war
in Ukraine's impact on all commodity prices.
Expenses. The Cooperative recognized corn expense of $30,317,000 and $23,515,000
for the three-month period ended March 31, 2022 and 2021 respectively, an
increase of 29% for the first quarter due primarily to an increase in the price
per bushel of corn purchased in 2022 compared to 2021.
The Cooperative recognized expense of $15,000 for the three-month period ended
March 31, 2022 and 2021 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 period ended March 31, 2022 and 2021 of $2,796,000 and $1,894,000,
respectively, an increase of 48% for the first quarter. The increase is
primarily due to an increase in 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, 2022 was $202,000, compared to $147,000
during the same respective period in 2021. The increase in administrative
expenses is primarily due to additional consulting and legal expenses associated
with the negotiation of ProGold's amended lease agreement and operating
agreement.
Other Income. Interest income for the three-month period ended March 31, 2022
was $27,000 compared to $41,000 during the same period in 2021. The decrease in
other income relates to lower interest earning investments.
Liquidity and Capital Resources
The Cooperative's working capital at March 31, 2022 was $7,836,000 compared to
$6,778,000 at March 31, 2021. The increased working capital at the end of the
first quarter of 2022 as compared to the same period in 2021 is primarily
related to increased distributions received from ProGold LLC. The Cooperative
received cash distributions from ProGold LLC totaling $4,303,000 for the
three-month period ended March 31, 2022 compared to $1,570,000 for the
three-month period ended March 31, 2021.
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, 2022. 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, 2022 or December 31,
2021.
The Cooperative had no long-term debt as of March 31, 2022 and March 31, 2021
and used operating cash flows of $168,000 for the three-month period ended March
31, 2022 compared to used operating cash flows of $100,000 for the three-month
period ended March 31, 2021. The decrease in operating cash flows for the
three-month period ended March 31, 2022 compared to the three-month period ended
March 31, 2021 is primarily due to a change in timing of payments.
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.
10
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, 2022. 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, 2021. 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, 2021. There have been no other
significant changes in the Cooperative's significant accounting policies or
critical accounting estimates since December 31, 2021.
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GOLDEN GROWERS COOPERATIVE 
