Mole Valley Farmers Cooperative

Welcome to this website and Happy New Year to shareholders and staff of Mole Valley Farmers and its associated companies.

Introduction
For many farmers 2008 For many farmers 2008 shows good prospects for much needed increases in returns from the market, tempered only by unprecedented rises in most of their main input costs. Apart from pig farmers whose traditional resilience will be severely tested in seeking to recover from a deep trough in the pig cycle, the main exception to optimism in 2008 lies with livestock farmers, and particularly those upland farmers here in North Devon who are heavily dependent on sheep as well as beef.

The January MVF Newsletter has provided shareholders with a summarised version of MVF consolidated accounts for the year ended 30th September 2007 together with reports and notice of the 47th AGM on February 14th in South Molton.

The full version of the MVF Accounts includes essential explanatory notes to assist understanding of the figures, and is available on request from the office, together with the four separate Reports and Accounts of the individual companies that make up the Mole Valley Group. Very few farmers have both the time and the inclination to wade through all the pages involved, so considerable reliance is placed upon the content of the Chairman’s Report and the Chief Executive’s Review. It is natural and quite proper that these will highlight the success factors within the year but a balanced appraisal and interpretation also requires negative aspects to be explained, with an indication of intended remedies whenever possible. Having read all the available information, this website offers an alternative appraisal which leads to some of its conclusions differing, on several issues, from the official versions.

This preliminary appraisal only covers growth, profitability and cost considerations and is set out below under numbered headings:-

1. The Mole Valley Farmers Group
The Consolidated accounts provide the most significant performance indicators for Mole Valley’s overall activities, with annual changes in growth and profit being the most important markers of commercial success.

GROWTH Turnover for 2007 was up by £16.65m to £183.5m, showing a 10.0% increase: £2.3m of this was attributed to two months acquisition turnover from Bridgmans, leaving an 8.6% increase which is reported as “normal organic growth”.

Half of Group turnover is made up of feed, fertiliser and fuel, each of which suffered extra high inflationary price increases from 2006 to 2007. The other half was, on average, subject to 4% increases, thus providing a weighted average of around 9%. Hence the whole of the “organic growth” was, in reality, due to inflation and there was no volume growth at all.

PROFIT Pre-tax profit of £1.72m shows a drop of £439,000 from 2006. This is explained as being partly due to a provision “… in excess of £200,000” for distribution as retrospective rebate on selected farm input purchases made by Ordinary Shareholders. The remainder is reported to be attributable to “efforts to lessen the impact of huge price increases in raw materials” used in feeds. Both of these factors are commendable objectives for Mole Valley as a farmers co-operative, but members who applauded introduction of the rebate when it was announced in early July, will be disappointed that the allocation of funds for those who qualify for it is so small a proportion (10.5%) of pre-tax profit, when 50% would have been a more reasonable expectation, and allowed it to be made available to Trading Shareholders also.

OPERATIONAL COSTS Recognising that this third factor may have a significant effect on profitability, the Group accounts have been examined to establish the extent to which omission of it has had on reporting to members.

The MVF accounting system includes manufacturing and delivery costs within the “Cost of Sales” line item and confirmation of this is now provided by a new entry in Note 1 “Accounting policies”. Contrary to the undertaking given at the 2005 AGM, there is no breakdown of Cost of Sales into its several components, so no comparative figures are disclosed.

Administration Expenses are however shown and are illuminating. The 2007 Group figures show these to have increased by £2.7m (10.4%) over the already high 2006 figure. Comment on this in the Reports is limited to “… admin costs as a percentage of sales have remained static at 15.7%”. Approximately true (2006 15.7%, 2007 15.8%) but seriously missing the point which is that inflationary impact on MVF turnover was around +9%, while that on Admin Expenses would not have been more than +4%. Even if it had been as high as half the turnover inflation then the expenses:turnover ratio should have reduced from 15.7% to 14.9%, without any increase in operating efficiencies. The effect of the resultant boost of £1.35m to MVF’s profitability would have outweighed the sum of all other factors.

SECTORAL PROFITS/LOSSES This heading recognises that these will constitute all principal components of profit changes, and these are examined under the separate headings shown below. From a Group perspective the correct allocation of overhead charges may seem irrelevant, but it is highly significant in the identification of problem areas and of necessary remedial action. Note that the effect of these profits and losses is not additional, since they are all components of the Group accounts.

2. SCATS Countrystores plc
Congratulations to those involved in achieving pre-tax increase in profitability as shown in the accounts of this subsidiary. The 2006 profit figure of £255,000 has increased to £1.187m in 2007, an increase of 365%, which now represents a remarkable 69% of MVF’s total profit. From the accounts it is seen that Admin Expenses have been controlled at the 4% increase level, which shows that this is possible, and must provide a lesson for other sectors of the Group. Real growth in sales has assisted the achievement, reflecting the wealthier rural clientele living in the south east of England. If a similar result is achieved next year then SCATS will be in an overall position to refund MVF the Parent company, for five years of funding provision, even including 5% annual interest on the £3m cash initially provided.

3. Southern Valley Feeds Ltd
Mole Valley’s entire feed sector was transferred into SVF for the whole of the period of the 2007 accounts. The increased pre-tax loss reported in the subsidiary accounts as £277,000 (2006 £100,000) does not include any reference to the previous feeds divisional profit of £200,000-£300,000 which has been subsumed within the integration process. The full pre-tax loss for SVF would not really be less than £500,000, of which £400,000 is an increase over the 2006 loss of £100,000.

When it is remembered that this sad picture is in spite of Mole Valley as parent company having:

- selected a 20-year period for annual write-off of the £3m goodwill part of the acquisition

then it is clearly a matter of urgency for Board action to redress this disaster.

4. Mole Valley Forage Services Ltd
This joint venture, 50% owned by MVF makes full use of the respected Mole Valley brand name in its title. Like SCATS it has provided a welcome addition to MVF’s pre-tax profit line. The £104,000 shown in the accounts as a positive contribution in 2007 is in fact more significant than that. This is because the previous Mole Valley fertiliser division had regularly been showing annual losses. Hence the net gain achieved would not be less than £150,000- £200,000 with these figures helping to put the modest scale of the retrospective rebate into perspective. Note that the substantial 2007 promotional costs of developing sales in South Wales should bear fruit, so one can look forward to even better results for 2008.

5. D & I Bridgman & Son Ltd
This most recent acquisition was only brought into Mole Valley’s operation for 2 months at the end of 2007, and therefore its impact on the accounts was minimal. Sales of £2.3m were added to MVF’s turnover but a pre-tax loss of £46,000 was not a welcome addition, any more than the £940,000 paid for the business by Mole Valley which included £732,000 of goodwill classified similarly to Pye Bibby goodwill as an “Intangible Asset”. Write off of this will not be completed until the year 2027, unless the Board invokes the new impairment provision in Note 1 Accounting Policies (see also Note 9 on Intangible Assets and Note 12 for full acquisition details).

Until the rationale for this acquisition is explained it will remain very difficult for anyone to reconcile the expressed intention to retain Bridgman’s price competitiveness and local service from five different North Devon locations when an 11 month loss to 30.09.2007 of £253,000 was recorded – raising serious question as to future sustainability. Clarification of a valid rationale will be necessary to silence the cynics who suggest that MVF’s motive was to remove troublesome competition: at the same time it will show Mole Valley shareholders how this acquisition will benefit them.

6. MVF - Parent Company (also described as the holding company)
The foregoing notes have been based on figures drawn from three MVF subsidiaries and one MVF joint venture, as well as from the Group accounts. The Group however also includes a fifth corporate entity for which the Balance Sheet is published as page 11 of the full MVF Accounts, headed “Company balance sheet”. Section 230 of the Companies Act 1985 is cited as providing permission for not disclosing the P&L account of this parent (or holding) company, but its principal components can be deduced with reasonable accuracy in rounded terms as Turnover £80m, Cost of Sales £65m, Admin Expenses £14m, Pre-tax profit £0.75m of which half is derived from interest charged to slow paying members. The main operations of this parent company include the nine long established Mole Valley main retail Branches, Mole Valley direct sales from external suppliers including fuels, building materials, tyres etc, together with grass and cereal seeds, and farm building fabrication at Witheridge.

7. Summary
The various sectoral factors involved in MVF pre-tax profitability in the year ended 30.09.2007, are based on pre-tax figures as shown in the published accounts and are summarised below:-

8. Conclusion
This appraisal of Mole Valley's Report and Accounts for 2007 is incomplete in two respects:

- There are a number of other points referred to in the accounts which have not yet been included for comment. Watch this space!

- More importantly, the analysis offered above is intended to be read as a complement to the official reports and not as a substitute for them. Taken together, it is believed, will provide better balanced reporting of MVF's progress over the past year.

The two principal factors which have affected MVF’s profitability in 2007 have been identified as inadequate admin cost control and escalating feed sector losses.

The 10.4% increase in Group Administrative expenses amounting to £2.7 million is £1.7m in excess of a 4% inflationary cost rise of £1.0m. Together with a SVF loss to the group of around £500,000 (in spite of funding subsidy by the parent company), the combined £1.5million profit erosion identifies the two areas upon which Board focus should be directed if this is not already being treated as a matter of urgency. The target for 2008 should be a 50% reduction in both these profit eroding factors, thereby adding more than £1 million to 2008 pre-tax profit.

This will not be accomplished without tough and radical decisions and determined implementation of appropriate policy revision. If downsizing is appropriate in some areas so be it. Additional profitability will provide the way to reduce mark-up in any sectors where MVF pricing is not fully competitive, while at the same time making provision for significantly higher levels of retrospective rebate. On this latter point some policy change will also be necessary in determining the relevant proportion of pre-tax profit made available for rebate. The 2007 decision of £200,000 only amounts to 10.5% with £1.7m subject to £282,000 tax, leaving a balance of £1.4m added to the Group P&L account.

Unless there is some essential investment priority that will provide existing members with cost-effective advantages, there appears to be no good reason not to allocate at least 50% of pre-tax profit to rebate provision. Ready availability of cash reserves carries the risk that inadequate research is conducted prior to its use, particularly in any acquisitions.

On February 14th MVF’s 47th Annual General Meeting will be welcomed back home in South Molton 2:30pm prompt at the Rugby Club. Let’s hope the home side turns up in good numbers!

Postscript: Your corrections to figures used above and comments on analysis and conclusions drawn will be gratefully received to john.jamesmbe@virgin.net or leave a message on 01769 574739

John James established this web site at the end of January 2007 with the stated intention of encouraging Mole Valley to “refocus its policy and concentrate on providing greater cost savings for farmer members in the south west.” He appointed himself as Editor !

The full Menu is set out below with the majority of 'Memos' recently updated. The introductory notes, which follow the Menu, indicate why farming shareholders should understand where their own Cooperative is going and what you can do about it.

Memo1 The Editor and MVF’s original purpose and principles
This has now been amended to include a definition of Mole Valley’s ‘ethos’, which was based on original purpose and intended principles.

Memo 2 Why this website ?
This Memo remains the same, reflecting the fact that the reason for its existence is unchanged. The need for it is probably increasing owing to the shortage of meaningful information being provided to MVF shareholders.

Memo 3 MVF’s share structure
This Memo has been up-dated to refer to the distinction introduced in June ’07 between Ordinary and Trading shareholder’s entitlement to retrospective rebates. These are now limited to Ordinary shareholders only.

Memo 4 Is Mole Valley Farmers really a Cooperative ?
This unchanged Memo is retained because our Company’s claims of cooperative credentials do not appear to be seriously supported by current developments.

Memo 5 Are the MVF subsidiaries being subsidised … and, if so, at what cost to farming members in the south west ?
This Memo draws upon recent MVF annual reports and accounts, together with those of SCATS plc and Southern Valley Feeds Ltd. The conclusion arrived at is that there is substantial continuing subsidisation from MVF’s core activities, with the major part of this cost reflected in less competitive prices for west country farmers.

Memo 6 MVF auditor’s report. What is its significance ?
This Memo has retained the (tediously) lengthy correspondence directed to our Auditors, because it provides an illustration of what Cooperative shareholders in a private limited company cannot expect to learn from such Reports.

Memo 7 MVF Reports and Accounts ~ Spin or Substance ?
Our new Prime Minister’s first intentions were stated as a reduction in the use of spin, which has become so pervasive in modern life. So let it be with Mole Valley! This is the theme of this revised Memo.

Memo 8 Do Mole Valley policies meet the needs of south west farming members in 2007 ?
This up-dated Memo does not find that annually increasing sales provide sufficient evidence to answer this question, when many farming members express the view that “Mole Valley seems to have lost the plot!”

Comments, questions and alternative views are all welcomed, by telephone, fax or e-mail, including your suggestions for relevant topics missing on this website. None of these will be published unless specific consent to this, including the author’s name, had been given, otherwise strict confidentiality will be observed. John James Editor

Introduction
During recent years many farming friends have been reporting that Mole Valley prices were far less competitive than they had been formerly. Though keen members from early days, the proportion of their farm inputs purchased from MVF was declining each year. "Mole Valley seems to have lost the plot" is a frequent comment, often coupled with "Mole Valley's got too big".

After this year's AGM I was invited, through the Chief Executive, to meet some Directors for discussions. As these are ongoing, readers will understand why I should respect any confidentiality involved and exercise discretion on airing our differences.

It is certainly the declared intention of Directors to operate Mole Valley as a cost-saving farmers’ cooperative, though fulfilment of this objective becomes progressively more difficult to achieve as administrative costs continue to escalate out of all proportion to increased sales (see Table below). Amortisation of purchased goodwill and finance charges are additional burdens. Similarly, while welcoming the MVF June announcement of a retrospective rebate for Ordinary shareholders (based on purchases of some farm inputs from 1st October 2006) as positive intent, it remains to be seen if a meaningful level of bonus can be achieved. It is to be hoped that the Board will reconsider their present exclusion of Trading shareholders who have, until now, always been assured that their MVF trading terms will be the same as those of Ordinary shareholders. The moral case is clear and justice should prevail.

MVF Trading Year ended Sept 30th	1996	2001	2006	10 year increase
Total MVF Sales £’000s (increase on previous figure)	£85,116	£89,511 (+ 5.2%)	£166,855 (+ 86.4%)	+ 95%
Total MVF Admin Exps £’000s	£7,485	£10,023 (+ 33.9%)	£26,185 (+ 161.3%)	+ 250%
Average MVF admin Exps /£100 sales	£8.79	£11.20 (+ 27.4%)	£15.69 (+ 42.5%)	+ 79%

Sales expansion over the last 10 years, claimed as beneficial to members, has in fact only been achieved at a high cost, with intended economies of scale evidently exceeded by ‘diseconomies’.

Overall success of MVF’s future policy, however, will be heavily dependent upon the achievement of a substantial reduction in administrative expenses from its present excessive level of £26.2 million, representing an average of £15.69 on every £100's worth of MVF sales.

Analysis of the Annual Reports and Accounts of Mole Valley, SCATS and Southern Valley Feeds provides some of the underlying causes of reduced comptetitiveness. See Memos 5, 6, 7 and 8, all of which lead to the conclusion that provision of Mole Valley benefits to non-member farmers in other areas of the UK, has been at high cost to west country MVF shareholders.

Bridgmans

The September Newsletter announced that D&I Bridgman and Son Ltd had now "joined forces" with MVF. The "common ethos" shared by both companies is also variously described as a "merger", a "partnership" and the "selling" of the busness to MVF. It is confidently asserted that MVF members and Bridgman customers will all benefit from wider customer choice, greater convenience (from retention of the five operating sites), future cost savings, additional technical expertise and improved farm delivery service. With a manifesto like that it would seem churlish not to welcome this new arrangement, yet the common theme amongst comments from correspondents has been that MVF's motivation has been to reduce price competition in North Devon!

On this web site judgement will await clarification of the confusing picture so far presented. With the end of Mole Valley's 47th trading year on September 30th, members may have to wait for the MVF accounts and those of SCATS Ltd and Southern Valley Feeds Ltd, plus those of the joint venture Mole Valley Forage Services Ltd.....and even, perhaps, Mole Bridge Ltd ?? Watch this space!.

John James Editor