2014 ANNUAL REPORTBETTER TOGETHER

OfficERs & diREcTORs

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Myron VothVice chairMan

Duane Johnson

cJ BlewchairMan

cecil Wiebe

David Millssecretary

Jason Gaeddert

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Keith Becker

Kenny carltonassociate Director

neal Beam

hal MayerappointeD Director

randy ellwood

allan WegnerappointeD Director

Dave christiansenceo / presiDent

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cHAiRmAN’s REPORTcj BLEwThank you for your interest and support of MKC this past year. MKC’s 49th annual meeting theme, “Better Together”, is the perfect theme to define MKC and the cooperative system!

From the members of the three initial coops that made up MKC in 1965 to the 217 new members we added this year along with the members of Farmers Cooperative Association of Manhattan who approved a merger with MKC by an overwhelming 91%, farmers have realized the benefits of working with MKC.

One of those benefits is the newly added Domestic Production Activities Deduction, often referred to as Section 199 Deduction. This deduction is only available to cooperatives and can be passed through to members. MKC members also saw a patronage distribution of $6.4 million this past year, all while adding 8.2 million bushel of additional grain storage space that includes three new green field sites.

Your board and management team continue to develop and implement strategic initiatives that leverage what working together can accomplish.

MKC doesn’t have an end date or retirement date. We need to position our coop to be viable for generations to come. There will be opportunities for growth in the future and all stakeholders in the cooperative system will need to keep an open mind about what it will take to compete in an ever-changing market place.

In an effort to accommodate some of MKC’s past and future growth, your board of directors decided to implement the bylaw change that was passed in 2012, allowing membership to vote for director elections by mail. We hope this change will make participation in the governance of your cooperative easier.

Thank you again for your support and I hope that as a member of MKC you’ve found value in many ways by being “better together”.

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PREsidENT’s REPORTdAvE cHRisTiANsEN

Since the inception of what we know today as MKC, your cooperative has stood tall as an example of the good that can be gained by working together. Collaboration in virtually all areas of our business continues to be our mission and drives many of our

strategies. Finding ways to work with others is more of an expectation from our board of directors than it is a suggestion. This drives our leadership team to continually search for ways we can gain advantages or leverage our scale for the benefit of our members.

As you look back through our history, MKC is a collection of producers who decided they would be better off working together than insisting on operating independently. The notes from the first meeting held in 1965 laid out our path clearly and sent a powerful message. Since that meeting we have added over 6,000 members as a result of more than a dozen mergers and acquisitions. I’m proud to work for an organization whose board of directors continues to stay focused on benefiting its members.

One of the things I am most proud of is more and more producers each year are discovering the same advantage. Last year we had 217 new members join your cooperative. Many of these producers are just like you and see the value in working with each other through the cooperative. By doing so, they gain economy of scale and enhance their relevance in the market, something that is so vital today. Self-sufficiency is not now, and has never been, the path to prosperity. Helping our growers be more successful is about the exchange and the

specialization of labor to gain significantly more together than we can individually.

Cooperative success is more about multiplying our efforts than dividing them. As many of you know, MKC was fortunate to have Farmers Cooperative Association, based in Manhattan, join forces with us. This merger made all of us stronger and is a great example of producers deciding they would be better together. As discussed over the past few years, MKC will continue to prepare for partnerships and mergers as more producer-led cooperatives seek to deliver more to their members. We believe we will continue to attract new members if we continue to do the things that provide for a positive customer experience. This will also lead those cooperatives looking to provide that same value and experience to their members to seek collaboration with MKC.

Our primary objectives have not changed. If the only measure of success was financial return, then we didn’t have the kind of year we planned for. Although virtually every business category we include in our portfolio experienced an inverse market this year, our performance actually would have to be considered successful. Just as we had planned for, we saw top line unit growth in all business units. This is a result of our overall focus on helping producers manage their risk and providing an overall positive customer experience.

Our efforts continue on renewing our infrastructure. This past fiscal year we’ve made significant investments in grain, agronomy and energy facilities across our company. Our customers have really shown they appreciate our efforts over the past few years by increasing their volume at every location we’ve upgraded.

I sincerely thank you for all you’ve done to help your cooperative grow, prosper and serve our members better than ever before. We are proof it is better when we work together.

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PROjEcTUPdATEsMKC continued its focus on renewing infrastructure this past year, investing more than $16 million. Our ability to do this, while still delivering a strong financial performance, is a clear reflection of well-developed strategies executed by our employees.

Continued investments in our facilities allow us to keep pace with the growing needs of our customers. By building state-of-the art facilities, we can provide not only speed and space, but also safety for our customers, employees and the environment.

Construction of grain facilities in Canton, Rice County, Benton and Talmage resulted in an additional 8.2 million bushels of grain storage space.

In addition, Manhattan started construction on a 430,000 bushel grain facility, expected to be completed by August 2014.

CANTON

BENTON

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New offices and scales were constructed in Longford and Talmage. The scales provide improved traffic patterns during peak harvest times.

A LeMar storage system was added at Groveland, increasing grain storage capacity by an additional 1.2 million bushels.

Groveland’s agronomy center also started offering 24-hour access to customers to pick up liquid fertilizer orders.

A seed warehouse in Abilene was completed, providing centralization for bagged seed storage. The seed treater was also moved inside the warehouse, allowing for multiple applications of treatments in a timelier and more accurate manner.

cONsOLidATEdBALANcE sHEETs

CURRENT ASSETS 2014 2013

Cash and cash equivalents $ 1,029,642 $ 2,275,645

Marketable securities, available for sale 1,190,796 1,324,891

Accounts and notes receivable - trade

Patrons and customers 7,075,330 7,152,181

Allowance for doubtful accounts (100,000) (135,000)

Grain shipments 4,294,986 2,475,804

Grain storage receivable 2,446,466 2,126,284

Commodity margin deposits 3,635,236 6,416,330

Other 5,471,728 6,223,340

Deferred income taxes 142,828 199,907

Prepaid inventories 13,501,428 20,012,430

Inventories on hand 90,011,355 117,300,487

TOTAL CURRENT ASSETS 128,699,795 165,372,299

OTHER ASSETS

Notes receivable, net of current portion 423,087 281,781

Equity in other cooperatives 23,052,165 20,459,795

Limited liability companies 11,792,641 7,872,829

Other 1,091,442 976,747

TOTAL OTHER ASSETS 36,359,335 29,591,152

PROPERTY, PLANT, AND EQUIPMENT

Cost 78,487,762 69,695,379

Accumulated depreciation (37,376,005) (37,154,262)

NET PROPERTY, PLANT, AND EQUIPMENT 41,111,757 32,541,117

TOTAL ASSETS $ 206,170,887 $ 227,504,568

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cONsOLidATEdBALANcE sHEETs

CURRENT LIABILITIES 2014 2013

Accounts payable and accrued expenses $ 33,498,414 $ 43,194,289

Customer forward contracts 10,534,608 8,581,907

Revolving bank notes 48,000,826 72,314,923

Patron demand certificates 1,811,771 1,779,624

Current maturities of long-term debt 5,887,449 5,666,531

Patronage dividends payable 2,566,204 3,417,300

Income taxes payable 970,308 1,788,769

TOTAL CURRENT LIABILITIES 103,269,580 136,743,343

LONG-TERM LIABILITIES, excluding current maturities

Non-revolving bank notes 17,759,002 10,732,057

Patron certificates of indebtedness 3,935,329 3,793,943

Capital lease obligations 249,297 710,294

Deferred income taxes 1,200,769 1,223,631

Other 1,841,651 1,508,108

TOTAL LONG-TERM LIABILITIES 24,986,048 17,968,033

MEMBERS’ EQUITY

Common stock 4,487,169 4,354,700

Participating stock 934,215 931,975

Qualified patronage allocations 27,497,170 24,793,559

Retained earnings 39,476,626 36,722,565

Noncontrolling interests 5,749,976 6,119,938

Accumulated other comprehensive income (loss) (229,897) (129,545)

TOTAL MEMBERS’ EQUITY 77,915,259 72,793,192

TOTAL LIABILITIES AND MEMBERS’ EQUITY $ 206,170,887 $ 227,504,568

February 28, 2014 and 2013

Financial Statement PresentationThe statements presented within do not contain all the necessary disclosures to be considered in conformity with accounting principles generally accepted in the United States of America. A report containing the required disclosures is on file at the general office.

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cONsOLidATEd sTATEmENTs OfOPERATiONsSALES 2014 2013

Grain $ 381,168,847 $ 315,516,174

Farm supply 119,950,474 124,466,905

TOTAL SALES 501,119,321 439,983,079

COST OF SALES

Grain 368,347,116 299,030,993

Farm supply 108,765,417 112,450,628

TOTAL COST OF SALES 477,112,533 411,481,621

GROSS MARGINS ON SALES 24,006,788 28,501,458

OTHER OPERATING INCOME

Grain storage and handling services 10,700,684 8,336,271

Limited liability companies 328,931 919,430

Agronomy services 5,461,451 5,293,795

Interest income 248,129 275,726

Gain on disposal of property, plant and equipment 513,883 557,249

Miscellaneous 1,106,083 1,391,054

TOTAL OTHER OPERATING INCOME 18,359,161 16,773,525

GROSS INCOME FROM LOCAL OPERATIONS $ 42,365,949 $ 45,274,983

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OPERATING EXPENSES 2014 2013

Personnel costs $ 16,207,802 $ 15,695,798

Fixed expenses 7,152,631 8,090,342

Other operating expenses 13,435,642 12,041,551

TOTAL OPERATING EXPENSES 36,796,075 35,827,691

EARNINGS FROM LOCAL OPERATIONS 5,569,874 9,447,292

OTHER EARNINGS

Patronage dividends 6,221,171 7,576,782

Investment income 2,174,980 2,976,900

TOTAL OTHER EARNINGS 8,396,151 10,553,682

NET EARNINGS BEFORE INCOME TAXES 13,966,025 20,000,974

PROVISION FOR INCOME TAXES

Current income taxes (990,641) (1,544,695)

Deferred income taxes (102,525) 268,806

TOTAL PROVISION FOR INCOME TAXES (1,093,166) (1,275,889)

NET EARNINGS BEFORE NONCONTROLLING INTERESTS 12,872,859 18,725,085

NONCONTROLLING INTERESTS (3,661,406) (4,651,309)

NET EARNINGS $ 9,211,453 $ 14,073,776

DISTRIBUTION OF NET EARNINGS

Patronage dividends $ 6,415,511 $ 8,543,250

Retained earnings 2,795,942 5,530,526

TOTAL $ 9,211,453 $ 14,073,776

For Years Ended February 28, 2014 and 2013

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PATRONAGE disTRiBUTiON ANd EqUiTy REdEmPTiONs2014 PATRONAGE ALLOCATION RATE AMOUNT

Grain 12.00 cents / bushel $ 2,926,367

Agronomy - Seed - Crop Protection 5.35% or $26 / ton on fertilizer 3,128,492

Petroleum - Lubricants 1.30% or 5 cents / gallon on fuel 249,756

Feed - Merchandise 1.13% 110,896

TOTAL PATRONAGE ALLOCATION 6,415,511

EQUITY REDEMPTIONS 1,052,323

TOTAL DISTRIBUTIONS $ 7,467,834

Patronage Distribution Equity Redemptions

PATRONAGE DISTRIBUTION AND EQUITY REDEMPTIONS – $7,467,834

14.09%

85.91%

CASH DISTRIBUTIONS TO MEMBERS - 10 YEAR HISTORYYEAR ENDED EQUITY REDEPMPTIONS CASH PATRONAGE TOTAL

2014 $ 1,052,323 $ 2,566,204 $ 3,618,527

2013 650,512 3,417,300 4,067,812

2012 698,399 2,379,444 3,077,843

2011 746,339 2,296,816 3,043,155

2010 649,765 1,703,704 2,353,469

2009 714,116 2,673,170 3,387,286

2008 563,574 805,434 1,369,008

2007 835,730 675,936 1,511,666

2006 558,727 1,263,906 1,822,633

2005 229,503 479,277 708,780

TOTALS $ 6,698,988 $ 18,261,191 $ 24,960,179

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NET EARNiNGs ANdLOcAL BENEfiTs

Personnel Costs

Other Expenses

Income Taxes

Property Taxes

2009 2010 2011 2012 2013 2014

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Grain Receipts

Net Earnings

2014 local beneFitS - $26,305,850

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31%

62%

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MKC provides benefits to as many as 50 local communities in the form of personnel costs, local taxes and other expenses. These payments have a significant impact on the communities and help support the businesses and services we all utilize.

HisTORicAL dATA

$14,073,776

2013 2014

$9,211,453

2009

30.20%

2012

21.43%

2011

17.22%

2010

18.57%

2008

12.77%

2007

13.80%

2006

20.48%

2005

16.31%

2005

$3,033,082

2006

$4,324,814

2007

$3,191,862

2008

$3,674,858

2009

$10,837,662

2010

$8,219,209

2011

$8,871,405

2012

$13,342,854

2014

11.82%

2013

19.33%

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$3,000,000

$6,000,000

$9,000,000

$12,000,000

$15,000,000

HISTORICAL NET EARNINGS

HISTORICAL RETURN ON EQUITY

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HisTORicAL dATA cOmmUNiTysTEwARdsHiP

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At MKC, we’re committed to keeping our rural communities strong by giving back to our communities with our time, talent and resources. Over the past five years, MKC has invested more than $300,000 in our communities. The majority of these investments help develop future leaders of our communities, assist with community safety, alleviate hunger and support ag education.

We’re proud to play a role in the following programs:

A: Each year MKC employees present educational programs to fourth grade students throughout our trade territory. Entitled, Ag in Our Every Day Lives, the program teaches students about different types of grains, how they are grown and the many products developed from the grains. In addition, programs supporting ag education benefited from more than $5,000 in contributions last year.

B: Community food banks located throughout central Kansas benefited from donations totaling more than $15,000. In addition, MKC employees collected more than 12,000 pounds of food.

C: We believe the leadership programs available through 4-H further develop the leadership skills of today’s youth – those same youth who will some day be the future leaders of our communities. To help strengthen these programs, MKC donated more than $11,000 to 10 area 4-H leadership development programs this past year.

• 4- Leadership Development

• Farm Safety Camps

• Kansas FFA Foundation and Local FFA Chapters

• Community Events and Festivals

• Ag in the Classroom

• City and County Emergency Services

• Women in Agriculture

• Young Business Professionals Programs

• Mennonite Relief

• School Programs

• Community Food Drives

• Community Blood Drives

• Community Angel Tree Programs

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mkcoop.com

MKc | 307 West cole | p.o. Box D | Moundridge, Ks 67107 | 620.345.6328 | fax 620.345.6330