LI E> R.AR.Y OF THE UNIVERSITY OF ILLINOIS 630. T no. 4-70-4B5 cop. 3. NO.N CIRCULATING CHECK FOR UNBOUND. CIRCULATING COPY Business Policies of Country Grain Elevators By L. J. NORTON Bulletin 477 - fNlVERSITV'OF ILLINOIS A(iRKTLTt?RAL EWERIMFNT STATION' CONTENTS FACE WHAT FUNCTIONS AND SERVICES SHOULD BE PERFORMED.. 280 Questions Involved in Analysis of Problem 281 Functions Performed Will Affect the Margins 282 Storage Space Could Be More Fully Used 283 Side Lines Needed Where Grain Volume Is Small 284 Feed Grinding an Important Side Line 291 More Kinds of Farm Products Could Be Handled 292 HOW LARGE A BUSINESS SHOULD A COMPANY AIM TO HANDLE 292 Bushel-Costs Decline as Grain Volume Increases 292 Grain Volume Determined by Many Factors 294 Margins Not Closely Related to Volume of Grain 298 Merchandise Sales and Margins Tend to Increase Together 300 WHAT GROSS MARGINS SHOULD A FIRM STRIVE TO EARN.... 302 WHAT SALES AND COLLECTION POLICIES SHOULD BE FOLLOWED 303 Advertising Not Used Extensively 303 Considerable Credit Is Extended 304 Interest Commonly Charged on Receivables 304 HOW SHOULD CAPITAL BE ACCUMULATED AND EARNINGS DISTRIBUTED '. 305 Capital Stock Supplemented by Earnings 305 Part of Earnings Distributed as Dividends 306 PLANS TO INCREASE MEMBERSHIP NEEDED 306 SUMMARY AND CONCLUSIONS.. . 307 Urbana, Illinois April, 1941 Publications in the Bulletin series report the results of investigations made or sponsored by the Experiment Station Business Policies of Country Grain Elevators By L. J. NORTON, Chief in Agricultural Marketing 1 ]f\i NHE COUNTRY ELEVATOR is the farmers' market for grain in most grain-raising areas, for most producers still sell -"* their grain locally. Efficient operation of these elevator com- panies is consequently to the interest not only of the owners, stock- holders, and managers of these companies, but to all grain producers, because the more efficiently the elevator businesses are operated, the better the market they can furnish for grain. In this bulletin an attempt is made to show how the policies fol- lowed by elevator companies have affected their earnings. The study is based largely upon analyses of yearly audits of 83 to 106 farmers' elevator companies during the years 1935 to 1939. 2 The typical unit among these companies is the independent farmers' elevator, owned by local people, mostly farmers, and operating as a rule at only one place, tho some such companies operate at one or more outlying points. In- dependent local operation and management are the rule. Ordinarily country grain elevators perform the following functions: 1. Provide a cash market for grain thruout the year. 2. Render services incidental to handling grain, such as weighing, re- ceiving, elevating, providing temporary storage while carloads are being collected or markets found, loading out, and shipping. 3. Store grain for longer periods, perhaps for several months. 4. Grade grain with some degree of accuracy. 5. Handle, mix, and condition grain to some extent, in order to preserve or improve its market value. 6. Direct the movement of grain to the best market on the basis of bids from different outlets. 7. Finance grain from the time it is purchased (sometimes before delivery) until it is sold by the elevator. 8. Carry the risks incident to ownership of grain (risks both from price 'The author wishes to acknowledge the courtesy of the many elevator man- agers and others who made available the information used in this study, and the aid rendered by L. H. Simerl, Associate in Agricultural Marketing Extension, E. C. Hedlund, Assistant in Agricultural Marketing Extension, and G. W. Freemyer, formerly Assistant in Agricultural Economics. Preliminary and partial reports of these data were made in mimeographed publications AE-692 (1937), AE-969 (1938), and AE-1445 (1940). The data also were the basis for Circular 476, "Farmers' Grain Elevators," issued in 1937. 279 280 BULLETIN No. 477 [April, changes and from fire losses and other physical hazards) during the time the grain is in the possession of the elevator. These risks may be shifted in part by insurance or hedging. 9. Provide side-line services, such as feed grinding, or the handling of various commodities in addition to grain. Altho these side lines are not necessarily a part of the country grain business, they are so commonly associated with it that they cannot be considered separately. It is in the attempt to perform these functions that differences in policy arise. Over some of the problems an individual company has control; over others it has no control, since circumstances in its ter- ritory or activities of its competitors may determine how it must operate. In general, the more important of these problems of policy have to do with the following questions: 1. What functions and services besides those involved in merely re- ceiving and shipping grain should be performed? 2. How large a business should be developed? This problem obviously is related to the first, as size of business is not merely a matter of the number of bushels of grain handled but is related also to the number and extent of the services performed. 3. What gross margins should the firm aim to earn on different com- modities handled? 4. What sales and collection policies should be followed? 5. How should the needed capital be managed and earnings distributed? WHAT FUNCTIONS AND SERVICES SHOULD BE PERFORMED A country grain business may be a very simple affair merely receiving and shipping grain or it may be a complicated business in- volving a variety of functions and services. In view of the alternative methods by which grain can be handled, the directors and management of each elevator company should give consideration to this question: Can ive increase our earnings or do a better fob of marketing the grain of our community by performing other or fewer functions than those we now perform? Beginning with the receiving and shipping of grain, the following functions could be added: 1. Storage of grain for account of farmers 2. Storage of grain for account of company 3. Storage of grain for others (mills or Commodity Credit Corporation) 4. Mixing, drying, and conditioning grain 5. Grinding grain and mixing feed 6. Handling simple lines of merchandise such as coal, feed, and twine 7. Handling more complicated lines of merchandise such as lumber, farm machinery, and hardware 194 1] BUSINESS POLICIES OF COUNTRY ELEVATORS 281 Questions Involved in Analysis of Problem The extent to which additional functions should be taken on is a difficult question for an elevator company to analyze, because of the diversity of combinations possible, and the problems of joint cost that therefore arise. Adding functions to the business is justified when it increases income more than it increases expense. If, for example, 20,000 bushels of grain can be stored for four months at a charge of 2 cents a bushel, $400 will be earned. Will this added income be more or less than the added expense for interest, insurance, handling, hedging, and pos- sibly shrinkage during storage? This is a simple problem in arith- metic, which can readily be worked out for any individual company. If the storage space is available, its use need not be counted as a cost, for if it is unused it will not earn anything on the capital invested in it. If storage space must be built, that is a different matter; but the fact is that many grain companies have unused space. To take another ex- ample: if adding grinding equipment increases gross annual earnings by $1,000 and adds only $700 to the expense, it obviously pays to add this equipment. Among other questions to be considered, beyond the direct effects on gross income and expense in the adding of further functions, are these: 1. How much will the business be increased in other directions by the new function? If, for example, grinding is added, how much additional grain can be sold locally at retail, and how much feed for mixing? 2. Is it necessary to add the proposed function in order to protect the business against a competitor? If money can be earned by storing grain, a competitor may bid up the price to farmers by cutting down on the handling margin, provided the sum of the handling and storage margins yields a profit. Under such circumstances a company that stores grain might force out of business one that does not do so. It would even be possible for a company engaged in a number of lines of business to handle grain for nothing and pay its way on the earn- ings from other lines. This, of course, would not be likely to happen except when a company had to meet unusual competition, for a com- pany successful enough to expand into a variety of lines would try to keep its grain business on a profitable basis. 3. Is the management competent to handle the technical problems involved in the new function? More knowledge obviously is required to store and merchandise grain successfully or to run a business in- 282 BULLETIN No. 477 [April, volving a variety of lines of merchandise than is needed merely to buy and ship grain. 4. Is sufficient capital available? The taking on of any new func- tion may turn on this question. New firms usually are short of capital ; they tend therefore to undertake only such operations as permit rapid turnover. As capital is accumulated, they are likely to expand into lines with slower turnover. Where these added lines are necessary for success, then an initial shortage of capital would so handicap a com- pany that it could never operate successfully. Similarly the loss of capital thru unsuccessful operation may put a firm into such an un- favorable position that it cannot carry on the combination of func- tions needed for its success, and may thus hopelessly cripple it. Ex- amples of the latter situation can be found among country grain firms. Functions Performed Will Affect the Margins The range in margins earned in different grains by 106 farmers' grain companies in 1939 is shown in Table 1. The most common earnings were: on corn, 1 to 3 cents a bushel; on oats, 1 to 3 cents; on soybeans, 2 to 5 cents ; and on wheat, 1 to 6 cents. On wheat the earnings were much more variable than on the other grains. The differences in the margins earned on grain were due in part to differences in functions performed in connection with handling the grain. The 23 companies whose earnings were 3 cents or more a bushel on corn must either have had extensive retail sales or have engaged in storage operations, as it is not likely that such margins TABLE 1. ONE HUNDRED Six ILLINOIS FARMERS' ELEVATOR COMPANIES GROUPED ACCORDING TO EARNINGS PER BUSHEL ON FOUR KINDS OF GRAIN, 1939 Cents per bushel Number of companies handling designated grain at margins indicated Corn Oats Soybeans Wheat Losses 1 4 52 24 8 4 4 3 4 2 106 1.8 cents 7 22 24 19 10 9 2 10 3 106 2.9 cents 1 2 5 17 22 16 9 3 11 20 106 3.7 cents 10 3 11 \l '] 9 17 106 2.9 cents Gains Less than 1 .0 cent 1.0 to 1.9 cents . . 2.0 to 2.9 cents 3.0 to 3.9 cents 4.0 to 4.9 cents 5.0 to 5.9 cents 6.0 to 6.9 cents 7.0 cents or more Data not available Total Average (median) margin 1941] BUSINESS POLICIES OF COUNTRY ELEVATORS 283 were earned by simple shipping operations. The same must also have been true of at least part of the 24 companies that earned between 2 and 3 cents a bushel on corn. It is likely that at least half the com- panies studied did more than merely buy, ship, or temporarily store the corn they handled. The 7 companies whose earnings on oats were less than 1 cent a bushel undoubtedly engaged in unprofitable storage operations. In a previous study it was pointed out that the average margins earned on grain by farmers' elevator companies vary with the trends in grain prices, being larger when the trend is upward and smaller when it is downward. 1 Probably most of the 50 companies whose margins on oats were 3 cents or more a bushel either had a considerable volume of retail sales or earned profits from storage. As regards earnings on soybeans, 55 of 86 companies handling soybeans earned between 2 and 5 cents a bushel probably their normal handling margin in- cluding some storage earnings. The 23 whose earnings were 5 cents or more a bushel likely had more income from storage for mills or for the account of the elevator on a speculative basis. Farmers' elevators probably engage in storing and merchandising operations less extensively than privately owned elevators, and also less commonly hedge the grain they handle, by sale of futures. These differences in practice are to be explained by the facts that: (1) Farm- ers' elevators have emphasized lower margins and higher volume of grain trade ; and many have built up an adequate volume of business for successful operations by merely buying and shipping. (2) Private grain dealers are as a rule more familiar with hedging technics than many managers of farmers' elevators are. (3) Boards of directors and managers of many farmers' elevators are prejudiced against trade practices involving future trading. Storage Space Could Be More Fully Used In a survey made in 1937, 217 farmers' elevator companies in Illinois reported average bin storage capacity of 38,439 bushels and average crib storage capacity of 2,455 bushels. In eastern Illinois, where more grain is handled than in other sections of the state, 61 companies averaged a storage capacity of 51,710 bushels in bins and 1,881 bushels in cribs. Many companies are thus in position to store some grain. Most of them, however, sell the grain as purchased. Re- plies to the question "Do you store grain?" indicated that most com- panies did not, for the following percentages of companies reported "111. Agr. Exp. Sta. Cir. 476. 1937. 284 BULLETIN No. 477 [.April, that they sold the designated grain immediately after it was purchased: sold corn immediately, 92 percent; oats, 72 percent; soybeans, 91 per- cent ; wheat, 94 percent. These figures very definitely suggest that in 1937 farmers' elevators in Illinois limited their grain activities largely to buying and shipping. Oats are more commonly stored than other grains, and soybeans are commonly stored for mills. According to these figures, much of the storage space owned by farmers' elevator companies is unused most of the time (or was when this survey was made, in 1937) and thus ties up capital that earns little or no return. Many of these companies could probably have in- creased their earnings by more complete use of this space. Since the survey was made in 1937, however, the practices of country elevators with regard to use of storage space have been changed by the demands for space in connection with the "ever normal granary" program. As long as this program is continued, elevator space is likely to be more completely utilized than it was by these companies in 1937. In fact, many companies have added to their storage space in order to store grain for the Commodity Credit Corporation. In 1939, 55 of the 106 companies studied reported storing some grain. These were in addition to the companies that had filled steel bins for the Commodity Credit Corporation. Thirty-three had stored a total of 1,136,200 bushels of corn in their elevators for the CCC; 9 had stored 231,000 bushels for customers; 8 had stored 178,000 bushels, chiefly soybeans, for mills and processors; and 11 had stored 152,000 bushels of grain for the elevator account. Sixty-two had handled about 100,000 bushels of wheat and had placed 3,176,000 bushels of corn in steel bins for the CCC. This storage activity of course increases the income of the companies engaging in it. A comparatively small proportion of farmers' elevator companies hedge grain by sale of futures. The following proportions of the 217 companies contacted in the 1937 survey reported that they did no hedging in connection with the designated grain: no hedging on corn, 79 percent; on oats, 75 percent; on soybeans, 92 percent; and on wheat, 89 percent. Hedging is most common in connection with oats, which are more often stored. Side Lines Needed Where Grain Volume Is Small Another way in which a country grain business may diversify and build up volume is to handle merchandise of various kinds sometimes called side lines. Farmers' elevators more commonly move in this di- 1941} BUSINESS POLICIES OF COUNTRY ELEVATORS 285 TABLE 2. RATES EARNED ON TOTAL ASSETS BY ILLINOIS FARMERS' ELEVATOR COMPANIES DURING FIVE YEARS, 193S-1939* Bushels of grain sold Rates earned when proportion of grain sales to total sales was Average of all firms Less than 70 percent 70 to 89.9 percent 90 percent or more Number of firms Rate earned Number of firms Rate earned Number of firms Rate earned Number of firms Rate earned 88 companies in 1935 Less than 100 000 12 perct. 3.7 11 perct. 1 2 b g perct. 1 7 b 31 perct. 2 100.000 to 199.999 200.000to 299.999 300,000 or more 2 1 6.0 7.1 14 5 1 2.7 9.7 10.5 13 15 6 1.9 2.2 13.8 29 21 7 2.6 4.2 13.3 All companies 15 4.2 31 2.3 42 3.1 88 3.0 92 companies in 1936 Less than 100,000 .... 14 7 9 3 11.5 4 1 2 21 7.1 100,000 to 199,999 200.000 to 299.999 300,000 or more 5 2 8.0 15.7 8 5 7 10.3 20.5 25.5 10 11 23 9.6 17.3 16.3 23 18 30 9.5 18.0 18.4 All companies 21 8.6 23 17 3 48 14.0 92 13.5 100 companies in 1937 Less than 100,000 100,000 to 199,999 200.000 to 299.999 300,000 or more 11 4 2 1 18 7.9 9.5 9.1 9.4 8.5 5 10 10 13 38 3.3 5.5 9.2 12.4 8.6 4 8 14 18 44 -4.5b 3.4 9.3 8.8 6.8 20 22 26 32 100 4.3 5.5 9.2 10.3 7.8 All companies 83 companies in 1938 Less than 100,000... 100,000 to 199.999 200.000 to 299,999 300.000 or more 7 4 4 2 17 6.4 6.7 8.0 5.9 6.8 7 9 12 28 8.5 8.9 12.2 10.2 1 6 9 22 38 -6.3>> 2.2 9.5 7.7 6.9 8 17 22 36 83 4.8 5.8 9.0 9.1 8.0 All companies 106 companies in 1939 Less than 100.000. .. 7 7.8 1 4.7 8 7.4 100.000 to 199.999 8 7.9 7 10.2 6 9.0 21 9.2 200,000 to 299,999 4 11.4 10 9.5 12 11.5 26 11.1 300,000 or more 3 15.5 21 13.3 27 11.2 51 12.3 All companies 22 9.5 38 12.1 46 10.8 106 11.0 Rates earned on total assets were calculated in a slightly different manner in 1935 than in the later years. In the later years the amounts of drafts drawn on grain firms were deducted from both current liabilities and grain inventories. Had this method been used in 1935 the rates earned that year would have been higher by about 1.5 percent. The general pattern of the table would not, however, have been changed. The first three fiscal years (1935, 1936, and 1937) ended on or before June 30 of the year following that designated, and the last two fiscal years (1938 and 1939) ended on or before February 28 of the following year. The most common period covered was approximately the calendar year designated. -Loss. 286 BULLETIN No. 477 [April, rection than privately owned grain firms. Since the side-line business is so closely related to the grain business, both must be considered in any discussion of the operation of country elevators. For comparisons to have any meaning in the study of the opera- tions of country grain firms, the individual concerns must be grouped according to the importance of their merchandise business. This is necessary because the handling of merchandise increases expenses and capital requirements and makes direct comparisons of little value unless the influence of the merchandise factor is eliminated. Average earnings over the five-year period 1935 to 1939, by companies grouped by volume of grain and importance of merchandise, are shown in Table 2. Earnings varied considerably from year to year, largely be- cause of variations in profits from handling grain. The group with less than 70 percent of their business consisting of grain had the least variable earnings, as measured by the rate earned on total assets. Minimum volume of grain. Certain details in Table 2 are im- portant in consideration of the problem under review. W hat minimum volume of grain must a concern handle in order to earn a reasonable rate of return without a considerable volume of side lines ? If a re- turn of 5 percent is considered to be the line between satisfactory and unsatisfactory returns, the minimum quantities in the different years on the basis of averages were as follows: Bushels required when proportion of grain sales to total sales was Less than 70 to 89.9 90 percent Year 70 percent percent or more 1935 100,000 200,000 300,000 1936 Less than 100,000 Less than 100,000 100,000 1937 Less than 100,000 100,000 200,000 1938 Less than 100,000 100,000 200,000 1939 Less than 100,000 100,000 100,000 When only a small volume of merchandise was handled, the mini- mum amount of grain necessary for successful operation varied from 100,000 bushels in 1936 and 1939, when grain business in general was profitable, to 300,000 bushels in 1935, when it was not so profitable. For companies whose merchandise sales comprized 10 to 30 percent of their total sales, the minimum quantity of grain necessary was smaller, ranging from 200,000 bushels in 1935 to less than 100,000 bushels in 1936. For companies 30 percent or more of whose sales consisted of merchandise, the minimum quantity of grain ranged from 100,000 bushels downward in the different years. Many concerns in this last group are primarily farmers' stores rather than grain elevators. 1941} BUSINESS POLICIES OF COUNTRY ELEVATORS 287 According to these figures, firms handling less than 200,000 bushels of grain and performing the services typical of these firms need to de- velop a side-line business if they are to operate successfully; and those handling less than 100,000 bushels must put major emphasis on side lines. The group of companies most consistently profitable handled 300,000 or more bushels of grain and sold merchandise to the extent of 10 to 30 percent of their total sales. Many of them also did con- siderable grinding. The concerns in this group had successfully handled grain for a number of years and had used a portion of their earnings to expand their merchandise business. Side lines increase expenses. Enlarging the volume of mer- chandise sales by elevator companies leads to higher expenses a fact which should not be neglected in planning the company policies. The 1939 average operating expenses for the companies whose merchandise sales made up high, medium, and low proportions of their total sales are shown in Table 3. Expenses for practically all items were higher in the groups where merchandise made up a more im- portant part of the business. The only exceptions were in rent and TABLE 3. AVERAGE EXPENSES OF 106 ILLINOIS FARMERS' ELEVATOR COMPANIES GROUPED ACCORDING TO PROPORTION OF TOTAL SALES MADE UP OF MERCHANDISE, 1939 Class of expense High merchandise sales (30 percent or more of all sales), 22 companies Medium merchandise sales (10 to 30 percent of all sales), 38 companies Low merchandise sales (less than 10 percent of all sales), 46 companies Average expense Percent of total expense Average expense Percent of total expense Average expense Percent of total expense Salaries and wages $ 6 248 1 382 463 565 880 51 247 132 597 126 50 209 124 854 813 687 175 $13 603 174 $13 777 45.4 10.0 3.3 4.1 6.4 .4 1.8 1.0 4.4 .8 .4 1.5 .8 6.2 6.0 5.0 1.2 98.7 1.3 100.0 $ 4 805 1 103 412 447 562 101 115 119 485 134 54 162 104 629 429 358 246 $10 265 109 10 374 46.3 10.6 4.0 4.3 5.4 1.0 1.1 1.1 4.7 1.3 .5 1.5 1.0 6.1 4.1 3.4 2.5 98.9 1.1 100.0 $2 915 914 365 329 401 68 66 84 270 98 21 96 93 404 108 70 169 $6 471 124 $6 595 44.2 13.9 5.5 5.0 6.1 1.0 .9 1.3 4.1 1.5 .3 1.5 1.4 6.1 1.6 1.1 2.6 98.1 1.9 100.0 Depreciation Elevator supplies and repairs Insurance Light and power Rent Advertising Audit Bad debts Directors' fees Dues and donations Office supplies Telephone and telegraph Property taxes and licenses* Sales tax Trucking expense Miscellaneous Total operating Interest Total, all expenses Includes sales tax in a few cases where taxes were not itemized in audit. 288 BULLETIN No. 477 {.April, directors' fees. The items which increased most markedly with an increase in volume of merchandise handled were: salaries and wages, light and power, advertising, bad debts, taxes and licenses, and truck- ing expense. In all groups salaries and wages were the most im- portant item of expense, constituting 45 percent of the total. The next three items, in order of importance, were depreciation, taxes and licenses, and light and power. The volumes of business that went with these differences in expenses are shown in Table 4. TABLE 4. VOLUME OF GRAIN AND MERCHANDISE SALES AND AMOUNT OF INCOME OF 106 ILLINOIS FARMERS' ELEVATOR COMPANIES GROUPED ACCORDING TO RELATIVE IMPORTANCE OF MERCHANDISE SALES, 1939 Item High merchandise sales (30 percent or more of all sales), 22 companies Medium merchandise sales (10 to 30 percent of all sales), 38 companies Low merchandise sales (less than 10 per- cent of aH sales), 46 companies Grain sales, bushels 173 231 371 825 348 596 Value of sales $ 80 469 $172 913 $177 177 Merchandise. 67 568 37 116 9 450 Total $148 037 $210 029 $186 627 Income from Grain $ 5 363 $ 8 846 $ 7 825 10 761 5 394 1 213 1 703 905 250 Handling grain for others 697 556 571 Interest 320 234 68 919 836 152 Total $ 19 763 $ 16 771 $ 10 079 On the average, the companies handling the highest proportion of merchandise handled 175,000 fewer bushels of grain than the companies handling the lowest proportion of merchandise. Their merchandise operations were $58,000 larger and they had $1,453 more income from grinding. If in the group handling the most merchandise all income except that from the handling of merchandise is deducted from the total expenses, the remainder represents 7.1 cents per dollar of merchandise sales. In this group merchandise inventories and ac- counts receivable amounted to about 36 cents per dollar of sales; 6 percent interest on this amount would add about 2 cents per dollar to the cost, making a total cost of 9.1 cents per dollar of merchandise handled. More capital needed to handle side lines. One important limita- tion on the expansion of an elevator business by the handling of merchandise is the amount of capital available. The amount of capital needed for the expansion and the policies to be followed in obtaining 1941] BUSINESS POLICIES OF COUNTRY ELEVATORS 289 it or building it up are questions facing the company management in any such expansion program. The average assets of the companies that handled high, medium, and low proportions of merchandise are shown in Table 5. Three of the five principal classes of current assets averaged consistently higher as the percentage of merchandise sales increased: these were receiv- ables, marketable securities, and merchandise inventories. In the group handling a high proportion of merchandise about two-thirds of the assets were current; and in the group handling a low proportion of merchandise about 50 percent of the assets were current. Ratios of receivables and merchandise inventories to merchandise sales in these three groups of companies were: Medium High proportion proportion of Low proportion of merchandise merchandise of merchandise (18 companies) (38 companies') (44 companies') Receivables per dollar of merchan- cents cents cents disc sales 20 29 SO Merchandise inventory per dollar of merchandise sales. . 16 20 15 Total 36 49 65 For the companies selling the highest proportion of merchandise, receivables and merchandise inventory totaled 36 cents per dollar of merchandise sales, or about $1 for each $3 of sales. At 6 percent in- terest, the cost of supplying this working capital was about 2 cents per dollar of merchandise sales. Inventories per dollar of merchandise sales were higher for the companies selling medium proportions of merchandise than for those selling the high and the low proportions, but receivables per dollar of sales were much higher in the group selling the low proportion of merchandise. Managers of companies selling relatively little merchandise may be more reluctant than others to apply collection pressure and thus perhaps offend grain customers. Also the companies selling relatively little merchandise may have sold at retail more grain in relation to merchandise than the other com- panies ; and since retail grain sales are not usually included in merchan- dise sales, the calculated ratio of receivables to merchandise sales would be more among those companies selling relatively little mer- chandise than among those selling moje. The added capital needed to handle merchandise by these com- panies was supplied largely by capital stock and surplus rather than by borrowing (Table 6). All liabilities other than capital stock and surplus 290 BULLETIN No. 477 [April, represented only from 14 to 19 percent of the total average capital used in the different groups. This percentage was highest in the group handling the least grain but, on the average, current liabilities of the different groups increased consistently with the amount of side lines TABLE 5. AVERAGE ASSETS OF 106 ILLINOIS FARMERS' ELEVATOR COMPANIES GROUPED ACCORDING TO PROPORTION OF TOTAL SALES MADE UP OF MERCHANDISE, 1939 Class of assets High merchandise sales (30 percent or more of all sales), 22 companies Medium merchandise sales (10 to 30 percent of all sales), 38 companies Low merchandise sales (less than 10 percent of all sales), 46 companies Average assets Percent of total Average assets Percent of total Average assets Percent of total Cash $ 7 787 13 769 1 494 3 ISO 11 087 772 $38 059 .< 1 154 249 560 $17 899 $57 921 13.4 23.8 2.6 5.4 19.2 1.3 65.7 2.0 .4 1.0 30.9 100.0 $ 8 268 10 873 204 4 898 7 250 309 $31 802 $ 932 161 856 $15 950 $49 701 16.6 21.9 .4 9.9 14.6 .6 64.0 1.9 .3 1.7 32.1 100.0 $ 5 758 4 689 65 4 001 1 4O9 436 $16 358 $ 932 125 365 $15 231 $33 Oil 17.5 14.3 .2 12.1 4.2 1.3 49.6 2.8 .4 1.1 46.1 100.0 Receivables Other current assets Other investments* Prepaid expenses Fixed assets Includes chiefly stock in other cooperative companies. b lncludes a number of old accounts tied up in closed banks. handled. The companies handling the highest proportion of merchan- dise averaged $13,000 more capital stock and $10,000 more surplus than those handling the lowest proportion of merchandise. This relationship illustrates the way in which capital may influence the scope of the services and functions performed by a cooperative grain company. To expand into the handling of merchandise, added capital is required. For this reason young grain companies, which are usually short of capital, and older unsuccessful companies that have depleted their capital do not often handle much merchandise. Probably the rapid growth of merchandising operations by many local grain companies represents a phase in the economic development of the state: grain operations enable these companies to accumulate enough capital to finance other services needed by the farmers of the locality. When nearly all the grain produced in a community was shipped out, only a very simple operation was needed; but as agriculture became more diversified, more livestock was kept, better rations were fed, and 19411 BUSINESS POLICIES OF COUNTRY ELEVATORS 291 TABLE 6. AVERAGE LIABILITIES OF 106 ILLINOIS FARMERS' ELEVATOR COMPANIES GROUPED ACCORDING TO PROPORTION OF SALES MADE UP OF MERCHANDISE, 1939 Class of liability High merchandise sales (30 percent or more of all sales) , 22 companies Medium merchandise sales (10 to 30 percent of all sales), 38 companies Low merchandise sales (less than 10 percent of all sales) , 46 companies Average liabilities Percent of total Average liabilities Percent of total Average liabilities Percent of total Bank overdrafts $ 167 2 442 43 770 828 452 2 032 $ 6 734 1 215 29 242 20 730 $57 921 .3 4.2 .1 1.3 1.5 .8 3.4 11.6 2.1 50.5 35.8 100.0 $ 17 1 469 29 437 2 169 399 1 686 $ 6 206 $ 683 23 760 19 052 $49 701 '3!6 .1 .9 4.3 .8 3.4 12.5 1.4 47.8 38.3 100.0 $ 4 1 106 29 173 2 334 309 553 $ 4 508 $ 1 734 16 183 10 586 $33 Oil '3!4 .1 .5 7.1 .9 1.7 13.7 5.2 49.0 32.1 100.0 Accrued interest Accounts payable Customers Accrued expense Accrued reserves, for taxes, etc Total current liabilities Mortgages payable Stock outstanding Total liabilities more items were purchased, farmers had need for a greater variety of services which local grain-merchandising institutions were in position to perform. Many local companies had the managerial ability to grasp their new opportunities, and earnings provided most of the capital needed for expansion. Feed Grinding an Important Side Line Grinding of feed at the local elevator is a practice that is increas- ing. Such grinding is a valuable service to farmers of a community, and at the same time creates a larger business for the elevator com- pany, including not only the direct income from grinding, but also larger sales of supplementary feeds and grain at retail. Of 106 com- panies studied in 1939, 36 percent realized more than $100 from their grinding service and 33 percent realized more than $1,000. The im- portance of this enterprise is indicated by the number of companies, among the 106, which engaged in it and the amounts of income they realized from it: Number of Income from companies feed grinding 5 3 100 to $ 999 15 1,000 to 1,999 6 2,000 to 2,999 6 3,000 to 3,999 6 4,000 or more 292 BULLETIN No. 477 [April, Eighteen of these companies thus had gross earnings of $2,000 or more from the grinding of feed. More Kinds of Farm Products Could Be Handled Farm products other than grain are not commonly handled by grain companies in Illinois except feed and seed for local sale. Only one of the 106 companies studied in 1939 dealt in livestock. A few bought and sold locally raised seeds. In view of the apparent trend away from specialization and toward diversification in local business enterprises, however, some local grain companies might well consider the broadening of their business to include a greater variety of farm products. The mere handling of another farm product does not, however, add much to the opportunity which a grain company has for serving the community or for increasing its earnings unless it improves the way in which the product is handled. Thus merely to buy and sell eggs on a run-of-mill basis, as is done by local farmers' stores in many places, is to render no particular service to the community and there is little opportunity for profit to the handler. Too many firms are already doing this job. But when the local cooperative company de- velops an egg-marketing business strictly on a quality basis, not only is the community benefited but the company can also expand its business in such other directions as the selling of feed and poultry equipment. HOW LARGE A BUSINESS SHOULD A COMPANY AIM TO HANDLE Measuring the size of a grain-handling business is not a simple matter. In a country grain business, size can be measured by number of bushels handled, total sales in dollars, amount of invested capital, number of people employed, and in other ways. When both grain and merchandise are handled, the size obviously is to be measured by the size of the combined grain and merchandising businesses. Bushel-Costs Decline as Grain Volume Increases Unit costs of operating a local grain elevator decrease and total earnings increase as the volume of grain handled increases a principle that is demonstrated by the relationships brought out in Table 2. Within each group of companies included in that table, earnings were higher where the volume of grain handled was larger. This was true in each of the five years for which figures are shown. 1941] BUSINESS POLICIES OF COUNTRY ELEVATORS 293 TABLE 7. EXPENSE PER DOLLAR OF SALES BY 106 ILLINOIS FARMERS' ELEVATOR COMPANIES GROUPED ACCORDING TO BUSHELS OF GRAIN HANDLED AND RATIO OF GRAIN SALES TO TOTAL SALES, 1939 Bushels of grain sold Expense per dollar of sales when ratio of grain sales to total sales was Average of all firms Less than 70 percent 70 to 89.9 percent 90 percent or more Number of firms Expense Number of firms Expense Number of firms Expense Number of firms Expense Less than 100,000 100.000 to 199,999 200,000 to 299,999 300,000 or more 7 8 4 3 22 cents 12.6 9.6 9.8 6.7 10.2 '? 10 21 38 cents 6.9 6.0 4.2 5.2 1 6 12 27 46 cents 6.8 5.2 3.6 3.3 3.7 8 21 26 51 106 cents 11.9 7.4 5.5 3.9 5.6 All companies How volume affects costs is also brought out in Table 7. Expense per dollar of sales in 1939 dropped from an average of 11.9 cents for the 8 companies handling less than 100,000 bushels of grain, to an average of 3.9 cents for the 51 companies handling 300,000 bushels or more. A similar tendency may be noted in each merchandise group. Costs averaged lowest in the group in which 300,000 bushels or more of grain was handled and in which grain sales constituted 90 percent or more of the total sales, altho, as noted on page 287, the group handling 300,000 or more bushels of grain and having 10 to 30 percent of their income from merchandise sales, had the largest earnings over the five-year period. Tho it is always difficult to calculate exactly the unit costs in a business that involves a variety of products, the approximate average cost of handling a bushel of grain can be calculated as follows for the 46 companies that handled a low proportion of merchandise in 1939 (from Table 3) : Cash expenses and depreciation, including interest paid . . $6,595 Six-percent interest on net worth 1,606 Total $8,201 Income from side lines Merchandise $1,213 Miscellaneous sources 1,041 Total deductions for nongrain business $2,254 Cost charged to grain $5,947 Cost per bushel sold: $5,947 -=- 348,596 = 1.7 cents This average cost, 1.7 cents a bushel, may be compared with the average margins earned by these companies: corn, 1.8 cents; oats, 2.9 294 BULLETIN No. 477 [.April, cents ; soybeans, 3.7 cents ; and wheat, 2.9 cents. No allowance is made for shrinkage in handling, but the margins are net that is, selling costs paid by the elevator have been deducted. If only 200,000 bushels were handled, costs per bushel would be higher because many of the items of cost do not vary with the volume handled. Grain Volume Determined by Many Factors Since costs decline and earnings increase with larger volume of grain handled, are there practical ways by which an elevator company can increase its grain volume? The volume that a given company will handle depends on: (1) size of territory, (2) importance of grain production and sales in the territory, and (3) proportion of total grain produced that it can attract. Size of territory. Every grain company has a rather well-rec- ognized territory, with a competitive border overlapping the territories of surrounding companies. The potential territory has been widened by the increasing use of trucks in local marketing. In determining the volume of grain that will be handled by an elevator company, however, size of territory is not in itself so impor- tant as the extent of grain production and sales in the area and the amount of competition that must be met. This is borne out by the fact that according to the 1937 survey of farmers' grain elevators in Illinois, the average size of territory served was smallest in eastern Illinois, the cash-grain area, but that nevertheless the companies located there handled the largest volumes of grain (Table 8). Importance of grain in the area. The amount of grain produced for market in an area, and hence the upper limit of grain volume for an elevator in the area, depends primarily on soil and topography, for these largely determine the proportion of land in grain crops, yields TABLE 8. AVERAGE SIZE OF TERRITORY, NUMBER OF COMPETITORS, AND VOLUME OF GRAIN HANDLED BY 201 FARMERS' ELEVATOR COMPANIES IN DIFFERENT SECTIONS OF ILLINOIS, 1937 SURVEY Section of state Number of companies reporting Average area served Average number of competing buyers Average volume of grain handled Northwestern 39 sq. mi. 71 3.4 bu. 221 000 Northeastern 34 73 6.1 345 000 Central 51 52 3.3 277 000 Eastern 61 43 6.5 366 000 West-southwestern 16 60 3.3 99 000 1941] BUSINESS POLICIES OF COUNTRY ELEVATORS 295 per acre, and the proportion of crops sold or fed. The sections which have the largest potential grain volumes are those With level topography and productive soils, and large acreages in corn, soybeans, oats, or wheat. Since physical factors cannot be altered materially, an elevator company must adapt its business to its environment. A company located in an area where soils are poor and grain volume low must keep its costs low and build up its business in other ways. The large volume of grain handled by an elevator often merely reflects a favor- able location ; management has little to do with it. Competition for grain. A third factor that affects volume is competition within the area served. If a firm is the only one at a station, it is likely to get the near-by grain and to have competition only on the borders of its territory; but if more companies than one are located at a station, each must compete thruout the territory. More firms have continued in the country grain business than are needed to handle the crops. Entrance into the business has been easy. Many plants were built years ago when construction costs were lower, margins were wider, and distance from farm to elevator was more important than at present. Grain marketing areas were interlaced with many railroads, each seeking to get its share of the grain tonnage and encouraging the construction of elevators. As a result, many com- panies are now so hampered by small volume of grain that they can survive only as convenient service points and can never expect to develop a profitable business based on the handling of grain alone. The extent of competition is indicated by the number of competing grain buyers per area, which according to the 1937 survey ranged from an average of 3.3 to 6.5 in the different sections of Illinois (Table 8). Competition for grain may be based on service, on loyalty to a par- ticular company, or on price. The service involved is so simple that it cannot be varied much as a basis for competition, altho some ele- vators are now shelling corn and trucking grain from the farm in order to draw more business. Undoubtedly loyalty is an important factor in maintaining business. Loyalty may arise when the com- pany is a cooperative firm owned by the patrons and returning surplus earnings to them, or when the manager or dealer is able to make and keep friends. But loyalty is a difficult point to analyze, and no data are available concerning it. Probably price is the most active basis for competition among grain elevators, particularly at times when new methods or new firms come into the picture. Now that grain may be moved so readily by truck, competition is keener than it was some years ago when grain was moved from the farms by wagon. 296 BULLETIN No. 477 [April, New methods of transportation increase competition. When new methods of grain transportation by water, for example, or by long-distance trucks, come into use at lower costs than the older method, a company in an area affected by them must adapt itself to the new conditions or lose some of its business. The country grain business is now keenly feeling the impact of changing transportation methods as long-range trucking becomes increasingly important. Long-range trucking of grain has developed in Illinois under three sets of circumstances: (1) the need at times to move grain from surplus to deficit areas; (2) the opportunity to sell grain directly to terminal markets or to mills, provided the lack of good railroad billing on the grain does not result in too large discounts; and (3) oppor- tunities for low-cost river shipment offered by elevators located on the Illinois and Mississippi rivers. Long-range trucking tends to de- velop under each of these circumstances when the cost of transporta- tion is less by truck or by truck and water than by rail. Trucking of feed grains into deficit areas is particularly important after a season of poor crops. Truckers handling this grain may buy from farmers or from elevators ; in cash grain areas, they buy more commonly from the elevators. In 1937, after the drouth of 1936, data were obtained from 217 companies in all parts of the state as to the quantities of grain sold to truckers to be hauled out of the com- munity. Two-thirds of the companies, or 144, reported such sales in the amount of 2,419,000 bushels, or about 17,000 bushels per company. These sales, however, represented only about 4.5 percent of the total grain sales of these companies. Of the sales to truckers, 70 percent consisted of corn; 24 percent, of oats; about 4 percent, of soybeans; and 1 percent, of wheat. In 1939 the managers of the 106 companies studied estimated that they sold 4.3 percent of their corn to truckers, 7.0 percent of their oats, 1.5 percent of their wheat, and .6 percent of their soybeans. Movement of grain by truck to terminal markets or mills is in- creasing certainly it increased in 1938 and again in 1939 over the previous year. 1 In the Chicago, St. Louis, and Peoria markets, some grain is consumed locally or shipped out by water, and consequently does not need railroad billing entitling it to favorable reshipping rates in order to sell to advantage. Considerable trucking to those markets has therefore developed. On the other hand, there has been little *L. J. Norton, "Some recent changes in transportation of grain," 111. Farm. Econ., Nos. 47 and 48 (1939) ; and "Water and truck transportation of Illinois grain," 111. Farm. Econ., No. 61 (1940). 1941] BUSINESS POLICIES OF COUNTRY ELEVATORS 297 trucking into markets like Decatur and Springfield, where most of the grain received is milled and the products reshipped, and where consequently good railroad billing is needed to apply on the products to be shipped out. On the St. Louis market the volume of trucked-in wheat increased in 1937, 1938, and 1939 even tho it sold at discounts. These discounts varied from time to time with shifts in outlets for the grain. One indicator of the discounts is the price at which "no tonnage" grain that is, grain without railroad billing which was loaded onto cars after being trucked into the market area, sells on the grain exchange at St. Louis, compared with prices of other grain of the same class and grade and description on the same day. For July, 1940, such discounts on wheat averaged a little more than 4 cents a bushel, in- creasing during the month. During that time such wheat represented slightly over one-tenth of all wheat sold by sample on the Merchant Exchange. At the time these comparisons were made little grain was moving out of St. Louis by water. The largest movement of grain by truck in Illinois is to the Illinois and Mississippi rivers. The savings in transportation costs resulting when grain is moved to terminal markets by truck and river barge instead of by rail are sufficient to draw grain in volume to stations on these rivers from distances up to 30 or 40 miles. For example, more grain is shipped by water from Morris than from any other shipping point on the Illinois river, in spite of the low local railroad freight rate of 5 cents per 100 pounds on corn from Morris to Chicago. Adjustments by local elevators. What adjustments should a local elevator make to these new methods of transportation? Obvi- ously, in the long run, grain will move by the cheapest route, all costs considered. To stay in business, therefore, a grain concern must take advantage of the changing methods of transportation, adopting that method which will result in greatest net returns. Obvious adjustments are: (1) to sell grain to responsible truckers when they will pay a higher net price than can be got from other outlets ; (2) to move grain from elevator to central market by truck when such movement pro- vides the highest net return; (3) to buy grain at the farm and truck it to the outlet paying the best price. All these adjustments are now being made by local elevators. In 1938 a corporation organized by 19 country grain dealers leased and operated a river elevator. This corporation also began to buy barges for transporting grain under a purchase agreement, and acquired the use of another river elevator in 1939. 298 BULLETIN No. 477 Margins Not Closely Related to Volume of Grain ' {.April, Companies that handle the larger volumes of grain have the lower costs per bushel. Do they also handle grain on lower margins? Except for corn, available figures do not indicate that they do. In other words, the larger firms attempt to earn more and, if organized on a cooperative basis, to pay larger patronage refunds. This situation would be expected in any well-established line of trading which has not recently been influenced by some new market technic. Gross margins earned over a five-year period by firms handling different volumes of grain are shown in Table 9. Except in 1936, margins on corn tended to be low when the volume handled was high. TABLE 9. GROSS MARGINS EARNED PER BUSHEL OF GRAIN BY ILLINOIS FARMERS' ELEVATOR COMPANIES GROUPED ACCORDING TO VOLUME OF GRAIN HANDLED, 1935-1939 (Only those companies are included whose grain sales comprized 90 percent, or more, of their total sales) Bushels of grain sold Cents per bushel margins in Average 1935 1936 1937 1938 1939 Corn Less than 100,000 3.7 2.3 1.5 5.7 2.9 3.2 100 000 to 199 999 2.5 2.0 2.6 , 3.0 1.9 2.4 200 000 to 299,999 3.0 1.7 3.0 2.1 1.9 2.3 300,000 and over 2.2 1.7 2.7 2.1 1.8 2.1 2.8 1 9 2.6 2.6 1.9 2.4 Oats Less than 100,000 .7 5.7 6.1 -.5* 3.0 100,000 to 199,999 6.1 2.8 4.4 1.6 3.1 3.6 200 000 to 299 999 7.3 .4 4.2 1.9 2.6 3.3 300,000 and over 4.8 2.2 4.5 1.2 3.1 3.2 Average 5.3 2.2 4.6 1.3 3.0 3.3 Wheat Less than 100,000 2.5 3.7 2.8 2.7 2.9 100,000 to 199,999 8.6 4.5 2.9 5.0 5.0 5.2 200,000 to 299,999 4.2 4.3 3.0 1.6 3.8 3.4 300,000 and over 5.3 2.8 3.1 .5 3.3 3.0 Average 5.5 4.0 3.0 1.8 3.8 3.6 Soybeans Less than 100,000 . . 2.5 3.5 4.1 2.7 3.2 100,000 to 199,999 4.5 3.7 4.8 2.8 2.9 3.8 200,000 to 299,999 4.0 4.4 5.8 3.4 3.1 4.1 300 000 and over 4.1 3 6 4.1 2.5 4.3 3.7 Average 4.0 3.9 4.6 2.8 3.8 3.8 1941] BUSINESS POLICIES OF COUNTRY ELEVATORS 299 Between the group handling less than 100,000 bushels and that handling 300,000 bushels or more, the average difference in margins for the five years was 1.1 cents ; between the group handling 100,000 to 199,000 bushels and that handling 300,000 bushels or more, it was .3 cent. These figures do not necessarily indicate that concerns handling the larger volumes of grain operate on narrower margins, because the differences may reflect variations in importance of retail sales or of storage. Nevertheless, the general level of margins earned in handling corn, by whatever method it was handled, tended to be lower where the volumes of grain were larger. For oats comparative margins were not lower where volume handled was higher. In two of the five years the group handling the largest volume of this grain had larger margins than the group handling the lowest volume. Both the size and the year-to-year vari- ability in these margins show them to be affected more by storage operations than are margins on corn. Hence any tendency for larger companies to handle oats on closer margins if any such tendency existed was covered up by variations in storage earnings. Average margins on oats varied with the trend in prices. Likewise no correlation was evident between the margins earned on wheat or on soybeans and the volume of grain handled. The group handling 100,000 to 199,999 bushels of grain consistently earned higher margins on wheat than either of the other groups. Many of these com- panies were located in southwestern Illinois, where wheat is the most important grain marketed and the margins taken are usually larger than in other sections of the state. From 1934 to 1938 the average margin earned on wheat declined from year to year. The lower degree of variation in average earnings on soybeans reflects a rather consistent margin for handling and considerable uniformity in sales practices. This lack of correlation, except for corn, between volume of grain and margin per bushel indicates that the larger companies do not attempt to increase their volume of grain by the price competition which their lower costs would permit, but rather that the margins in a given area tend to become established at a given level without regard to the volumes of grain handled by the respective companies. In a former study covering elevator operations in the period 1928 to 1930, 1 companies were classified as to location in the "grain area" and in the "outside area." Margins earned in the "grain area" at that time averaged as follows: Mimeographed reports, Department of Agricultural Economics, University of Illinois. 300 BULLETIN No. 477 [.April, Corn Oats Wheat Soybeans cents cents cents cents 1928-29 3.1 4.0 9.4 1929-30 2.3 2.3 1.0 10.7 1930-31 2.6 1.4 -1.4 4.8 For corn and oats these margins are similar to those shown in Table 9 for the 1934-1940 period except that in the later period the margin on corn was a little lower and the margin on oats was less variable. In the earlier period the margins on wheat were lower, reflecting the downward trend in prices at that time, and the margins on soybeans were considerably higher. The soybean crop was not then of the major commercial importance it has achieved since 1934. The relationship between bushels of grain handled, costs, and margins may be stated as follows: costs per bushel decline and total earnings increase as more bushels of grain are handled. Volume of grain handled per company depends largely on the quantity of grain available for sale, the number of elevators in the territory, and the reputation of a dealer or company. Building up volume by lowering margins apparently was of minor importance in the period studied. The actual cost of handling would be reduced somewhat if com- panies with small volumes were eliminated and all the grain were handled by fewer and larger firms. A very gradual trend in this direc- tion is taking place. Merchandise Sales and Margins Tend to Increase Together Margins earned on merchandise by companies handling larger amounts of merchandise were typically larger than those earned by companies handling small amounts. Small volumes of a commodity are handled on a low margin strictly as a side line ; but when a com- modity becomes important to a company, larger margins are more common. This relationship between margins and sales suggests that volume of merchandise sales is not typically related to low margins. To illustrate the point, examples based on operations in 1937 are presented in Table 10. No records were used where less than the minimum amount mentioned for the respective commodity group was sold. Feed. Practice among the companies differed widely with re- spect to margins. Gross earnings per dollar of sales of feed ranged from a loss of 3.2 cents to a gain of 22.4 cents. Margins were higher as volume of sales increased up to a level of $20,000 to $29,999 of sales per company. 1941} BUSINESS POLICIES OF COUNTRY ELEVATORS 301 TABLE 10. VOLUME OF SALES, AND MARGINS EARNED ON VARIOUS COMMODITIES, BY ILLINOIS FARMERS' ELEVATOR COMPANIES, 1937 Range in volume of sales Number of firms Average margin per dollar of sales Range in margin per dollar of sales Average volume of sales Feed Thousands of dollars cents cents 3 to 9... 14 7.8 2. 6 to 14.7 10 to 19 16 10.8 -3. 2 to 17. 8 20 to 29 8 12.4 6. 2 to 21. 4 30 or more 6 12.4 6. 2 to 22. 4 Coal Ito 2.. 13 12.0 3.2to23.4 3to 5 20 13.9 7.2to25.2 6toll 21 16.0 8.3to24.9 12 or more 13 17.1 10. 3 to 26. 8 Seed 1 to 2.. 8 13.7 6.0 to 19.9 3to 5 12 14.5 7.8to21.9 6toll 6 10.7 3.5tol8.4 12 or more 11 14.2 7. 8 to 24. 2 Lumber and other building materials 2 to 9... 9 19.8 12.1 to 25. 9 10 to 39 6 15.6 9. 3 to 19. 8 40 or more 5 21.0 15. 7 to 27. 5 Farm machinery 2 to 29 7 13.2 7. 8 to 20.0 30 or more 4 13.2 5. 2 to 20. 5 Fencing Ito 2 10 18.8 1.1 to 29.0 3 or more 9 17.0 2. 5 to 30. 4 $ 6 352 14 679 24 260 52 920 $ 1 916 4 564 9 445 17 034 $ I 959 4 019 8 183 17 578 $ 5 724 20 944 50 734 $ 9 846 54 828 1 907 4 623 Loss. Coal. The same trend in margins on coal occurred as in margins on feed: the larger the volume of sales the wider. were both the average and the minimum margins. Seed. No relationship between volume of seed sales and margins was to be noted, but there was great diversity in margins. Lumber. Margins differed widely but were not correlated with volume of sales. 302 BULLETIN No. 477 {.April, Farm machinery. Only 11 companies handled any significant volume of farm machinery. Sales and margins were not correlated. The uniformity in the maximum margins reflects the influence of the price policies of the manufacturing companies, but the average margins were considerably lower than the maximum because of losses on used machinery taken in on sales. Fencing. Volume of sales and margins were not correlated. Margins differed greatly. Other merchandise items. Five companies reported sales of hardware of $2,000 or more, the largest being $36,492 and the average $15,744. The average margin was 19.2 cents; and the range in margin, 10.2 to 27.5 cents per dollar of sales. Thirteen companies reported sales of twine amounting to $1,000 or more. The average sales of twine were $1,790; the average margin, 10.5 cents per dollar of sales; and the range in margins, .9 to 22.4 cents. WHAT GROSS MARGINS SHOULD A FIRM STRIVE TO EARN The question of size of margins was discussed to some extent in connection with the previous problem concerning size of business, where it was pointed out that, except for corn, volume of grain handled and margins on grain were not correlated, and that for certain types of merchandise margins averaged larger as greater volumes were handled. Apparently the larger companies have not attempted to build volume by competitive price leadership. Data that would help in solving this question scientifically are not available. To answer it would require controlled experiments in price policy aimed at measuring the effects of different prices on sales. The result would of course depend on how sales would respond to price reductions and how increased sales would affect costs. For the local grain and merchandise companies being considered here, it is probably a wise business policy to take as wide margins as possible without losing volume. Such companies cannot increase total sales for any commodity very much, and they have no affiliated manu- facturing operations that would permit them to benefit from the lower costs that go with increased volume. This policy conforms to the old rule for cooperatives: "Charge competitive prices and then return profits, if any, to users by payment of patronage dividends." However, if a local company should go into a processing line, such as feed grinding, it might pay to establish lower margins if this would build up 1941] BUSINESS POLICIES OF COUNTRY ELEVATORS 303 volume and thus make it possible to utilize the processing plant more completely. In recent years considerable publicity has been given to coopera- tives which have followed a contrary policy that of taking leader- ship in price competition. The Swedish cooperatives furnish an ex- ample, with their policies of combating monopolies by lowering prices and margins of handling. But they are operating on a national rather than on a local basis, and being engaged in large-scale manufacturing operations they gain the benefits from lowered manufacturing costs. The G-L-F Exchange, a large-scale cooperative operating in New York and nearby states, has also emphasized low margins. Again, this organization directly operates manufacturing enterprises and covers a region rather than a locality. WHAT SALES AND COLLECTION POLICIES SHOULD BE FOLLOWED Sales policies of local grain elevator companies are closely linked to the price policies discussed in the previous sections on margins and volume of business, in which wide differences were noted in price margins among the companies, as well as some tendency for higher margins on merchandise items to be earned by the companies with the larger volumes of merchandise sales. Hence it appears that price is not a very active factor in the sales policies of these companies. Advertising Not Used Extensively Comparatively small sums were spent for advertising by these companies. Average advertising expenses by the 106 companies studied in 1939 grouped on the basis of relative importance of merchandise sales, were as follows: Proportion of Advertising merchandise expense per Number of sales to Outlay for Merchandise $100 of companies total sales advertising sales sales 22 High $247 $67,568 $.36 38 Medium 115 37,116 .31 46 Low 66 9,450 .70 Average $121 $31,430 $.38 Such outlays for advertising do not indicate high-pressure selling methods. These companies sell service items in limited areas and apparently do not feel any need to advertise extensively. No definite 304 BULLETIN No. 477 {.April, correlation is indicated between volume of sales and expenses for advertising per $100 of merchandise sales. Considerable Credit Is Extended Three principal means used to expand sales are convenience, credit, and personal contact. Of these, only the credit factor can be measured in the present study from information at hand. Among the 106 local elevator companies in 1939 bad debts per dollar of merchandise sales averaged .9 cent, 1.3 cents, and 2.9 cents for the companies whose merchandise sales comprized, respectively, a high, medium, and low proportion of their total sales. These losses indicate that liberal ex- tension of credit is an important factor in sales of merchandise. The important part which credit plays is further illustrated by the ratio of receivables at the end of the year to merchandise sales. For the companies selling the high, the medium, and the low proportions of merchandise, these ratios were respectively 20 cents, 29 cents, and 50 cents per dollar of merchandise sales. Where receivables at the end of the year equal one-fifth to one-half the value of merchandise sales, credit must be an important element in sale policies. Would the extension of less credit be a better policy? To answer this question one would need to know the loss in sales to be expected from a strictly cash policy, and to balance this loss against the losses and costs involved in extending credit. For the group selling relatively the most merchandise in 1939, the sum of bad-debt losses and interest at 6 percent on receivables totaled 2.1 cents per dollar of merchandise sales. For the group selling the lowest proportion of merchandise, these two items totaled 5.9 cents per dollar of merchandise sales. In some of the companies in the latter group stricter credit and collection policies would certainly have been good business policy. Comparison of records of individual companies indicates that this question of credit depends largely on local circumstances, the attitude of the manager and directors toward the problem being of prime importance. The granting of cash discounts by country elevator firms is gener- ally confined to sales of machinery and other capital items. Interest Commonly Charged on Receivables The practice of some companies of automatically charging interest on outstanding accounts after 30 or 60 days is desirable, for it puts a part of the cost of extending credit directly on those who receive the credit. Fifty-nine of the 106 companies studied in 1939 had in- 1941} BUSINESS POLICIES OF COUNTRY ELEVATORS 305 terest income. Excluding those whose interest was entirely from in- vestments, the rest of the companies would group as follows with respect to amount of interest received, some of the interest being from investments: Interest received Number of companies Less than $100 30 $100 to $199 11 $200 to $499 8 $500 to $999 6 $1,000 or more 4 The collection of interest on overdue accounts by local elevator com- panies is evidently a common practice. HOW SHOULD CAPITAL BE ACCUMULATED AND EARNINGS DISTRIBUTED Capital Stock Supplemented by Earnings Typical farmers' cooperative grain companies have been financed by the sale of capital stock to people in the local community and by allowing earnings to accumulate. Some long-time funds are borrowed, and some working capital is obtained by short-term loans. The general capital structure of the companies is indicated by the data in Tables 5 and 6, which are summarized in Table 11. About 85 percent of the capital in use by the 106 companies in 1939 represented stockholders' equities, and the remaining 15 percent TABLE 11. DISTRIBUTION OF ASSETS AND LIABILITIES OF 106 ILLINOIS FARMERS' ELEVATOR COMPANIES, 1939 Cents per dollar of assets or liabilities in Item Companies selling high proportion of merchandise Companies selling medium proportion of merchandise Companies selling low proportion of merchandise Assets Current 65.7 64.0 49.6 Fixed 30 9 32.1 46.1 Other 3.4 3.9 4.3 Total 100 100 100.0 Liabilities Current 11.6 12.5 13.7 Long-term 2.1 1.4 5.2 Capital stock 50 5 47.8 49.0 Surplus 35.8 38.3 32.1 Net worth 86.3 86.1 81.1 Total 100 100.0 100.0 306 BULLETIN No. 477 [.April, was borrowed. The ratio of borrowed capital was higher for com- panies that sold relatively small amounts of merchandise than for those that sold more merchandise. Good financial management demands that a substantial part of the earnings be kept in the business until enough capital is accumulated to enable the company to perform the functiaf^it can perform to ad- vantage. That the group of companies selling relatively large amounts of merchandise, requiring much capital, had done this is clearly indi- cated by the ratios shown in Table 11. Part of Earnings Distributed as Dividends Good management demands also that dividends, if earned, be paid at a reasonable rate on capital stock, since the stockholders have pro- vided the funds to make the enterprise possible. In 1939 the 106 companies studied paid or authorized stock and patronage dividends equal to 41 percent of their net earnings; dividends on stock aggre- gating $111,740 were paid out or authorized by 66 companies, and patronage dividends amounting to $102,730 were distributed by 28 companies, according to the audits. Slightly over 50 percent of these 106 companies were paying stock dividends. In cooperative companies it is good practice to pay patronage dividends when earnings justify, for such dividends reward each patron according to the business he has given the company, furnish a means of equitably distributing net earnings, and encourage patronage. About one-fourth of these 106 companies were paying patronage dividends in 1939. A complete survey of all farmers' elevators in Illinois in 1937 revealed that 19 percent of the 369 reporting companies paid patronage dividends aggregating $254,12^;., PLANS TO INCREASE MEMBERSHIP NEEDED A common problem in farmers' elevators in Illinois is the high requirement for membership. Of 377 companies included in a 1937 survey, 50 percent required the purchase of stock of $100 par value; 21 percent, stock of $50 par value; 10 percent, stock of $25 par value; while only about 16 percent have some easy requirement such as pur- chase of low-value common stock. Too few companies follow a systematic plan for selling stock to new farmers in a community. Only about 36 percent of the patrons of the 106 companies studied in 1939 were members (stockholders), 1941} BUSINESS POLICIES OF COUNTRY ELEVATORS 307 and only 25 percent of the companies did 75 percent or more of their business with members. For strictly business reasons many companies have found it wise to pay patronage dividends to all patrons and, by lowering the, par value of their stock, to make it easier for stock to be purchased. Many Illinois companies follow the practice of crediting patronage dividends ftftterd the purchase of a share of stock until the stock is paid for. In mis way all patrons gradually become members. \ SUMMARY AND CONCLUSIONS Country grain elevators have the problem of selecting the functions and services that will enable them to operate most successfully. They may simply receive and ship grain ; or they may store and merchandise grain, handle various types of other merchandise, grind and mix feed, and handle other types of farm products. Adding these other activities means that more capital and more management must be put into the business than are necessary when grain only is handled. In an investigation of the business policies of farmers' elevator companies in Illinois from 1935 to 1939, the following facts, along with certain conclusions to be drawn from those facts, were brought out: 1. In Illinois, unless about 300,000 bushels or more of grain are handled by a local elevator, or unless the business is operated very economically, additional functions or services beyond merely receiving and shipping grain are needed if the elevator business is to be profitable. 2. The more successful companies combine a large grain busi- ness with a substantial volume of other merchandise. Usually these are older companies that have operated successfully and built up from their earnings the capital needed for handling the additional merchandise. 3. Many companies do not take full advantage of their oppor- tunities to earn merchandising margins by storage, nor do they make complete use of the storage capacity which they own and in which a large amount of capital is invested. Too many companies do a simple receiving and shipping business. Of the various grains, oats are most commonly stored. 4. Storing soybeans for mills and storing cereal grain (especially corn) under the "ever normal granary" program provide ways of making fuller use of tlT^ capital invested in storage space. 5. Grinding feed is a good side line, particularly in areas where there is considerable livestock. About 40 percent of the 106 com- 308 BULLETIN No. 477 panics studied in 1939 were grinding feed. Such grinding not only provides a source of direct income, but also by stimulating the local demand for supplementary feeds and grains enables a company to dispose of more grain at retail prices. 6. Capital requirements for handling merchandise by the com- panies studied were increased, on the average, about $1 for each $3 of merchandise sold. 7. Unit costs of operation decrease with an increasing volume of business. Volume of business may be increased by handling more bushels of grain or by performing more functions or services. 8. Volume of grain handled is determined largely by the loca- tion of the elevator, the size of the territory served, the proportion of grain in the area marketed, and the ability of the management to attract grain. 9. Grain volume (except volume of corn) does not appear to be built up to any appreciable extent on a competitive price basis. 10. The tendency for margins on certain lines of merchandise to increase with an increase in the volume handled indicates that typically merchandise sales are not built up by price competition. Evidently as the sales of a given commodity increase, a company tends to depend on this commodity for income, and so increases its margin on it. When only a small amount of the commodity is handled, as a service to grain patrons, it is often handled on a very small margin. Also the companies handling a larger volume on a wider margin probably give more attention to their merchandising methods. 11. When faced by changing methods of transportation, elevator companies must adjust their operations to the altered conditions if they are to maintain their volume of grain business. They must keep in mind that they exist to provide a local market for grain, and that if the method of marketing changes, they must fashion their operations accordingly. Many companies are making the needed adjustments. 12. If cooperatives are to be successful, they must give more attention to membership relations and must adopt better methods for bringing new members into the organization than have commonly been used in the past. 4.4110,05020324 UNIVERSITY OF ILLINOIS-URBANA