Green Acres Seed Company

Green Acres Seed Company

Issues

While Green Acres sales and gross margin has increased every year since 2006, its EBIT has decreased every year since 2008. Operating expenses don't appear to be the problem as they were only 34.9% of sales in 2010, the lowest of the five years shown. Gross margins are the problem. Gross margin percent has decreased every year since 2007, going from 50.9% in 2007 to 39.4% in 2010. Unit cost of sales has increased from $88 a bushel in 2006 to $122 a bushel in 2010. However this was expected as the percentage of GM corn sold has increased which is significantly more costly. GM seeds were 75% of sales in 2010 whereas they were only 30% of sales in 2006. GM corn dominates the US market and seed producers like Green Acres pay hefty royalties to companies like Monsanto for use of their technology.

Green Acres balance sheet doesn't appear to be in good order. Its current assets are $13,332,000 vs. current liabilities of $13,364,000 which yields a negative net working capital.

Green Acres sells 25 different varieties of seed corn, with only two considered outstanding: GM S27 and hybrid 5900. Hybrid is priced slightly below the average price of major competitors whereas GM are priced at $210 per sack which is the lowest price for combined herbicide and insect resistant varieties in the industry. Therefore gross margin per unit is higher for hybrids than GM. Since a higher percentage of sales are now coming from GM, then it only stands to reason that gross margins have declined.

Green Acres market share is highest in the smallest markets. Iowa, Illinois, and Nebraska are the three largest corn seed markets comprising 47.3% of industry sales. Green Acres market share in these states is 0.6%, 0.9%, and 0.3% respectively. Green Acres sells seed through farmer-dealers and farm supply stores, however farmer-dealers account for 95% of total sales.

Small market share gains in larger states could help improve profit significantly for Green Acres. EBIT declined $339,000 from 2009 to 2010. To gain back that $339,000, and assuming the 2010 net profit percentage of 4.5%, Green Acres would have to generate additional sales of $7,550,000. Average revenue per sack sold in 2010 was $201.50, so it would take 37,469 additional sacks sold to generate additional sales of $7,550,000. Raising market share to just 1.5% in Iowa and Illinois would increase sacks sold by 36,760 which would nearly cover the additional sacks needed to gain back the $339,000 in EBIT lost from 2010 to 2009.

Looking at the sales territories one thing that is surprising is only having two sales reps in Iowa, the biggest market. Green Acres only has 0.6% of the Iowa market, yet sales from Iowa account for 18.2% of company revenue. Also surprising is that,