page 4 flying thecoop members from How tokeep Rural COOPERA COOPERA SA/RrlDvlpet January/February2005 USDA /RuralDevelopment TIVES TIVES COMMENTARY

Rural America’s role in the energy economy

As the second term of the Bush President Bush has user-friendly to consumers and pro- administration begins, I want to ducers. express USDA Rural Develop- said America must In the 1890 Land Grant Colleges ment’s continued commitment to and Universities Initiative, we added the positive agenda the President have an energy policy 30 new 1890 scholars in December. has outlined for rural America. A Our goal is to hire some of these major component of the adminis- 1890 scholars for exceptional careers tration’s domestic agenda contin- that plans for the here at USDA. ues to be forming a new energy One of the more competitive policy with the development of future, but meets the programs available through USDA renewable energy technology play- Rural Development’s Cooperative ing a key role. This ties into our needs of today. Programs is the Value-Added bio-based and bio-energy pro- Producer Grants (VAPG). These grams. Both the nation’s farmer grants consist of planning or using and utility cooperatives are playing gram will benefit the environment, working capital to establish a value- a major role in this effort, and that will help reduce our dependence on added agricultural marketing ven- role will certainly grow in the years foreign oil and will boost revenues ture, many of which are owned by ahead. for farmers and their co-ops, which cooperatives. For an example, see This effort includes the in turn bolsters the entire rural the Value-Added Corner on page Renewable Energy Systems and economy. 15 of this issue for a look at Golden Energy Efficiency Improvements President Bush has said America Ridge Cheese Cooperative in Iowa Grant Program (9006) from the must have an energy policy that and the article about Crooked Bow 2002 Farm Bill. This initiative plans for the future, but meets the beef strips on page 7. Last year, makes it possible to finance the needs of today. This will be our approximately $13.2 million in purchase of renewable energy sys- goal as we finance new technolo- grants were available for up-and- tems and to make energy improve- gies needed to convert bio-mass coming cooperatives in rural ments for agricultural producers into bio-based products and bio- America. and rural small businesses through energy in a manner which is cost- As you can see, our USDA Rural grants offered through our business competitive in large national and Development team is committed to programs. Other efforts include international markets. U.S. produc- providing strong leadership to USDA Rural Development electric tion of ethanol from corn was 60 increase economic opportunities loans that encourage the inclusion million gallons in the mid-1970s; in and improve the quality of life for of renewable energy sources to help 2004, the U.S. produced an esti- citizens living in America’s rural power America’s rural electric grid. mated 3.4 billion gallons. communities. We look forward to To help achieve this goal, USDA USDA has also made great working with you to bring such Rural Development has forged a progress in the implementation of opportunities to you and your partnership with the Environmen- the President’s management agen- community. ■ tal Protection Agency to promote da, including the e-Government — Peter J. Thomas, development of new, agricultural- Initiative; our services are now Administrator, based renewable energy projects available on the World Wide Web. Business & Cooperative Programs, (see Newsline, page 40). This pro- As a result, our programs are more USDA Rural Development

2 January/February 2005 / Rural Cooperatives Rural January/FebruaryCOOPERACOOPERA 2005 TIVESTIVESVolume 72 Number 1

FEATURES & NEWS

4 Flying the coop Why members leave co-ops and ways to prevent it Rural COOPERATIVES (1088-8845) is published By Catherine Merlo bimonthly by Rural Business–Cooperative Service, U.S. Department of Agriculture, 1400 Independence Ave. SW, Stop 0705, Washington, DC. 20250-0705. p. 4 8 Leaving home? The Secretary of Agriculture has determined that publication of this periodical is necessary in the Reasons vary for co-op conversions; critics remain wary transaction of public business required by law of By Nancy Jorgensen the Department. Periodicals postage paid at Washington, DC. and additional mailing offices. Copies may be obtained from the Superintendent of 12 Co-op stock exchange Documents, Government Printing Office, Washington, Why choice of trading rules matters DC, 20402, at $23 per year. Postmaster: send address change to: Rural Cooperatives, USDA/RBS, Stop for new-generation co-op stockholders p. 8 3255, Wash., DC 20250-3255. By Steven J. Holland & Robert King Mention in Rural COOPERATIVES of company and brand names does not signify endorsement over 17 Of necessity & invention other companies’ products and services. Conference shows diversity of responses Unless otherwise stated, contents of this publication by co-ops to changing markets are not copyrighted and may be reprinted freely. For By Kimberly Zeuli noncopyrighted articles, mention of source will be appreciated but is not required. p. 22 22 Charley’s Angels The United States Department of Agriculture (USDA) prohibits discrimination in all its programs and Co-ops show true colors sending aid to activities on the basis of race, color, national origin, Hurricane Charley-ravaged Southern states sex, religion, age, disability, political beliefs, sexual By Stephen Thompson orientation, and marital or family status. (Not all prohibited bases apply to all programs). Persons with disabilities who require alternative means for 26 Retail co-ops advised to foster member communication of program information (braille, large print, audiotape, etc.) should contact USDA’s TARGET p. 27 identification, not force conformity Center at (202) 720-2600 (voice and TDD). By Janet Ciccone

To file a complaint of discrimination, write USDA, Director, Office of Civil Rights, Room 326-W, Whitten 27 Paper or plastic? Building, 14th and Independence Avenue, SW, For single-serve milk market, the answer is plastic Washington, D.C. 20250-9410, or call (202) 720-5964 (voice or TDD). USDA is an equal opportunity By Dan Campbell provider and employer.

Gilbert Gonzalez, Acting Under Secretary, DEPARTMENTS USDA Rural Development 2 COMMENTARY Peter Thomas, Administrator, Rural Business-Cooperative Service 15 VALUE-ADDED CORNER

Roberta D. Purcell, Deputy Administrator, 20 LEGAL CORNER USDA Rural Business-Cooperative Service 34 NEWSLINE Dan Campbell, Editor 44 NEW USDA CO-OP PUBLICATIONS

Vision Integrated Marketing/KOTA, Design Have a cooperative-related question? Call (202) 720-6483, or On the Cover: Fax (202) 720-4641, Information Director, Our cover story discusses strategy for preventing members from “flying the This publication was printed with vegetable oil-based ink. coop.” Greg Spalenka’s art has also been featured in Time, Newsweek, The Wall Street Journal, New York and Los Angeles Times and many other publi- cations and books. To see more, visit: www.spalenka.com.

Rural Cooperatives / January/February 2005 3 Flying the coop Why members leave a co-op and ways to help prevent it

By Catherine Merlo But they shouldn’t have been, says consternation. Coincidentally, the co- the 49-year-old, whose family had op’s long-time CEO was preparing to Editor’s note: Merlo is a freelance been with the farmer-owned co-op retire, and the search had begun for writer and former co-op communications since the 1930s. Palla himself had been new management. director based in Bakersfield, Calif., who a member for more than 20 years. Palla had expressed his views about specializes in issues pertaining to coopera- “For months, I had been urging the the board’s “inherent deficiency in its tives. co-op to reconsider its process for oversight of management.” He had selecting a new chief executive officer recommended more emphasis on n August 2002, grower (CEO),” he says. “It was faulty. Also, strategic planning. He had even sug- Greg Palla rose before the co-op had exhibited poor perfor- gested the board consider adding an the board of directors of mance. I felt the board did not have outside director to offer a different I a major regional market- proper oversight on the co-op’s policy perspective. He had been met with ing cooperative and or management.” what he calls “cross looks.” made a startling announcement. The co-op, accustomed to annu- “The board was not inclined to Standing before the group during al sales of $500 million and high- hear my message,” says Palla. executive session, Palla announced he er, had come through a rough Changes weren’t made. Six was resigning from the 50-member marketing season the year months after his resignation from board after nearly 10 years as one of its before. For the first time in the board, Palla ended his connec- directors. decades, it had been forced to ask for tion with the association during the “They were shocked,” Palla remem- a return on payment advances made to co-op’s annual membership sign-out bers. members. That had caused widespread period.

4 January/February 2005 / Rural Cooperatives Lack of response prompts million. This decline reflects the mance speaks much more loudly,” he co-op members to quit decreasing number of farms, farmers says. Palla wasn’t alone in his departure. and ranchers in the United States. But Problems can develop when mem- Three more long-time directors soon these numbers also drive home the bers perceive their co-op isn’t doing as resigned from the co-op’s board and importance of sustaining cooperative well as a competitor or the open mar- membership. Numerous members also membership when the overall pie ket, or if its performance has lagged withdrew, angry and disappointed over shrinks — at a time when volume mat- behind the industry average for three having to pay back the advances the ters and markets have become more or four years. co-op had overpaid on its marketing competitive. “A co-op can lose members when pools. there’s no real or perceived value in the The co-op’s management troubles co-op,” says Joe Huffine, manager of deepened. Nine months after hiring member services for Tennessee him, the board fired the new CEO. Farmers Cooperative, a federated farm The experience hasn’t soured Palla Co-ops that have supply co-op with 64 members repre- on co-ops. He remains a member of senting 70,000 farmers. two other co-ops and serves as board strayed too far “It’s very important to evaluate the chairman for one of them. services offered to determine if they’re “I still believe in growers banding from their original being utilized or meeting current together to enjoy economies of scale needs,” Huffine says. and have ownership in their particular Not meeting members’ needs can activity,” he says. “But what happened purpose or aren’t in create indifference to the co-op, adds made me aware there are inherent Huffine. Members can also drift away concerns at co-ops.” touch with member when they perceive the co-op is not Today, the co-op Palla left has focused on profitability or future rebounded with a new CEO, a return needs “are often the growth and needs. of many previously departed members “When you’re not returning and successful results. But both Palla co-ops with the most patronage, when they see little or no and the co-op have learned hard value or your co-op’s services are not lessons from the experience. problems and least compatible with their needs, members can become disenchanted,” Huffine Reality of member departures says. “Then the co-op becomes like The case illustrates the reality that loyal membership.” any other business and members may few cooperatives publicly like to talk seek out someone else. Perceived indif- about: members do grow unhappy and —Joe Huffine ference to members can create a wall withdraw from their cooperatives. of obstruction for any business, espe- Certainly, not all member withdrawals cially a cooperative.” stem from frustration. A co-op can lose Co-ops that have strayed too far members when they die, retire or leave from their original purpose or aren’t in the business. Performance first touch with member needs, Huffine But co-ops also lose members for A co-op’s performance is paramount adds, “are often the co-ops with the more sharp-edged reasons, such as in retaining members, says Dan most problems and least loyal mem- poor performance by the association, Vincent, president of Pacific Coast bership.” questions about its credibility or lead- Producers (PCP), a 176-member fruit ership, or inadequate products and ser- and vegetable processing and market- Contending with competition vices. In an era of fewer farmers and ing cooperative based in Lodi, Calif. Co-ops also may lose members to farmer-owned co-ops, membership loss Vincent, who became PCP presi- competing businesses or even other can pose serious problems for a co-op. dent in June 2004, says, “The best farmer-owned organizations. According to USDA’s Farmer advice I’ve had came from our previous “Competition is legitimate and can Cooperative Statistics for 2002, U.S. president: Run the co-op like a busi- be healthy for business,” Huffine says. farmer cooperatives number 3,140, ness. In today’s market, members are “But it can also be a death sentence for down 89 from 2001. This includes investing in us and expecting a decent co-ops not willing to adapt to current losses from mergers, closures and con- return. If they’re not getting it, they’ll membership and market demands.” versions. Between 1993 and 2002, take their business somewhere else.” He points out that many co-ops no memberships in U.S. farmer coopera- Palla agrees. “A co-op can buy ads longer have just local competitors to tives dropped from 4 million to 2.8 and give out hats and toys, but perfor- contend with. With the advent of

Rural Cooperatives / January/February 2005 5 national companies through attrition farming communities, where directors communications are essential to solid and consolidation, competition has usually live, are small and close-knit, member relations. Forthright and widened to a national scope. Farmers Palla says. Farms are so often steeped straightforward communications are and ranchers can even turn to the in family tradition that it can be hard the best way to earn members’ trust Internet for products and services. All to separate the family farm from the and support, says Palla. that’s created an atmosphere of “sur- co-op. “Make sure the membership under- vival of the fittest,” Huffine says. Palla recalls hearing one long-time stands how the co-op is attaining its Competitors looking to boost their director emphatically state that the co- level of performance,” says Palla. “If market share can do more than offer op’s board had only to hire a CEO, not the performance is less than targeted, promises of better prices, products or question his or her management deci- explain why — not with excuses, but services. They can sabotage a co-op’s sions. with reasonable, plausible explanations. efforts, undermine its relationship with “That doesn’t sit right with me,” That’s the best way.” members or deliberately attempt to Palla says. “If a board member is not The small service co-op where Palla woo them away. questioning management, he’s not ful- serves as board chairman is doing a Dr. Shermain Hardesty, Extension filling his fiduciary responsibility.” “great job” of member retention, he economist for cooperatives and mar- Further, he says, “I maintain that says, despite fewer producers as a keting at the University of California the board needs to review its strategic result of retirements and consolidation at Davis, has seen that happen between plan and the performance of its CEO of farming operations. Its success is co-ops. on an annual basis. That is the mini- partly due to a board that “sets aside “There were two rival co-ops in mal fulfillment of a director’s fiduciary its own personal objectives in favor of California,” Hardesty says. “One co-op responsibility.” the co-op’s objective.” had been struggling, and the other said The co-op also does a good job all kinds of negative things about it. Communications are essential communicating its performance status This just added fuel to the fire.” Whether it’s between directors and to members. “The books are open to The negative campaign created members, or directors and manage- them,” Palla says. “We go through all more doubt in the minds of members ment, or management and members, financial statements in detail at least at the struggling co-op. As a result, Hardesty says, many members left the troubled co-op, further weakening it. In time, it closed its doors for good. Actions that help retain members In addition to delivering a strong financial performance, co-ops can help The role of the board retain their members in other ways, such as: A co-op’s board plays an important • Listening. Board members and management should listen to members to be role in member retention. In fact, “the aware of what they want and need. Create opportunities by holding meet- board can make or break a co-op,” ings or roundtable discussions or simply visiting with members. Huffine says. • Educating. Whether it’s through face-to-face meetings or a regular newslet- “A board member plays a significant ter, keep members informed about performance, policy decisions, co-op role because he or she represents procedures or industry development. “Many co-ops today have members members,” Hardesty agrees. “It’s his or who are third and fourth generation owners,” says Joe Huffine of Ten- her duty to be in touch with them.” nessee Farmers Cooperative. “The younger generation has no sweat equity “If board members are fulfilling in the co-op. It’s always had the co-op in the community. It’s imperative for a their responsibilities so that a co-op co-op to educate the next generation of members and employees.” achieves its performance objectives, • Being involved in the community. “If you’re an integral part of the communi- why would a member go anywhere ty, people will support you better,” says Huffine. “Publicize the good you do else?” asks Palla. for your community.” Those efforts might include scholarships, support of But too often, board members fail youth organizations like FFA or 4-H, or volunteering activities by co-op in their responsibilities. employees. “The majority of board members • Taking a fresh look. A co-op may need a face lift in its mission, strategy or are often there for the ride,” says Palla. marketing efforts. Maybe it’s time to reintroduce your co-op to its communi- “Too many directors view their role ty with a name recognition campaign. Annual meetings may also need some more as an honor rather than perform- revising. “Co-ops need to take a close look at their annual meetings,” says ing a fiduciary responsibility represent- Huffine. “Are you getting enough bang for your buck at them? Are you happy ing the membership. It becomes a or satisfied with them?” He suggests co-ops may want to plan annual meet- social club.” ings with more member education on the agenda. ■ That happens frequently because

6 January/February 2005 / Rural Cooperatives once a year with members.” eroding, it’s time to reevaluate the ben- have no regrets whatsoever,” he says, Whether a co-op is large or small, it efit of your co-op to members today,” “except that I wasn’t able to be more needs the support of its members to he says. “Maybe you need a third party effective in getting the board to recog- survive. Member retention takes work, to analyze your co-op. Problems may nize the problems I saw. The rank- commitment and a willingness to adapt be invisible to us but obvious to others. and-file member who’s not inside the to the needs of your members, Huffine It may be time to adopt a new business leadership is dependent on those lead- says. or marketing strategy.” ers to lead. Having seen it from the “If you’re losing members, if you’re As for Palla, he remains confident inside, I can say it’s often not adequate not getting growth or your margins are of his decision to leave the co-op. “I at all.” ■

USDA, MSU Extension help Crooked Bow beef take a bow

he newest addition to value-added products from what they the made-in-Montana produce. T pantry, Crooked Bow The co-op now has six members, smoked beef strips, had owns the Crooked Bow brand and its an impressive debut in members raise the beef that is smoked September when it was sold at the and turned into strips. Other Flathead Smithsonian Institution’s new Reservation producers have shown an National Museum of the American interest in joining. The beef strips are Indian in Washington, D.C. The prepared and packaged in Mission museum gift shop’s first consignment Mountain Market’s licensed commer- of 200 packages sold out almost cial kitchen and certified organic food immediately. Crooked Bow’s beef processing center. The facility was cre- strips — a very old recipe in a brand ated to help area entrepreneurs test, new package — are made of grass-fed develop, refine and prepare and market beef raised by Salish, Kootenai and value-added food products of all kinds. Pend O’Reille tribal members of the A nonprofit entity, the market is Flathead Native Agricultural also a business incubator that provides Cooperative. The beef is hand- expertise on food-related regulatory stripped and seasoned with locally Very old recipe, brand new package: the issues and business and cooperative grown huckleberries and chokecher- just-introduced Crooked Bow brand development, including possibilities ries, a touch of apple cider vinegar smoked beef strips. MSU photo by Erin Raley. for capitalization. Other MSU faculty and honey, then smoked over alder. helped develop the product, adapt the Helping in the development of the the Flathead Reservation. Clairmont original recipe for commercial pro- product was a $100,000 Value Added was “the key player” in pulling togeth- duction, and train the people who Producer Grant awarded in 2002 for er the cooperative, according to Jan prepare the strips in food handling working capital for the project by Tusick, a manager with the Mission and food safety. The Crooked Bow USDA Rural Development. Mountain Market Cooperative product line is to be enlarged soon The agricultural cooperative is a Development Center in Ronan. Five with the addition of a beef stick prod- result of work done by Joel Clairmont years ago, Clairmont began talking uct. For more information, contact the of the Salish tribe, who is the Montana with the ranchers about ways they Flathead Native Agricultural Co-op, State University Extension agent on might combine forces and develop (406) 745-7500, ext. 2202. ■

Rural Cooperatives / January/February 2005 7 Leaving home? Reasons vary for co-op conversions; critics remain wary of producers losing control

The debate involves many of the same principles and issues that arise in the sale of co-ops to non-cooperative businesses, recent examples being the sale of Minnesota Corn Processors and the now-scuttled sale of FCSAmerica (see Nov-Dec. issue of this magazine). Are producers sacrificing their long- term good and that of producers who follow them for short-term gains? Is the conversion being undertaken pri- marily for the benefit of management staff or a select few members with large amounts of stock, rather than the overall membership? Or will the con- version open the door to greater mar- keting clout for producers? Should the definition of “cooperative” be expand- ed to include producer-owned LLCs as a new type of co-op, and should they receive Capper-Volstead protection? These are just examples of the ques- tions raised by some co-op conver- sions. This article does not examine all of these questions, but it will focus A load of soybeans arrives at the South Dakota Soybean Processors (SDSP) plant in on why several co-ops have recently Volga, S.D. Photo courtesy SDSP converted to LLCs or other corporate structures, and how some co-op lead- By Nancy Jorgensen or other business forms in recent years. ers view co-op conversions. And of these, most proudly say that Editor’s Note: Jorgensen worked for they are still producer controlled. Why some co-ops convert CoBank in Denver for 13 years before Regardless, co-op conversions con- Attorney Mark Hanson is viewed by establishing her own communications and cern some co-op leaders, who say the some as an “evangelist” in the cause of marketing consulting business in risk is great that converted co-ops will co-op conversions, having been the Pomerene, Ariz., which specializes in coop- eventually wind up under the control architect of several. “We’re supportive eratives. of outside investors. of co-ops,” says Hanson, an attorney Promoters of the concept counter with Lindquist and Vennum, a o-op conversions aren’t that co-op conversions give producers Minneapolis-based firm with 13 attor- exactly sweeping the another avenue for raising capital neys devoted to co-op law. “We still nation — only a handful needed to become players in value- help form more new co-ops than we C have converted to limited added agriculture markets and can help convert. But some successful co-ops liability companies (LLCs) them gain other operating efficiencies. have outgrown the form.”

8 January/February 2005 / Rural Cooperatives Hanson says co-ops convert for ments by producers. In these four company to remain farmer-owned, but three major reasons: “To gain capital, cases, the minimum investment they want to pass shares down to their to gain liquidity or to access enterprise required for membership ranged from children, even if the children aren’t value — the value of the business as a $1,500 to $20,000. farmers.” going entity. In successful co-ops, the Farmer-members of all four co-ops The new LLC structure brings value of the farmers’ commodities is voted to adopt new structures that shareholders more liquidity, since they small compared to the co-op’s enter- allow for non-farmer investment. In can sell shares to non-farmers. Shares prise value.” each case, more than 80 percent voted recently traded for $6. Hanson estimates that only a dozen for the conversion. It is important to “Farmers are proud to own the co-ops have converted to LLCs or note that all but one of the companies business, but at the end of the day, other business forms in recent years. remains 100 percent farmer-owned and they want to make money,” says Staley. This doesn’t include conversions of co- controlled. Dakota Growers raised “Even if that means a different [busi- ops which have all their members outside capital, but farmers still own ness] structure.” residing in only one state. These are more than 90 percent of the shares. Staley adds that under the LLC harder to track because they aren’t reg- structure, farmer-owners continue to ulated by the federal Securities and benefit from the market the company Exchange Commission. However, the created for grain, but they are no number of such “one-state” co-op con- longer obligated to deliver grain to the versions is thought to be very small. company. This benefits those who no On the other side of the “conver- longer farm, or who can’t meet their sion aisle” is E.G. Nadeau, director of obligation in times of poor production. research, planning and development for Cooperative Development Services U.S. Premium Beef, Ltd., in Madison, Wis. Nadeau is a defender (an LLC); Kansas City, Mo. of the traditional co-op model who Steve Hunt, CEO of U.S. Premium sees serious problems ahead if the Beef (USPB), says liquidity of member small number of co-op conversions and investments ranks as the top reason for demutualizations becomes a trend. USPB’s conversion. “The LLC struc- In a report on demutualization (the Dakota Growers Pasta Co. in ture increases liquidity and flexibility term commonly used for conversion of Carrington, N.D., is now the nation’s for our members,” says Hunt. “As their consumer co-ops — such as housing, third largest producer of dry pasta businesses change, they may want to utility, insurance, food and credit co- products. Photo courtesy Dakota slow down, divest or expand.” ops — to investor-owned business) Growers Pasta USPB’s 1,900 members include which he co-authored for the National ranchers and feedlot owners in 36 Cooperative Business Association, states. At its initial stock offering in Nadeau noted that Australia once had Golden Oval Eggs LLC; 1996, owners purchased a minimum of a large co-op business sector, but expe- Renville, Minn. 100 shares at $55 per share, with each rienced “massive privatization” in One of the top 10 producers of liq- share representing the right and oblig- recent years. uid eggs in the nation, Golden Oval ation to deliver one finished animal to While such occurrences are still Eggs owns more than 5 million laying USPB’s processing company. rare in the United States, “growing hens and had sales of $80 million in its Today, the company owns the economic pressures to demutualize last fiscal year. In 1994, when Golden nation’s fourth largest beef processor, requires a coordinated response if Oval formed, the co-op required its National Beef Packing Co. It had been widespread loss of member choice and 700 farmer-owners to deliver a mini- partners with Farmland Industries in control is to be avoided,” he wrote. mum of 2,000 bushels each of feed the company before buying out Lack of capital is often used to justify corn annually, and to invest $3.50 per Farmland when the latter filed for co-op conversions, he adds, saying this bushel, with each bushel representing a bankruptcy. underscores the need to find new ways share. Since converting in late 2004, to help co-ops gain access to capital. The desire for greater transferabili- USPB has offered two classes of stock, The four co-ops discussed below ty of co-op stock was the major reason of which only Class A stock owners are each started out as new-generation, it converted to an LLC. obligated to deliver cattle. A member value-added co-ops. Adding value to “A lot of our shareholders are who owned 100 shares before the con- farm commodities usually requires retirement age,” says Marie Staley, vice version now owns 100 Class A units building capital-intensive processing president and chief administrative offi- and 100 Class B units, which combined plants, and that means sizable invest- cer for Golden Oval. “They’d like the now trade for $170.

Rural Cooperatives / January/February 2005 9 Owners of Class A units also benefit patronage relationship with our mem- $3.85 each, and to deliver 1,500 from receiving a dividend based on the bers for the added soybeans we would bushels of durum each annually to the profitability of the company, and addi- need.” co-op. tional premiums based on the quality Christianson says members have Back then, the Durum Triangle of of beef they deliver. Class A units seen their original minimum invest- north-central North Dakota produced receive 33 percent of dividends, while ment of $5,000 increase two to three most of the nation’s durum, a wheat Class B units earn 66 percent. times. “Our goals remain steadfast: used to make pasta. But years of heavy “A rancher nearing retirement adding value and returning that value rains in the area following the forma- could sell Class A units to a niece who to our members. The direction is in tion of the co-op caused the spread of raises cattle, for example, and hold on the hands of our members and the a plant blight known as scab. As a to his Class B units,” Hunt says, board of directors. The organization result, durum production declined in USPB, which had $800 million in builds and keeps loyalty only if it adds the co-op’s primary membership area, net sales for 2003, continues to see value to its membership.” SDSP’s gov- so production moved west to other major benefits in remaining a produc- ernance has retained many co-op fea- parts of North Dakota and Montana. er-owned business. “Surveys of USPB tures, such as one-member, one-vote. “Mother Nature wasn’t kind to the customers show that consumers trust a farmers who originally put up the product that’s directly tied to the pro- money,” says Timothy Dodd, CEO of ducer,” Hunt says. “They trust how Dakota Growers. “Our members no we treat our animals and the longer had the ability to deliver environment, our animal health high-quality durum.” Members practices, and the quality of our tried to swap grain with the new beef.” producers. “Still, we ran the risk of being called on the South Dakota Soybean carpet [for failing to source Processors LLC; Volga, S.D. the majority of their crop Rodney Christianson, CEO from members] with no of South Dakota Soybean source of durum.” Processors (SDSP), cites taxes as Despite this chal- the No. 1 reason his co-op’s lenge, ownership in Dakota 2,100 members voted to become Growers proved profitable. an LLC in 2002. “We paid back farmers’ origi- A co-op may pass tax liabilities on nal investment long ago to its members based on business done through dividends and stock splits,” with each member — based on patron- Dodd says. age. However, the South Dakota com- Since the conversion in 2002, pany expects to handle more non- investors have owned two types of patronage business in the future, and USPB owners also responded to tax stock: common stock, which can be co-op members would be double-taxed concerns. “As a co-op, anything sold to anyone, and Series D stock, a on that business — both at company deemed non-patronage income was preferred stock conveyed exclusively to and individual levels. double-taxed,” says Hunt. “As an LLC, co-op members before the conversion. In an LLC, Christianson says “All we can pass through all taxes to the Series D stockholders own a first- profits and tax liabilities are passed on producer.” Non-patronage revenues in come, first-served privilege to deliver to the member or partner.” He says USPB’s future might come from apply- durum. They can transfer D stock to the LLC structure better meshes with ing food safety additives to the carcass other producers, subject to board SDSP’s goal to maximize member in the processing plant, he adds. approval. profits. Christianson estimates 2004 Dakota Growers, the third-largest sales at $240 million. Dakota Growers Pasta Co. Inc., manufacturer of dry pasta products in Based on members delivering 28 (a C-corporation); Carrington, N.D. North America, generated net rev- million bushels of soybeans per year, Durum growers in North Dakota enues of $145 million in 2003, despite the company produces 620,000 tons of and Minnesota formed Dakota more consumers trending toward low- soybean meal, 50,000 tons of hulls and Growers Pasta in 1991, before the carbohydrate diets. Through a part- 310 million pounds of oil. “What if term “new generation co-op” had even nership with another firm, Dakota SDSP develops a market for 40 million been coined. About 1,000 producers Growers has responded with a new more pounds of oil?” Christianson agreed to purchase a minimum of product offering that reduces the num- asks. “It would be difficult to develop a 1,500 shares in the new co-op for ber of digestible carbs found in tradi-

10 January/February 2005 / Rural Cooperatives tional pasta. This pasta will be market- Lindquist and Vennum’s Hanson side capital since its conversion. In ed under the Dreamfields brand. — who represented three of the four 2004, MVC Capital provided $5 mil- Meanwhile, Dakota Growers refuses co-ops (all but SDSP) — weighs in on lion in equity financing to the pasta to give up on a production revival in the tax issue: “LLCs are tax-efficient company. the Durum Triangle. “We created an for distributing income over time, “We expect to use the funds to capi- agronomy department, and worked while C-corporations increase public talize on what we feel are excellent with breeders to develop a variety investment and liquidity,” he says. C- opportunities to promote a healthy that’s resistant to blight,” Dodd says. corporation status is preferable if lifestyle using the new Dreamfields While the other three co-ops con- leaders foresee the business becoming [low-carb] technology and to bolster verted to LLCs, Dakota Growers a publicly traded company. A co-op our position in the traditional pasta became a C-corporation. “The compa- should become an LLC if generating market,” Dodd says. ny took this route because it could income takes precedence over growth, “We missed out on some very reorganize on a tax-free basis, com- and if it wants to broaden access to appealing opportunities, especially pared to the LLC option,” says Ed capital. when Borden Foods exited the pasta Irion, the pasta company’s vice presi- business,” said Dakota Growers dent for finance. “It also provides New investors bring added capital Chairman Jack Dalrymple in 2002 greater opportunities for liquidity and Of the four co-ops discussed above, when the co-op converted. “We’re access to capital.” only Dakota Growers has sought out- continued on page 36

Study: co-op conversions rarely member-driven

According to a study commissioned by the National tages of co-op conversion for consumer-members are Cooperative Business Association, co-op conversions obvious,” it says. “When the business is motivated by are rarely driven by members or by perceived benefits profit, rather than by member service, most members to members. Rather, conversion is more often driven will pay more for the services or products they buy.” To “by co-op staff, leadership or outside consultants” slow the conversion trend, the study recommends a who stand to gain from a switch, according to the cross-sector campaign to communicate the benefits of report, Strengthening Cooperative Business Struc- member-owned businesses and state and federal leg- tures: Lessons Learned from Demutualization and islative or regulatory changes to prevent co-op leader- Cooperative Conversions. ships from gaining financially from conversions. Cooperatives that have high voting thresholds, that The study says rural electric cooperatives and retail engage their members in their activities, and that stay food co-ops have a near total immunity to conversion, connected to the community are less likely to fall prey while mutual insurance companies, particularly those to even the most aggressive conversion tactics, the that offer life insurance, have the highest susceptibility study says. The report, issued last year, was commis- to conversion. Credit unions and housing cooperatives, sioned by a coalition of organizations including the Con- constrained by outdated laws and regulations from sumer Federation of America, Credit Union National dealing with increasing economic pressures, are Association, CUNA Mutual Group, National Cooperative becoming conversion targets more often, the study Bank, National Cooperative Business Association, and added. the National Rural Electric Cooperative Association. Among the study’s sector-specific findings was that It was co-authored by E.G. Nadeau, a director with lack of liquidity, financial difficulties and financial Cooperative Development Services in Madison, Wis., incentives to management and directors have fed the and Rod Nilsestuen, long-time president of the Wis- pressure on farmer-owned co-ops to convert. Members consin Federation of Cooperatives and now Wisconsin of a converting farm co-op may enjoy short-term finan- Secretary of Agriculture, Trade and Consumer Protec- cial gains, but they face longer term losses as they lose tion. control over the price they are paid for their products. “The best way to avoid demutualization is to have As a result, the market imbalance that led to creation of active members engaged in the cooperative who rec- the cooperative in the first place may reemerge. ognize the role of the co-op in their economic well- Strengthening Cooperative Business Structures: being,” says NCBA President Paul Hazen. Lessons Learned from Demutualization and Coopera- Even though conversions are relatively rare, the tive Conversions is available from NCBA, 1401 New report said they merit attention because of their impact York Ave., NW, Suite 1100, Washington, DC 20005. Con- on their consumer-members. “The economic disadvan- tact Art Jaeger, (202) 383-5462 for more information. ■

Rural Cooperatives / January/February 2005 11 Co-op stock exchange Why choice of trading rules matters for new-generation co-op stockholders

By Steven J. Holland sions in a way that maximizes their Macalester College long-run welfare. Robert P.King, The model also includes a non- University of Minnesota cooperative firm that is not involved in farming but can build a processing Editor’s note: Holland is policy associate, plant or purchase a cooperatively Macalester College. King is professor and owned plant. The farmers in the head of the Department of Applied model can join together to create a Economics, University of Minnesota. cooperatively owned value-added pro- Please e-mail questions to: cessing plant, and the procedures for [email protected] trading cooperative stock can be modi- fied in the model in order to explore he new-generation coop- the implications of these organizational erative (NGC) is an design decisions. T institutional innovation • We use our model to investigate that has helped many three questions: farmers establish value- • Why do cooperatives often lead in added processing operations that the development of new types of would have been impossible to capital- value-added processing? ize with a traditional cooperative. • When is an NGC most likely to be NGCs — with well-defined delivery vulnerable to takeover by a non- rights/obligations and tradable shares cooperative firm? — were a driving force in the sharp • How do rules and procedures for increase in the number of cooperatives trading NGC stock affect coopera- formed during the 1990s. More tive formation and vulnerability to The diversification of stock benefits is one recently, though, concerns have begun reason so many ethanol cooperatives are takeover? to emerge about the long-run viability being organized on the new-generation of NGCs. co-op model. Our findings help explain NGC In 2002, for example, members of takeovers and conversions. They also Minnesota Corn Processors approved decisions that led to organizational point to some practical steps coopera- the sale of their cooperative ethanol change. In order to explore the ques- tive boards can take to make an NGC and corn sweetener business to Archer- tion of whether there are fundamental more attractive to new farmer Daniels-Midland, and members of forces common to all situations, we investors and more robust when faced Dakota Growers Pasta Co. approved developed a simulation model of coop- with takeover threats. conversion of their cooperative to an erative formation and the market for investor-owned corporation (see page cooperative stock. Why do co-ops often lead in the 8). Should these and other takeovers Our model is “populated” by farm- development of new types of and conversions be considered aberra- ers who produce a crop that can be the value-added processing? tions, or do they reveal an inherent raw product for a value-added process- A significant, but rarely mentioned, vulnerability of the NGC organiza- ing facility. These farmers differ in the advantage of farmer investment in an tional form? amount of land they farm, location and NGC value-added processing facility is Each takeover or conversion case is risk attitudes, but all manage their the benefit of diversification. Consider unique, with a sequence of events and resources and make investment deci- the case of corn producers who have

12 January/February 2005 / Rural Cooperatives an opportunity to invest in an ethanol Figure 1: Investment thresholds for an shares. Of course, this argument fails plant. These farmers always face the NGC and an IOF when the member’s shares cannot be risk of large downward swings in the easily traded. This is called the “thin price of corn. market” problem. However, low corn prices increase In most cases, only a limited num- the operating margin for an ethanol ber of individuals are in a position to NGC, yielding higher patronage buy NGC stock because cooperative refunds. While investment in an laws require that members produce the ethanol plant carries its own risks, it product being processed. Among those can also result in a moderation of a who can buy stock, even fewer actually member’s overall exposure to uncer- will want to. tainty by blunting the impact of down- For example, many corn producers ward corn price fluctuations. In short, considering investment in an ethanol the NGC provides benefits to mem- plant will be too far from the ethanol bers beyond the ability to share in the plant to make membership in the enterprise’s profits. NGC a viable investment. Some sim- The opportunity to diversify helps ply will not be interested in investing. members, but it also helps the cooper- Figure 1 illustrates this point. An The thin market problem is made ative. If cooperative investors benefit ethanol plant is highly profitable when worse by the fact that members tend to from the diversification offered by the ethanol price is high and the corn have the same general objectives. For shares of an NGC, then they should be price is low. This corresponds to the example, when an ethanol plant is — and they apparently are — willing area in the upper left corner of the doing very well, there will be many to invest in an NGC processing plant figure, which represents conditions potential investors but there might be that is slightly less profitable than under which investment is desirable a shortage of sellers. On the other would otherwise be necessary to attract for anyone. In the lower right corner, hand, when an ethanol plant is not investment. The practical implication the ethanol price is low, the corn price profitable, many members may be will- is that it is easier for the cooperative to is high, and the ethanol plant is likely ing to sell but few will be willing buy- sell shares when the benefits of diversi- to be losing money. Here, no one ers. fication are known to potential wants to own an interest in the plant. In either case, little NGC stock will investors. The “investment thresholds” in figure be traded unless there are large The diversification benefits of 1 represent the conditions under increases or decreases in share prices, NGC stock ownership may help which an NGC and an IOF will first and investors will begin to fear that explain why so many ethanol plants find investment in an ethanol plant they will not be able to get out of the are NGCs. For example, according to desirable. investment. In other words, a thin the Minnesota Department of Because of the benefits of diversifi- market can make the decision to invest Agriculture, 11 of Minnesota’s 14 cation, potential NGC members are irreversible. ethanol plants are NGCs — account- willing to invest in value-added pro- This irreversibility can have two ing for over 85 percent of total cessing facilities under less favorable important effects on an NGC. First, ethanol production in the state. circumstances than IOF investors. As a potential investors may hesitate to buy As a general rule, investor-owned result, there should be market condi- shares if they anticipate the investment firms (IOFs) invest in ethanol produc- tions (those between the two invest- may be irreversible. This sort of think- tion because it promises to be prof- ment thresholds) where NGC mem- ing makes it much more difficult for itable — not because it helps to diver- bers would be willing to invest in a the NGC to raise initial capital. sify their portfolios. Consequently, processing facility when IOF investors The second problem occurs when they will build an ethanol plant only would not. This can give a start-up the NGC is able to form, but the mar- when it promises a level of profitability NGC the opportunity to form without ket for NGC shares becomes thin later sufficient to fully recoup the cost of interference from a competing IOF. on. Our model suggests that this is a their investment. New-generation distinct possibility. cooperatives, on the other hand, can When is an NGC most likely to be Generally, when an NGC makes its tolerate lower profitability because vulnerable to takeover by a non- initial offering, there are interested they offer the added benefit of diversi- cooperative firm? investors who are not able to buy fication to their members. It follows One of the reasons NGCs offer stock. Over the first few years after the that NGCs can raise the money to diversification benefits is because NGC forms, both the volume of stock build processing plants under condi- members can constantly adjust their trading and the share price are tions where IOFs would shy away. exposure to risk by trading their NGC propped up because producers who did

Rural Cooperatives / January/February 2005 13 not invest initially are trying to buy erative’s ability to raise money or sur- While a discriminatory auction is a into the NGC. Once most available vive a takeover attempt. convenient and easy way to match buy- investors have achieved a level of Economists often refer to a “per- ers and sellers, it may not be the best investment that fits their needs, fect” market, with many buyers and way to increase market liquidity. Buy- though, fewer people want to buy and many sellers shouting out the prices at ers, knowing they will pay their bid sell NGC stock and the thin market which they are willing to buy or sell price, have an incentive to submit a bid problem sets in. the good. If the quantity offered for that is lower than the amount they are Our analysis suggests the trading sale at the prevailing price is less than truly willing to pay. However, lower volume and share price of an NGC the quantity demanded, buyers will bid bid prices can mean that trades that will remain relatively high as investors up the price in an effort to buy the could have taken place if bids had been adjust their holdings of NGC stock. limited supply before their competition “honest” will not take place. This However, trading volume and share does so. increases market thinness. price will settle to much lower levels The same process brings the price An alternative to the discriminato- after this initial period of adjustment, down when supply exceeds demand. ry auction is a “competitive auction.” and this may present an opportunity The immediate and accurate exchange Under a competitive auction mecha- for an IOF looking to invest. of information makes this process hap- nism, successful bidders do not pay If the NGC share price drops far pen quickly and results in an equilibri- their bid price. Instead, everyone enough, the cost to an IOF of purchas- um “market price” at which supply trades at the same market clearing ing an existing processing plant will be equals demand. This is called a per- price — that is, the price at which the lower than the cost of building a new fectly competitive market. number of shares with bids at or one. This might be sufficient to pull For a perfectly competitive market above the market clearing price is the IOF into the market. At the same to exist in the real world there must be equal to the number of shares with time, NGC members who have been many buyers and sellers and free reserves at or below the market clear- frustrated about their inability to sell exchange of information. However, the ing price. shares to other producers might see an pool of potential buyers and sellers for With this rule, successful bidders offer from an IOF as too good to pass NGC stock is often small. Also, are guaranteed to pay an amount that up. This response to the thin market despite an NGC’s best efforts, there is lower than or equal to their bid, so problem may help explain why NGCs may not be a free flow of information they have no incentive to bid below are sometimes taken over by IOFs or when information about members their true valuation of the stock. choose to convert to legal forms that wishing to buy or sell shares is simply Higher bids imply more trading, and allow investment by non-producers. listed on a bulletin board or a Web this increases market liquidity. Results site. This does not provide a mecha- from our modeling analysis indicate How do rules and procedures for nism for potential buyers and sellers to that the shift from a discriminatory to trading NGC stock affect co-op quickly adjust price or quantity to a competitive auction can significantly formation and vulnerability to reflect market conditions. increase market liquidity and reduce takeover? Some NGCs have tried to over- the likelihood of takeover by an IOF. The thin market problem reduces come their inability to create a perfect, the demand for NGC shares, makes it liquid market for their stock by hold- 2) Diversify the NGC membership. more difficult for NGCs to raise capi- ing frequent stock auctions. But the Recall that a thin market can arise tal, and increases the chances of design of the auction format can have a when investors all have the same gen- takeover by an IOF. If NGCs are to significant effect on market liquidity. eral objectives. Another way, then, to fully realize their advantage over IOFs, We used our model to evaluate two improve liquidity in the NGC stock they must find a way to alleviate the types of auctions. market is to increase diversity among thin market problem. Here are three The first is called a “discriminatory” members. strategies that can help. auction. Potential sellers submit a For instance, when the NGC is reserve price and potential buyers sub- profitable, a young farmer may want to 1) Choose trading procedures carefully. mit a bid price. The cooperative then increase the level of his or her invest- NGCs use a variety of procedures matches buyers who submit high bid ment. Normally, he or she would have to trade their stock. In some cases the prices with sellers who submit low trouble finding a seller, but if the cooperative acts as a clearinghouse that reserve prices until no more matches NGC has a number of members near- puts willing buyers in touch with will- are possible. Inevitably, some people ing retirement, some of them might ing sellers. Many other NGCs orga- submit bids or “asks” that are unsuc- take that opportunity to sell their nize periodic stock auctions. When cessful. The defining characteristic of a shares. In this way, diverse ages can establishing rules for trading stock, few discriminatory auction is that success- improve market liquidity. boards consider the effect on the coop- ful buyers pay their bid price. continued on page 33

14 January/February 2005 / Rural Cooperatives V ALUE-ADDED CORNER Iowa cheese co-op helps preserve a way of life

Copyright 2004, Des Moines Register The Amish farmers invested more American Cheese Society’s annual of their own capital into the plant, for contest held in Milwaukee. ike the blue cheese it a total of $1 million, and brought in The competition is “considered produces, the Golden Neville McNaughton, a New Zealand one of the world’s most influential Ridge Cheese Cooper- native and cheese consultant who and prestigious competitions in rec- L ative had to age a while now lives in St. Louis. Like the blue ognizing the art of specialty cheese- before it was ready to go. mold that turns the Amish milk into making,” according to the American Founded five years ago by 40 Old cheese, McNaughton’s addition as Cheese Society’s Web site. Since Order Amish dairy farmers in northern general manager has turned the the announcement of the award, Iowa and southern Minnesota, Golden Golden Ridge co-op into a going McNaughton said, “Cheese is now Ridge was plagued by a series of pro- operation. flying out of here. People are calling duction problems before the first blue The co-op got a big boost in July us.” Prospects at the co-op weren’t so cheese wheels were shipped from its when its Schwarz und Weiss natural rosy when McNaughton first showed 12,500-square-foot plant north of rind blue cheese tied for first place in up at the Golden Ridge plant. Cresco, Iowa, last January. the blue cheese category of the “This was a stalled project,” he said.

Cream of the crop: Neville McNaughton and Sara Bahgat pull stainless steel knives through a 7,000-pound batch of natural blue cheese at Golden Ridge Cooperative. Photo by Harry Baumert. Copyright 2004, Des Moines Register and Tribune Co. Reprinted with permission.

Rural Cooperatives / January/February 2005 15 “They couldn’t decide how to get this With McNaughton on board and makes blue cheese at its plant in up and running.” the American Cheese Society award, Mindoro, Wis. Myrna Ver Ploeg, pres- McNaughton did a three-day assess- Gingerich said he thinks Golden Ridge ident of Maytag Dairy Farms, said she ment of the operation and re-wrote the has turned the corner. Golden Ridge did not think the Golden Ridge and co-op’s business plan. The co-op had makes three cheese products: Schwarz Maytag blue cheeses can be compared. been focused on making what und Weiss, which means “black and “Ours is so different because it is made McNaughton called commodity blue white” in German; Harmony Blue, by hand,” Ver Ploeg said. “They are cheese. “We refocused the plant on which has extra cream added, and very different cheeses, and they satisfy making a quality product that plays to Ultimate 50, which is half Amish cow different markets.” the strength of the milk,” he said. milk and half goat milk supplied by Joy The Maytag Dairy Farm, which was A $2 million loan guarantee was founded by Maytag appliance family obtained from the U.S. Department of members in 1941, no longer is con- Agriculture’s rural development agency nected with the company. The dairy is [USDA Rural Development]. That “Cheese is now flying privately owned by 12 Maytag family loan guarantee allowed the co-op’s members. The dairy does not release bank to advance it more money to out of here. People its sales numbers, Ver Ploeg said, but it reconfigure the plant. makes 1 million pounds of blue cheese Dan Gingerich, an Old Order are calling us.” a year and buys 27,000 gallons of milk Amish dairy producer from a day from small dairy farms within 15 Lanesboro, Minn., said the co-op miles of Newton. The Maytag dairy is members “didn’t realize what we were Peckham, whose Peckview Dairy expanding its aging calves to allow getting into” when they decided to Goats operation is near the plant. production to increase, Ver Ploeg said. form the co-op and make cheese. The Peckham sells the Golden Ridge “We don’t make enough cheese to dairy producers milk their small herds cheese and her other dairy goat prod- meet the demand,” she said. “We don’t by hand and sell the milk in stainless ucts at the Metro Market in Des want to be a big cheese company. We steel cans weighing 80 pounds that Moines and the Des Moines Farmers just want to be a good one.” hold just under 10 gallons of milk. Market. Gingerich, chairman of Golden The number of dairy processors will- “Last weekend, I sold everything I Ridge, said the same thing about the ing to handle their milk cans had brought in from Golden Ridge in the Amish co-op.“We want to keep it dropped from five to one, Gingerich first hour,” Peckham said. “I wish I had small,” he said. said, narrowing their marketing brought more.” Peckham said she McNaughton said Golden Ridge options considerably. hopes the Ultimate 50 cheese takes off now buys about 20,000 pounds of milk “I’m trying to hang on to the dairy,” so she can eventually sell to Golden a day from its Amish producers. But he said. “It got tougher to make a liv- Ridge all of the 500,000 pounds of only about 5,000 pounds of the milk ing on the farm than 20 years ago.” goat milk produced annually by her bought by Golden Ridge is processed Forming a cooperative to produce goats. Now, she sells almost all of her into cheese, McNaughton said. The cheese in a modern plant needed to be goat milk to a plant in Illinois. rest is sold to AMPI, a large regional examined by leaders of the Old Order Steve Logsdon, owner of the Basil dairy processor [and also a farmer- Amish, Gingerich said. For religious Prosperi Bakery in Des Moines, said owned cooperative]. The co-op’s goal, reasons, Old Order Amish do not use Schwarz und Weiss is selling well out Gingerich said, is to make all the many kinds of modern machinery. of his dairy case. Amish milk into cheese. Their lifestyle is best known for the “We carry European blue cheeses horse-and-buggy transportation on and Australian blue cheeses, and we’ve Editor’s note: this article is reprinted which the Amish rely.” Our elders had a really good response to the courtesy the Des Moines Register. In addi- thought that in order to keep the fami- Golden Ridge cheese,” Logsdon said. tion to the $2 million USDA Business and ly farms going, we needed to change,” “People like the fact that it’s from Iowa Industry (B&I) Guaranteed loan men- Gingerich said. and that they are using their own tioned above, Golden Ridge Cheese “We needed something like this so milk.” The Golden Ridge cheese also Cooperative also received a $500,000 our children won’t have to live on one is priced competitively, he said, with a Value Added Producer Grant (VAPG) or two acres and become factory work- half-pound selling for $7 to $8, about from USDA Rural Development. To learn ers. On the one hand, it might be a the same as the nationally known more about both programs, visit: www.rur- modern concept, but on the other Maytag blue cheese, the only other dev.usda.gov, and follow the links for busi- hand, we needed to have something blue cheese made in Iowa. ness programs. Or call (202) 720-4323, like the cheese plant to keep our way Swiss Valley Farms, a farmer-owned and press “1” to be connected to your of life going.” cooperative with operations in Iowa, USDA Rural Development state office. ■

16 January/February 2005 / Rural Cooperatives Of necessity & invention Conference shows diversity of responses by co-ops to changing market conditions

By Kimberly Zeuli, eratives Conference — Cooperative Processors LLC, provided insight into Assistant Professor Innovation — highlighted some unique how farmers can successfully secure University of Wisconsin-Madison and successful examples of innovative the returns ethanol promises. agricultural cooperatives. The annual They both agreed that farmers need Editor’s note: More highlights of the conference, most recently held Nov. 1- to commit to success and be willing to 2004 Farmer Cooperative Conference will 2 in Kansas City, was established by sacrifice much for achievement. As leg- be included in the March-April issue of the University of Wisconsin Center for endary football coach Vince Lombardi Rural Cooperatives. Cooperatives (UWCC) in 1998, with once said, “winning is everything.” financial support from the Farm Success also requires patience. Ten “Innovation is rarely rocket Foundation, to provide an open forum years of planning went into the science…in the past few decades, most of the companies that have created truly extraordinary amounts of wealth have done so by inventing great processes, not great products.” (The Economist, April 24, 2004)

usiness innovation can be defined as any new activ- for critical thinking about the major Northeast Missouri ethanol plant. ity related to firm struc- trends and issues affecting agricultural Defenbaugh suggested that farmers B ture, production and cooperatives. and co-ops might not be attacking the output. Today, many right enemy: “The enemy in agriculture cooperatives are at the forefront of New energy for co-ops is not other farmers and not other com- agribusiness innovation. Cooperatives It seems that everyone is talking panies. It is poor prices. Farmers need are being created in new sectors, such about ethanol these days, spurring to work together to combat this enemy.” as renewable energy, to help farmers great expectations for corn and grain The statement that agricultural co- capture the full rewards of technologi- producers. According to the ops needed to work together to succeed cal innovation. Established coopera- July/August 2004 issue of USDA’s was reiterated throughout the confer- tives are modifying their financial and Rural Cooperatives magazine, 75 ethanol ence. As Benjamin Franklin said, “We ownership structures to seek strategic plants operate in the Midwest and must all hang together…or assuredly advantage in today’s global market- Great Plains, with another dozen or we shall all hang separately!” place while continuing to meet the more under construction. Most of Practicing what they preach, Big needs of their diverse memberships. these ethanol plants are farmer owned. River Resources Ethanol members are Recent changes in state laws allow Raymond Defenbaugh, president and willing to share the lessons they learned unprecedented prospects for the evolu- CEO of Big River Resources Ethanol with other farmers interested in start- tion of the cooperative model. pant, and John Eggleston, board presi- ing an ethanol plant. As Defenbaugh The seventh annual Farmer Coop- dent of Northeast Missouri Grain noted, his co-op has also certainly ben-

Rural Cooperatives / January/February 2005 17 efited from the experiences of others to sell the co-op or invest in new assets Jeff Nielsen, general manager of along the way. He also stressed the because of the risk posed to its patron United Farmers Cooperative (UFC), importance of partnerships. Big River equity. Eventually, it agreed to merge presented such a case. UFC is a highly has pursued several joint-venture with CHS to gain CHS’ oversight on diversified local cooperative. Risk man- opportunities, with very positive strategic management decisions at the agement and the desire to provide results. “Most people want to work local co-op level. “customer-driven solutions” guided its together, so don’t hesitate to look into In addition to its fully autonomous pioneering effort to create a member- joint-venture options.” member co-ops, CHS currently owned alternative insurance company: Defenbaugh and Eggleston also includes 27 “regionalized” local co-ops Parthenon Risk Partners. According to issued a perennial warning to all new (business units). All 27 pool their Nielsen, “the cost of insuring our peo- co-ops: make sure you raise sufficient patronage with CHS. The patronage ple, property and assets had become capital — the “life blood” of any orga- refunds are then distributed back to the almost unbearable.” nization. If co-ops are not adequately locals, based on local use. CHS works Parthenon is a captive insurance capitalized, they are not managing risk closely with these units in terms of company; this means it is owned and well. However, those interested in major decision-making and mar- starting an ethanol co-op can’t assume keting. capital will flow to the co-op, even For example, the CHS board with a good business idea. decides the percentage of cash With all the interest in ethanol, is patronage refunds and the level there a risk of producing excess supply? of equity redemption. The local Defenbaugh believes that this is a pos- co-op’s employees become CHS sibility, but legislation and the increas- employees, although the local ing popularity of ethanol fuel will bal- co-op retains daily authority. ance supply and demand. He compared One of five regional directors ethanol to the computer, which was for CHS attends the local board ahead of its time at first, but today is meetings. used by most of the population. McEnroe acknowledged that there are pros and cons to this Necessity: the mother of concept. On the positive side, it cooperative innovation brings financial stability to the “If necessity is the mother of invention, local co-ops, which are afforded then resourcefulness is the father.” timely equity redemption and — Beulah L. Henry (The inventor of protection. The local co-op still a type of umbrella.) maintains significant control and CHS Inc. provides compelling evi- direction at the local level, while dence that cooperatives can innovate also achieving economies of All 27 of CHS’ ”regionalized” local co-ops retain daily when it comes to changing traditional scale as part of CHS. On the operational authority, but the CHS board decides the structure. John McEnroe, vice presi- downside, members may per- percentage of cash patronage refunds and the level dent of Country Operations for CHS, ceive that the co-op is “selling of equity redemption. Above, grain loading at the provided one specific example of this out,” although in actuality mem- Corson Co-op in southeastern South Dakota. Photo with his presentation on the CHS bers retain considerable local courtesy CHS. “regionalization” concept. control, as well as the ongoing Regionalization refers to the situa- economic benefits of being part of a controlled by the insured parties. It is tion when a local co-op is essentially co-op. similar in design and operations to a consolidated with CHS (the local Authority for a few decision-making cooperative business. In 2002, there becomes a CHS business division), but abilities — such as how equity is paid were over 4,500 captive insurance it may maintain its own name and out, which is decided by the CHS companies operating in the United retains its local producer board and Board — is also lost and, ultimately, States. This new insurance program considerable local control. the local co-op’s fortunes are tied to has helped UFC lower insurance pre- The CHS regionalization concept, those of CHS. miums and increase coverage for its under which it has consolidated with In contrast, as CHS would be the employees. 27 local co-ops, was born in 1993 in first to acknowledge, many local co- Nielsen believes that: (1) a pro- North Dakota. At that time, a local co- ops are doing just fine on their own, active and engaged membership and op there in CHS’ trade territory was implementing their own innovative (2) a pro-active and visionary board are struggling, but the board didn’t want strategies. the two essential components for

18 January/February 2005 / Rural Cooperatives cooperative innovation. “When mak- producers who considered agriculture has a joint venture with a New York ing a commitment to find a solution, vital to their rural communities wanted lamb wholesaler. A cross-country sup- you need to decide whether to create a to invest in such a venture, but they ply ensures year-round, consistent- quick fix or the correct fix.” could not if it was organized as a coop- quality products. erative. Some members also wanted to According to Mark Hanson, Market stress leads to invest more but did not want to have Attorney & Partner at Lindquist & cooperative formation to supply a proportionate amount of Vennum PLLP and the primary archi- In 1972, the Michigan factory that product. tect of the new Wyoming cooperative local cherry farmers sold their crops to Brad Boner, board chairman of statute, “The changing demographics was closed. One of those farmers was MSLC, said the cooperative created a of producers in the United States and Don Nugent, who — along with other separate co-op in 2001, the Mountain elsewhere and the consolidations in the cherry growers — responded to the States Lamb & Wool Cooperative food industry generally will provide closure by forming Graceland Fruit (MSL&W), which is organized under opportunities, nudge and even force Cooperative, which purchased the fac- the new Wyoming co-op statute. MSLC changes in business structure.” From tory. is the sole member of MSL&W. The his perspective, the traditional co-op The dual problems of oversupply model was designed to enhance farmer- and the short, 12-hour shelf life of ripe member income, not provide increased cherries provided the momentum to “The enemy in returns to investment. Therefore, a create an innovative food product: modified structure is necessary for infused dried cherries. Nugent, now agriculture is not today’s value-added cooperatives. president and CFO of Graceland Fruit, overcame food poisoning and a car Co-op conversion — is it worth it? accident to close a marketing deal for other farmers and Gene Carbone, former CFO for this product with Ocean Spray, vividly Calavo Growers, spoke previously at illustrating the principle that persis- not other companies. the Farmer Cooperatives Conference tence pays off. in 2000, when his California-based avo- In 1998, the IRS ruled that It is poor prices. cado-growers’ co-op was in the midst Graceland no longer qualified as a co- of converting to a C-Corporation. op because of its level of non-member Farmers need to With hindsight, has his perspective on business, so it converted to a C-corpo- the conversion changed? ration. The cherry growers created a work together to Carbone said he believes it was a new co-op (still using the old name, success, in the sense that it provided Graceland Fruit Cooperative), which much needed liquidity to members and supplies all of the cherries to Graceland. combat this enemy.” provided a market-driven firm valua- Nugent believes that growing an innov- tion. After conversion, shares were ini- ative co-op depends upon a good strate- —Raymond tially offered at $5. Shares are current- gic plan, a solid management team that ly trading at $10.80 and there is a can implement marketing strategies, as Defenbaugh healthy turnover rate. well as alliances for inputs, manufactur- “Today, Calavo members are driving ing and sales. Lexuses and Mercedes,” he said. “The As the instigator of a new Wyoming latter was formed to provide marketing, shareholders are very happy.” Original cooperative state law, the Mountain processing and other services to both members have probably been selling States Lamb Cooperative (MSLC) is patron and possibly non-patron mem- some of their stock to new investors, often featured in co-op news. MSLC is bers. but former members are also returning a Wyoming-based, vertically integrated This co-op’s structure (referred to to the company. This suggests that the marketing cooperative for lamb and as “the Wyoming model” or the capitalization issue was an important wool. It has 125 members in 10 west- “Patron Investor Cooperative”) is simi- impediment to Calavo members. ern states. lar to an LLC in that it allows outside Under the current corporate struc- By the turn of the last century, lamb investment without a delivery require- ture, the company no longer has to producers had suffered through 20 ment, but the business also receives the treat all growers equally. Carbone feels years of dismal prices. A core group of benefit of co-op tax laws while being this flexibility is another positive out- producers decided to form a vertically able to provide a return greater than come from the conversion. However, integrated marketing and processing the standard co-op limit of 8 percent Calavo has to offer competitive returns operation, but were confronted a on contributed capital. MSL&W now for the fruit producers (dividends per major road block: lack of capital. Non- sells its products on both coasts and continued on page 35

Rural Cooperatives / January/February 2005 19 LEGAL CORNER New tax law includes several cooperative provisions

By Donald A. Frederick, exclusion, is repealed for transactions goods is included, and Program Leader for Law, after Dec. 31, 2004. This includes the • Income from the production (but not Policy & Governance language allowing agricultural and the transmission or distribution) of USDA Rural Development/RBS horticultural marketing cooperatives to electricity, natural gas and potable e-mail: [email protected] pass ETI benefits through to their water is included. patrons. Transition rules provide coop- Two limitations apply to this deduc- Editor’s note: this article does not repre- eratives and other taxpayers with 80 tion. First, the deduction that may be sent official policy of USDA, the Internal percent of their otherwise-available claimed is the lesser of QPAI or tax- Revenue Service, the U.S. Department of ETI benefits for transactions during able income for the year. So, if a coop- the Treasury or any other government 2005 and 60 percent of their other- erative or other taxpayer loses money agency. It is presented only to provide wise-available ETI benefits for transac- on other activities, that could reduce information to persons interested in the tax tions during 2006. or eliminate this deduction. A special treatment of cooperatives. Transition relief is also available for provision in the law says cooperatives income realized under certain con- that allocate the deduction to their patrons n Oct. 22, President tracts in effect on September 17, 2003. can compute “taxable income” for this Bush signed into law the purpose without taking into account O American Jobs Creation U.S. Production Deduction enacted their deductions for qualified patron- Act of 2004. The prima- To encourage United States domes- age refund and per-unit retain alloca- ry impetus for the new tic economic growth, the law provides tions and the redemption of non-quali- law was a World Trade Organization a new, phased-in deduction from tax- fieds. The allocation rules are dis- (WTO) ruling that certain export tax able income for a portion of “qualified cussed later in this article. benefits in our existing tax code violat- production activities income” (QPAI) Second, the QPAI deduction may ed international trade agreements we generated by businesses, including not exceed 50 percent of the W-2 had signed. The WTO authorized cooperatives. The new deduction can wages paid by the taxpayer for the year. European countries to collect special be as much as 3 percent of QPAI for tariffs on American products they tax years beginning in 2005-2006, 6 Cooperative Pass-through Provision imported, until we repealed those percent for 2007-2009, and 9 percent The report of the conferees who export tax benefits. for 2010 and later. drafted the final version of the law While the original purpose of the The range of income that can quali- makes it clear that income derived legislation was to repeal the export fy is broad, including most taxable from manufacturing, production, incentives in question, numerous other income realized on manufacturing, growth or extraction of any agricultur- changes to the tax code were added producing, growing and extracting al or horticultural product by a coop- during the legislative process. The end goods in the United States. Special erative, or from marketing agricultural result is a long, complex statute that rules of interest to cooperatives pro- or horticultural products by a coopera- includes several provisions important vide that: tive, may be included in the coopera- to cooperatives. • Income from food processing (but tive’s QPAI. A note to that report not retail operations) is included, states that the term “agricultural or Extraterritorial Income • Income from storing and handling horticultural product” includes “fertil- Exclusion repeal (but not transporting) agricultural izer, diesel fuel and other supplies used The offending export incentive, products that are used in manufac- in agricultural or horticultural produc- called the extraterritorial income (ETI) turing, producing or growing other tion that are manufactured, produced,

20 January/February 2005 / Rural Cooperatives grown or extracted by the coopera- ket agricultural or horticultural market- of incorporation, bylaws or marketing tive.” ing through a cooperative may be contracts with their members and The law provides that patrons of attributed to that cooperative for pur- other patrons. Many cooperatives will agricultural and horticultural cooperatives poses of computing its QPAI deduction. want to amend one or more of these can take a deduction on their tax organizational documents to include returns for QPAI allocated to them as Planning suggestions such a provision. part of a qualified patronage refund or Here are some points to remember qualified per-unit retain. The amount in planning how best to use this new Declaratory Judgment relief each patron can deduct must be com- deduction. First, the legislative lan- Farmer cooperatives that want puted by the cooperative and a written guage is not always entirely clear. Tax access to the special tax deductions notice must be provided each patron experts have many unanswered ques- permitted under Internal Revenue explaining the computation. tions about determining what income Code section 521 and other benefits A special rule says a cooperative may is eligible for the deduction. So, all that come with section 521 status, not take a patronage refund deduction cooperatives will want to work with must apply for, and receive, approval for amounts passed through to patrons their tax adviser to keep abreast of from IRS. In the past, the only ways a that can be deducted by those patrons. Internal Revenue Service rulings and cooperative could get a court to review As this amount is already eligible for other interpretations of this program. a rejection of its application was claim the QPAI deduction at the cooperative Second, the deduction is first avail- a deduction IRS said they weren’t enti- level, this language merely makes it able for tax years beginning on, or tled to, or pay some tax they didn’t clear cooperatives can’t deduct the after, Jan. 1, 2005. Many cooperatives think they owed and then sue for a same amount twice. on a tax year that begins sometime in refund. This provision enables a the summer or fall will thus have near- farmer cooperative to seek judicial Example case ly two years to become familiar with review of the denial without first creat- This example illustrates how the the intricacies of computing and allo- ing a tax controversy or being subject deduction and the pass-through might cating it. to immediate tax liability. work at a typical agricultural or horti- Third, it is a deduction, not a cred- cultural cooperative. Assume Co-op C it. Tax credits, such as the energy- Marketing includes value-added has $100,000 of QPAI. Also assume it related credits discussed later in this processing involving animals is a tax year beginning in 2005 or article, can be used dollar-for-dollar to One of the activities that allows a 2006, so the available deduction is 3 offset taxes due. Deductions can only farmer cooperative to qualify for sec- percent of QPAI, or $3,000. be used to reduce taxable income, so tion 521 tax status is to engage in Co-op C allocates the $100,000 to their value depends on each taxpayer’s “...marketing the products of members its member-patrons as a qualified tax bracket. or other producers.” IRS interpreted patronage refund. It is allowed to this language to include value-added deduct the $3,000 in QPAI under the Dividend Allocation Rule repeal processing involving a mechanical new law and the remaining $97,000 as The dividend allocation rule was an process (converting corn to ethanol) a traditional patronage refund. Thus, Internal Revenue Service (IRS) inter- but not a biological process (feeding the result is the same for the coopera- pretation of the tax code requiring corn to hens and selling eggs and tive as it was before the new law was cooperatives that paid dividends on chickens). enacted, the entire $100,000 is their equity investments to allocate The new law makes it clear that deductible. those dividends on a pro rata basis under both section 521 and regular Now, assume Patron P does 10 per- between their patronage and non- cooperative tax rules, marketing prod- cent of the business with Co-op C in patronage income. Under the new law, ucts of members and other producers the tax year. Patron P receives a cooperatives can pay dividends on includes feeding products of members patronage refund of $10,000 in QPAI, stock entirely out of non-patronage and other producer to cattle, hogs, all of which is taxable income to Patron income. This allows cooperatives to fish, chickens or other animals and P. However, under the new law Patron reduce the tax cost of paying dividends selling the resulting animals or animal P can deduct the applicable percentage on their equity investments and, at the products. of QPAI (3 percent in 2005 and 2006), same time, return more of their mar- or $300. The value of this benefit will gins to patrons as patronage refunds. Small ethanol producer increase significantly when the QPAI To take advantage of this change, credit, co-op pass-through deduction increases to 6 percent in the new law requires cooperatives to Current law provides a 10-cents- 2007 and again to 9 percent in 2010. have appropriate language authorizing per-gallon tax credit for each gallon of Another provision states that any them to pay stock dividends out of ethanol produced and sold by so-called qualifying activity of patrons who mar- non-patronage income in their articles continued on page 34

Rural Cooperatives / January/February 2005 21 Charley’s Angels Utility co-ops show true colors sending aid to Hurricane Charley-ravaged Southern states

By Stephen Thompson, dent of marketing and member ser- $42 billion in damage Assistant Editor vices: “Two-thirds of our system suf- While Peace River was the hardest fered significant damage; and one- hit, power co-ops in Georgia, Florida, or people in the area third of that was simply gone.” Alabama and Mississippi all suffered around Wauchula, Fla., That wasn’t all. Two weeks later, varying amounts of damage in the located on the state’s just as soon as Charley’s damage had 2004 hurricane season from four major F mid-Gulf Coast, 2004 been repaired, Hurricane Frances storms in rapid succession: Charley, was not the best of years. marched through with huge amounts Frances, Ivan (which missed Peace On Aug.13, Hurricane Charley roared of rain and extensive flooding. River) and Jeanne. The 2004 hurricane in from the Gulf of Mexico, bringing Mercifully, it did less damage than season, which totaled nine hurricanes winds of 140 miles per hour and Charley, but still knocked out power to altogether, caused more than $42 bil- spawning tornadoes. The storm a significant number of customers. And lion worth of damage — the most knocked down trees, power lines and Frances was followed three short costly hurricane season in history. poles in the Peace River Electric weeks later by Hurricane Jeanne, Damage was even greater than in Cooperative subscriber area. whose high winds pummeled the area 1992, when Hurricane Andrew devas- Damage was huge, according to with a vengeance, toppling power tated southern Florida, causing $35 Brad Kimbro, Peace River’s vice presi- poles like bowling pins. billion in damage.

A lineman from Cuivre River Electric Cooperative of Troy, Mo., unreels replacement cable while repairing lines in Florida. Electric co-ops from 15 states sent employees to help reconstruct power distribution systems in hurricane-damaged areas. Photos by Jeff Joiner, courtesy Association of Missouri Electric Cooperatives

22 January/February 2005 / Rural Cooperatives Despite widespread damage to resources from member co-ops, we’re dedicating resources, we have to power distribution systems, electric co- matched it up with assistance require- remember that something could hap- op customers had their power restored ments, and put together a workable pen at home while we’re away.” in surprisingly quick time in all cases, deployment plan. “One problem was Regardless of the irregular condi- an outcome that was made possible by that we only had one cell-phone charg- tions under which Land and Drake the dedication of their maintenance er between us,” chuckles Drake. were working, they managed to put personnel and the help of fellow co- together an expedition to the south ops around the country. More than Quick assessment crucial that arrived in Mississippi just in time 100 co-ops from 15 states sent hun- Drake points out that if the affected to start putting things back together in dreds of linemen and other workers co-ops do damage assessments as Charley’s wake. with equipment to rebuild distribution quickly as possible, it helps the assist- “We’d never worked in that kind of ing co-ops allocate the resources at environment before,” Drake says. hand most effectively. “The damage was similar to that we’ve As the co-op managers were noti- seen with tornadoes, but it was much fied, they in turn asked their employ- more widespread. And the working ees for volunteers to pack up and move environment was different, too, with their equipment to the affected areas. lots of sand and marshland. Our guys “We never have a problem getting help had to learn how to get their trucks for this kind of thing,” says Drake. around in the sand by lowering their “Most of the people are anxious to tire pressures.” go.” This is despite the fact that work- Being from the Show-Me State did ers know they will be facing long hours have its advantages, though, as a local of hard work in difficult conditions — line crew found out when they were faced with the job of digging a hole in a concrete slab. “They didn’t know what to do, because they weren’t equipped for it,” says Drake. “But our guys have to dig through rock all the time, so our augurs have tungsten-car- bide teeth on them.” It was one case of people from Missouri showing some- Clouds of bugs bothered linemen working one else. “They drilled through that to restore power on the Gulf Coast, includ- concrete with no trouble at all.” ing this one from White River Valley Electric Co-op. Co-op aid from near and far Among other states that sent help infrastructure. And while the scope to hurricane-affected areas were and severity of the damage were much Oklahoma, Illinois, New Jersey and greater than anyone was used to, the Pennsylvania. Kentucky alone sent way it was handled was in many ways almost 100 workers and 60 trucks from routine. 12 rural electric cooperatives. Many As the path of Hurricane Charley who stayed home also put in long began to develop, a call for help went Employees from Poplar Bluff, Missouri's hours: the Kentucky Association of out from state electric cooperative Ozark Border Electric Cooperative and other Electric Cooperative’s transformer associations in the threatened areas. out-of-state co-ops had to adapt to working manufacturing plant and the United Rob Land, the director of risk manage- in Florida’s high humidity, soft sandy soil and Utility Supply Cooperative, also head- ment for the Association of Missouri marshes. quartered in Kentucky, put in long Electric Cooperatives, was attending a hours of overtime, including weekends, conference in Savannah, Ga., with up to 18 days, in this case — and that to make rewiring supplies and replace- Doug Drake, the association’s field they may have to put up with less- ments for damaged distribution equip- training director, when Charley hit. than-ideal sleeping and bathing ment. Both put in long hours on their cell arrangements. Bill Davis, Service Manager of phones in their hotel rooms, keeping The biggest problem, he says, is not White River Valley Electric notes on scraps of paper as they gath- in getting people to go, but in deciding Cooperative in Branson, Mo., agrees ered information about available who is going to stay behind. “When with Drake that getting linemen to

Rural Cooperatives / January/February 2005 23 volunteer for the trip wasn’t hard. Co-op’s subscriber area were “pretty the assisting co-ops brought large “line “The guys knew there’d be problems, bad.” It wasn’t the fault of the local co- bucket” trucks and other heavy equip- that they might have to sleep in the op, he says. The problem was that so ment, Bill Davis’s crew brought small trucks,” he says. “Even when we have many people had been forced out of “service” buckets mounted on four- storms at home it’s not easy — they their homes, the only rooms left were wheel-drive vehicles, which allowed have to work 15 or 16 hours a day. in an old motel that had recently them to reach downed lines in areas They knew we had a job to do, and so reopened after being closed for a long the heavier trucks couldn’t reach. they just went and did it!” period. But the reactions of the local Meanwhile, back in Peace River’s Davis says that it took the trucks people to the appearance of the out-of- subscriber area, power was almost almost two days to travel the 750 miles state crews helped make up for the completely knocked out. So it was with to the storm area because of govern- grubby conditions: “They were real relief, tinged with amazement, that ment commercial driving regulations. happy to see us.” residents watched help arrive in the “They waived the rules in Alabama and form of a parade of almost 100 bucket Mississippi, so we were able to drive Small, 4WD trucks prove value trucks, augurs, pole setters and other straight through,” he says. When it came to choosing which equipment. In all, about 700 co-op Their first stop was Singing River equipment to take south, White River men and women from 15 states Electric Cooperative, headquartered in went against the grain. While most of descended on Wauchula to help clean Gautier, Miss. Singing River was dam- up after Charley. aged relatively lightly by Charley, so With almost all power knocked out, after a couple of days of work, crews Peace River had figured it would take headed east into Alabama, where they months to get all its subscribers back spent 12 days repairing damage to “They finished the on line. But with the help of their fel- Clarke-Washington Electric low co-ops, power was back on for Membership Corporation, headquar- job in 5 hours. everyone in only two weeks. tered in Jackson. Unfortunately, nobody had much of a John Davis of Ozark Electric If we’d done that chance to enjoy it. Cooperative in Mount Vernon, “Just as soon as we got cleaned up, Missouri, says that the first lodgings stretch by ourselves, Frances came in,” says Kimbro. offered his linemen in Singing River Compared to Charley, which had it would have taken us 5 weeks…” —Brad Kimbro

24 January/February 2005 / Rural Cooperatives brought mostly high winds and torna- the east. Its winds, while not quite as communications manager was one of does, Frances was less powerful, but strong as Charley’s, were still strong those,” says Kimbro. “She noted in a moved much more slowly. As a result, enough at 120 miles-per-hour to do TV interview that Peace River it dumped a terrific amount of water extensive damage to an area still recov- employees had suffered losses, and on the area, causing extensive flooding ering from the previous two storms. never hinted about her own.” Kimbro and, again, many downed lines. “We had a four-mile stretch of high- thinks that the shared ordeal has This time the help wasn’t as plenti- way where every single pole was strengthened the employees’ relation- ful, because Frances cut a much wider down,” says Kimbro. About 140 three- ships with each other and the co-op as swath, covering most of Florida, and phase distribution poles on that high- a whole. co-ops all over the state needed help. way alone had to be replaced or reset. Kimbro also remembers with grati- Nevertheless, as many as 200 outside Again, outside co-ops came to the tude the support Peace River received co-op personnel showed up again to rescue, with about 250 linemen and from co-op personnel who were unable help put things right. other workers. “We had 75 trucks to be on the scene. “Central EMC in Ivan followed soon after. Projected working to restore those lines. They North Carolina couldn’t spare person- to take the path of Charley, it swung to finished the job in 5 hours. If we’d nel, but they sent a big care package the west instead, sparing Peace River done that stretch by ourselves, it would with soap, sunscreen, deodorant and so but hammering Alabama and the have taken us 5 weeks,” Kimbro says. on,” he says. Other co-ops donated Florida panhandle before moving north clothing, and the National Rural and east over land toward Virginia. Co-op staff also hard hit Electric Cooperative Association sent Later, it moved out to the Atlantic, While the volunteers made sacrifices, $4,500 for Peace River employees who looped south and west to cross Florida, the employees of the affected co-ops suffered damage. “I was really and finally expired in Texas. were hit hard — working long hours, in impressed when I found that the Spared by Ivan, and with things up some cases, for weeks on end, as in money was from NRECA employees.” and running for the second time, Peace Peace River. On top of the extra work, Brad Kimbro says he is “really hum- River sent some of its crews to the pan- Peace River employees had to deal with bled” by the effort made by his own co- handle to help out there. Unfortunately, the effects of the storms on their own op’s employees and by hundreds of however, Mother Nature was far from lives and those of their families. employees of fellow co-ops to get Peace finished with them. The co-op had over 70 employees River’s subscribers back on-line. “I hope Hurricane Jeanne pounced from a who suffered losses from the storms — they never need help like we did,” he different direction than the others — and 13 of them lost everything. “Our says, “But if they do, we’ll respond.” ■

Rural Cooperatives / January/February 2005 25 Retail co-ops advised to foster member identification, not force conformity

By Janet Ciccone, member with the co- Director of Communications, op influences the like- College of Human Ecology, lihood that members The Ohio State University will participate in the e-mail: [email protected] voluntary co-op pro- grams,” Stoel says. etail cooperatives wanti- “Specifically, if they ng to retain members identified strongly and encourage their par- with the co-op, if they R ticipation in programs considered their role would do best to foster as co-op members Some 20,000 U.S. hardware stores belong to a cooperative, with feelings of identification within the more important than Ace and Tru Value being two of the largest. Photo courtesy Ace group to increase interactions, rather their role as a store Hardware than force conformity to group goals. owner, they were This is according to a study by more likely to adhere to the norms of to another hardware cooperative. Leslie M. Stoel, assistant professor of the group, such as adopting a new sign Stoel also looked at how belonging merchandising management at The program or a new computer program.” to the co-op affected members’ per- Ohio State University, College of At the same time, however, Stoel ceptions of rivalry toward stores in Human Ecology. The results of her notes that identification with the co-op their geographic area belonging to a study, which appeared in the Journal of should not be confused with conformi- different co-op. She asked: If Ed’s Tru- Small Business Management, apply to ty. “High levels of forced conformity Value Hardware is competing for cus- retail cooperatives in other industries to group goals can be divisive,” Stoel tomers against Fred’s Ace Hardware, and to many types of franchises, even says. “Care should be taken in order- to what extent will belonging to the though data were collected from the ing conformity, because it may lead to Tr uValue cooperative influence Ed’s hardware industry. within-group conflict, ultimately split- perceptions about Fred as a rival for U.S. retail hardware cooperative ting the group.” local customers? groups have increased their member- Stoel found that the importance a ship in the last decade, some as much Hardware stores surveyed co-op member attaches to being a as doubling. This is in part due to co- Stoel surveyed 147 retail hardware member of the group influences op mergers, and in part due to inde- store owners that had five or fewer his/her perception of conflict with a pendent retailers joining cooperatives employees and less than 10,000 square rival party and beliefs about what to work toward results that they can- feet of retail space. Half of the stores behavior was appropriate in response. not achieve individually. had a sales volume of under $1 million. “The majority of respondents con- Cooperatives offer a variety of pro- The stores answered a series of sidered their primary competitive rival grams that, in the past, were all volun- questions about being a member of the as being the Big Box stores (e.g., Home tary. Today, however, co-ops increas- co-op group and about their competi- Depot, Lowe’s), despite the proximity ingly rely on prescribed programs. tive situation. Each store was located of the store belonging to the rival co- “From our study, we found that in a geographic area where it compet- op,” Stoel said. “Another small fraction strength of identification by the co-op ed with a hardware store that belonged continued on page 32

26 January/February 2005 / Rural Cooperatives Paper or plastic?

For single-serve milk market, there is no debate as plastic sales soar, bringing smiles at dairy conclave

By Dan Campbell, editor of the nation’s largest fast food restaurant chains: McDonalds and onald McDonald wasn’t Wendy’s. officially registered as a Wendy’s led the way by offering guest or a speaker, but single-serve milk in plastic bottles as a R his presence was certain- substitute for soda in its kid-meal ly felt during the joint packs. Within a year of introducing annual meeting of the National Milk the new milk packaging, sales shot up Producers Federation (NMPF) and from about 65,000 milk cartons to Dairy Management Inc. (DMI), the more than 1 million plastic bottles of planning and management organiza- milk per week, according to DMI tion formed by the National Dairy CEO Thomas Gallagher. McDonalds Promotion and Research Board soon followed suite, and saw its milk (NDB) and United Dairy Industry sales rocket from 600,000 cartons to Association (UDIA). The meeting, 4.2 million bottles weekly. held in Reno, Nev., was filled with Other fast food chains are expect- good news for dairy producers and ed to join the party as production their co-ops. Some of the best reports capacity is ramped up to meet the concerned the rapidly increasing sales surge in demand, producers were told of single-serve milk containers at two at the meeting, held in late October.

The exhibit hall at the dairy conference featured samples of a wide array of new dairy foods, many of which are being developed with help from the Dairy Checkoff Program. USDA photos by Dan Campbell

Rural Cooperatives / January/February 2005 27 Many reasons to cheer the newest version of the USDA food es made by school districts and health There were plenty of other reasons pyramid, which has bumped up the professionals. Last year alone, school for good cheer at the conference, number of recommended daily serv- lunch and Women, Infants and including big wins on the legislative ings of dairy products from Children (WIC) feeding programs front, higher on-farm two to three per day. New made about $16 billion in purchases. milk prices thanks to dietary studies are also DMI Chairman Paul Rovey said the the industry’s supply- showing that milk can play a industry has traditionally been slow to balancing actions, and part in fighting the obesity respond to changes in the fluid milk an increasing number epidemic. market and has not been active enough of school districts get- The 3-A-Day campaign in meeting the challenge as “others ting back on the milk shows that producers can hedged-in on dairy’s calcium advan- bandwagon. look at food manufacturers tage.” But the dairy industry has Another cause for “not as the enemy, but as become more flexible and proactive, as optimism was the way powerful partners,” the marketing gains of the past year the entire industry — Gallagher said. And to those show, said Rovey, an Arizona dairy- producers and their who think food pyramid man. co-ops, food processors, retailers and placement doesn’t mean much, he Now the industry needs to capital- nutrition and health experts — are pointed out that it helps to trigger ize on the finding that dairy calcium is uniting behind the “3-A-Day” promo- government food purchases for use in a useful tool in fighting obesity, which tional campaign. That effort builds on feeding programs and the menu choic- may prove to be “the most powerful

CoBank CEO: Gear co-ops to consumer demand

Doug Sims, CEO of Denver-based CoBank, told national influence than any other livestock industry because you are dairy conference attendees that consumer-driven co-ops working together.” For example, Sims pointed to the milk will be the winners in the years ahead because “the con- supply/demand balancing program of Cooperatives Working sumer is driving the bus that all of agriculture is riding on.” Together (CWT) as “a real success that shows the industry For many, the ability to capitalize on market niches will also is united.” be crucial as is their capability to work together to strength- He encouraged continued cooperation, noting that co- en the market position of co-ops. Co-ops must further show ops need to collaborate to fund research and development how they are different and what makes them unique — to — as the dairy industry is — and should even try working demonstrate that they add value for members, customers with competitors. and employees, said At a time when only a hand- Sims, who grew up ful of retail chains control on a dairy farm. “The consumer approximately 40 percent of CoBank and its food sales in the U.S., Sims said affiliated agricultural is driving the through cooperation, co-ops credit associations in can and must create market the U.S. Farm Credit bus that all of power. The rate of concentra- System support the agriculture is tion in food retail markets is dairy industry with likely to accelerate rapidly, he more than $2 billion in riding on.” predicted, and co-ops must loans outstanding to —Doug Sims establish market position with agricultural coopera- these top food retailers. tives, dairy proces- “Investing in new ways to sors and dairy farm collaborate, investing in new operators. products, new markets and Sims told atten- new ways of thinking about dees at the annual your value proposition are criti- meeting of the National Milk Producers Federation, United cal success factors,” Sims said. Dairy Association and National Dairy Promotion and Sims added that the dairy industry’s willingness to fund Research Board that the dairy industry today has “more new, innovative products is paying off. He pointed to the

28 January/February 2005 / Rural Cooperatives dairy nutrition message ever,” Rovey said. “Five years ago, we saw that obesity “After 18 months of would be ballooning as a health issue, and we wanted to make sure dairy was depressed milk prices, part of the solution, not the problem,” doing nothing was the Gallagher said. The point hammered home riskiest course of all…” throughout the conference was that —Jerry Kozak most of these marketing successes can be traced back to work funded by the Dairy Checkoff program, under which producers pay 15 cents per hundred- weight to fund promotion and research.

CWT helps balance supply Under the NMPF banner, dairy producers helped to boost on-farm milk prices this past year by using the

industry’s success in introducing “low-carb” products to proposition, Sims continued. Co-ops must also deliver supe- satisfy changing consumer preferences as one example. rior service and convenience, and provide access to domes- Citing research from Productscan Online, Sims noted that in tic and global markets at a competitive price. the first five months of the past year, dairy processors intro- He further urged co-op leaders at the meeting to deter- duced 62 “low-carb” ice creams. In contrast, there were mine whether their capital plan will meet demands of equity only 19 “low-carb” ice creams in 2003 and in 2000 there retirements, business growth, product research and devel- were none. opment and other needs. If outside capital is being raised, “Consumer-driven co-ops will be the global winners,” he how will it affect the governance of the co-op? “And does said. “The consumer by far is the key driver in the food sys- your co-op have the right skills on the board? Do directors tem. In the U.S., the consumer is “king and queen.” understand the co-op’s strategic plan? How is the co-op Sims also acknowledged the changing global market- measuring progress?” place, noting that governments are reducing barriers to If directors lack skills, get training for them, he stressed, entry and providing access to U.S. markets. Specifically and remember that every meeting is a director-training with regard to the Farm Credit System, Sims said that FCS opportunity. Sims said he is a proponent for using outside owes thanks to the dairy industry for supporting efforts to (non-member) directors to bring valuable expertise to the oppose the sale of a key Farm Credit System lender to Dutch board, which can range from help with product development banking giant Rabobank this past year. He stressed the to greater financial acumen. importance of farmers having a locally owned and con- The most important function of a co-op board is hiring the trolled cooperative lender. CEO or manager, Sims continued. To do it right, and to moni- Another key factor to watch in today’s business environ- tor his or her performance, directors must be able to ask the ment, according to Sims, is the effect of recent scandals on right questions. the image of corporate America. Good governance practices “The keys to success today and in the future is all about by co-ops will help avoid such scandals, he advised. He investing in the right things — people, strategy and business posed a series of questions to encourage co-op attendees to execution,” he emphasized. “Co-ops need to critically engage in critical self-examination of their business prac- examine the combination of expertise reflected in their tices, governance policies and business focus. “What do you boards and management teams, re-evaluate their business offer members that they value? Why should retailers take focus in light of changing markets and challenges, and col- your products? Why do employees want to work for you? laborate in efforts to deliver innovative products quickly and What is the difference between your co-op and the business efficiently. down the road? What training do you provide your directors? “Working together, co-ops can invest in a better future, If patronage returns are the only way a co-op returns and continue to make a definitive difference in the market- value to members, it will ultimately prove to be a losing place,” he concluded. ■ — By Dan Campbell

Rural Cooperatives / January/February 2005 29 CWT program to better balance milk always be a big part of the dairy indus- dietary habits. As one speaker said, “if supply with demand. CWT is an indus- try, Kozak said, quoting Charles they drink milk at 16, odds are they try-funded, self-help program under DeGaulle’s comment that “politics is will still be drinking it at 86.” which some producers contribute to a too serious to leave to politicians.” Test marketing showed that in- special fund that helps reduce excess Campaign finance reform has not school milk sales would jump 30 per- milk production capacity by paying removed the need for political action cent when the switch was made to re- some producers to retire from the committees, he added. “Federal offi- sealable plastic bottles. But last year’s industry and by providing export assis- cials want to know what people are results were even better, up 34 percent tance for selected dairy products. thinking, and you must stand out from in schools where the change was made, “To some, CWT was a crazy, bet- the crowd to be counted.” Gallagher said. And this year the num- the-farm wager,” said Jerry Kozak, ber of schools offering the improved NMPF president and CEO. “But oth- packaging will jump from 1,200 to ers were confident that it was a sound 3,000, meaning the industry needs investment for the dairy industry, and While dairy foods “more processors to step forward” with they were proved right.” Indeed, the the product, he added. program was renewed on July 1 for are very nutritious, another year. Mad Cow response “After 18 months of depressed milk they are being “out- The discovery of mad cow disease prices, doing nothing was the riskiest (BSE) in a single animal in Moses Lake, course of all,” Kozak said. No one is Wash., in December 2003 could have claiming CWT was entirely responsi- marketed and out- been a disaster for the dairy industry, ble for higher on-farm milk prices last but a crisis communications plan was in year, but it was definitely a “tailwind” scienced by the com- place for that eventuality, leading to the that can probably take credit for a flow of the type of prompt, reliable price increase of 60 cents per hundred- petition.” information needed to reassure the weight, he noted. public and media about the safety of the “CWT needs to be part of the —Kevin Toland nation’s dairy foods and herds. industry’s long-term portfolio,” Kozak Beckendorf said the biggest out- stressed. come of the BSE discovery will be the There were also key successes on eventual creation of a national animal the legislative front, including a full- Working in partnership with IDFA identification program that will enable court-press lobbying effort that result- (International Dairy Foods Assoc., a any disease problem to be traced back ed in no major increase in dairy prod- food processors’ trade group) was “a to the exact source so that it can be uct imports from “down under” as a risky gamble,” given that the organiza- nipped in the bud. result of the Australia Free Trade tion “has so often been at odds with With a lean staff of only 17, Agreement. NMPF Chairman Charles us,” Kozak said. But successes in Beckendorf said he knows of no other Beckendorf said that trade deal would school lunch lobbying and other areas ag commodity organization that does as have been “anything but free for our has proven it to be a good business much for its members at does NMPF. dairy producers.” move, he added. NMPF staff and co-op representa- New direction for promotion tives spent “countless hours” knocking School sales gaining William Siebenborn, a Missouri on doors on Capitol Hill to carry the The dairy industry successfully sup- dairyman and UDIA chairman, said dairy producer’s message to Congress ported legislation passed by Congress forging a single dairy marketing plan and the Bush administration. They earlier this year that requires school and vision will help boost worldwide even bought a full-page ad in the districts to offer students at least two demand for U.S. dairy products. Under Washington Times to run an open letter types of milk and would forbid schools this effort, what had been primarily an to President Bush, telling him how from entering into exclusive contracts advertising and classroom-based dairy crucial trade and other legislative with soft drink companies that restrict promotional program has transitioned issues are to dairy producers. the sale of milk products at school to one that leverages partnerships with Beckendorf said that there will still functions. the industry. It was not a quick or easy likely be a slight rise in dairy imports Beckendorf said the industry’s abili- transformation to complete, he said, into the United States in coming years, ty to work with schools is vital, because adding that the effort starts with local but that it will be “a drop in the bucket improved milk products must be dairy promotion boards. compared to what it could have been.” placed in front of the nation’s youth at “Kids don’t read or study the food Politics and government policy will a time when they are forming lifelong pyramid,” he said, so product presenta-

30 January/February 2005 / Rural Cooperatives tion to them is all important. “Milk William Ahlem, Jr., a Hilmar, Calif., obesity is increasingly spreading to our won’t be cool just by saying it is in dairyman and NDB chairman, said it children. Dairy Checkoff-funded ads,” he continued. “We need the right takes an enormous logistical effort to research shows that calcium helps burn products in the right places — avail- get new dairy products into stores and body fat, Ahlem noted. ability is the key.” So emphasis has fast food restaurants. The industry has switched from running health-oriented felt “tremendous frustration” for many Low-carb milk? ads to creating milk products with years with school districts for not being About 7 percent of the U.S. popula- more pizzazz. more willing to include more milk and tion is now on a low-carb diet, and 24 “Now the concept is to work within dairy products on their menus. percent say they are watching their marketing chains to get improved A door of opportunity was thrown carbs, it was noted. products into more outlets,” Gallagher open to the dairy industry when the John Kaneb, CEO and chairman of said. He cited Yoplait Yogurt as an Surgeon General issued a warning that HP Hood, a New England dairy com- example, noting that it will print the the nation is facing a calcium-deficien- pany with seven national dairy brands 3-A-Day logo on all of its yogurt lids. cy crisis, Ahlem continued. The report and $2.3 billion in annual sales, said “That’s 2 billion packages annually that said 7 of 10 boys and 9 of 10 girls are Hood spent $25 million in 2004 to moms all across the country will be deficient in calcium. Other reports develop a new low-carb milk, called seeing,” he said. indicate that the nation’s epidemic of Carb Countdown. That effort was

Livingston gives producers legislative tips Former Louisiana Rep. Bob Livingston, who chaired the host a fact-finding session for them. These can take the form House Appropriations Committee during his tenure, told of a town hall-type meeting with constituents, a tour of farms, producers they must continue to find effective ways to etc. Having your political action committee hold a fund-rais- make their needs known to their elected officials. “You may ing barbecue on a member’s farm is also a good idea. Such be convinced in the righteousness of your position, but an event can be 90 percent fun, but the critical time “is the there is always someone just as fervent on the other side,” half-hour you spend discussing your key concern.” said Livingston, who retired from Congress in 1999 and now Members can also become activists in campaigns, he operates a lobbying firm. noted. “You need to frame and condense your message so that “Tighter budget caps are coming for farm programs, they listen to you, rather than the other guy. That’s why we which means you must make your voice even louder,” band together in trade Livingston said. associations and hire He noted that the dairy lobbyists and attorneys industry failed last year to — to study, advocate “Tighter budget caps close a loophole that is allow- and lobby.” ing imported casein-protein Congressional repre- mean you must make to enter the United States, sentatives are incredibly your voice even louder…” which means the industry busy, he said, so you needs to worker harder next can’t waste their time. —Bob Livingston year to close the loophole. “You must be ready to “Continue to work to make make your case in 15 to sure free trade means fair 30 minutes.” He advised trade, and work to hold your letting elected officials seat at the table so you don’t know that a large num- wind up as the main course,” ber of their constituents Livingston advised. “Oppose favor the position you unilateral disarmament [in espouse, and hammer that point home by having con- trade talks]. Keep pressure on your elected officials all stituents contact the official prior to, or immediately follow- year long.” ing, your meeting. “It is incredibly important to have grass- Congressional oversight of agriculture is critical, but roots activity back home support your position,” Livingston over-regulation is not, he said. “If government does not said. provide sufficient oversight, you get monopolies and lack of He advised producer groups to find out when one of their competition.” But too much regulation will stifle the indus- elected officials will be back home, and then volunteer to tries it is supposed to help. ■

Rural Cooperatives / January/February 2005 31 launched following a request from having to pay Class I prices for milk da.” He urged farmers to continue to Wal-Mart in 2003 for such a product. being purchased for use in some of make their voices heard, noting that Kaneb, whose family purchased Hood these promising new products. their coffee shop discussions funnel in 1995, said even a company of Hood also makes Lactaid, a best- up to farm and co-op meetings that Hood’s size can’t go on putting that selling, lactose-free milk. It too is eventually help set trade policy. He kind of money into new product devel- expensive to process and package, as it noted that the EU and some other opment indefinitely. must be processed with enzymes. competitors far out-spend the Hood would like to find ways it can Hood has to buy five gallons of milk to United States on export subsidies work with dairy co-ops and NMPF to make four gallons of Lactaid, Kaneb and trade-distorting domestic sup- get more help in the early stages of said, “so producers should love it.” ports, and they erect far more tariff product development, he said. “Dairy’s and non-tariff barriers. competitors have many advantages. Other meeting highlights: • Emphasis is being placed on devel- They either control raw materials, or • U.S. Agriculture Trade Ambassador opment of new cheese snacks, which the raw materials are so cheap — as in Allen Johnson said the goal in ongo- is important because a slowdown is the case of soda — that they don’t ing trade talks is to establish the level expected in the growth in demand need to control them,” he said. playing field that farmers demand. for cheese from pizza makers. Kaneb indicated that help from He said President Bush has made ag • Almost all consumption gains in the dairy producers might come in the trade a priority, and that “without beverage category are being achieved form of allowing processors to avoid agriculture, there is no trade agen- by health beverages, led by bottled

Retail co-ops advised to foster member identification, not force conformity continued from page 26 didn’t seem to perceive a rivalry at all, mends that they focus on helping training programs based on educa- instead focusing on their customers.” members develop a sense of belonging tion level/workforce readiness of However, 28 percent of the respon- and appreciation for their membership. potential workers (e.g., program dents perceived that their No. 1 com- She suggests that co-ops could consid- needs for rural and urban stores petitor was the other hardware store er the following: may differ in some cases from sub- that belonged to a rival cooperative. • Offer programs that accommodate urban needs). With 20,000 hardware stores belong- members in diverse competitive situ- • Educate members about benefits of ing to cooperatives in 1996, this num- ations, i.e., allow variations in pro- conforming to co-op programs, espe- ber is noteworthy. For these members, grams to keep them relevant to dif- cially in terms of customer appeal feelings of identification with the ferent situations. Examples of varia- (e.g., answer the question: how will cooperative group resulted in increased tions for different competitive situa- this program improve customer per- perceptions of conflict with the mem- tions are as follows: ceptions and responses?). One method ber of the competing cooperative. a. An advertising/promotion pro- of education would be to obtain and These feelings influenced their beliefs gram (or store interior and signage publicize customer response to pilot about the importance of competitive program) for stores that compete tests of new programs. behaviors relative to that rival. heavily with Big Box stores, • Provide opportunities for co-op “It is critical that we understand another program for stores that members in similar competitive situ- how belonging to the group can influ- compete mostly with another coop ations to network with other mem- ence perceptions and behavior,” Stoel store, and perhaps another for bers and with co-op management said. “Hardware retailers must com- those that compete mostly with (e.g., using online bulletin boards or pete on two fronts — against “category Wal-Mart or other general mer- discussion boards). killers” and group-affiliated retailers. chandise discounter. They will want to make careful choic- b. Merchandise/inventory assort- Stoel’s recommendations about es, especially since research shows that ment programs for rural stores, rivalry are to be aware of it in order to intense rivalry is associated with poor urban stores and suburban stores, stay sharp but focus on your cus- performance.” or programs targeted by region tomers. What can you do, with the (e.g., southern vs. midwestern or help of your co-op, that your rival Strategies for retail co-ops northern, due to climate differ- can’t do? Or what you can do better To help cooperatives operate to ences, housing differences, etc.). than your rival, with the assistance of maximum advantage, Stoel recom- c. Human resource development/ your co-op? ■

32 January/February 2005 / Rural Cooperatives water, which has doubled its sales balize existing milk sales). On the efficient cheese plants in the world, since 1998. Low-carb drinks are up plus side, these companies have the processing over 2.4 billion pounds of 67 percent, while milk is up only ability to get the drinks into conve- milk and producing in excess of 250 about 1 percent since 1998. Drink- nience stores and vending machines, million pounds of cheese and 16.5 able yogurts have been a bright spot where dairy struggles for a bigger million pounds of high-value-added for dairy, with sales quadrupling presence. One speaker said soft whey proteins annually. Variety, con- since 1999. drink companies may have designed venience and healthful nutrition fac- • Soy beverages “tried to grab a bigger these products simply as “place tors are driving consumer choices, he piece of the action” from real milk in holders” to fulfill school contracts said, calling nutrition a “worldwide 2004, which the dairy industry is requiring that dairy beverages be mega-trend.” While dairy foods are countering with efforts to keep the soy offered to students. Both companies very nutritious, they are being “out- drinks from being labeled as “milk.” have currently pulled their dairy soft marketed and out-scienced by the • Some soda-pop companies, includ- drinks off the market, but others are competition,” he said. “Even on cal- ing Coke and Schweppes, are experi- likely coming. cium, we are being beaten by raw- menting with dairy soft drinks con- • Kevin Toland, executive director with calcium supplements.” He said using taining about half milk. This is Irish dairy co-op Glanbia PLC, more dairy products, such as whey, as largely seen as negative for dairy reported on a major new cheese plant food ingredients and nutritional sup- producers, in that these drinks being built in New Mexico as a joint plements, looks very promising, and would be marketed as a milk venture with DFA. The new factory he gave a detailed overview of the replacement (and would thus canni- will be one of the largest and most potential market. ■

Co-op stock exchange continued from page 14

Greater stock market liquidity can It can also allow potential traders to because it is feared that the organiza- also be gained by making sure the quickly and easily adjust their prices tion can stray from its cooperative NGC membership has a balance of and quantities to reflect market condi- nature. Another possibility that does large and small farmers as well as tions. While an NGC might never be not require outside investment is to farmers from a wide geographic range. able to replicate the trading pit model allow distant farmers to arrange for If members are affected differently by of exchange, prudent use of technology delivery of corn through the exchange weather conditions, local prices and might allow it to get closer to that of warehouse receipts at cooperating changes in production costs, then it is model than it ever could before. grain elevators. This practice is cur- more likely that at any point in time Two key constraints that limit the rently used by some NGCs to expand some will want to buy shares and some number of potential NGC investors the area from which they find raw will want to sell shares. This kind of are: legal rules that prevent non-pro- product and has the added benefit of diversity helps keep the NGC stock ducers from investing in an NGC and increasing the number of stock market market healthy. the cost of delivering a crop from a participants. distant farm to the NGC. NGCs can 3) Grow the pool of potential do little to change the legal rules, but Conclusions investors. they can often circumvent these The NGC model makes it easier Internet auction Web sites, such as restrictions. The most common for farmers to invest in value-added eBay, put sellers of myriad products in method of expanding the pool of processing facilities, creating new touch with a large audience of poten- potential investors is for the NGC to opportunities for profit-making and tial buyers, greatly increasing the enter into a joint venture or partner- diversification. But thin markets for chances of finding someone with ship with non-producers. NGC stock can limit farmers’ ability whom to trade. Analogously, the mar- In fact, many ethanol plants are to adjust their holdings and can leave a ket for NGC stock can be made more LLCs or LLPs that are partially owned cooperative vulnerable to takeover by liquid if steps are taken to expand the by the NGC and partially owned by an IOF. The thin market problem can- pool of potential NGC investors. outside investors. Some NGCs have not be eliminated, but it can be allevi- The Internet can create opportuni- gone a step further and chosen to con- ated through careful design of stock ties for the inexpensive and timely vert to a non-cooperative business trading procedures, diversification of exchange of information between form. membership and expansion of the pool farmers who have never met each Other NGCs are uncomfortable of potential investors. other and live hundreds of miles apart. with partnerships with non-producers ■

Rural Cooperatives / January/February 2005 33 NEWSLINE Send items to: [email protected]

TFC’s $447-million sales year farmers statewide also received good sets record; income also climbs prices for crops and livestock. A good year for Tennessee Glover said fertilizer volume was farmers, bolstered by excellent 462,000 tons, while feed sales were growing conditions, translated up $860,000, with increases in miner- into record sales for Tennessee als and beef, horse, goat and sheep Farmers Cooperative (TFC), a feeds. The Home, Lawn, Specialty regional farm supply and service Department recorded the most prof- organization owned by 64 local TFC’s member store construction projects have con- itable year since 1997. All of the Ag co-ops across the state. TFC’s tinued at a record pace. Henderson Chester Farmers Distributors Inc., (ADI) subsidiary sales topped $447 million for the Cooperative was rebuilt after a tornado destroyed the operations were profitable and had fiscal year ending July 31, 2004. old one in 2003. Photo courtesy TFC sales increases. Sales of FFR seed That’s a gain of $35 million from increased, as did sales of crop protec- 2003. Net income before taxes in cash to member co-ops through its tion, hardware, TBA (tires, batteries, and member programs was nearly $11 member marketing allowance, perfor- accessories) and animal health prod- million, an increase of more than $2.7 mance and patronage programs. ucts. “As we have grown our business, million since 2003. Both Board Chairman Larry Paul we have also emphasized expense con- TFC, following a five-year plan Harris and CEO Vernon Glover trol, inventory management and the enacted in August 2002, also strength- praised the efforts of management and reduction of long-term debt.” ened its financial standing by increas- employees in a banner year for the co- Harris challenged management and ing working capital to $17.1 million — op as they reported the results at the membership to work together to a $3.6 million increase over 2003 and TFC’s annual meeting Nov. 29 in maintain the momentum as they up $10.7 million in two years. TFC Nashville, attended by nearly 1,000. In address the issues of a “changing agri- also returned more than $6.5 million addition to outstanding crop yields, cultural climate that holds a lot of

New tax law includes several cooperative provisions continued from page 21 small ethanol producers, including Small, low-sulfur diesel fuel between 155,000 and 205,000 barrels cooperatives. These are companies producer credit, co-op pass-through per day. The conferees’ report states with production capacity that does not The act creates a new, 5-cents-per- that when capacity “differs substan- exceed 30 million gallons of ethanol gallon tax credit to small petroleum tially” from average daily output of per year. The credit can be claimed on refiners who must incur capital costs refined product, capacity should be production of up to 15 million gallons complying with the Environmental measured by reference to average of ethanol per year. Protection Agency’s rules limiting the daily output. The new law allows cooperatives to sulfur content of diesel fuel. Eligible Cooperatives may also choose to choose to pass some or all of the small refiners may claim the credit until pass some or all of this credit through ethanol producer credit through to they have recovered 25 percent of to their patrons. As with the small their patrons. The credit is to be appor- such costs. For these purposes, a ethanol producer credit, any pass- tioned among patrons on the basis of small refiner is one that employs not through is to be apportioned among the quantity or value of business done more than 1,500 persons directly in patrons on the basis of patronage and with, or for, such patrons during the tax refining and has less than 205,000 any credit not passed through to year. Any credit not passed through to barrels per day (average) of total patrons is treated as a general busi- patrons is treated as a general business refining capacity. The credit is ness credit by the cooperative. credit by the cooperative. reduced for refiners with a capacity ■

34 January/February 2005 / Rural Cooperatives uncertainty.” He noted that the 2002 growing number of goat producers and chosen to remain independent by Farm Census shows that the number selling pet and horse feeds to those securing its future through acquisitions of Tennessee farms has climbed from farmers’ neighbors. We’ll always be and consolidating all of its operations 75,067 in 1992 to 87,595, but the aver- here for our farmer owners — that’s in California. age size decreased from 149 to 133 our focus — but we must continue to Recent acquisitions include: The acres. Just 11 percent of the farms pro- meet the needs of all those involved in Aug. 1 purchase of a 40,000-square- duced 86 percent of the state’s agricul- Tennessee agriculture.” foot distribution facility and nine acres ture in 2002. Some 78 percent of the in Stockton, Calif., from P&O Cold state’s agricultural operations had less Humboldt Creamery acquires Logistics; The Nov. 1 acquisition of than $10,000 in annual sales of agricul- WestFarm’s ice cream division the ice cream division of WestFarm tural products. Humboldt Creamery Association, a Foods, which has facilities in Seattle, “More and more, we’re providing Fortuna, Calif.-based dairy co-op, has San Jose and Los Angeles, and a license products and services to the row-crop completed acquisitions that make it of the WestFarm Foods/Darigold farmer growing hundreds or even one of the nation’s largest ice cream brandof ice cream, and the Nov. 1 thousands of acres of corn, soybeans manufacturers and have nearly doubled acquisition of Arctic Ice Cream in and cotton,” Harris said. “And, at the its size. Rich Ghilarducci, Humboldt’s Seattle, including its Arctic and same time, we’re finding ways to help a president and CEO, says the co-op has Vitarich Ice Cream brands.

Of necessity & invention continued from page 19 pound), otherwise it risks losing sup- In this case, however, a private ing that Pro-Fac is also more stable plies. This is a source of tension company — Curtice-Burns (which financially. However, as Harris some- between shareholders, who receive div- eventually became Birds Eye Foods) what wistfully noted, Pro-Fac no idends per share, and growers. — leased and operated the processing longer controls its own destiny. Carbone cautioned that converting facilities and marketed the finished If Vestar wants to sell Birds Eye, the a company does not happen overnight. product for the co-op. According to co-op can’t stop it. Grower-members The three-stage conversion process Harris, the profit and losses were have limited input into the company’s was, in his words, “a long and painful shared equally between Pro-Fac and decisions. They now have a legal, con- process.” It took almost nine-months Curtice-Burns through a series of tractual relationship with their proces- to complete. There are also downsides agreements. “The business model sor. Pro-Fac members are left out of the to the process. At the top of his list worked extremely well and through loop at the corporate level and decisions was the loss of heritage, or co-op cul- acquisitions the company grew.” are not as transparent as in the past due ture. A potential change in directors Perhaps it grew too quickly, or too to stronger confidentiality conditions. and, therefore, company vision, was large. In 1994, Pro-Fac purchased As a result, Harris feels that “what another risk. Further, the registration Curtice Burns. By 1999, Pro-Fac was would have been small disputes between requirements for a public company can highly leveraged and poorly posi- growers and Birds Eye have now be onerous and costly. tioned to take advantage of future become protracted disagreements.” growth opportunities. In hindsight, Dave Swanson, Partner at Dorsey Sale means veggie growers Harris acknowledged, Pro-Fac did not & Whitney LLP, counseled coopera- no longer control own destiny retain enough of its earnings. It also tives to exhaust other options before William Harris, a long-time Pro- had issued a lot of preferred stock, committing to a business conversion. Fac Cooperative member and investor which led to a cumulative dividend “Identify your goals and examine the in Birds Eye Foods, provided a grow- issue. options. Can you get additional capi- ers’ assessment of his co-op’s sale of Even with “their backs against the tal from your members or through the majority of Birds Eye stock. Over wall,” Harris said that the decision in joint ventures?” Alternative options 70 percent of Harris’ gross farm 2002 to sell approximately 60 percent include sale of preferred stock, joint income depends on his sales to the of its processing company and brand, ventures and consolidation. Each co- cooperative. Pro-Fac has always been Birds Eye, to Vestar Equity Investment op’s situation is unique. The potential innovative, he noted. Like the cherry was only made “after a lot of soul pitfalls and benefits of alternative cap- growers in Michigan, the vegetable searching.” italization methods need to be kept in growers established a “new age” co-op Was it the right decision? Birds Eye mind in order to preserve the political in 1961 to buy failing processing com- Foods is certainly more financially and social aspects of the co-op panies in the region. viable today than it was in 1999, mean- involved. ■

Rural Cooperatives / January/February 2005 35 “Humboldt Creamery will become a tribution in the first quarter of 2005. full-service frozen dessert supplier to Humboldt Creamery is a co-op associa- the retail grocery industry and one of tion owned by 62 Northern California the largest ice cream manufacturers in dairy families and is the oldest active the United States,” said Ghilarducci. dairy cooperative in the state. The “This company expansion will allow us company, which celebrated its 75th to preserve our members’ pasture- anniversary in October, produces a full based family dairies and protect green line of dairy products, including fluid space in Northern California for gen- milk, powdered milk, ice cream and erations to come.” frozen novelties, both conventional and In conjunction with the expansion organic. announcements, Ghilarducci also announced the national launch of a Record crop returns for new Humboldt Creamery brand of Blue Diamond members organic super-premium ice cream. The Almond growers who deliver to product is expected to begin retail dis- Blue Diamond received 2003 crop Photo courtesy Humboldt Creamery

Leaving home? continued from page 11 now in a position to attract new Caution urged ness is unsuccessful, leaders may be investors and additional capital,” adds Many co-op advocates take a dim desperately looking for some way to Dalrymple, who is lieutenant governor view of co-op conversions, especially save the business. If a co-op is success- of North Dakota. those that don’t require a majority of ful, farmers may not be able to capture Neither SDSP, USPB nor Golden farmers to control the business. the co-op’s value, and can seek another Oval plans to raise outside capital now, The National Cooperative Business business form that would allow them but their new structures allow for the Association (NCBA) in Washington, to tap into the value. possibility. Says Golden Oval’s Staley: D.C., opposes conversions even when “Some successful co-ops, rather “Farmers make up less than 2 percent members retain control. than generating equity to farmers, put of the population. We can’t continue “We think the co-op form of busi- their dollars into unallocated reserves,” to go to farmers for equity in order to ness remains the best model for pro- he says. “How does a farmer cash out grow or keep strong.” ducers and consumers,” says Paul their value if they can’t get their hands “It puts us in a position to protect Hazen, NCBA president and CEO. on it?” ourselves from difficult times when NCBA represents all types of co-ops, Hanson points to GoldKist Inc., the prices might go down,” adds USPB’s including farmer, food, housing and nation’s largest integrated chicken Hunt. insurance co-ops as, well as credit company, as an example of a traditional Of the four co-ops examined above, unions. “When any non-member has co-op that converted so that members only USPB requires farmer control. At ownership, that’s not a co-op.” could access enterprise value growth USPB, owners of delivery rights hold a James Baarda shares that view. “My and public market liquidity. After the majority of the seats on the board of overall concern is when farmers start to conversion, he says, the 2,300 former directors. “The premise of a producer- think of their own organization as an farmer-members converted $360 mil- owned entity remains intact,” says investment,” says Baarda, an agricultur- lion of patronage equities to stock, plus Hunt. al economist with the Cooperative added cash and stock of $140 million. Neither Golden Oval nor SDSP Services branch of USDA Rural GoldKist issued publicly traded stock requires farmer control. Development in Washington, D.C. as part of the conversion, and farmer- At Dakota Growers, the 10-member In cases where the business has outside held stock will be publicly tradable as board must include five North Dakota investors, it is those investors who get well after a holding period. residents and three agricultural pro- paid first, he notes. “Farmers get what- E.G. Nadeau expresses disappoint- ducers. Currently, nine board members ever’s left. That’s why farmers formed ment in co-op conversions, including all farm, while an MVC representative co-ops in the first place [to ensure that the examples cited above. “But I under- holds the tenth seat. producers come first]!” stand some of the motivations,” says “We’re still a farmer-owned busi- Baarda says co-ops on both sides of Nadeau. “Some co-ops have converted ness, just not a farmer co-op,” Dodd the “success spectrum” can wind up as for the wrong reasons: based more on says. candidates for conversion. If the busi- financial benefits to management and

36 January/February 2005 / Rural Cooperatives returns that were 35 percent higher, on Youngdahl said. nesses profitable” in years ahead, he a per-pound basis, than in 2002. The “The days of looking at large crops noted. co-op’s average payment of $2,900 per with trepidation are over,” added acre shattered the old record of $2,500 Youngdahl. “Ever-larger crops will be USDA awards $8.8 million per acre, set in 1997. The co-op needed in the future to support global in rural broadband grants reported near-record net sales of consumption growth.” The co-op had USDA has announced that $8.8 $541.9 million 43 percent growth in retail brand sales million in broadband community con- “This new revenue record is a in 2003 and has achieved more than $9 nect grants will be awarded to 16 com- remarkable performance because the million in annual savings since 2001 munities in 10 states to connect essen- 2003 crop was the second largest crop from new technology and process tial community facilities in rural towns in the industry’s history and the second enhancements. and communities where no broadband billion-pound crop in a row,” Blue Youngdahl said almond tree planti- service exists. USDA believes that Diamond President and CEO Doug ngs are projected to exceed 50,000 net technology is key to the ability of rural Youngdahl told owner-members at new acres per year through 2010, businesses and rural economies to their 94th annual meeting in Fresno, resulting in a dramatic increase in compete in the global marketplace. Calif. “As a result, global consumption almond supplies beginning in 2007 Extending broadband technology to reached new levels and industry ship- and 2008. Additional tonnage deliv- allow more families and communities ments exceeded one billion pounds for ered to Blue Diamond will support to access business, education, public the first time in history — the fifth “new products markets and additional safety and heath services is part of the consecutive year of record shipments,” consumption and will keep your busi- Bush administration’s effort to expand

board members than on benefits to apply to the formation of new cooper- Other business forms continue to members,” he says. He notes that some atives and do not affect existing co-ops. change as well, he says. “The corpo- former members of Minnesota Corn They require that patrons retain at rate business form arose in the early Processors are suing the former manag- least 50 percent of decision-making 1800s because of the lack of venture er, alleging that he “walked away with power. capital,” he says. “Today, there is no more than $1 million as a result of his “These laws retain the important shortage [of venture capital], and support for the merger.” co-op provision of democratic member there’s an active equity market. At the In its Nov. 7 issue, the Chicago control,” Nadeau says. “Attempts to same time, the cost of regulatory bur- Tribune ran a detailed account of how form co-op-like entities, such as C- dens, spurred by corporate scandals MCP’s then-CEO began secretly corporations or LLCs, don’t share this such as Enron, have increased dramati- meeting with its chief rival — Archer basic statutory protection and thus can cally. In this environment, many cor- Daniel Midland Co. — to lay the more easily be converted to investor- porations are evaluating conversion.” groundwork for the sale of the co-op controlled businesses.” Barr adds that most traditional ag to ADM, and that he agreed at these co-ops already modified their struc- meetings to try to convince farmers to Not a black & white issue tures or capital plans to deal with a accept a lower price than most thought Te rry Barr, an agricultural econo- changing global marketplace. “Many the co-op was worth, while focusing on mist with the National Council of farmer-owned co-ops are building rela- how much he would receive from Farmer Cooperatives (NCFC) in tionships with companies throughout ADM. “The case has fed long-standing Washington, D.C., thinks critics the food chain,” he says. “Most are resentments among independent- should avoid viewing co-op conver- involved in joint ventures. Most have minded farmers against the consolida- sions as a black or white issue, consid- subsidiary LLCs. None are the same.” tion of agriculture into the hands of a ering the complex challenges facing Barr agrees with co-op attorney few global titans, such as ADM,” the farmer co-ops. Hanson that the changing structure of article says. [Editor’s note: this was an “NCFC supports all farmer-owned food and agriculture presents a transi- outright acquisition, not a co-op con- organizations that seek to enhance tional challenge for most co-ops. version, but many of the same issues farmer returns,” says Barr. “We should “When co-ops were formed, the idea arise in each type of transaction.] worry less about what we call the form, was that current patrons would replace Nadeau likes new co-op laws passed and more about whether members the capital of prior patrons,” Hanson in Minnesota and similar laws being understand the implications of the says. “But co-ops have fewer patrons developed in other states that allow for change and whether it truly serves the today. Without outside capital, that non-member investors but preserve interest of the farmers in both the points to a train wreck in the future.” majority member control. These laws short and the long term.” ■

Rural Cooperatives / January/February 2005 37 economic opportunity and improve the ative was working to provide uninter- The butter plant primarily churns quality of life in rural America. rupted service to its butter customers. cream and packages butter. One grant was awarded to the “Other butter makers from throughout Havasupai Tribal Council to provide the country are generously helping CHS 2004 earnings a wireless broadband internet service to AMPI fill its orders,” said AMPI record $221 million the community of Supai, Havasupai General Manager Mark Furth. CHS Inc. reported record net Reservation in Arizona. Located in Alert employees reported the fire income of $221.3 million for its fiscal the southwest corner of Grand Canyon shortly after 6 p.m. on Dec. 1. year ending Aug. 31, 2004. The record National Park, the Supai community Following safety protocol, all 30 net earnings represent the highest ever will connect all critical facilities, employees on duty in the plant were recorded by a U.S. regional agricultur- including public safety and health ser- immediately evacuated and no injuries al cooperative. The 2004 results com- vice, public schools and homes in the were reported. Fire officials commend- pared with net income of $123.8 mil- community that has a population of ed AMPI employees for their quick lion for the period Sept. 1, 2002 - Aug. 503. Other grants range from the action and assistance in controlling the 31, 2003. Net income for 2004 exceed- North Slope Borough of Nuiqsut, Ala., blaze. “AMPI did an excellent job with ed a previous company record of to Benoit, Miss. its evacuation $178.6 million set in fiscal 2001. Net Communities selected plan,” said sales for fiscal 2004 also set a record at for the Broadband New Ulm $10.9 billion, compared with $9.3 bil- Community Connect Fire Chief lion for fiscal 2003, largely attributed program (the complete to increased prices for list is available at energy products and www.rurdev.usda.gov) do grain. not have access to broad- Strong refining mar- band connectivity for the gins, combined with essential services of improved performance police and fire protection, hospitals, by CHS lubricants and local government, libraries and propane, contributed to schools. The program is in its third the highest energy earn- year and, including today’s ings in the co-op’s histo- announcement, has invested $30.1 ry. Agronomy opera- million in grant funds. tions, represented by Ninety rural communities have CHS 50 percent owner- now been connected to high-speed ship in Agriliance, LLC, telecommunications through this reported earnings double program. In return, the communi- those of fiscal 2003. ties will make at least 10 computers CHS “outputs” busi- Debris is cleared following a fire at AMPI’s butter plant in New available to the public with set nesses, consisting of Ulm, Minn. Above, Minnesota Governor Tim Pawlenty (left) and AMPI hours and instruction available for General Manager Mark Furth survey the damaged plant, which will be local operations, business use on the Internet. The grant pro- rebuilt in New Ulm this spring. Photos courtesy AMPI services, grain market- gram supplements USDA Rural ing, processing and Development’s standard high-speed foods, reported telecommunications loan program. Curt Curry. “Their participation in the improved performance across the process was outstanding. There were board. Country Operations and AMPI butter plant hit by fire employees on the ground helping with Services, which includes CHS local Cleanup was underway in early the plant layout and location of haz- operations, animal nutrition and sun- January at the scene of a fire that dam- ardous materials.” flower businesses, turned in its fourth aged the Associated Milk Producers Service to the dairy producers who consecutive year of strong perfor- Inc. (AMPI) butter manufacturing and ship their milk to the plant was not mance. Grain marketing operations packaging plant in New Ulm, Minn. interrupted. The butter plant’s milk overcame challenges in Chinese soy- Workers began clearing rubble from receiving facility, which is housed in a bean markets to complete fiscal 2004 the exterior of the manufacturing plant separate building, did not sustain any with its best earnings in five years. as fire and insurance investigators con- damage. Milk delivered to the facility Earnings for 2004 were up signifi- tinued their assessment. While the full is routinely processed at one of AMPI’s cantly over the previous year within extent of the damage caused by the fire 12 other manufacturing plants that are the processed grains and foods seg- was still being determined, the cooper- located throughout the upper Midwest. ment, which consists of oilseed pro-

38 January/February 2005 / Rural Cooperatives cessing, Mexican foods, CHS owner- concern that has capacity to start Dakota, Iowa and Wisconsin efficiently ship in Horizon Milling LLC (a flour- repaying members from profits to help produce and export specialty grains. milling venture), and Ventura Foods liquidate their deferred accounts, which More information is available at: LLC (a vegetable oil-based food man- will be turned into equity,” Pape said. www.mnshippers.org. As a private ufacturer and packager). foundation, The Cooperative Found- CHS has realigned its business UW co-op reference ation has supported cooperative busi- organization and leadership responsi- book newly revised ness development, education and bilities to position the company for Cooperatives: Principles and Practices research projects in the Upper growth in current and future business- in the Twenty-First Century, a coopera- Midwest for more than 50 years. es. Under the realignment, CHS will tive reference book last published in For more information, visit: consist of four operating divisions: 1980, has undergone an extensive revi- www.coopfoundation.org. Processing, Ag Business, Energy and sion by Kimberly Zeuli, assistant pro- Business Solutions. There will also be fessor, and Bob Cropp, professor Cropp interim director two supporting divisions: Finance and emeritus, at the University of Wis- of UW Center for Co-ops Shared Services. Each of the six divi- consin Department of Agricultural and Bob Cropp, professor emeritus of sions will be led by an executive vice Applied Economics. The book’s chap- agricultural economics, will serve as president. The changes took effect Jan. ters on organization, structure, financ- interim director of the Center for 1. “As CHS focuses on continuing to ing and management of cooperatives Cooperatives at University of add value for all of its stakeholders, it’s are as relevant today as ever. Books can Wisconsin-Madison. Cropp was essential that our structure reflects our be ordered (there is a charge) at: director of the center from 1990 to strategic direction and efforts to grow http://cecommerce.uwex.edu/ 2003. Anne Reynolds, who had been in our core business areas,” said John showcat.asp?id=107. A PDF version serving as interim director, will Johnson, president and chief executive can be downloaded for free at: remain at the center as assistant direc- officer. http://cecommerce.uwex.edu/pdfs/ tor. The change relieves her of CHS also recently announced that A1457.PDF. administrative responsibilities so she it is entering the wholesale propane can focus on developing and deliver- business in the Indiana, Ohio and Specialty grain industry ing extension and outreach programs Michigan marketplace previously education network expands and applied research. served by Countrymark Co-op. The Midwest Shippers’ Association “The center has increasing demands (MSA) co-op will be able to strengthen for work to address critical extension Bison co-op optimistic about its Midwest Specialty Grain Industry and outreach needs,” said Dean Elton emerging from Chapter 11 and Education Network through a Aberle. “I commend Anne Reynolds for The North American Bison grant from The Cooperative Found- her leadership as interim director while Cooperative of New Rockford, N.D., ation. “The Network provides valuable also carrying major responsibilities for filed for Chapter 11 (reorganization) education to producers on existing and extension, outreach and grant projects.” bankruptcy in Fargo, N.D., in emerging opportunities in the identi- Founded in 1962 as the International November, but says it is in better ty-preserved specialty grains industry,” Cooperative Training Center, the shape than a year ago and expects to says William J. Nelson, Cooperative UWCC provides programs for interna- emerge from bankruptcy within a year. Foundation president. “It also pro- tional and domestic cooperatives. Meanwhile, the 330-member co-op is vides producers with a network of fighting back with a new retail brand processors, traders, as well as domestic DotCoop launches directory; name, TenderBison, and will be improv- and international buyers and end users Paul Hazen to head OCDC ing the efficiency of its processing in the specialty grains industry.” A directory of all active .coop Web plant by doing custom bison slaughter- As a networking project, the contri- sites is now available from DotCo- ing. The co-op currently handles 250 bution will help support a promotional operation LLC, the sponsor of the to 600 head a month at its plant, but DVD for the 2005 Midwest Specialty cooperative-only .coop domain. has the capacity to process more than Grains Conference and Trade Show. Launched in November, the directory 1,000 bison or cattle each month. The Network also includes weekly allows searches for co-ops by name, Co-op CEO Dieter Pape said news and information releases relating location and domain name. The direc- $600,000 will be spent on capital to foreign trade leads and market intel- tory of nearly 4,300 addresses can be improvements this year, according to ligence. found at www.directory.coop or AgWeek. “I think the changes we have MSA is a nonprofit, agricultural through a link from the dotCoop site at implemented will allow us to emerge cooperative that helps producers, pro- www.coop. The directory displays each fairly quickly from Chapter 11 and ducer groups and small agribusinesses domain name; clicking on the domain continue to be a profitable and ongoing in Minnesota, North Dakota, South name takes you directly to the site.

Rural Cooperatives / January/February 2005 39 “When you find co-ops on our used for electric and telecommunica- officials to change federal law and directory,” says NCBA CEO Paul tions loans. The lender, whose notes make the cooperative legal structure Hazen, “you know they are co-ops that the government will guarantee, will be more attractive. Hanson also orga- truly identify themselves as co-ops and required to pay an annual fee of 30 nized some of the first ethanol, egg promote the co-operative principles basis points over the term of the and beef-processing cooperatives through their Internet identity.” The unpaid debt. Most of the 30 basis using marketing agreement pledges .coop domain, approved by ICANN in points will be deposited into the and stock invest- 2000 and launched in early 2002, now REDLG program. ment for capitaliz- has more than 8,000 domain names The program was authorized by ing these sophisti- registered. Section 6101 of the 2002 Farm Bill. cated businesses. In other NCBA-related news, Like other USDA Rural Development The Leadership Hazen, who has served on the programs, local leaders will make the Award is sponsored Overseas Cooperative Development decisions on what projects are needed and administered Council (OCDC) board for six years, in their communities. The REDLG by the Minnesota has been elected chair by the board. program provides zero-interest loans Mark J. Hanson Association of OCDC is an association of eight inter- and grants for all types of community Cooperatives to national cooperative development and economic development projects. honor distinguished individuals for organizations. As board chair, Hazen Past projects have included fire trucks, their contributions to cooperative said his top priorities will be to guide libraries, health facilities and industrial business. Nominees are selected for OCDC through the transition expect- parks. their leadership, vision, personal com- ed with the retirement of long-time From the beginning of this program mitment, innovation and statesman- Executive Director Ted Weihe and to in 1989, USDA Rural Development ship. refocus on expanding funding for has invested approximately $250 mil- OCDC members’ international devel- lion in more than 1,000 projects across Dakota local co-ops merge opment work. the country, leveraging an additional The Farmers Union Co-op “We need to reverse the trend $1.4 billion in private sector funds and Association of Redfield-Doland has toward a declining federal commit- creating an estimated 28,000 jobs. merged with the 4 Seasons Cooperative ment to overseas cooperative develop- During the Bush administration, of Britton, both in South Dakota, ef- ment and renew policy makers’ sup- approximately $90 million has been fective Feb. 1, 2005. The merger was port for cooperatives as a tool to build invested, creating or saving almost approved Dec. 6 at the 4 Seasons Co- wealth and opportunity in some of the 15,000 jobs. op’s annual meeting. Patrons of world’s poorest countries,” Hazen said. Redfield-Doland voted unanimously on “I’ll be working to ensure that OCDC Hanson gets co-op Nov. 22 to merge with 4 Seasons, while resources are focused on that core leadership honor there were only two dissenting votes at goal.” Mark J. Hanson, chairman of the later co-op, for a 98 percent favor- Lindquist & Vennum PLLP’s able vote. The merged co-op will be New funding source for Agribusiness and Cooperative Practice operated initially by a 16-member rural economic development Group, received the Minnesota board. Plans call for three directors to The U.S. Department of Cooperative Leadership Award during go off the board each year at the first Agriculture has announced the cre- the joint annual meeting of the two annual meetings, reducing the ation of a new rural development pro- Minnesota and Wisconsin state co-op board to nine directors. gram that will provide a long-term associations. Hanson is the youngest 4 Seasons Co-op’s year ending Aug. funding mechanism for loans and recipient of the award and the only 31 was the second most profitable year grants to rural America. This new attorney to be so honored. for the co-op since 1986. It had a mar- source of capital for rural economic He is responsible for developing a gin before taxes of $837,695. The development will bring new jobs to new form of business organization: a grain division showed a profit of some of the most isolated and rural cooperative taxed on a partnership $102,000. areas of the country. basis. His efforts in analyzing trends USDA Rural Development’s Rural related to the future viability of coop- Lamb Checkoff faces vote Economic Development Loan and eratives led to Minnesota Chapter Sheep producers, feeders and first- Grant Program (REDLG) manages 308B, a 2003 law intended to help handlers are voting to decide whether these projects. New regulations enable spur significant Minnesota coopera- to continue the American Lamb USDA to guarantee up to $3 billion in tive development. He is working with Checkoff program, which promotes bonds or notes of nonprofit lenders, similar legislation in Wisconsin and year-round consumption of American for up to 20 years, if the proceeds are Iowa as well as working with federal lamb and works to minimize the

40 January/February 2005 / Rural Cooperatives volatility of seasonal lamb sales. The Dak and Sensient Technologies of The 2004 crop sugar content is four-week voting period begins Jan 31 Milwaukee, Wis., recorded sales of down to 16.7 percent, due to large and ends Feb. 28. The referendum is $7.3 million. amounts of rain in the fall. being conducted at local county USDA Minn-Dak President and CEO Farm Service Agency (FSA) offices. To David Roche said he foresees chal- USDA Ag Outlook Forum provides find your closest office, visit FSA’s Web lenges looming large on the horizon insight on “front-burner” ag issues site: www.fsa.usda.gov/pas/default.asp. for the co-op, including falling sugar USDA’s annual Ag Outlook Forum Collections under the Lamb prices, the need for more industry pro- will be held Feb. 24-25 in the Checkoff program began in July 2002, motion, higher production costs and Washington, D.C. suburb of and raise a budget for the American trade agreements which could result in Arlington, Va. Leading commodity Lamb Board of about $2.3 million more sugar imports. Stagnant, if not analysts will be on hand to discuss annually. Administrative expenses are declining, prices have been the norm planting, trade and price prospects for limited to 10 percent of budget. The at Minn-Dak the past several years, farm commodities for the year ahead. 13-member board is appointed by the and the co-op has continually taken The program will focus on the impact Secretary of Agriculture, and the board steps to increase productivity and effi- of science on farming, farm policy and office is in Denver. ciency to counteract the price declines agricultural markets. Speakers will in order to cushion the impact on also discuss issues such as Mad Cow Record beet payments disease (BSE) and beef trade, for Minn-Dak members prospects for energy prices Minn-Dak Farmers and ethanol, international Cooperative harvested net trade talks, market integra- revenues of $198.9 million for tion in North America, early the excellent 2003 crop, debate on the next Farm Bill resulting in the highest gross and new dietary guidelines. beet payment in co-op history There will be ample time for member-shareholders. for networking at this popu- Addressing members at the lar event, which attracted co-op's annual meeting in 1,400 people last year. Fargo, N.D., in early Attendees will receive a set of December, Minn-Dak new USDA long-term com- Executive Vice-President modity projections to 2014. Steve Caspers said sugar con- Sugar samples are tested in Minn-Dak’s lab. Members received The conference will be held tent of the 2003 crop was “an the highest gross beet payments in the co-op’s history for the 2003 at Crystal Gateway Marriott excellent 18.7 percent -- well crop. Photo courtesy Minn-Dak Hotel. For program details, above the five-year average,” registration and hotel infor- and beet purity was also good. mation, visit the conference The co-op sliced 2.1 million tons of shareholders, he noted. In addition, Web site:http://www.usda.gov/ beets, the second largest volume ever the entire sugar industry has had to oce/forum, or call (877) 744-3083. processed by Minn-Dak. About 2.26 come to terms with lower consumption million tons of beets were harvested by consumers, which has prompted Crop-based biofuels could add from 112,800 acres in 2003, with an sugar producers to consider new ways $5 billion to farm profits by 2025 average yield of 20 tons per acre. to promote sugar. A new report provides further The high-quality crop also resulted Despite these hurdles, Roche said he weight to the potential benefit of in a good year for Minn-Dak’s market- sees a bright future for the co-op. “The ethanol and other biofuels in reducing ing subsidiaries. John Doxie, president intensity of our owners has created a America’s dependence on imported of United Sugars Corporation, a joint ‘can do’ culture at Minn-Dak,” he said. oil, while adding $5 billion annually venture which markets sugar for Victor Krabbenhoft, delivering his to farm profits by 2025 if production Minn-Dak and two other sugarbeet last speech before retiring as Minn- commitments are made now. “These co-ops, said sales volume was up 23 Dak board chairman, compared the fuels are derived from cellulosic bio- percent in 2004. Midwest Agri- history of the co-op to a marathon. mass such as corn stover, grain straw, Commodities Co. of San Rafael, Calif., “It’s a long run, complete with obsta- straw and sugarcane waste rather than marketer of Minn-Dak’s molasses and cles, and those with a strong will con- just from grains, thus providing a fur- beet pulp, also had record sales volume tinue on. It’s important that we don’t ther benefit of harvesting two crops and made record returns to members. back down from these challenges, but from every field,” says Brent Minn-Dak Yeast Co., owned by Minn- rather meet them head on.” Erickson, a vice president of the

Rural Cooperatives / January/February 2005 41 Biotechnology Industry Organization (EPA) recently announced a new inter- “Energy production is an exciting (www.bio.org). agency partnership to support agricul- growth sector for U.S. agriculture,” At $40 per dry ton, the $5 billion tural and business based renewable said Gonzalez, “and a strong rural added profit is based on 200 million energy systems. This agreement is part economy, more jobs in rural areas, tons of biomass, which is less than of the Bush administration’s effort to renewable energy production and a one-sixth the total amount of biomass increase teamwork in delivering ser- cleaner environment are all key ele- farmers could produce by 2050, vices to rural America. ments of President Bush’s agenda. according to the report “Growing “This agreement is a triple play,” USDA Rural Development is commit- Energy: How Biofuels Can Help End said Agriculture Acting Under ted to aggressive leadership on these America’s Oil Dependence,” issued by Secretary for Rural Development initiatives. the nonprofit National Resources Gilbert Gonzalez. “It’s good for the The 2002 Farm Bill directs USDA Defense Council (NRDC). The result environment. It helps exploit a new to encourage the development of of a two-year study by agricultural, energy source — one with high growth renewable energy. In 2003-04, USDA engineering and environmental potential — of clean, renewable fuel to Rural Development invested $16.9 mil- experts, it is the first to focus on what reduce our oil imports. And it’s good lion in 67 anaerobic digester projects. bioenergy technologies can do With leveraging, the total when commercially mature investment exceeds $80 mil- and operating on a large scale. lion. These projects serve In addition to adding to farm 11,300 rural households, profits, biofuels have the generate 127 GWh, and cre- potential of being cheaper ate 120 jobs. than gasoline and diesel, sav- ing about $20 billion per year Another $3 million going on fuel costs by 2050, accord- back to Walton EMC ing to the report. Moreover, members biofuels could reduce green- For the second year in a house gas emissions by 1.7 bil- row, most Walton Electric lion tons per year. Membership Corporation “This report also addresses customer-owners will be some of the concerns raised taking part in a $3 million when using biomass for energy refund. That means $22 independence,” Erickson said. USDA’s Gilbert Gonzalez (right) and the Environmental Protection million has been returned to “For example, biofuels can be Agency’s Jeff Holmstead sign an agreement setting up a new part- co-op members over the competitive with gasoline and nership to support agricultural- and business-based renewable past 17 years. Most of the diesel, with a price of between energy systems. refunds will appear as a 59 cents and 91 cents per gal- credit on electric bills, with lon for the former and 86 cents per gal- for the bottom-line of farmers, ranch- the average being $27. This saves more lon for diesel. This is the equivalent of ers and small businesses.” than $30,000 in check production and saving $20 billion per year in fuel costs The agreement provides for EPA mailing costs. Refunds are based on by 2050. Enough land is available for technical support of USDA in review- the amount of the customer’s annual biofuels to make a big contribution, ing systems for methane gas recovery power bills. and emission concerns over low-per- via anaerobic digestion of animal Some margins are held for reserve centage blends of ethanol in the exist- waste. EPA will also consult on techni- funds so that Walton EMC is prepared ing fleet can be addressed.” cal guidelines for USDA Rural for emergencies. Margins are also used For a copy of the 96-page report Development initiatives encouraging to help pay down debt and to make and executive summary Growing more state-of-the-art digester tech- major purchases. “But when those Energy: How Biofuels Can Help End nologies. USDA and EPA are also margin reserves grow to more than America’s Oil Dependence, log onto: investigating expanding support to what’s needed for a safe financial cush- http://www.bio.org/ind/ other areas. The partnership will pro- ion, Walton EMC returns the extra,” GrowingEnergy.pdf mote use of anaerobic digestion tech- explains CEO Ronnie Lee. More than nology in a way that enhances rural 92,000 customers will get money back. USDA-EPA partnership agricultural development, provides Walton EMC is a customer-owned promotes renewable energy environmental benefits and increases electric company and serves 107,000 USDA Rural Development and the farm revenues through the generation electric accounts in ten Northeast Environmental Protection Agency of renewable energy. Georgia counties. ■

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44 January/February 2005 / Rural Cooperatives