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Advancing with Purpose, Vision and Strategy

The future of farming will continue to evolve faster than ever before.

From the advancement of data and information tools to modern facilities and cutting edge

equipment – this evolution presents new opportunities for farmers.

But it also adds pressure and complexity.

We’re here to guide growers through this new landscape, to help them reap the benefits

technology brings while mitigating the challenges it poses. Side by side,

advancing farming forward.

WE ARE FARMWARD COOPERATIVE.

2 3Farmward 2018 Annual ReportAdvancing with Purpose, Vision and Strategy

BOARD OF DIRECTORSANNUAL REPORT 2018

Front Row: Dave Kadlec - Olivia, Rick Schwindt - Sacred Heart, Mike Haubrich - Danube, Tim Sullivan - Franklin, Bob Liesenfeld - Comfrey, Roger Kettner - Morton

Back Row: Dave Stuk - CEO, Calvin Aarons - Bird Island, Cole Trebesch - Springfield, Gary Seehusen - Renville, Terry Flesner - Walnut Grove, Steve Santjer - Sacred Heart, Joel Bakker - Renville

Missing from photo: John Schwartz - Sleepy Eye

OFFICERS AND DIRECTORS

CALVIN AARONS .............................................................................................................................................. CHAIRMAN

BOB LIESENFELD ..............................................................................................................................VICE CHAIRMAN

TIM SULLIVAN ................................................................................................................ SECRETARY/TREASURER

JOEL BAKKER ..........................................................................................................................................................DIRECTOR

TERRY FLESNER...................................................................................................................................................DIRECTOR

MIKE HAUBRICH ..................................................................................................................................................DIRECTOR

DAVE KADLEC ........................................................................................................................................................DIRECTOR

ROGER KETTNER ................................................................................................................................................DIRECTOR

STEVE SANTJER ....................................................................................................................................................DIRECTOR

JOHN SCHWARTZ ...............................................................................................................................................DIRECTOR

RICK SCHWINDT ..................................................................................................................................................DIRECTOR

GARY SEEHUSEN ................................................................................................................................................DIRECTOR

COLE TREBESCH .................................................................................................................................................DIRECTOR

DAVID STUK ........................................................................................................................................... CEO/PRESIDENT

FARMWARD COOPERATIVEAND CONSOLIDATED SUBSIDIARY


Front: Sadie Reiners - CFO, Miki Schultz - President of AgQuestSecond Row: Dave Stuk - CEO, Randy Ludewig - CIO, Lynne Payne - Treasurer, Dennis Schreier - Vice President of Agronomy & EnergyBack Row: Willis Kleinjan - President of Northland Capital, Craig Hebrink - Vice President of Grain & Feed, Kristin Henning - Director of Human Resources

SENIOR LEADERSHIPHave you ever played the game “Don’t Break the Ice”? It’s a game that has been around for a many years and has been played by countless children and adults. The object of the game is to see how many blocks of ice you can knock out of a frame without having the polar bear, which sits on the middle cube of ice, fall through. It is really amazing how many blocks of ice can be knocked out without collapsing the whole thing.

While this might be a silly game, it is a good example of how a solid foundation that is balanced can still re-main stable. For anything to remain stable and endure the challenges that come along it has to have a strong, resilient base. This is true for many things: buildings, re-lationships, countries, businesses, life in general, the list goes on. Without that firm foundation, just like when one too many blocks of ice are knocked out, everything will crumble.

The theme for this year’s annual report is “Advancing with Purpose, Vision and Strategy”. In order to move for-ward we need to make sure that we have that solid foun-dation. To that extent, we have an initiative to have four base building blocks from which we will strive to remain solid and in balance.

Financial Performance

Customer Intimacy

Operational Excellence

Culture and Employees

Our employee base has to be well trained and compe-tent in each of their particular areas of expertise. They have to have a healthy balance between their work life and their personal life. The culture of the company is that everyone needs to understand that regardless of their position, we are all leaders and that our actions really dictate what type of leader we are.

We have to have operational excellence. Our internal processes have to be efficient, reducing redundancy and allow us to work smarter. In this initiative we have and are continuing to develop better use of our technology. This allows us to access data much easier and run our operations more effectively.

You have heard it said “Customer Satisfaction is Job One”. Our goal is to continue to develop each customer rela-tionship by bringing our full menu of the products and services to the table. We are fortunate to have loyal cus-tomers and we don’t take that for granted. The retention of your business is absolutely necessary and we want to make sure that we are meeting your needs.

The final building block is financial performance. As member/owners of this cooperative you have an invest-ment that you should expect a return on. To that, we know that we have to be profitable so that we can return to you cash patronage, equity retirement and invest in the future of the company.

We believe that we have a solid, balanced foundation. Even though there might be times that “blocks” get knocked out, we know that Farmward Cooperative will stand strong and move forward to Advance with Pur-pose, Vision and Strategy.

“The future of farming will continue to evolve faster than ever before. From the advancement of data and information tools to modern facili-ties and cutting-edge equipment – this evolution presents new opportunities for farmers. But it also adds pressure and complexity. We’re here to guide growers through this new landscape, to help them reap the benefits technology brings while mitigating the challenges it poses. Side by side, advancing farming forward. We are Farm-ward Cooperative.”

The paragraph above speaks volumes to who Farmward is and what we are striving to do. It’s what we refer to as “Our Story”, but what it really is, is a foundation that provides Purpose, Vision and Strategy to be a leader in providing our cus-

tomers the products and services they need to succeed today and into the future. Yes, 2018 was a challenging year, but as we take time to reflect, we see it more as a defining point in our company’s history; a year that made us more resilient and committed to being your cooperative for generations to come.

September 1, 2018 marked one year as Farmward Cooperative. As a newly merged company, we have made a con-certed effort to review literally every aspect of our business to make sure it is up-to-date and in line with our vision and culture. The process has taken some time, but it has been well worth it, as we have seen very positive results from bringing our two cultures together. Today, we continue to keep our eye on achieving performance and over the next 12 to 18 months we will focus on driving operational costs down, growing our business and maintaining healthy margins. With this approach, we believe we are building a foundation that will help us be a sound, competitive com-pany well into the future.

Even with the challenges of 2018, Farmward has so much to be grateful for:

• An amazing group of loyal and dedicated employees who are committed to making Farmward, AgQuest and Northland Capital successful.

• An experienced and dynamic leadership team that is steadfast in leading this company into the future.• A strong, united board of directors who are supportive and put a great deal of time and energy into helping

this company be prepared for the future.• And, a strong and loyal customer base that we are devoted to building stronger, healthier relationships with.

Former NFL coach, Tony Dungy, wrote a book called “The Mentor Leader”. In the book he states it is important to take time to push back, slow down, look around, and take stock of our priorities and put other things in life in their proper places. The first step is to understand and appreciate that the journey is as important as the destination. We truly are “Advancing with Purpose, Vision and Strategy” and we could not be doing this without the support of our owners and customers. We sincerely thank you for and look forward to going on this future journey together!

Advancing with Purpose, Vision and Strategy


INDEPENDENT AUDITOR’S REPORTTo the MembersFarmward CooperativeMorgan, Minnesota

Report on the Financial Statements We have audited the accompanying consolidated financial statements of Farmward Cooperative (a Minnesota coopera-tive) and subsidiary, which comprise the consolidated balance sheet as of August 31, 2018, and the related consolidated statements of operations, patrons’ equity, and cash flows for the year then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audit. We did not audit the financial statements of Northland Capital Financial Services, LLC, a subsidiary, which statements reflect total assets constituting 41 percent of consolidated total assets at August 31, 2018, and total revenues constituting 26 percent of con-solidated total revenues for the year then ended. Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Northland Capital Financial Services, LLC, is based solely on the report of the other auditors. We conducted our audit in accordance with standards generally ac-cepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Cooperative’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Cooperative’s internal control. Accordingly, we express no such opinion. An audit also involves evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, based on our audit and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Farmward Cooperative as of August 31, 2018, and the results of its operations and cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

www.carlsonsv.com

INDEPENDENT AUDITOR’S REPORT To the Members Harvest Land Cooperative Morgan, Minnesota Report on the Financial Statements We have audited the accompanying consolidated financial statements of Harvest Land Cooperative and subsidiary, which comprise the consolidated balance sheets as of August 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive income, changes in patrons’ equity and cash flows for the years then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Cooperative’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Cooperative’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Harvest Land Cooperative as of August 31, 2017 and 2016, and the results of its operations and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. New Ulm, Minnesota CarlsonSV LLP November 1, 2017 Certified Public Accountants www.carlsonsv.com

INDEPENDENT AUDITOR’S REPORT .......................................................................................................................................... 7

FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEET .................................................................................................................................... 8-9

CONSOLIDATED STATEMENT OF OPERATIONS ................................................................................................... 10-11

CONSOLIDATED STATEMENT OF PATRONS’ EQUITY ...................................................................................... 12-13

CONSOLIDATED STATEMENT OF CASH FLOWS .................................................................................................. 14-15

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS..................................................................... 16-34

TABLE OF CONTENTS

New Ulm, MinnesotaOctober 24, 2018

CarlsonSV LLPCertified Public Accountants


2018CURRENT ASSETS

Cash on hand and in bank $637,781 Short-term investment 14,268,482 Due from commission firms 52,775 Trade accounts receivable 8,632,750 Allowance for doubtful accounts (2,330,214)Notes receivable 108,593,047 Accrued interest receivable 3,039,763 Margin account 1,384,777 Other receivables 10,820,420 Net investment in direct financing leases 68,279,479 Grain inventory 25,248,173 Patron owned grain (916,822)Merchandise inventories 11,170,660 Prepaid expenses 12,373,088

Total Current Assets 261,254,159

PROPERTY AND EQUIPMENT (AT COST) Land and land improvements 6,487,875 Buildings and equipment 118,642,204 Equipment under operating leases 25,817,153 Construction in progress 121,128

Total Property and Equipment 151,068,360 Accumulated depreciation (67,510,350)

Net Property and Equipment 83,558,010

OTHER ASSETS Notes receivable, noncurrent 41,801,071 Net investment in direct financing leases, noncurrent 145,046,806 Investments in other cooperatives and other investments 34,443,524 Impairment of investment (5,372,731)Repossessed equipment 1,039,966 Prepaid expenses, noncurrent 77,000 Intangible assets, net of amortization of $332,691 2,113,357 Other assets 652,076

Total Other Assets 219,801,069 TOTAL ASSETS $564,613,238

FARMWARD COOPERATIVE AND CONSOLIDATED SUBSIDIARYCONSOLIDATED BALANCE SHEET

AUGUST 31, 2018ASSETS

(The accompanying notes are an integral part of these financial statements.)

2018 CURRENT LIABILITIES

Checks written in excess of bank balance $3,938,205 Accounts payable 9,982,600 Patrons’ credit balances and prepayments 3,493,514 Deferred revenue 735,389 Deposits 385,106 Grain payable 17,381,106 Notes and mortgages payable 146,757,467 Capital lease obligations 835,184 Installment sales contracts 2,565,131 Accrued expenses 14,994,137

Total Current Liabilities 201,067,839 LONG-TERM LIABILITIES

Notes and mortgages payable 200,204,860 Capital lease obligations 9,986,920 Installment sales contracts 1,084,546

Total Long-Term Liabilities 211,276,326

Total Liabilities 412,344,165 DEFERRED TAX LIABILITIES 5,422,336 PATRONS’ EQUITY

Preferred stock, subsidiary 3,000,000 Common stock B, subsidiary 442,500 Treasury stock (114,500)Contributed capital 186,100 Non-controlling interest 22,347,027 Patrons’ equity reserve

Class A 23,093,318 Class B 8,133,434

Capital reserve 70,862,621 Non-qualified equity 2,311,400 Non-qualified equity, ordinary dividends 16,584,837

Total Patrons’ Equity 146,846,737 TOTAL LIABILITIES AND PATRONS’ EQUITY $564,613,238

FARMWARD COOPERATIVE AND CONSOLIDATED SUBSIDIARYCONSOLIDATED BALANCE SHEET

AUGUST 31, 2018LIABILITIES AND PATRONS’ EQUITY



2018Sales $283,922,994 Cost of sales 256,704,159

GROSS MARGIN 27,218,835 OTHER OPERATING RECEIPTS

Storage and handling 2,450,593 Grain drying 2,628,688 Spreading and spraying 4,599,679 Grinding, mixing, and delivery 1,607,024 Sampling 254,278 HarvestMax program fees 118,529 United Mills management fees 139,015 Labor income 21,723 Rental income 84,751 Interest income 10,109,688 Insurance premium income 3,372,639 Fee income 807,981 Lease interest 13,096,762 Operating lease rentals 4,551,735 Service charges 196,657 Late payment fees 902,316 Miscellaneous income 1,639,509

Total Other Operating Receipts 46,581,567 Total Gross Margin and Other Operating Receipts 73,800,402

OPERATING EXPENSES

Salaries and wages 21,102,988 Payroll taxes 1,558,893 Employee benefits 6,001,081 Other employee expense 188,380 Management fee 321,774

Total Employee Expenses 29,173,116 Depreciation and amortization 11,575,067 Interest expense 10,967,057 Repairs and maintenance 2,206,017 Truck, tractor, and auger 2,650,134 Custom hire 1,359,351 Insurance, bonds, and licenses 1,221,766 Property taxes 1,300,138 Utilities 1,460,089 Supplies 1,548,625 Advertising and promotion 658,996

FARMWARD COOPERATIVE AND CONSOLIDATED SUBSIDIARYCONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED AUGUST 31, 2018

FARMWARD COOPERATIVE AND CONSOLIDATED SUBSIDIARYCONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED AUGUST 31, 2018OPERATING EXPENSES (Continued) 2018

Rent and lease expense $1,402,218 Impairment of investment 162,810 Telephone and markets 314,382 Meetings and mileage 808,453 Professional fees 452,791 Soil tests and sampling 203,256 Dues, fees, and subscriptions 172,335 Directors’ fees 104,300 Consulting fees 1,263,439 Meals and entertainment 77,242 Provision for loan and lease loss 410,976 Commissions and fees 776,993 Credit services 164,320 Other taxes 100,848 Contract labor 101,210 Miscellaneous expense 244,438

Total Operating Expenses 70,880,367 NET MARGIN FROM OPERATIONS 2,920,035 OTHER INCOME (EXPENSE)

Patronage refunds received 4,347,727 Investment income 63,670 Recoveries on charged-off leases 183,424 Gain on sale of assets 46,155 Gain on sale and termination of leases 1,514,171 Other income 236,640

Net Other Income 6,391,787 NET MARGIN BEFORE NON-CONTROLLING INTEREST AND INCOME TAXES 9,311,822

Non-controlling interest (3,490,019) Income tax expense (693,580)

NET MARGIN FOR YEAR $5,128,223

(The accompanying notes are an integral part of these financial statements.)(The accompanying notes are an integral part of these financial statements.)

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Common Stock B

SubsidiaryTreasury

StockContributed

Capital

Preferred Stock

Subsidiary

SEPTEMBER 1, 2017 $3,000,000 $442,500 $(126,000) $147,600 $20,751,167 $25,650,988 $0 $54,228,920 $2,316,579 $16,585,945 $0 Equity from merger 8,988,634 Fair value adjustment 11,014,397 Distributions to members (1,894,159) Stock sales 11,500 38,500 Equity retired (2,547,720) (854,748) Allocation adjustment (9,508) (40,576) Transfers (442) (452) 7,181 (5,179) (1,108) From deferred patronage payable 750,911 Preferred stock dividend (210,000) Common stock dividend (16,435) Net margin for year 5,128,223 To be retained 3,490,019 5,128,223 (5,128,223)

AUGUST 31, 2018 $3,000,000 $442,500 $(114,500) $186,100 $22,347,027 $23,093,318 $8,133,434 $70,862,621 $2,311,400 $16,584,837 $0

FARMWARD COOPERATIVE AND CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENT OF PATRONS’ EQUITY



FARMWARD COOPERATIVE AND CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENT OF PATRONS’ EQUITY


Non-Controlling

Interest

Patrons’Equity

Reserve Class A

Patrons’Equity

Reserve Class B

Capital Reserve

Non-Qualified

Equity

Non-QualifiedEquity,

OrdinaryDividends

Net Marginfor Year



2018CASH FLOWS FROM OPERATING ACTIVITIES

Net margin for year $5,128,223 Adjustments to reconcile net margin for year to net cash provided (used) by operating activities

Depreciation and amortization 11,575,067 Gain on sale of lease portfolio (974,611)Allowance for uncollectible lease and note payments 436,148 Non-cash portion of patronage refunds received (241,427)Gain on sale and termination of leases (539,560)Gain on sale of assets (48,818)Non-controlling interest 3,490,019 Common stock dividend (16,435)Impairment of investment 162,810

Changes in assets and liabilities (Increase) Decrease in receivables 4,094,465 (Increase) Decrease in inventories 4,335,242 (Increase) Decrease in prepaid items (7,051,562)Increase (Decrease) in various payables (3,916,197)Increase (Decrease) in grain payable (5,578,738)Increase (Decrease) in accrued expenses 5,959,765 Increase (Decrease) in deposits 86,881 Increase (Decrease) in deferred revenue (154,211)

Total Adjustments 11,618,838

Net Cash Provided by Operating Activities 16,747,061 CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from sale of assets 51,194,307 Acquisition of property and equipment (10,322,136)Acquisition of intangible assets (1,207,194)Acquisition of equipment under operating leases (7,826,690)Investments purchased (259,265)Investments retired 3,497,820 Net investment in direct financing leases (63,454,371)

Net Cash Used by Investing Activities (28,377,529)

CASH FLOWS FROM FINANCING ACTIVITIES Cash acquired through merger 2,101,547 Payments on short-term debt (3,697,831)Long-term debt borrowed 84,815,207 Long-term debt retired (69,354,894)

FARMWARD COOPERATIVE AND CONSOLIDATED SUBSIDIARYCONSOLIDATED STATEMENT OF CASH FLOWS



FARMWARD COOPERATIVE AND CONSOLIDATED SUBSIDIARYCONSOLIDATED STATEMENT OF CASH FLOWS


CASH FLOWS FROM FINANCING ACTIVITIES 2018 Long-term capital lease obligations borrowed $9,981,679 Distributions to members (1,894,159)Equity retirements (3,402,468)Payment of patronage dividends (1,264,686)Proceeds from stock sale 50,000 Preferred stock dividend (210,000)

Net Cash Provided by Financing Activities 17,124,395 NET INCREASE IN CASH AND CASH EQUIVALENTS 5,493,927 BEGINNING CASH AND CASH EQUIVALENTS 9,465,111 ENDING CASH AND CASH EQUIVALENTS $14,959,038 CASH AND CASH EQUIVALENTS

Cash on hand and in bank $637,781 Short-term investment 14,268,482 Due from commission firms 52,775

TOTAL CASH AND CASH EQUIVALENTS $14,959,038 SUPPLEMENTAL DISCLOSURES

Schedule of non-cash investing and financing activity Repossessed equipment exchanged for net investment in direct financing leases $411,900

Assets, liabilities, and equities acquired through merger Receivables 8,456,172 Inventories 20,864,186 Prepaid items 1,204,335 Property and equipment 24,883,269 Intangible assets 22,053 Investments 4,165,775 Various payables (7,237,551)Grain payable (10,833,334)Accrued expenses (797,824)Notes and mortgages payable (21,801,673)Capital lease obligations (840,424)Patrons’ equities (8,988,634)



NOTE 1 – ACCOUNTING POLICIES

The following is a summary of significant accounting policies followed in the preparation of these financial state-ments.

OrganizationFarmward Cooperative is organized and operated on a cooperative basis marketing grain and supplying mer-chandise and services to patrons. Major commodities supplied to patrons are fertilizer, chemicals, seed, feed, farm supplies, and petroleum products.

AgQuest Financial Services, Inc. is a Minnesota corporation owned by various grain and farm supply retailers (hereinafter “farm supply retailers”), with Farmward Cooperative owning the voting common stock. The Company is primarily in the business of financing agricultural inputs and assets for the farm supply retailers’ patrons.

AgQuest Energy, LLC is a single-member limited liability company involved in the production of wind energy. AgQuest Financial Services, Inc. is the single member of AgQuest Energy, LLC.

Northland Capital Financial Services, LLC is a limited liability company consisting of two members. The two members are Northland Capital Group, Inc. and AgQuest Financial Services, Inc., with AgQuest Financial Ser-vices, Inc. having the majority capital interest. Net income or net loss for the year ended August 31, 2018, has been allocated as agreed upon in the member control agreement.

Northland Capital Financial Services, LLC is engaged in leasing operations that consist principally of the leasing of construction equipment, agricultural equipment, vending machines, and manufacturing equipment. Northland Capital Financial Services, LLC has approximately 5,800 leases, of which 93% are classified as direct financing leases and 7% are classified as operating leases. The direct financing leases will expire over the next twelve years. The operating leases will expire during the next eight years.

The consolidated financial statements include the accounts of Farmward Cooperative (parent company); AgQ-uest Financial Services Inc. (subsidiary whose voting stock is owned by the parent); AgQuest Energy, LLC, and Northland Capital Financial Services, LLC. All material intercompany transactions have been eliminated.

Cash and Cash EquivalentsFor purposes of the statements of cash flows, cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three months or less. The Cooperative maintains cash balances with local financial institutions which are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At times, such investments may be in excess of the FDIC limit.

Notes ReceivableAgQuest Financial Services, Inc. finances agricultural inputs and assets with various agricultural producers served by the farm supply retailers. As of August 31, 2018, the Cooperative has $2,266,207 of notes receivable that are classified as non-accrual.

ReceivablesFarmward Cooperative is a locally owned farm supply and marketing cooperative with facilities in Clements,

Comfrey, Danube, Morgan, Morton, Olivia, Renville, Sacred Heart, Springfield, and Wabasso, Minnesota. The Co-operative extends credit to customers, substantially all of whom are agricultural producers operating in the trade area. The Cooperative charges its doubtful accounts against current income. An allowance account is maintained for financial statement purposes that includes an amount which uncollectible accounts are reasonably expected not to exceed. Receivables are considered past due when payment is not received within the period allowed under terms of the sale. The Cooperative generally discontinues any finance charge accrual when a receivable is referred to a collection agency. Periodically, the Cooperative’s Board of Directors and management review past due receivables and allow for accounts deemed uncollectible after all reasonable collection efforts have been exhausted. Receivables older than 90 days are $244,614 as of August 31, 2018.

Allowance for Doubtful AccountsNotes receivable are evaluated monthly by management for collectability based on a number of factors. These factors include current and expected economic conditions, analysis of loan portfolios’ overall quality, and indus-try standards. The allowance account is adjusted accordingly.

Allowance for Uncollectible Lease PaymentsThe carrying amount of the net investment in direct financing leases is reduced by a valuation allowance for un-collectible lease payments. The allowance for uncollectible lease payments is established as losses are estimated to have occurred through a provision for lease losses charged to earnings. Lease losses are charged against the allowance when management believes the uncollectibility of a lease balance is confirmed.

The allowance is evaluated on a regular basis by management and reflects management’s best estimate of the amounts that will not be collected based on management’s evaluation of a number of factors, including current and expected economic conditions, analyses of lease portfolios, overall portfolio quality, and industry standards. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific reserve component relates to leases that are classified as impaired. Impairment is measured on an individual lease basis. For those leases that are classified as impaired, an allowance is established when the discounted cash flows or collateral value of the im-paired lease is lower than the carrying value of that lease. The general component covers non-classified leases and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process.

A lease is considered impaired when, based on current information, it is probable that the Company will be un-able to collect the scheduled payments of principal and interest when due according to the contractual terms in the lease agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled payments when due. Leases that experience insig-nificant payment delays generally are not classified as impaired. Management determines the significance of payment delays on an individual lease basis, taking into consideration circumstances surrounding the lease and the lessee, including the length of the delay, the reasons for the delay, the lessee’s prior payment record, and the amount of the shortfall in relation to the amounts owed.

General reserves cover non-impaired leases and are based on historical loss rates for each portfolio segment, adjusted for the effects of qualitative factors that are likely to cause estimated credit losses as of the evaluation

FARMWARD COOPERATIVE AND CONSOLIDATED SUBSIDIARYNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2018


AUGUST 31, 2018


NOTE 1 – ACCOUNTING POLICIES (CONTINUED)

date to differ from the portfolio segment’s historical loss experience. Qualitative factors include consideration of the following: changes in economic conditions, changes in the nature and volume of the portfolio, changes in the volume and severity of past due, nonaccrual and other adversely graded leases, changes in the value of the underlying collateral, concentrations of credit, and the effect of other external factors.

InventoriesGrain is stated at net realizable value, including appropriate adjustments for open purchase, sales, and futures contracts. These contracts are effective economic hedges of specified risks although they are not designated nor accounted for as hedging instruments. The Cooperative follows the general policy of hedging its grain in-ventories and unfilled orders for grain to the extent considered practicable for minimizing risk from market price fluctuations. Gains or losses on contracts are recognized on the basis that all parties are able to perform on their contractual obligations.

Merchandise inventories are valued at the lower of cost or net realizable value, with cost determined using the first-in, first-out method.

Property and EquipmentProperty and equipment are stated at cost. Depreciation of property and equipment is provided by charges to operations using the straight-line method. The estimated useful lives that are the basis for such provisions are as follows:

Land improvements 15 - 20 Years Buildings 5 - 60 Years Equipment 3 - 25 Years Office equipment 3 - 20 Years Vehicles 3 - 10 Years Equipment under operating leases 5 - 10 Years

Expenditures for maintenance, repairs, minor renewals, and betterments which do not improve or extend the useful life of the respective asset are expensed. All other expenditures for renewals and betterments are capi-talized. The assets and related depreciation accounts are adjusted for property retirements and disposals with the resulting gain or loss included in income. Fully depreciated assets remain in the accounts until retired from service. Depreciation expense for the year ended August 31, 2018, is $11,417,778.

Fair Value of Financial InstrumentsAll financial instruments are carried at amounts that approximate estimated fair value, except for investments in other cooperatives for which it is not practicable since these equities are not transferable, and are redeemable only at the discretion of the Board of Directors of the other cooperatives. Such investments are made primarily to obtain the benefits offered by affiliation rather than return on investment or for capital appreciation purposes.

Investments in Other CooperativesStock and equities (including permanent type allocated equities) in other cooperatives are stated at cost or the stated value of patronage allocation notices. They are recognized in the year notice of allocation is received and are redeemable only at the option of the issuing cooperative.

Patrons’ Credit Balances and PrepaymentsPatrons’ credit balances and prepayments represent customer deposits to be used for future purchases of prod-ucts from the Cooperative. When a patron deposits money with the Cooperative, they can at that time choose a specific quantity of a product or products at a set price with a future delivery date, or they can wait and purchase the product as needed at the market price at the time of purchase. There are no repayment terms associated with these credit balances and prepayments. Patrons’ credit balances and prepayments as of August 31, 2018, are $3,493,514.

Accounting EstimatesThe preparation of financial statements in conformity with United States generally accepted accounting princi-ples (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Actual results may differ from these estimates.

AdvertisingThe Cooperative expenses advertising costs as they are incurred.

Long-Lived AssetsLong-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstanc-es indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell.

Repossessed EquipmentThe Cooperative repossesses equipment when it is determined that the prospect for payment is very low or non-existent. The Cooperative updates the specific reserve amount on the equipment on a quarterly basis and adjusts it to net realizable value. The Cooperative sets forth its best effort to sell repossessed equipment at a later date.

Revenue RecognitionThe Cooperative supplies a wide variety of products and services. Major commodities include fertilizer, chemi-cals, seed, feed, farm supplies, and petroleum products. All sales are recognized upon transfer of title, which can occur upon shipment or receipt by the patron. Grain revenue is recorded at the point the grain leaves the Coop-erative’s facility and revenues are adjusted in the subsequent period for any weight and grade variances. Service revenues are recorded only after such services have been rendered. The Cooperative finances agricultural inputs and assets for the farm supply retailers’ patrons. Interest revenue is recognized over the period the funds are bor-rowed. Lease revenue is recognized over the term of the lease beginning with the date the leased asset is placed in service. Insurance revenues are recognized pro rata over the period in which the policy was issued.


AUGUST 31, 2018


AUGUST 31, 2018


NOTE 1 – ACCOUNTING POLICIES (CONTINUED)

Accounting for Uncertainty in Income TaxesThe Cooperative has adopted ASC 740-10, Income Taxes, which prescribes a comprehensive model for recogniz-ing, measuring, presenting, and disclosing in the financial statements uncertain tax positions which the Coop-erative has taken or expects to take in its income tax returns. The Cooperative’s policy is to include interest and penalties related to unrecognized tax benefits/liabilities in income tax refunds/expense. As of August 31, 2018, the Cooperative does not have any unrecognized tax benefits/liabilities. The Cooperative is no longer subject to federal and state income tax examinations by tax authorities of originally filed returns for years ending prior to and including August 31, 2014.

Subsequent Events ConsiderationThe Cooperative has considered the effect, if any, that events occurring after the balance sheet date and up to October 24, 2018, may have on the financial statements as presented. This date coincides with the date the finan-cial statements were available to be issued. Management has determined that there were no material events that would require recognition or disclosure in the Cooperative’s financial statements through this date.

NOTE 2 – RELATED PARTIES

According to ASC 850-10, Related Party Disclosures, the Cooperative is required to disclose material related-party transactions. Related parties at this time consist of members of the Board of Directors, management, and employ-ees. Purchases from related parties for the year ended August 31, 2018, were $5,893,160. Sales to related parties for the year ended August 31, 2018, were $47,687,610. Net related party accounts receivable at August 31, 2018, were $2,709,113. Notes and mortgages payable dealing with related parties at August 31, 2018, were $3,771,421.

NOTE 3 – OTHER RECEIVABLES

Other receivables as of August 31, 2018, are as follows:

Insurance commissions receivable $1,621,956 Accrued storage and drying receivable 1,281,232 Grain in transit receivable 5,098,212 Grain advances 509,446 Miscellaneous receivables 2,309,574

TOTAL $10,820,420

NOTE 4 – NET INVESTMENT IN DIRECT FINANCING LEASES

The Cooperative leases equipment to customers under direct financing leases. The current portion of net invest-ment in direct financing leases is included in current assets and the long-term portion is included in other assets.

Components of net investment in direct financing leases as of August 31, 2018, are as follows:

Total minimum lease payments receivable $226,768,554 Unguaranteed residual values accruing to lessor 16,843,880 Initial direct costs 2,131,114 Unearned interest revenue (30,189,825)Allowance for uncollectible lease payments (2,227,438)

NET INVESTMENT IN DIRECT FINANCING LEASES $213,326,285

Future minimum lease payments receivable under existing leases are as follows:

August 31, 2019 $72,395,179 August 31, 2020 59,243,420 August 31, 2021 44,893,141 August 31, 2022 29,115,263 August 31, 2023 and later 21,121,551

TOTAL $226,768,554

NOTE 5 – MERCHANDISE INVENTORIES

Major classifications of merchandise inventories as of August 31, 2018, are as follows:

Fertilizer $4,572,379 Chemicals 5,532,167

Seed 35,266

Feed and animal health 381,397

Fuels 477,891

Other 171,560

TOTAL $11,170,660


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AUGUST 31, 2018


NOTE 6 – EQUIPMENT UNDER OPERATING LEASES

Investment in equipment under operating leases by major class as of August 31, 2018, is as follows:

Agricultural equipment and facilities $23,124,782 Other equipment 2,692,371

TOTAL 25,817,153

Accumulated depreciation (8,121,517)

NET EQUIPMENT UNDER OPERATING LEASES $17,695,636

Future minimum rentals on non-cancelable leases are as follows:


TOTAL $15,446,559

NOTE 7 – CONSTRUCTION IN PROGRESS

Construction in progress as of August 31, 2018, is as follows:

The Cooperative is in the process of evaluating an expansion of the grain facilities in Morgan. The total estimated cost and the estimated date of completion are unknown at the reporting date. As of August 31, 2018, $35,256 had been expended on the project.

The Cooperative is in the process of purchasing a fuel truck. The total estimated cost is $300,000 and the esti-mated date of completion is September 5, 2018. As of August 31, 2018, $42,990 had been expended on the truck.

The Cooperative is in the process of installing new signs at various locations. The total estimated cost is $90,000 and the estimated date of completion is September 15, 2018. As of August 31, 2018, $42,882 had been expended on the project.

NOTE 8 – INVESTMENTS IN OTHER COOPERATIVES AND OTHER INVESTMENTS

Principal investments in other cooperatives and other investments as of August 31, 2018, are as follows:

CHS, Inc. $10,343,004 (8) Wind Energy LLCs 6,512,400 CoBank 4,364,706 AgFirst, FCB 4,171,472 AgriBank, FCB 3,600,000 Land O’Lakes, Inc. 3,310,263 Ag Processing, Inc. 671,782 United Mills 447,870 Access Insurance 284,407 Granite Falls Ethanol 100,000 Minnesota Energy 49,330 Heartland Corn Products 13,387 Other 574,903

TOTAL $34,443,524

NOTE 9 – INTANGIBLE ASSETS

AgQuest Financial Services, Inc. Intangible assets consist of a customer list, a book of business, and a non-compete agreement that are being amortized over 10-year to 15-year periods. Amortization expense for the year ended August 31, 2018, is $90,622.

Farmward CooperativeIntangible assets consist of goodwill acquired along with the operating assets of an independent business and costs associated with obtaining a trademark. These intangible assets are being amortized over a period of 15 years, using the straight-line method. Amortization expense for the year ended August 31, 2018, is $66,667.


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AUGUST 31, 2018


NOTE 10 – NOTES AND MORTGAGES PAYABLE

Notes and mortgages payable as of August 31, 2018, are as follows:

Current Noncurrent TotalFARMWARD COOPERATIVE CoBank Revolving credit supplements 27137400S01-C (1) $0 $0 $0 Revolving term loans 27137400T01 (2) 600,000 1,455,100 2,055,100 27137400T02 (3) 600,000 2,695,000 3,295,000 27137400T03 (4) 400,000 2,500,000 2,900,000 27137400T04 (5) 150,000 1,050,000 1,200,000 27137400T06 (6) 600,000 5,400,000 6,000,000 Patrons Demand notes (7) 7,958,964 0 7,958,964 Promissory notes (8) 5,490,501 10,720,755 16,211,256

AGQUEST FINANCIAL SERVICES, INC. Farmer Mac (9) 7,500,000 0 7,500,000 AgriBank, FCB (10) 66,524,112 50,164,439 116,688,551 Bremer Bank (11) 0 0 0 Rekstein, LLC (12) 85,000 765,000 850,000 Farm Credit Leasing (13) 221,104 0 221,104

NORTHLAND CAPITAL FINANCIAL SERVICES, LLC CoBank (14) 42,000,000 14,461,839 56,461,839 AgFirst, FCB (15) 14,627,786 110,992,727 125,620,513

TOTAL $146,757,467 $200,204,860 $346,962,327

(1) Seasonal loan 27137400S01-C has a limit of $75,000,000 and matures on March 1, 2019. The Cooperative can, within the limits of the commitment, borrow, repay, and reborrow. The variable interest rate as of August 31, 2018, was 4.58%.

(2) Revolving term loan 27137400T01 is borrowed to finance fixed asset expenditures and provide working cap-ital. The loan has a $2,055,100 commitment, of which $2,055,100 had been borrowed as of August 31, 2018. The available commitment shall be decreased by $150,000 beginning November 20, 2017, and continuing

NOTE 10 – NOTES AND MORTGAGES PAYABLE (CONTINUED)

each quarter thereafter through and including November 20, 2021, followed by a final reduction at the ex-piration of the commitment on February 20, 2022, at which time any outstanding balance shall be due and payable in full. The variable interest rate as of August 31, 2018, was 4.83%.

(3) Revolving term loan 27137400T02 is borrowed to finance a 4,000,000-bushel flat storage grain facility in Springfield. The loan has a $3,295,000 commitment, of which $3,295,000 had been borrowed as of August 31, 2018. The available commitment shall be decreased by $150,000 beginning October 20, 2017, and con-tinuing each quarter thereafter through and including October 20, 2023, followed by a final reduction at the expiration of the commitment on January 20, 2024, at which time any outstanding balance shall be due and payable in full. The variable interest rate as of August 31, 2018, was 4.83%.

(4) Revolving term loan 27137400T03 is borrowed to finance fixed asset expenditures and provide working capital. The loan has a $2,900,000 commitment, of which $2,900,000 had been borrowed as of August 31, 2018. The available commitment shall be decreased by $100,000 beginning November 20, 2017, and con-tinuing each quarter thereafter through and including August 20, 2025, followed by a final reduction at the expiration of the commitment on November 20, 2025, at which time any outstanding balance shall be due and payable in full. The variable interest rate as of August 31, 2018, was 4.83%.

(5) Revolving term loan 27137400T04 is borrowed to finance fixed asset expenditures and provide working capital. The loan has a $1,200,000 commitment, of which $1,200,000 had been borrowed as of August 31, 2018. The available commitment shall be decreased by $37,500 beginning November 20, 2017, and continu-ing through each quarter thereafter through and including May 20, 2021, followed by a final reduction at the expiration of the commitment on August 20, 2021, at which time any outstanding balance shall be due and payable in full. The variable interest rate as of August 31, 2018, was 4.83%.

(6) Revolving term loan 27137400T06 is borrowed to finance fixed asset expenditures and provide working capital. The loan has a $6,000,000 commitment, of which $6,000,000 had been borrowed as of August 31, 2018. The available commitment shall be decreased by $150,000 beginning November 20, 2018, and con-tinuing each quarter thereafter through and including May 20, 2028, followed by a final reduction at the expiration of the commitment on August 20, 2028, at which time any outstanding balance shall be due and payable in full. The variable interest rate as of August 31, 2018, was 4.83%.

(7) Patron demand notes are payable on demand and are unsecured. Interest rates are periodically adjusted by the Board of Directors.

(8) Patron promissory notes are payable in 24, 37, 50, or 62 months and are unsecured. Interest rates range from 2.5% to 4%.

(9) Federal Agricultural Mortgage Corporation (Farmer Mac) has extended a $20,000,000 line of credit. As of August 31, 2018, $7,500,000 had been advanced. Payments are due on the due date set forth for each specific bond. The bonds are secured by security agreements, mortgages and deeds of trust specifically funded by each bond.

(10) AgriBank, FCB has extended a $160,000,000 line of credit, of which $116,688,551 had been advanced as of August 31, 2018. The note is secured by a first lien on security agreements, mortgages, and deeds of trust specifically funded by funds advanced from AgriBank, FCB. Restrictions placed in accordance with the loan


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AUGUST 31, 2018


NOTE 10 – NOTES AND MORTGAGES PAYABLE (CONTINUED)

agreement include lending limits. The repayment of the balance is coordinated with the maturities of the underlying receivables and, therefore, a portion has been classified as noncurrent.

(11) Bremer Bank has extended a $1,000,000 cash management line of credit that matures on January 24, 2019. As of August 31, 2018, $0 had been advanced.

(12) Rekstein, LLC has extended an $850,000 term note. As of August 31, 2018, $850,000 had been advanced. Principal payments of $85,000, plus accrued interest, will be made annually beginning on January 10, 2019, and continuing through and including a final payment on January 10, 2028. The note has a fixed interest rate of 4.5%.

(13) Farm Credit Leasing has advanced $221,104 as of August 31, 2018. Payments due on the loan are coordinat-ed with the lease payments on the underlying leases. The loan is secured by a first priority security interest in the leases specifically funded by the loan.

(14) CoBank has extended credit in fixed and variable interest rate notes secured by net investment in leases. As of August 31, 2018, $56,461,839 had been advanced. Payments are due on the due date set forth for each specific funding advance. As of August 31, 2018, the latest such date is April 2023.

(15) AgFirst, FCB has extended credit in fixed and variable interest rate notes. As of August 31, 2018, $125,620,513 had been advanced. The notes are secured by a first lien on security agreements, mortgages, and deeds of trust specifically funded by funds advanced from AgFirst, FCB. Restrictions placed in accordance with the loan agreement include lending limits. Payments are due on the due date set forth for each specific funding advance. As of August 31, 2018, the latest such date is June 2028.

Restrictions placed in accordance with its loan agreements with CoBank include, but are not limited to, the fol-lowing:

· The Cooperative will maintain working capital as determined in accordance with U.S. GAAP consistently applied, plus any unadvanced portion of revolving term debt, of not less than $14,500,000 at the end of each fiscal year, and $12,500,000 at the end of each interim period for which financial statements are required to be furnished, based on unconsolidated financial statements.

· The Cooperative will maintain local net worth (total assets over total liabilities minus investments in other cooperatives and joint ventures) as determined by U.S. GAAP of not less than $40,000,000 at the end of each period for which financial statements are required to be furnished, based on unconsolidated finan-cial statements.

· Outstanding principal balances on the patron investment note program are limited to $20,000,000 for demand notes and $20,000,000 for 24-month, 37-month, 50-month, and/or 62-month promissory notes.

· The Cooperative will not incur indebtedness to the Minnesota Department of Transportation in excess of $60,000.

The Cooperative has complied with all conditions as stipulated in the loan agreements with the lenders as of August 31, 2018.

Future long-term debt payments are due as follows:


TOTAL $339,003,363

Technically, some payments will be due prior to August 31, 2023, for the AgriBank, FCB loans at AgQuest Financial Services, Inc. and consolidated subsidiaries. However, it is the intention of the Cooperative to renegotiate these loans when the commitments expire.

Total cash paid for interest during the year ended August 31, 2018, was $10,857,540.

NOTE 11 – CAPITAL LEASE OBLIGATIONS

The Cooperative has entered into a capital lease agreement with Farm Credit Leasing for a 250,891-bushel grain bin at the Sacred Heart location. The Cooperative has also entered into a capital lease agreement for the Clem-ents grain facility and Danube grain bin and bulk weigher system. The assets are being depreciated over their estimated useful economic lives and are included in depreciation expense for the year ended August 31, 2018.

Future minimum lease payments and purchase options under capital leases are as follows:


TOTAL 13,314,655

Amount representing interest (2,492,551)PRESENT VALUE 10,822,104 Current portion (835,184)NONCURRENT PORTION $9,986,920


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AUGUST 31, 2018


NOTE 12 – DEFERRED TAX LIABILITIES

Deferred tax liabilities are primarily the result of timing differences between currently allowable depreciation of property and equipment and loan loss provisions as charge-off expenses for tax purposes versus proper report-ing for U.S. GAAP purposes.

The 2017 Tax Cuts and Jobs Act was signed into law on December 22, 2017, and lowers the federal income tax rate permanently to a flat 21% beginning with the 2018 tax year. Valuations on deferred tax assets and liabilities have been updated to reflect the newly enacted rates.

NOTE 13 – PREFERRED STOCK

In January 2012, the Board of Directors authorized the sale and issuance of up to 10,000 shares of 7% cumulative preferred stock at a price of $500 per share. The stock is redeemable at the discretion of the Board of Directors. As of August 31, 2018, the Cooperative had $3,000,000 (6,000 shares) of preferred stock outstanding.

NOTE 14 – CAPITAL STOCK

Capital stock consists of a total of 500,000 shares of Class A and Class B common stock authorized. Both types of common stock have a par value of $500 per share. Class A is voting stock; Class B is non-voting. Effective Au-gust 31, 2012, the Class A shares issued and outstanding became wholly owned by the Cooperative. There were 25,386 shares of Class A and 885 shares of Class B common stock issued and outstanding as of August 31, 2018.

NOTE 15 – TREASURY STOCK

Treasury stock consists of 229 shares reacquired and stated at par as of August 31, 2018.

NOTE 16 – PATRONS’ EQUITY RESERVE

The patrons’ equity accounts were established for the purpose of acquiring non-stock capital. This type of capital is non-dividend bearing. The Cooperative maintains a record of the holders of patrons’ equity and the amount allocated to each holder. Principal sources of additions to patrons’ equity are capital contributions by each patron of a portion of his share of patrons’ net margins. Patrons’ equity may be retired at any time at the discretion of the Board of Directors. All retirements are subject to approval by the Board of Directors and are not mandatorily re-deemable. Patrons’ equity retired during the year ended August 31, 2018, was $3,402,468. The Cooperative holds a first lien on patrons’ equity for any indebtedness of the holder to the Cooperative.

NOTE 17 – CAPITAL RESERVE

Capital reserve as of August 31, 2018, is as follows:

Unallocated capital reserve $59,848,224 Fair value adjustment 11,014,397

TOTAL $70,862,621

Unallocated Capital Reserve Total net margins less patrons’ net margins are designated as the Cooperative’s net margins. These margins are taxable to the Cooperative and consist of all patronage-sourced net margins not allocated to patrons, as well as any nonpatronage-sourced net margins.

Fair Value AdjustmentThe fair value adjustment relates to the merger with Co-op Country Farmers Elevator. The fair value adjustment consists of total assets less total liabilities, and patrons’ equities brought over from the merger with Co-op Coun-try Farmers Elevator.

NOTE 18 – RETIREMENT PLANS

Co-op Retirement Plan The Cooperative is one of approximately 400 employers that contribute to the Co-op Retirement Plan (“the Plan”), which is a defined benefit plan constituting a “multiple employer plan” under the Internal Revenue Code of 1986, as amended, and a “multiemployer plan” under the FASB Accounting Standards Master Glossary. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:

a. Assets contributed to the multiemployer plan by one employer may be used to provide benefits to em-ployees of other participating employers;

b. If a participating employer stops contributing to the multiemployer plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and

c. If an employer chooses to stop participating in the multiemployer plan, the employer may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

The Cooperative’s participation in the Plan for the year ended August 31, 2018, is outlined in the following table. Unless otherwise noted, the most recent Pension Protection Act (PPA) zone status available in 2017 and 2016 is for the Plan’s year-end at March 31, 2017 and 2016, respectively. The zone status is based on information that the Cooperative received from the Plan and is certified by the plan actuary. Among other factors, plans in the red zone are generally less than 65% funded, plans in the yellow zone are less than 80% funded, and plans in the green zone are at least 80% funded. The “FIP/RP Status Pending/Implemented” column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented.


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AUGUST 31, 2018


NOTE 18 – RETIREMENT PLANS (CONTINUED)

Pension Fund

EIN/Pension Plan Number

Pension Protection Act

Zone Status

FIP/RP Status

Pending/ Implemented

Contributions

Surcharge Imposed

Expiration Date of Collection/

Bargaining Agreement

Years Ended August 31

2017 2016 2018 2017

Co-op Retirement

Plan

01-0689331-001 Green Green No $1,718,551 $1,572,266 No N/A

The Cooperative’s contributions for the years stated above constitute its total contributions made to all multiem-ployer plans and did not represent more than 5% of total contributions to the Plan as indicated in the Plan’s most recently available annual report (Form 5500). Plan-level information is included in Form 5500 and therefore is available in the public domain.

401(k) Plan In addition, a 401(k) plan is available to full-time employees after one year of employment. The plan is adminis-tered by Capital Bank and Trust. Under the plan, the Cooperative contributes 3% for each 1% an employee con-tributes up to a maximum 6% employer contribution. Employees participating in the plan are 100% vested. During the year ended August 31, 2018, Farmward Cooperative contributed $1,047,308 to the 401(k) plan.

NOTE 19 – OPERATING LEASESThe Cooperative is leasing a number of different vehicles from Enterprise Fleet Management. The lease terms vary from 27 months to 48 months with various lease payments and beginning dates.

The Cooperative has also entered into various operating lease agreements for equipment under which terms extend beyond one year.

Payments for equipment under operating leases as of August 31, 2018, are as follows:

Payment Schedule Amount MaturityPitney Bowes mail machine and scale Quarterly $850 12-1-182011 Case IH FLX 3420 fertilizer floater applicator Annually 20,092 1-1-192014 Case IH 4530 floater Annually 51,809 10-1-182014 Case IH 4530 floater Annually 64,985 11-1-182014 Case IH SPX 4430 Patriot sprayer Annually 71,154 6-1-192015 Case IH FLX 4530 floater Annually 66,269 11-1-192015 Case IH SPX 4440 Patriot sprayer Annually 71,133 8-1-202015 Case IH SPX 4440 Patriot sprayer with 132’ boom Annually 76,934 6-1-202016 Ag-Chem 9300B TerraGator Annually 71,567 2-1-212017 Case IH SPX 4440 sprayer Annually 73,523 6-1-22(4) 2015 John Deere 9620R tractors Annually 86,221 9-21-202015 John Deere 9620 tractor Annually 21,000 10-12-22

Future minimum lease payments are due as follows:

August 31, 2019 $910,760 August 31, 2020 545,215 August 31, 2021 181,464 August 31, 2022 34,954 August 31, 2023 and later -

TOTAL $1,672,393

NOTE 20 – INCOME TAXES

Farmward Cooperative is organized as a taxable farmers’ cooperative marketing and purchasing company. Total cash paid for income taxes for the year ended August 31, 2018, was $139,112.

AgQuest Financial Services, Inc. is organized as a corporation under the laws of the State of Minnesota, and is subject to federal and various state income taxes. Total cash paid for income taxes for the year ended August 31, 2018, was $418,478.

NOTE 21 – LOAN COMMITMENTS

The Cooperative has unadvanced commitments to borrowers in the amounts of $39,235,521 as of August 31, 2018. The borrowers will draw from the loan commitments as needed.

NOTE 22 – CONTINGENCIES

The Cooperative is contingently liable for the quality and grade of grains it has on warehouse receipts.

A contingency exists for either gains or losses on exposed market positions resulting from market price changes, either up or down, from prices at the balance sheet date. Grain market positions are affected by buying and/or selling actual grain commodities or grain contracts. The market position indicates the Cooperative’s position at the close of business on the balance sheet date.

The Cooperative is contingently liable for any federal and state tax assessments that may arise regarding returns which have not had final acceptance by the respective tax authorities.

The Cooperative is contingently liable for any future costs which may arise by directive of federal and state regu-latory agencies relating to air, water, and waste management in the handling of agricultural products.

No other contingent liabilities are known to exist.


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AUGUST 31, 2018


NOTE 23 – SALE OF LEASES

Portfolio sales as of August 31, 2018, are as follows:

Sale Price Carrying Value Grain Recognized Deferred Servicing

$ 37,482,163 $ 36,215,959 $1,063,256 $202,948

NOTE 24 – FAIR VALUEThe following methods and assumptions were used by the Cooperative in estimating the fair value of its financial instruments:

· The carrying amount approximates fair value for cash and cash equivalents, accounts receivable, mer-chandise inventories, prepaid expenses, accounts payable, patrons’ credit balances and prepayments, and accrued expenses because of the short maturity of those instruments.

· The fair value of readily marketable securities and grain inventories and commodity derivatives is deter-mined using quoted prices in active markets or derived from prices in underlying futures markets.

· The Cooperative’s revolving line of credit and some term debt is variable-rate debt. Management believes the carrying amount of this debt approximates fair value because the interest rate on these financial in-struments changes with market prices.

· The fair value of fixed-rate long-term debt and capital lease obligations is estimated through a present value calculation based on available information on prevailing market interest rates for similar securities.

The Cooperative applies generally accepted accounting principles for fair value measurements of financial in-struments that are recognized or disclosed at fair value in the financial statements on a recurring basis. Generally accepted accounting principles establish a fair value hierarchy that prioritizes the inputs applied to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).

The three levels of inputs within the fair value hierarchy are as follows:

· Level 1 inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.

· Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in ac-tive markets, and inputs that are observable, or can be corroborated, for substantially the full term of the asset or liability.

· Level 3 inputs to the valuation methodology are unobservable and supported by limited or no market activity.

Assets and liabilities measured at fair value on a recurring basis as of August 31, 2018, are as follows:

CarryingValue

Fair Value MeasurementLevel 1 Level 2 Level 3 Total

Financial DerivativesMarketable Inventories $10,294,638 $0 $10,294,638 $0 $10,294,638

Commodity DerivativesAssets 2,938,988 2,938,988 0 0 2,938,988Liabilities (6,170,846) 0 (6,170,846) 0 (6,170,846)

Debt 0Notes payable, and capital lease obligations, fixed rate

(27,883,360) 0 (27,883,360) 0 (27,883,360)

As of August 31, 2018, there are no Level 3 inputs used in estimating the fair value of the Cooperative’s financial instruments.

Marketable Inventories Marketable inventories consist of grain inventory, net of patron owned grain and price later and basis fixed obli-gations, stated at net realizable value. Net grain inventory is readily marketable, has quoted local market prices, and may be sold without significant additional processing. The Cooperative estimates the net realizable value of this inventory based on exchange quoted prices adjusted for differences in local basis markets and includes it in Level 2 inputs. A change in the net realizable value of inventory is recognized in the Cooperative’s statement of operations as a component of cost of goods sold.

Commodity Derivative Assets/LiabilitiesIn the normal course of operations, the Cooperative purchases and sells grain commodities. The Cooperative also enters into futures contracts offered through regulated commodity exchanges that are used to reduce exposure to changes in commodity prices. These contracts are not designated as derivatives under ASC 815, Derivatives and Hedging. These futures contracts are readily marketable and have unadjusted quoted market prices. The Cooperative estimates the fair value of the futures contracts based on exchange quoted prices and includes it in Level 1 inputs. The Cooperative’s gains or losses on its purchase and sales contracts are adjusted for differences in local basis markets and, therefore, classified as Level 2 inputs. A change in the fair value of these contracts is recognized in the Cooperative’s statement of operations as a component of cost of goods sold.

Notes Payable and Capital Lease Obligations, Fixed Rate The Cooperative estimates the fair market value of this term debt based on quoted interest rates for similar liabil-ities in active markets and includes it in Level 2 inputs.


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AUGUST 31, 2018


NOTE 25 – MERGER

The membership of Co-op Country Farmers Elevator voted in favor of a plan of merger with Harvest Land Co-operative to form Farmward Cooperative, with an effective date of September 1, 2017. Harvest Land Cooperative, now operating as Farmward Cooperative, acquired substantially all of the assets and assumed substantially all of the liabilities and 100% of the equity of Co-op Country Farmers Elevator. Equity ownership of $8,988,634 in Co-op Country Farmers Elevator was exchanged on a dollar-for-dollar basis for $8,988,634 in equity with Farmward Cooperative. The purpose of the merger was to expand the Cooperative’s trade area related to the sale of grain, agricultural, and feed products. The acquisition date in measuring fair value was September 1, 2017. On that date, the Cooperative recorded assets of $63,454,635, assumed liabilities of $43,451,604, issued $8,988,634 of equity credits to the former patrons of Co-op Country Farmers Elevator, and recorded a balance of $11,014,397 as a fair value adjustment which was reported in the Patrons’ Equities section. There were no assets or liabilities recog-nized in this merger arising from contingencies.


AUGUST 31, 2018 Notes

36 Advancing with Purpose, Vision and Strategy

Notes

41277 farmward ar 2018 · 2019-01-08 · tomers the products and services they need to succeed...

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