Evaluation of the financial strategies of coffee producer cooperatives in the state of Minas Gerais, Brazil

Abstracts

As cooperativas devem possuir uma estrutura de capital coerente com os objetivos dos associados e ser administradas com vistas a manter a empresa competitiva. Para isso, é importante que as estratégias do setor financeiro procurem viabilizar a ocorrência de sobras, pois esta é uma indicação de que a empresa consegue pagar a seus credores, atender os associados e proporcionar retorno financeiro para a cooperativa. Nesse sentido, buscou-se avaliar a influência dos indicadores financeiros na ocorrência de sobras e determinar qual a estratégia adotada pelas cooperativas de cafeicultores do Estado de Minas Gerais, com base na estrutura financeira, utilizando o modelo Logit. Constatou-se que as sobras apresentadas pelas cooperativas foram explicadas pelo giro dos ativos e pela rentabilidade sobre vendas, e suas estratégias concentram-se na administração de vendas.

indicadores financeiros; modelo Logit e cooperativismo

Evaluation of the financial strategies of coffee producer cooperatives in the state of Minas Gerais, Brazil

Valéria Gama Fully Bressan^I; Marcelo José Braga^II; João Eustáquio de Lima^II

^IMS in Agricultural Economics, Departamento de Economia Rural, Universidade Federal de Viçosa

^IIProfessors, Departamento de Economia Rural, Universidade Federal de Viçosa

ABSTRACT

Coffee producer cooperatives need to have a capital structure coherent with their associates' objectives and administered to maintain the organization’s competitiveness. For this, it is important that the cooperative’s financial section’s strategies lead to the creation of a financial surplus to pay creditors, assist the associates, and provide the cooperative a financial return. Using the Logit model, our study evaluates both the financial strategies employed by coffee producer cooperatives in the state of Minas Gerais to maximize surpluses and the influence of different financial indicators on the occurrence or non-occurrence of these surpluses. It was verified that the analyzed cooperatives’ business strategies concentrate on the management of sales and that the occurrence or non-occurrence of surpluses was explained by asset turnover and the profitability of sales.

Key words: Financial evaluation, logit models, agricultural cooperatives

1. Introduction

Brazilian coffee cooperatives play a fundamental role linking the Brazilian grower with the domestic and international coffee market. At the same time, they provide the domestic production sector with order, stability, and expertise. For these reasons, it is extremely important that these cooperatives succeed.

The State of Minas Gerais produces more coffee beans than any other Brazilian state and is home to many of the country’s most important coffee producer cooperatives. These coffee cooperatives strive to insure that affiliated producers control production costs, farm in an efficient manner, and maintain product quality To achieve these requirements, the cooperatives must have the ability to assist their members, knowledge of market necessities, and solid financial structures.

Brazil’s economic opening, the deregulation of its markets, the crisis that arose from the maintenance of traditional methods of State intervention, and the formation of international trade blocks, caused structural changes in the country’s agribusiness sector as it sought to improve competitiveness. According Panzutti (1997:86), the transformations in the economic environment "demanded more and more performance from the agricultural cooperatives, which demanded improved business strategies and financing mechanisms." Requejo (1997) verified that the future success or failure of a cooperative is directly related to the variables that explain its capital structure, mainly variables that affect efficiency and profitability.

This work evaluates financial strategies adopted by Minas Gerais’ coffee producer cooperatives to maintain financial liquidity, control debt, and insure profitability. It is hoped that the results of our study will suggest possible financial and administrative strategies to coffee producer cooperatives

2. The importance of financial analysis

The analysis of any business organization’s accounting statements is the first step in understanding its financial affairs. According to Gitman (1997), to compare one company’s performance and situation with others, or with itself over time, an analysis should made using indices that reflect the individual company’s situation and financial performance. The basic inputs for this analysis are company sales’ results and return on equity.

Evaluation of the results from financial analyses must be adjusted by company specific variables, such as the company’s objectives, policies, time in operation, product, etc., because acceptable performance values for one company may not be acceptable values for another. Every analysis using financial indexes should take into account market risk and the potential level of profitability inherent in the company’s sector (Oliveira, 1996).

Managers use historical analyses of financial indicators to adjust strategies for future success. To simplify both analysis and managerial interpretation, it is common that the analyst selects the smallest possible number of indices needed to reflect the company’s situation accurately.

Basically, a financial analysis can be divided in three different concomitant parts: company liquidity, debt, and profitability. All existing accounting information is found in these three company financial segments. Company liquidity determines the company’s capacity to meet commitments. The company’s debt indicator shows the proportion between the use of the company’s own funds and borrowed funds to maintain operations and serves as the decisive parameter of implicit financial risk. The company’s profitability indicator measures the efficiency of capital employment.

According to Oliveira (1996), liquidity indexes are fundamental in the evaluation of risk. The more liquid a company, the greater its short term debt payment capacity. However, high liquidity indexes can indicate that profitability is not optimized. Risk of company failure can also be evaluated by the size of its debt. The larger the participation of debt financing in the company’s financial structure, the greater the chance of the company’s failure. However, appropriate use of borrowed capital can improve the profitability of the company’s own capital. Greater company profitability reduces risk and greater risk demands greater profitability.

It is important that each company engage in financial planning to foresee future financial needs and problems. The plan must consider present and future resource allocation based on a forecast of future returns that has been tested through sensibility analysis (Rhoden, 1993). A properly developed financial plan will incorporate the results of all financial analyses and direct the company’s activities to most efficiently reach its objective.

3. Methodology

3.1. Financial indicators

According to Oliveira Jr. (1996), when cooperatives are inserted in a competitive market economy they are evaluated by their associate members, the public, financial agents, government, and the competition.

Because cooperatives have both economic objectives and social functions, an evaluation of the capital profitability and productivity of is not enough to define a cooperative’s performance. The evaluation must help both the cooperative and its owner/users meet their economic and social needs.

This owner/user dimension makes the cooperative a more complex company from an administrative point of view, as the cooperative’s investments and strategies should be directed to benefit its associates. Therefore, the investment and growth strategies of a cooperative are not only orientated by the market, but also to guarantee the survival and growth of its associated productive units.

The measure of a cooperatives' efficiency is a combination of its financial balance, its associates satisfaction, and in the speed of its capital accumulation. According to Oliveira Jr. (1996), a low level of capital accumulation is one of the most chronic problems confronted by Brazilian cooperatives, and the one that most affects their efficiency. Capital accumulation is essential if the cooperative is to incorporate and develop new technologies to improve competitiveness while it assists its associates. Weak capital accumulation by a cooperative is often the result of inefficient administration of a group of united independent producers, paternalism, and a lack of understanding of the accumulation process.

On the other hand, Panty (1994) emphasized that capitalization is not the only necessity for a successful companies, but that company liquidity is also "an essential condition for the continuity of business" activities.

Debt is considered to be the company’s financial obligations to any lender, usually resulting from a lack of internally generated capital to pay for operations or finance investments. According to Benetti (1985), from 1975 to 1983, many cooperatives in the Brazilian state of Rio Grande do Sul promoted their growth through the accumulation of debt, which became a significant problem in the early eighties.

The financial indicators liquidity, debt, and profitability are used in this study to evaluate the performance of coffee cooperatives in Minas Gerais, Brazil. Liquidity indicators are used to evaluate the cooperative's capacity to pay contracted obligations. Liquidity will be measured using the "warranty margin,"¹ defined by the division of total assets by the more long-term demandable circulating liabilities derived through borrowing. Debt obligations will be measured using the "total debt" indicator,² which is formed by the division of current liability minus demandable long term debt by total assets. The profitability measure will be formed by the following indicators: a) Profitability of sales = (Surplus AD / sales)*100; b) Return from active investments = (Surplus AD³ / Total Active Investments)*100; c) Profitability of equity = (Surplus AD / equity); and Total Asset Turnover = Sales / Assets.

3.2. Decisive factors in the occurrence of surpluses

Basically, financial performance of a cooperative is measured by the occurrence of surpluses, which correspond to profit, at the end of each period. The application of the surplus is defined by the associates in the Ordinary General Assembly that meets every March. The members of the cooperative can choose to reinvest the surplus in the cooperative, through capitalization or investment, divide the surpluses among the associates in agreement with each associate's contribution to the surplus, or choose some combination of reinvestment and distribution.

The generation of a surplus is the result of a series of cooperative specific administrative factors. Once you have enough information about these factors, the chance of a surplus being generated and the influence of each factor on surplus generation can be determined. This type of information is useful to both the cooperative and any agency considering offering the cooperative either credit or funding through loans.

Requejo (1997) used the Logit model to verify the occurrence of consecutive losses by a sample of agricultural cooperatives in Rio Grande do Sul, Brazil. His work was based on the indicators total asset turnover, debt, and the associates' equity in and debt to the cooperative. The author verified that the cooperatives’ negative results are related to their inappropriate capital structures and lack of internal controls: the Brazilian cooperative system’s two biggest problems.

In our study, the Logit model was specified to examine factors that affect the probability of coffee producer cooperatives in Minas Gerais generating surpluses. The dependent variable admits the discreet values zero (no surpluses) and one (surpluses).

Briefly, the Logit model is based on the logisyic cumulative distribution function given by

that can also be written as

.

The function F(Z) varies from zero to one, when Z varies from minus to plus infinite. To analyze the probability of surpluses occurrence we can define

where prob(s) is the probability of surpluses occurrence, X is a vector of independent variables, b is a vector of parameters to be estimated and " e" is the base of natural logarithm. The probability of no-occurrence of surpluses (prob(n)) is then given by

The estimation of equation (2) is by Maximum Likelihood. By this method the vector b is determined so as to maximize the likelihood function given by

where i refers to the cooperatives that had surpluses and j to those that did not have.

In this study, the following variables were considered to be the most important factors determining the occurrence of surpluses in a cooperative:

• Warranty Margin (MG) — a liquidity index that measures the capacity of the cooperative to clear all debts by the selling all its assets. A positive correlation between variation in the value of this indicator and the possibility of surplus occurrence is expected, because if the cooperative is administrated so it can meet all of its obligations, it is supposed that surpluses can exist.

• Total debt (ET) — measures the percentage of external resources used in financing total investment over the short and long runs. A negative correlation between variation in the value of this indicator and the probability of surplus occurrence is expected: the larger is the debt, the smaller is the probability of surpluses occurrence.

The other variables, defined below, are profitability indicators. A positive sign is expected for the respective coefficients, because the larger the profitability, the greater the possibility of surplus occurrence:

• Profitability from sales (RV)—measures the percentage chance of creating liquid surpluses (before the distributions) with the existing volume of economic activity.

• Return from active investments (RIA)—measures in percentage the capacity of the cooperative to accomplish results (surpluses) in relation to the total of the assets. This index is important to measure the average period for return of investments and the opportunity cost of applying resources to operational and permanent assets.

• Profitability of the equity (RP)—an index that measures the capacity of the company to remunerate its equity (its own capital and reserved funds). This indicator is very important in the measurement of the opportunity cost of capitalization.

• Total asset turnover (GA)—an index that measures the operational capacity of the cooperative. This value of this indicator is fundamental to the evaluation of return on assets, because, every time that an asset is turned over, surpluses should be accumulated.

3.3. Area of study and source of data

The study area is the State of Minas Gerais, the Brazilian state that produces the most coffee and contains the most important Brazilian coffee producer cooperatives. The data used in this study are from a sample of six producer cooperatives. All six are among the ten largest coffee cooperatives in terms of income over the last six years. The data were obtained from the Organization of the Cooperatives of the State of Minas Gerais (OCEMG, 2001).

4. Analysis of the financial indicator results

Table 1 presents the coffee producer cooperatives’ financial indicators for the period from 1994-1999. It is verified that there are great differences in their financial structures.

Table 1
- Click to enlarge

The established patterns used by Oliveira Jr. (1996) were used for our evaluation of the coffee cooperatives’ liquidity, debt, and profitability indicators. The author’s criteria for analyzing liquidity are based on the relationship between total debt payment capacity and total assets. He stipulated the following analytical parameters for evaluating liquidity: a "warranty margin" above 2 = an exceptional situation; from 1.25 to 2 = a good situation; from 1 to 1.25 = a regular situation, and below 1 = a bad situation. The cooperatives’ liquidity indices, evaluated using the "warranty margin" indicator, varied from 2.00 (1994) to 1.71 (1999), with an average period of 1.86, verifying oscillation during the period under analysis. In general, the calculated liquidity indices indicate that the group of coffee producer cooperatives has the capacity to both pay their current debts and distribute assets to their active associates: they are in great shape from a liquidity standpoint.

Oliveira Jr. (1996) established the following correlations between the "total debt" ratio and a company’s economic situation: below 30% = exceptional situation, from 30% to 50% = good situation, from 50% to 75% = regular situation, from 75% to 100% = bad situation, and above 100% = terrible situation. The author formed the total debt ratio parameters through an analysis of the amount and type of credit the company is using for operations. The study’s index of "total debt" averaged 30.34% annually over the period: 30.34% of the capital used to finance activities was borrowed: a very good situation. The total debt indicator’s value decreased over the study period, from 42.59% in 1994 to 29.97% in 1999. This index indicates that the cooperatives are borrowing in a manner that is coherent with their payment capacity.

Oliveira Jr. established the following correlations between the "profitability of sales" ratio and the company’s economic situation: above 10% = excellent situation, between 2.5% and 10% = good situation, from 0% to 2.5% = regular, and below 0% = bad. He determined the following correlations between the "return on active investments" ratio and company’s economic situation: above 20% = excellent, from 15% to 20% = good situation, from 10% to 15% = reasonable, from 5% to 10% = reasonable to bad, from 0% to 5% = bad, and smaller than zero = terrible. The "profitability of equity" investment indicator has the same defined parameters as the "return on active investments" ratio above.

The values determined in our study for the variables "profitability of sales," "return on active investments" and "profitability of equity" indicated that the cooperatives’ situation varied from "bad" to "regular," using Oliveira Jr.’s (ibid) correlations. Profitability indices at these levels imply a "tight operational income structure, slow investment recovery capacity, and possible difficulty financing maintenance and attending to sectoral growth" (Oliveira Jr., 1996:38).

The cooperatives "profitability of sales" averaged 1.03% over our study period, increasing from 0.08% in (1994) to 1.73% in 1999. The cooperatives average "return on active investments" over the period was 4.20%, presenting an increase in the period from 0.07% in 1994 to 7.33% in 1997. Despite the increases, these two profitability indicators’ values correspond with a "reasonable" or "bad" situation, indicating possible operational costs, financing, and/or competitiveness problems.

The annual average value of the "profitability of equity" index was 0.26 and did not show a defined tendency of either increase or decrease through the study period. This low and stable value indicates a "bad" situation and little capacity to maintain the legally mandated "reserve fund" using capital generated by a surplus. The "reserve fund" is used to pay unforeseen future damages.

This weakness in three of the four profitability indicators is compensated for by the strength of cooperatives’ the fourth profitability indicator: the "total asset turnover" index. This index presented an "excellent" situation, with an average value of 3.68 over the study period.

In general, Minas Gerais’ coffee producer cooperatives have the capacity to easily pay their debts in a timely manner and generate good returns for their associates. This does not imply that each individual cooperative in Minas Gerais is in such a favorable position because the cooperatives have an extremely differentiated capital structures, our sample is small, and all the indicators presented a relatively large deviation-pattern.

5. Influence of the economic-financial variables on the occurrence of surpluses

It is verified that the profitability indicators "total asset turnover" and "profitability of sales" stood out as most important to the occurrence of surpluses in this sample of cooperatives.

The adjusted model verified that the values for the variables "profitability of sales" (RV), "total asset turnover " (GA), and "return on active investments" (RIA) were significant to 5% probability, that the value for the variable "total debt" (ET) was significant to 10% probability, and that the values for the variables "warranty margin" (MG) and "profitability of equity" (RP) were not significant (Table 2). The expectation-prediction table verified that 86.1% of the observations were foreseen correctly.

Table 2
- Click to enlarge

The coefficient of the "profitability of sales" variable presented a coherent sign, as expected, and was statistically significant. The study’s results show that this variable helps explain the existence of surpluses in the cooperatives. The "profitability of sales" indicator is one of the most important determinants of a surplus occurrence. A variation of one unit in the "profitability of sales" index causes a variation of 0.37252 percentage points in the probability of surplus occurrence in the same direction: an increase in sales causes financial improvement, a higher profitability indicator, and successive increases in the surplus.

The coefficient of the variable "total asset turnover" was statistically significant. The variable itself was found to be the most important factor determining the existence of surpluses in the cooperatives. Its marginal effect, the largest of all variables studied, indicates that an increase of one unit in the "total asset turnover" index’s value causes an increase of 0.50269 percentage points in the probability of surplus occurrence, presenting coherent sign as expected.

The parameter obtained for the "return on active investments" variable was statistically significant; however, it presented a sign opposite to that expected, which implies that an increase in the return from active investments decreases the probability of surplus occurrence. According to the model, a variation of one unit in the return from active investments is associated with a variation of 0.15565 percentage points in the opposite direction in the probability of surplus occurrence.

The coefficient of the "total debt" variable was statistically significant, with the expected coherent negative correlation. A one unit variation of the total debt variable causes a 0.0121 percentage point variation in the opposite direction in the probability of a surplus occurring: an increase in debt reduces the capacity of the cooperative to generate a surplus.

In spite of having presented a coherent sign to the expected, the coefficient of the variable "warranty margin" was not significant to 10% of probability. This indicates that the cooperatives are capable of paying their obligations to other parties but that company policy does not permit the accumulation of a surplus. In cooperatives, such policies would be ones that prohibit the generation of surpluses or mandate the distribution of any surplus to the associates, rather than accumulation.

The coefficient of the "profitability of equity" variable was also not statistically significant, demonstrating that this variable does not explain the existence of surpluses in the cooperatives.

Our results are coherent with those from Rock (1999), who found that product producers with limited per-unit margins will tend to prioritize their own remuneration to the detriment of the cooperative’s growth. In this sense, it is crucial that the cooperative facilitate asset turnover so as to improve the affiliated producers’ situation. Every product that is sold through the cooperative enhances both the cooperative’s and the producer’s surplus.

Rock (1999) also writes, "The success or failure of a cooperative depends on its capacity to accomplish its economic function." In this sense, it is important that a cooperative’s debt position is continually analyzed by its management. This was reinforced by our study’s results, which show that debt has an inverse relationship with the occurrence of surpluses. It is important to highlight that companies normally need to obtain resources from other parties to finance business expenses and investments. Since interest paid on borrowed funds is an important component of debt, companies must secure credit at interest rates below the rate of return from an investment that depends on funds derived through borrowing. Benetti (1985) reported that many cooperatives in Rio Grande do Sul in the mid-1970s promoted their growth through debt accumulation; however, since this the interest rates they paid were higher than the rate of return from investments, they were often forced to renegotiate their debt.

Generally, it can be noticed that the performance of the cooperatives analyzed in this study is greatly dependent on their asset turnover, and consequently, their sales strategy. The influence of the "profitability of sales" indicator on performance, second only to the impact of "asset turnover," again highlights the importance the cooperative’s sales strategy.

Kotler (1996) emphasized that the sales plan and the management and development of the sales force determine potential sales. The author found that not only the size of the sales force but the quality of its objectives, strategies, structures, remuneration, recruitment and selection, training, direction, motivation, evaluation, negotiation abilities, and abilities to construct relationships determine the sales force’s performance. Although the importance of the cooperatives’ sales strategies was made evident in our study, particulars regarding a cooperative’s sales policies, styles, and strategies were not addressed since financial indicators were used as the objects of this study’s analysis.

6. Conclusion

The studied coffee producer cooperatives in the State of Minas Gerais showed great differences in their financial structures with expressive variation found among their financial indicators. However, in spite of these variations, the Logit model used to verify the occurrence or non-occurrence of surpluses presented good adjustment; in other words, the indicators "total asset turnover," "profitability of sales," "total debt," and "return on active investments" were important to explain the occurrence of surpluses, and the model correctly predicted 86.11% of the occurrence or non-occurrence of surpluses.

The indicators that presented larger responsibility for an occurrence or non-occurrence of surplus were "total asset turnover" and "profitability of sales." The values of these two indicators are, in turn, most greatly affected by the cooperative’s selling strategies. To market coffee, it is essential that the cooperatives selling strategy is well thought-out, coherent with the cooperative’s objectives, includes a training program to develop negotiation techniques, addresses the proper target market, and stresses professional behavior.

It is worthwhile emphasizing that the cooperative’s administration must not only control financial factors, develop coffee selling strategies, and attempt to increase global growth and profitability; it must also attend to the associates' interests. Only by meeting both the economic and the social objectives inherent in the cooperative system, will the cooperative realize success.

The analyses presented in this study were realized using data gathered from a small sample group. To more accurately evaluate the financial strategies used by coffee cooperatives in Minas Gerais, further studies that use data collected from a much larger sample are needed.

References

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1

Warranty Margin= Total Assets / Current Liability + Demandable Long term liability.

2

Total debt = Current Liability - Demandable long term liability/ Total Assets.

3

AD = ante (before) deductions for the Social, Educational, Technical Support Fund, Reserve Fund, and other required set-asides.

Publication Dates

• Publication in this collection
  13 Dec 2004
• Date of issue
  Dec 2002