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Rural January/FebruaryCOOPERACOOPERA 2006 TIVESTIVESVolume 73 Number 1

FEATURES

4 Making the Grade Off-grade potatoes have a home, thanks to Keystone plant

Rural COOPERATIVES (1088-8845) is published By Dan Campbell bimonthly by Rural Business–Cooperative Service, U.S. Department of Agriculture, 1400 Independence Ave. SW, Stop 0705, Washington, DC. 20250-0705. p. 4 9Fruits of Their Labor The Secretary of Agriculture has determined that Co-op winegrowing takes root in North Carolina publication of this periodical is necessary in the transaction of public business required by law of By Bruce Pleasant the Department. Periodicals postage paid at Washington, DC. and additional mailing offices. Copies may be obtained from the Superintendent of 14 Voice of experience: co-ops are resilient Documents, Government Printing Office, Washington, DC, 20402, at $23 per year. Postmaster: send address By Scott Yates change to: Rural Cooperatives, USDA/RBS, Stop p. 9 3255, Wash., DC 20250-3255. 16 Trade, Farm Bill challenges Mention in Rural COOPERATIVES of company and brand names does not signify endorsement over eyed at dairy conference other companies’ products and services. By Dan Campbell Unless otherwise stated, contents of this publication are not copyrighted and may be reprinted freely. For noncopyrighted articles, mention of source will be 20 Foreign Affairs appreciated but is not required. p. 16 Co-op leaders share strategies for pursuing global markets The U.S. Department of Agriculture (USDA) prohibits By Stephen Thompson discrimination in all its programs and activities on the basis of race, color, national origin, age, disabili- ty, and where applicable, sex, marital status, familial 25 Largest 100 ag co-ops status, parental status, religion, sexual orientation, genetic information, political beliefs, reprisal, or post strong margins in ‘04 because all or part of an individual’s income is derived from any public assistance program. (Not By David Chesnick all prohibited bases apply to all programs.) Persons p. 20 with disabilities who require alternative means for communication of program information (Braille, 32 An Art & Science large print, audiotape, etc.) should contact USDA’s Revised co-op curriculum gets test drive in Madison TARGET Center at (202) 720-2600 (voice and TDD). To file a complaint of discrimination, write to USDA, By Jane Livingston Director, Office of Civil Rights, 1400 Independence Avenue, S.W., Washington, D.C. 20250-9410, or call (800) 795-3272 (voice), or (202) 720-6382 (TDD). USDA DEPARTMENTS is an equal opportunity provider and employer.

Mike Johanns, Secretary of Agriculture 24 LEGAL CORNER Thomas C. Dorr, Under Secretary, 30 VALUE-ADDED CORNER USDA Rural Development, 35 MANAGEMENT TIP Jack Gleason, Acting Administrator, Rural Business-Cooperative Programs 37 NEWSLINE 47 INSIDE RURAL DEVELOPMENT Roberta D. Purcell, Deputy Administrator, USDA Rural Business-Cooperative Programs

Dan Campbell, Editor On the Cover:

Vision Integrated Marketing/KOTA, Design A vine laden with Chardonnay grapes awaits harvest. See page Have a cooperative-related question? 9 for a look at how wine grape growing is making a comeback in Call (202) 720-6483, or North Carolina. Photo contributed by Rodney Lough, a prize-win- Fax (202) 720-4641, Information Director, ning photographer who specializes in outdoor photography. This publication was printed with vegetable oil-based ink. See more of his work at: www.theloughroad.com.

Rural Cooperatives / January/February 2006 3 Making the Grade Off-grade potatoes now have a home thanks to Keystone dehydrator plant

By Dan Campbell, Editor provides fuel for the steam Keystone needs to process fresh spuds into 40-pound bags of tanding in a steady drizzle under a dehydrated potato flakes. steel-gray October sky, Cory The culprit for the power interruption ulti- S Schlegel and several other men are mately proves to be a defective switch that shut peering at the gauges on a control down one of the blowers that drive methane panel, trying to find the kink that has inter- gas into and through the underground pipeline rupted the flow of gas under the road to the that leads to the plant, located near the town of new Keystone Potato Products plant. The hud- Hegins in the Appalachian Mountains of east- dle takes place on a giant landfill, the final rest- ern Pennsylvania. ing place for trash from all over the Northeast. Decomposing garbage is the source for the methane gas that

4 January/February 2006 / Rural Cooperatives When the methane gas system shuts able marketing advantage, Masser says. ning the driers, peelers and blanchers. down, the plant’s back-up propane He’s long been convinced of the need “We pursued that idea aggressively, but burners kick on, so the potatoes keep for a plant like Keystone in the East — the logistics just didn’t work out.” rolling. “But we hate to have to use the ever since returning to the family farm- Part of the problem was that to propane because of the higher cost,” ing operation in the late 1970s after maintain the steam pressure required, explains Schlegel, the plant’s general several years working in the paper the potato processing plant would have manager. Indeed, it was the availability industry for Proctor & Gamble. had to be located virtually next door to and economics of a low-cost, waste-to- Buyers in the East typically have to the co-generation plant — not exactly energy power source that was the pay about 12 cents per pound more for an appetizing prospect for a food facto- lynchpin for getting this $12 million fresh potatoes than do their counter- ry. Further, there was concern about project built. parts in the West, he notes. To offset how long the coal supply at any one of There’s a lot riding on the outcome that differential, a cheap source of ener- these plants would last. of the effort. This plant could play a gy was needed for a processing plant. With methane gas, the supply will major role in determining whether Attention was first focused on one of last as long as the landfill is in opera- Pennsylvania’s fresh-market potato tion, and probably even long industry stabilizes and grows or afterwards. So, the co-op found 83 continues to contract. The acres of land adjacent to a landfill Keystone plant — the only one of where a methane-collection sys- its kind east of the Mississippi tem was already in place, but the River and outside Maine — was gas was just being flared off. A built so that growers here could contract was negotiated with the stop dumping their off-grade CES (Commonwealth Environ- potatoes or giving them away for mental Systems), the private com- cattle feed. pany that operates the landfill, and “For our industry to be viable the county agreed to sell the adja- in fresh markets, we need to have cent land. Project backers then a market for our off-grade pota- went to work to form the LLC toes as well,” says Keith Masser, and line up financing. president of Pennsylvania Cooperative Potato Growers Inc., Stimulating a stagnant economy one of the nation’s oldest co-ops, Local government agencies and and the largest of 42 stockholders the state have backed the Keystone in the LLC that was formed to project both as a way of shoring- build and operate the plant. up the state’s potato industry and Masser is also president of the Potatoes are steamed during the dehydration process at to create industrial jobs in a region Keystone board and runs his fami- the new Keystone Potato plant near Hegins, Pa., which where the coal industry has long ly potato farm and a large packing uses power from methane gas piped in from a nearby been fading and the garment house (Sterman-Masser) in nearby landfill. USDA photo by Dan Campbell; Facing page: photo cour- industry has almost entirely Sacramento, Pa. Masser is the sec- tesy U.S. Potato Board migrated overseas. ond biggest stockholder in the But it took several unsuccessful LLC. the half dozen or so small co-generation attempts before a strong enough appli- In the early 1950s, about 100,000 power plants located in the region that cation and business plan were devel- acres of potatoes were planted in burn waste coal to produce electricity. oped to win a Value-Added Producer Pennsylvania. “Today we grow less than “The coal industry wasn’t as efficient Grant (VAPG) from USDA Rural 12,000 acres,” says Masser, whose fami- in the past, so a lot of good coal went Development. The VAPG grant was ly grows about 600 acres of spuds. “Our out with the rock deposited in waste considered essential to making the proj- decline has gone out West.” piles that built up over the past century. ect fly. There’s still a lot of energy in it,” “The second time we failed to get Competing with the NW Masser explains. These co-generation the USDA grant, our then-state agri- Producers in the Pacific Northwest plants use steam turbines to generate culture secretary asked me what kind of dominate America’s potato industry, and electricity, but just blow off the excess help the state could supply to make it growers there have long had the advan- steam as a useless byproduct. happen,” Masser recalls. “I told him we tage of access to processing plants The original idea was to build the needed about $50,000 to hire someone where they can sell their off-grade pota- plant next to one of these co-generation who could work for a year to develop a toes. This has given them a consider- plants and use that waste steam for run- really strong application.” The state

Rural Cooperatives / January/February 2006 5 department of agriculture came through into higher-profit-margin foods, such as food-maker’s specifications. As with the with that grant, and Schlegel — a man- fresh-cut French fries. Masser says it other off-grade potatoes, these are per- ufacturing-process engineer and a doesn’t take an economic genius to see fectly good spuds, just not quite what home-town boy — was hired away from why: it takes six pounds of raw potatoes the potato chip makers require. But Alcoa Aluminum to go to work on the to make one pound of dehydrated flakes Schlegel says they work fine for him. application package. that sell for 40 cents a pound, whereas In 2001, the revised application — one pound of fresh potatoes can nearly Shake-down cruise predicated on the use of methane gas to yield one pound of French fries that sell Like most new plant start-ups, there power the plant — was approved by for 50 cents a pound. have been a number of bumps in the USDA, and Keystone was awarded a Keystone is working with the road and a learning curve to master $450,000 VAPG. As a matching grant, National Agri-Marketing Association at during the plant’s start-up cruise, Keystone members had to put up a like Penn State University to identify the Schlegel says. The plant began operat- amount of equity. The money was used most promising value-added products ing in mid-May, but it took most of the for everything from attorney fees to to pursue. About 10,000 square feet in summer to prefect the process to pro- incorporate the business to start-up the plant has been allocated for produc- duce a superior product. capital. Another huge boost “This is a unique opera- came in the form of a $1 mil- tion for this part of the lion grant from Pennsylvania country,” Schlegel says. “We for an on-site wastewater couldn’t just run around the treatment plant (the grant was corner for answers every actually awarded to an inter- time we ran into a problem.” mediary, which in turn is The equipment supplier, leasing the treatment plant to Idaho Steel Products, has Keystone). A well was drilled been a big help, as has been for an on-site water supply. the ability to consult with The state also kicked in others who had experience with $1.75 million in low- in potato processing, says interest loans for machinery, Schlegel. land and the building. Key- “I thought the learning stone borrowed $5 million curve would be shorter than Eye to eye: Cory Schlegel samples a delivery of new spuds. Perfectly from a local bank, with the rest it was,” Masser says. “But good, but off-grade, potatoes that were once used for livestock feed of the money coming from by mid-September, we had in eastern Pennsylvania can now be processed into value-added member equity investment. foods. USDA photos by Dan Campbell pretty well learned how to dehydrate our type of pota- Higher-value products eyed toes. Out West, they are Schlegel says he hopes to produce 8 ing such products. doing mostly Russet Burbanks, with to 10 million pounds of dehydrated The plant’s business plan calls for high solids content.” But that’s not a potato flakes this year, and to double pulling raw product from a 600-mile variety Keystone handles very often. that amount within the next couple of radius, although sky-high fuel and “We struggled with the process after years. Most of the plant’s initial sales trucking costs have currently shrunk the blanching and cooling. But we kept are being made to buyers who repack- that radius, says Schlegel. The rise in at it, and developed a formula that age Keystone’s product into smaller fuel prices actually costs Keystone’s reconstitutes and tastes better than the packages and sell it under various pri- competitors in the West far more. “A product of our competitors.” vate labels. fuel increase that costs us an extra 1-2 “It’s not as simple as cooking a potato, The extremely depressed potato cents per pound will cost them 7-8 peeling it and drying it,” Schlegel adds. prices in recent years (although 2005 cents per pound,” Schlegel says. “There are many little things to watch to saw some improvements) resulted in big In addition to off-grade fresh-market get the right time, temperature and con- carryover inventories of dehydrated potatoes (usually kept off the fresh mar- sistency. But we’ve made huge progress.” potatoes, which has put a damper on ket due to small size or superficial blem- The landfill-gas component has been flake prices. ishes), another source of raw supply is the most complex and challenging part Keystone is targeting the food-ingre- Pennsylvania’s large potato chip indus- of the start-up project, Schlegel says. dients industry, where dehydrated pota- try. The state is home to about a dozen “It’s a custom, hybrid system — not off toes can be used for just about anything, major and minor chip fryers, and those the shelf. Everything had to be designed from breads and rolls to ice cream. The plants frequently reject loads that arrive and engineered from scratch. So we’ve ultimate goal is to expand production with a flesh color that will not fry to the had bugs to work out.”

6 January/February 2006 / Rural Cooperatives Coal mining (such as this operation near Hegins) and tex- tiles once dominated the region’s economy, but have been on a decline, making it crucial to preserve the area’s agri- cultural base, co-op members say. Inset (above): a country church is neighbor to the Sterman-Masser potato packing plant. Inset (below): the main street in Hegins. USPB promotion effort enlists celebrity spokespud

The potato may be America’s favorite vegetable, but it role in helping to educate children about potatoes: Mr. has had to scrap a bit more in recent years to maintain that Potato Head. Yes, the venerable, ever-flexible, face-chang- status, due in part to the popularity of the Atkins and South ing toy that has entertained children for more than half a Beach diets, which make scant use of the tuber. century is helping kids learn that potatoes are an important Keith Masser, president of the Pennsylvania Coopera- part of a healthy, balanced diet. tive Potato Growers, says he believes the impact of Through nutritional education programs such those diet crazes on the market has already large- as this, consumer public relations and retail ly passed. But he sees a much bigger challenge programs, foodservice marketing and export for the industry in the ever-increasing trend programs, USPB strives to educate con- toward consumption of convenience foods sumers, retailers and culinary profession- that can be prepared in a hurry — never the als about the convenience, good nutrition strong point of the potato, although consider- and versatility of potatoes. able product development is taking place to “The potato is a nutritional power- address that demand. house, loaded with fiber and essential Helping the industry spread messages vitamins and minerals,” says USPB Chair- about the nutrition of the potato is the United man Ray Meiggs of Camden, N.C. He notes States Potato Board (USPB), established in 1971 that a 5.3 ounce potato is a great source of by a group of potato growers to promote the ben- vitamin C; is an excellent source of potassium efits of eating potatoes. Today, this cooperative when eaten with the skin; contains only 100 industry effort represents 6,000 potato growers and calories; has less than 10 percent of the daily value handlers across the nation. Recognized as an innovator in of carbohydrates and is a good source of fiber when eaten the produce marketing industry, the Denver-based USPB with the skin. was one of the first commodity groups to promote its prod- As evidence that the industry’s Healthy Potato Campaign uct generically and to develop a nutrition label approved by is having an impact, USPB cites a recent survey showing the USDA and FDA. that 4 percent more consumers in 2005 agreed that “pota- USPB is funded through a small assessment on grower toes are a good food for the health of consumers” than in production, which generates around $9 million annually. 2004. There was a like increase from 2004 to 2005 in the USPB recently acquired the services of a celebrity number of consumers who reported serving potatoes at spokesman — or spokespud — who is playing an important home the previous week. ■

For the first year, the plant is operat- hourly workers. When the plant con- High fuel/shipping costs is a major ing every other week, running 24 hours verts to a full-time schedule, it should reason for a regional supply close to the a day with two 12-hour shifts. That greatly help with the labor issues, major markets of the Northeast, Masser means that the work is half-time for the Schlegel notes. says. He notes that it costs about $9.50 20 hourly workers (there are also five He works closely with the co-op to per hundredweight to ship potatoes full-time managers). That has made it order supplies needed to keep the from the Northwest to the East Coast. difficult to retain workers. plant running at optimum level. To “But we can grow them here for $8 per A major warehouse distribution cen- help the plant succeed, co-op members hundredweight — less than the cost of ter has been developed about 10 miles have been willing to sell product to the the freight. It wouldn’t make sense to north of the plant, which is proving to plant for less than they can get else- lose production here.” be a major source of competition for where. ■

8 January/February 2006 / Rural Cooperatives Fruits of Their Labor Co-op winegrowing takes root in North Carolina

While California’s wine crown is in By Bruce Pleasant no danger of being lost, winegrowing is Old Business Programs Specialist steadily making a comeback in North North USDA Rural Development/North Carolina, which currently ranks 12th State Carolina among the states for wine production. Winegrowers Interest in wine grapes has been fueled Cooperative efore Prohibition in the in part by declines in the state’s textile, Association 1920s, North Carolina tobacco and furniture industries, which (ONSW) in Mt. Airy, was the nation’s leading once dominated the region’s economy. N.C., was incorporated in 2001, and is B wine-producing state, Data compiled in 2003 indicates that currently the only co-op among the with Muscadine and 1,000 jobs and $84 million are directly state’s 52 wineries. When ONSW start- Scuppernong wines dominating its related to wine production in North ed, there were only 22 wineries, which industry. But that all changed with Carolina. While the ultimate economic provides some idea of the burgeoning Prohibition, which lasted longer in the impact wine has on the state’s economy wine industry in North Carolina. South than in most other parts of the has not been determined, Knight Cooperative members have pooled nation. Combined with low prices for believes that it is significantly higher resources to take advantage of table grapes, most vines were ripped out than the $84 million estimate. A new economies of scale and marketing or left to die, says Margo Knight, exec- study has been commissioned to meas- opportunities not available to small utive director of the North Carolina ure the economic impact with certainty, independent growers. ONSW has Wine and Grape Council. which should be completed this April. members from nine counties, so the

Wine ages in the barrel room of the Old North State Winegrowers Cooperative Association (ONSW) in Mt. Airy, N.C. Wine production is steadily making a comeback in the state, contributing $84 million to its economy in 2003. USDA photo by Bruce Pleasant; grape photo courtesy Shelton Vinyards Rural Cooperatives / January/February 2006 9 impact of the winery reaches at least as Capitalization and growing pains tributor to expand its market. Expand- far as their member vineyards. Managing growth can be a welcome ing the markets and distribution of the problem to have, but it has also caused “38 Vines” brand into new geographic Look for the co-op label some pitfalls for the ONSW coopera- markets is essential, given the number When ONSW bottled its first wine, tive. One of the biggest challenges the of wineries in the Yadkin Valley region, the label chosen by the co-op was cooperative has faced has been raising according to Thomas. “Carolina Harvest,” reflecting the pride capital. However, their first attempt to the members had in North Carolina- Most members are small producers obtain a distributor failed after one grown wine. After a year of marketing who must make substantial up-front backed out on a deal. At this point, the the brand, the co-op made a bold move investment in their vineyards, with a 2- co-op was left with excess product that by changing its brand to “38 Vines” for to 3-year waiting period before generat- could not be moved quickly enough to its 38 charter members. ing any income from a harvest, says free capacity. This past year, the coop- The label change was suggested by a Doug Thomas, treasurer of the erative dedicated more capacity to cus- team of MBA students at Wake Forest Winegrowers Association. “As a result, tom crushing for other wineries and for Babcock School of Management to the membership is limited as to how its members who wanted to bottle wine make the wine appealing to out-of-state much additional capital it has to invest under their own labels. markets. Each bottle now tells the story into the cooperative.” Growth has outstripped the capacity of the cooperative and explains the sig- The cooperative structure has been to process wine. The inability to take nificance of the brand name. both an impediment and an avenue for equity when they leave the cooperative The Wake Forest MBA students financing their facility and operations. has hindered member investment. This were the winning team responsible for Cooperative members have one vote has prompted the board to consider developing a new marketing plan for regardless of vineyard size. To meet the converting from a cooperative status to the cooperative winery. need for more capital, the members a stockholder corporation that would “It was the best thing that happened, voted to assess themselves each $7,500. allow producers to recover their equity and it was the worst thing that hap- In addition, each member pays a fee of in the entity. However, the board pened to us,” says Gray Draughn, presi- $1 per vine, with a 250-vine minimum. tabled any proposed entity change, but dent and general manager of the coop- The vineyards range in size from 250 to will revisit it again in 2006. erative. After a year of marketing, they 6,500 vines, which represents from had to start from scratch to gain brand about 1/3 to 10 acres. There are about Key help from USDA, N.C. recognition. However, as they have 54,000 vines planted by cooperative The cooperative has benefited from expanded, the co-op’s new brand has members. a number of grants. It has used busi- gained recognition. This year, the co- The cooperative did not have a sales ness/cooperative programs of USDA op’s Chardonnay took a double gold staff that could service a wide geograph- Rural Development and has obtained medal in the state fair wine competition. ic area, so it contracted with a wine dis- funding from other state and private

Location, location, location The ONSW winery is located in the heart of downtown Mt. Airy — a town of about 8,500 in the foothills just south of the Virginia border. It is not unusual to see tour buses dropping off passengers to visit any number of places of interest in this tourist-friendly town. Mt. Airy is the boyhood home of actor Andy Griffith, and is believed to be the basis for the fictional town of “Mayberry” from the Andy Griffith TV show. The “Mayberry” theme and nostalgia are evident all over town. Mt. Airy holds two festivals annually: Mayberry Days and Autumn Leaves. These are two big weekends for the cooperative, as the festivals draw nearly a quarter of a million visitors to the area. This is in addition to the 78,000 visitors who signed the guest register at the town’s visitor center in 2004. Located in a three-story, 26,000-square-foot mercantile building con- Don Knotts and Andy Griffith confront town structed in the 1890s, the winery has a “vintage” (no pun intended) look, drunk Otis Campbell. The co-op’s winery is located in Mt. Airy, the boyhood home of with oak floors and decorative tin ceilings. The winery is complete with a Griffith and the inspiration for the fictional tasting room, gift shop and restaurant. The building is owned by the Old town of Mayberry. Photo courtesy TAGSRWC North State Winegrowers Foundation, a nonprofit organization that leases Archives the facility to the cooperative.

10 January/February 2006 / Rural Cooperatives foundations as well. To assist with the cooperative was awarded a Value-Added tasting room or at festivals. renovation of the building, the Old Producer Grant of $150,000 for working While the Old North State North State Winegrowers Foundation capital to market its wine. This grant Winegrowers Cooperative winery got received a $200,000 grant from the will be used to purchase inventory and off the ground with help from USDA, Appalachian Regional Commission, a supplies as well as to cover marketing it has been the members who have vol- federal-state partnership. expenses associated with sales staff salary. unteered their time and money that will In 2002, the town of Mt. Airy make this cooperative venture success- received two $99,000 Rural Business Member assets ful. Though the cooperative faces many Enterprise Grants to purchase bottling As with most cooperatives, every of the same, and some unique, chal- equipment and renovate the buildings, member brings something to the table. lenges as most cooperatives, the cooper- that would in turn be leased to the Renovating an old building to make it ative members will continue to pool cooperative. In 2003, the Winegrowers suitable for a winery and restaurant their financial and strategic resources to Foundation obtained the building with required many resources. One member exploit their strengths in an industry an $829,000 loan guarantee from who is an iron worker furnished the that has been reborn in North Carolina. USDA Rural Development through the wrought iron railing and gate for the ■ North Carolina Agricultural Finance tasting room. The decorative railing is Authority. NCAFA also provided the functional as well since alcohol laws cooperative a $525,000 loan for work- require separation between the tasting ing capital, which was also guaranteed room and other parts of the winery. Expanding the mar- by USDA Rural Development. The sprinkler system for the build- In 2004, the co-op’s application for a ing was provided by a member who has kets and distribution zero percent Rural Economic a fire protection business. Another Development Loan of $210,000 was member who is a restaurant owner of the co-op’s “38 selected for funding. However, because helped the cooperative purchase “gently of the liens placed in connection with used” restaurant equipment at auction the Business and Industry Loan for about 10 percent of the cost of new Vines” brand into Guarantees from USDA, the co-op was equipment. unable to use the zero percent interest One cooperative member is a musi- new geographic loan for start-up expenses, but the cian who has lined up bands for festivals majority of the co-op’s working capital and events for the winery. Other mem- markets is essential. needs had already been met by the bers volunteer time in the bottling NCAFA loan. This past September, the room or assist with wine tastings in the

Roses planted at the end of each row of vines aren’t just for looks; they attract the same pests that attack grapes, and thus serve as a natural bell-weather. Photo courtesy Shelton Vineyards

Rural Cooperatives / January/February 2006 11 Yadkin Valley Wine Bar “takes off” at Charlotte airport

By Bruce Pleasant time at airports — Americans took 633 million domestic trips last year, according to the Bureau of Transportation Editor’s note: Pleasant is a business programs specialist Statistics — this gives weary travelers something to do. for USDA Rural Development in North Carolina. It’s a great way to promote local wines,” the WSJ wrote. As with many wineries, the members of the Yadkin “Isn’t everybody always looking for a last-minute present Valley Winegrowers Association (YVWA) in North Carolina at the airport? What could be a better and more interest- are constantly looking for new ways to add value to their ing present than a bottle of local wine?” grapes. The processing of grapes into wine will yield 10 The revenues generated at the North Carolina airport times more than grapes sold in bulk. While that compari- son is somewhat misleading (since there is much expense associated with operating a winery), production of wine nonetheless results in greater returns to grape growers. In 2004, the YVWA received a Value-Added Producer Grant from USDA Rural Development for working capital to market wines of member wineries through a retail wine store at the Charlotte-Douglas International Airport. Buddy Norwood, YVWA vice president and manager of the Yadkin wine bar help support the nine member wineries, including Valley Wine Bar, says the store would not have opened a cooperatively owned winery with 38 charter members in without the $250,000 working capital grant received from some of the most rural counties in the state. The store is USDA in 2004. The store was only one of two such airport an extension of the tasting rooms of the member wineries, stores in the country when it opened in March, 2005. reaching a customer base that they would never otherwise But the idea is apparently catching on. A wine-tasting tap. bar has since opened at Virginia’s Dulles Airport in subur- ban Washington, D.C., and other airports have plans to add Supreme Court ruling impacts local wineries wine-tasting bars. The Wall Street Journal (WSJ) recently The Yadkin Valley Wine Bar has enjoyed remarkable included an article on airport wine sales, which featured success since opening in March of 2005. Visitors from the North Carolina wine bar. “With people spending more other states and abroad can taste and purchase Yadkin Valley Wines and take them home or send them as gifts. In March, the Supreme Court ruled that it is uncon- stitutional to prohibit inter- state wine shipment to states that allow wine to be shipped within their borders. Since the Supreme Court rul- ing, the Yadkin Valley Wine Bar has noticed brisk increases in out-of-state shipments. Most go to Florida or New York because of their popularity as travel destinations from the Charlotte airport. However, the ruling did not necessarily mean that wine can now be shipped to The association’s wine bar opened at Charlotte-Douglas International Airport with the help of a all parts of the country. One VAPG from USDA Rural Development. USDA photos by Bruce Pleasant state, Louisiana, responded

12 January/February 2006 / Rural Cooperatives to the court ruling by enacting legislation to prohibit the unique climate and soils of the valley that are benefi- intrastate shipping previously permitted, effectively block- cial to growing wine grapes. This designation was granted ing the shipment of wine into the state. Of the remaining in February 2003 by the Treasury Department’s Alcohol and states, only nine do not allow interstate wine shipments, Tobacco Tax and Trade Bureau, a process that took 2 primarily because they do not permit any wine shipping at years. all. With the designation, all wines marketed as Yadkin Ultimately, the Supreme Court decision should open Valley wines must contain 85 percent grapes grown in the new markets for North Carolina wineries. Yadkin Valley region. This designation is important to area wineries because it creates interest and helps establish More incremental returns for producers the region as a wine destination. Wine bar traffic is directly proportional to the traffic in Margo Knight, executive director North Carolina Wine the airport, Norwood says, with afternoons on Wednesday and Grape Council, says having that designation is a key through Friday being the busiest time. The store also does point in the growth of the state’s wine industry because it good business with vacation travelers on Saturdays. helps develop a “sense of place” for wines of the region. The wine bar is on track to sell over 13,000 bottles this Unlike wineries scattered across a wide area, a number of year. Norwood says, “it’s remarkable how close we have wineries in an area encourages tourism. come to our sales projections.” The average price per bottle “Then it becomes a critical mass,” according to Knight. is actually $3 higher than projected, due to the number of Many will make a day trip to visit several wineries but tastings sold and the amount would not travel to visit just of wine sold by the glass. The one. While applications for average bottle of wine sells other designations are in for around $15. Tastings gen- process, Yadkin Valley is erate $18 per bottle while currently the only designat- wine sold by the glass gener- ed appellation in the state. ates $23 per bottle. In addition to becoming The requirements of the acquainted to Yadkin Valley store are minimal. At 600 wines, visitors to the square feet of retail space, “Yadkin Valley Wine Bar” the $400 per-square-foot can receive complimentary annualized sales compare passes for tours and tast- favorably with the $300-$400 ings at member wineries. average for most retailers at Visitors can also obtain the airport. Typically, most maps and brochures that travelers expect to pay more will direct them to each of for food and other items with- The airport wine bar sold about 13,000 bottles of wine last year. the wineries in the Yadkin in an airport. The average price per bottle was $3 higher than projected, Valley. However, the prices of reflecting the higher price paid for wine ordered by the glass members’ wine are the same or for tasting. Value of VAPGs as they are in a grocery store While the airport store or at the winery. Visitors to the Yadkin Valley Wine Bar may still is a relatively fresh concept, it appears to have been be greeted by a winemaker or owner of any one of the nine very successful for the YVWA. The airport wine bar is a member wineries, each of whom work about 2 days per good example of how, through the assistance of a USDA month at the airport store. These representatives provide Value-Added Producer Grant, agricultural producers were an enormous amount of goodwill in addition to staffing for able to start a new venture that would not have been pos- the store, Norwood says. Their presence at the wine bar sible otherwise. usually results in a spike of their own label. “If a customer “The Value-Added Grant Program helps North Carolina asks for a recommendation of a good Chardonnay, they are farmers transition from tobacco and other crops to grapes expected to push their own,” Norwood notes. which yield a greater return per acre,” says John Cooper, state director for USDA Rural Development in North Yadkin Valley wine designation Carolina. “I look for this venture to be the start of a trend California has its Napa Valley, but North Carolina has its which will “take off” at airports across the country.” Yadkin Valley, thanks to a new designation that recognizes ■

Rural Cooperatives / January/February 2006 13 Voice of experience: co-ops are resilient

By Scott A.Yates that has agricultural commodities dealing with the leading edge of science over problems like BSE, bird flu and other Editor’s note: this article is reprinted courtesy the Capital Press, phytosanitary issues. which covers agriculture in California and the Northwest United And that doesn’t even address the question of getting big- States. Yates is that publication’s Washington state staff writer. He ger, which he said shouldn’t be confused with needing to grow. can be contacted at: [email protected]. “We simply had to handle more widgets. We couldn’t stay competitive if we didn’t grow,” he said. he question itself was revealing, but according to But for the farmers his cooperative serves, the real value to Dennis Bolling, the answer is: “Yes, cooperatives the operation, as revealed in a survey, was the company’s pres- do have a future.” ence in the marketplace. T Speaking at the Joint Northwest Co-op “Which is a good thing, because the equity is gone,” he Council’s annual meeting in Post Falls, Idaho, said, referring to the bankruptcy loss. the president and chief executive officer of United Producers “Co-ops can’t be hobbies, habits or the Church in with headquarters in Columbus, Ohio, said anybody wanting Wildwood,” Bolling wrote on one of his power point displays. to investigate the future of cooperatives should think about shutting down. That’s what happened to his company. “If your co-op closed tomorrow, would your members start Co-op progressing it up again?” he asked the roomful of cooperative directors and managers. under Chapter 11 He related the saga of the Midwest livestock cooperative that got caught in a ponzi (pyramid) scheme, which resulted in Editor’s note: this backgrounder supplied courtesy Unit- $140 million worth of damages. The house of cards involved ed Producers. individuals showing banks duplicate cattle inventory as part of United Producers Inc. (UPI), originally formed in the receiving financing. 1930s, is a multi-state livestock marketing, lending and Two banks lost over $50 million. The cooperative lost $12 related services cooperative headquartered in Columbus, million. And that doesn’t count the “boatload” spent on attor- Ohio, governed by a 17-member board. UPI currently serves neys during litigation. over 70,000 patrons in about a dozen Midwest states. “We were rocking and rolling with litigation,” Bolling said. In 2001, UPI was victimized, along with several banks, “I was a little overwhelmed when I came on the board. How cattle producers and agri-businesses, by a third-party cat- do you think directors of ours felt? ‘And, oh, by the way, here’s tle-fraud situation. The perpetrators are serving time in fed- the 50 pounds of legal stuff I have to go through with you.’” eral prison. UPI suffered significant losses coupled with That “legal stuff” will increasingly be part of the future of legal expenses from related litigation. cooperatives. That means directors will increasingly be UPI filed for Chapter 11 on April 1, 2005, to reorganize its responsible for ensuring due diligence was performed “when it business and have a forum to ultimately deal with the litiga- hits the fan.” tion. Subsequently, in early October of 2005, UPI’s Plan of And don’t think it can’t happen to you, Bolling told the Reorganization was confirmed by the Court. CoBank contin- group. It’s a myth to think that what happened to United ues to provide financing for the cooperative’s operations. Producers couldn’t happen to any cooperative out there. “We UPI’s core business continued intact during this time- are a litigious society... [but] it is not just a matter of being frame. UPI markets nearly 4 million head of livestock and sued. It is a matter of positioning for the future,” he said. has a loan portfolio of over $50 million. Sales volume Bolling has taken a business lemon and turned it into approaches $1 billion. Additionally, risk management and lemonade by helping the directors understand what is neces- production coordination, including a Managed Beef sary to survive. The future, Bolling said, is a fast-paced one Alliance, are provided to the cooperative’s membership.

14 January/February 2006 / Rural Cooperatives A model created in the 1930s, it “The challenge for us is how do largely went on the same way for 65 we connect the farmer further up the years. Only recently have co-ops food chain,” Bolling said. been forced to adapt for the 21st cen- Although farmers can accomplish a tury. lot on their own, he said, a coopera- Bolling said it would be a mistake tive can effect more change. But co- to think the cooperative structure ops of the future will need market isn’t alive and well. Farmers are position, financial capital and leader- forming co-ops right and left, which ship to compete. “We are going to suggests the model is healthy. In have to address economic perform- Ohio, four new livestock cooperatives ance, structural alternatives and inten- were formed recently. tional leadership,” he said. “We are feeling pretty happy In the process, it’s likely co-ops because we are the big fish, but will have to change entrenched poli- farmers have formed these related cies. For instance, 5 years ago, the co-ops because they are dealing with United Producers board would have issues or needs we weren’t address- reacted in horror to the idea of enter- ing,” he reminded co-op managers ing into a formal supply agreement and directors. with a packer. Now it has one. Sam Roberts, beef technologies coordinator for In addition to dealing with the “We’re competing on a much dif- United Producers Inc., applies a new electronic producer, the input provider, the ferent plane. Our competition is not identification ear tag designed to track cattle slaughterhouse, the wholesaler and other co-ops like us,” Bolling said. back to their place of origin. Photo courtesy United the retailer, today’s cooperative has to “In reality, our competition is our Producers address the consumer, who is king. customer, the packing companies.” ■

Leaders evaluate risks of serving

Listening to speakers at the Joint Co-op Council Annual Donald Heikkila, on the Co-op Supply Board in Northern Meeting and Educational Seminar talk about the obligations Idaho, said it’s all about being able to sleep at night. faced by directors of modern farming cooperatives raises “I’m not so much concerned about personal liability. All questions about why they serve. the decisions we make are based on good, sound judgment, Talk to a few directors from various boards and one of and I think we all have a clear conscience that our vote is the first things they mention is the obligation to give back to not only in the best interests of the cooperative, but of its the community. For many, it is a responsibility that has been members,” said the 25-year veteran. passed from parent to child. Tim Butler, on the Wilco Board in the Willamette Valley, But to paraphrase an automobile ad of the 1990s, this said as owners of the company, it’s important to be involved isn’t your father’s cooperative. Once a quiet backwater of in the company. Sure, litigation is possible, he said, but American business, co-ops are finding themselves on the “Board members have made those decisions before me, cutting edge of finance, science and society. More is and now it’s my turn to make those decisions, and in 5 or 10 expected of directors, and more risk is involved. years, it will be somebody else making the decisions. It has Hence the need for educational meetings where direc- to be done.” tors learn that litigation is only a lawsuit away. Mark Han- Besides, said Bud Dyk, on the board of Midstate Coop- son, a lawyer for Lindquist & Vennum in Minneapolis, which erative in Ellensburg, Wash., it’s important to know how a works with cooperatives, agreed agriculture is more liti- cooperative actually operates. He said he was pretty gious nowadays, but still much less than any other sector of naive when he first became a director and called his 9 the economy. years on the board a good challenge. Some risks are “I think, unfortunately, the rural lawyers have changed. worth taking. They are more willing to sue,” Hanson said. “I always wanted to give back, and this is one way to do So is serving on a board worth taking the risk? Wade it. Yes, there is a risk, but you have to weigh it with what McClean of Co-op Supply Inc. in Northern Idaho said you you’re doing,” he said. ■ owe it to the community to help out. — Scott A. Yates, Capital Press

Rural Cooperatives / January/February 2006 15 Trade, Farm Bill, co-op structure challenges eyed at dairy conference

By Dan Campbell, Editor fare and product standards and labeling and cheer. After three successful bid- will also be in the mix more so than in ding rounds of the CWT (Cooperatives ow important are the past Farm Bills. Working Together) program, 74 per- World Trade Another fundamental challenge fac- cent of the nation’s milk production is Organization talks for ing producers comes from “people out- enrolled in this industry self-help effort H U.S. dairy cooperatives side the industry who would like to dis- to stabilize on-farm milk prices by bet- and their members? mantle the cooperative business struc- ter balancing supply and demand. In “Either we have a place at the table, or ture,” he said. This would have 2006, the CWT focus will likely shift we’ll be on the menu,” is how Jerry “extremely serious consequences for from voluntary herd reductions to Kozak, CEO of the National Milk farmers and the industry,” Kozak con- boosting the export-enhancement com- Producers Federation (NMPF), put it tinued. “Now is the time to rally ponent of the program, Kozak noted. in his address to the joint annual meet- around the cooperative structure and NMPF Board Chairman Charles ing of NMPF, the United Dairy take advantage of the magic of coopera- Beckendorf said the 5 cents per hun- Industry Association and National tives and the Capper-Volstead Act. We dredweight producers contribute (on a Dairy Promotion and Research Board need to take advantage of cooperative voluntary basis) toward the CWT pro- in December. unity for the benefit of all producers.” gram is “the best nickel you could ever NMPF lobbying efforts have been spend.” Last year, CWT removed 900 based on the stance that there can be no CWT & market gains million pounds of excess milk from the dairy trade deal if the European Union As sobering as those thoughts were market, he noted. makes only incremental cuts in its sub- for the 1,100 or so producers and guests Dairy Management Inc. CEO sidies and import tariffs, which are gathered at the meeting in San Thomas Gallagher recounted gains in much higher than those in the United Francisco, there were also many dairy research and promotion, many of States, he stressed. Still, the industry’s achievements in 2005 to look back on which were achieved through invest- very willingness to even discuss possible reductions in a 50-year-old support Jerry Kozak, left, and the senior staff of the National Milk Producers Federation (NMPF), hosted program — under which the U.S. gov- a lively “town hall” meeting, during which producers could quiz them about any NMPF pro- ernment pays more than $4 billion gram. USDA photos by Dan Campbell annually to support the dairy industry — represents something of a shift toward greater flexibility on free trade. And how much is at stake for pro- ducers as the 2007 Farm Bill takes shape? “Either we get our ducks in a row, or we’ll be sitting ducks,” Kozak warned, noting that agriculture is brac- ing for farm program reductions and that the dairy industry needs to be unit- ed and proactive to keep the budget ax from swinging its way. Environmental issues — including potentially stricter air and water quality controls — will play a part in the Farm Bill debate, Kozak said. Food security and the war on terrorism, animal wel-

16 January/February 2006 / Rural Cooperatives A Grip on Success Gardner recalls odyssey from ‘failure’ to gold medal victor By Dan Campbell, Editor

When Jason VanderKooy left his dairy farm near Mount Vernon, Wash., in late November and headed to San Francisco for the joint annual meeting of three ment of producers’ Dairy Checkoff dol- major dairy organizations, he went expecting to learn more about the state of the lars. Topping the good news on the industry and what is being done to strengthen it. But one thing VanderKooy never nutrition front was the revised U.S. expected was to wind up in the hammerlock of Olympic gold medal Greco-Roman Dietary Guidelines, which keep dairy as wrestling champion Rulon Gardner. its own food group and boosts the rec- Yet there he was, up on stage in front of 1,100 producer delegates, nose-to- ommendation from twice-daily to nose with Gardner as the champ demonstrated the techniques he used to defeat thrice-daily consumption of dairy foods Russia’s supposedly invincible Aleksandr Karelin. It’s been called “the miracle on for adults and children. the mat,” and some sportswriters consider Gardner’s victory the greatest upset in Yogurt was the retail star for the Olympic history. industry in 2005, with sales that Karelin had easily defeated Gardner in a prior match in 1997, throwing Gardner climbed 6 percent, to 2.87 million to the mat three times — including a head-first landing which caused a spinal pounds, and is becoming “a ‘growth crack (diagnosed years later). Gardner said it seemed everyone in Sydney, Aus- engine’ for the industry,” Gallagher tralia, wanted to see the legendary Russian win again — the crowd, the sponsors said. and even the officials. But as he has on so many other occasions in life, Gardner The big news for fluid milk consump- fooled the odds makers, who had made him as much as a 2,000-1 underdog. He tion continues to be sales gains in did so by drawing on the qualities schools and fast food outlets, achieved that got him into the Olympics: per- primarily by replacing cardboard milk severance, dedication, determina- cartons with flavored milk in single- tion and heart. Gardner said he also serve, plastic bottles. Indeed, several used some of the techniques dairy times during the meeting, the image of farmers must master “to make cows the single-serve, cardboard milk carton do what you want them to do, not was flashed onto video screens as a sym- what they want to do.” bol of an industry that in the past was So was VanderKooy scared up sometimes too slow to adapt to modern there in the vice-like grip of the champ? Washington state dairyman Jason “Nah, Rulon is really just a big VanderKooy, left, was “volunteered” to teddy bear,” said VanderKooy, safely serve as Olympic champion Rulon back home on the 1,000-cow dairy Gardner’s wrestling foe. farm he operates with his brother and father. After all, when you make your living herding 1,200-pound Holsteins around your farm, doing mock battle with a 265-pound wrestling champ seems almost tame! VanderKooy, 30 and a member of the Northwest Dairy Association cooperative, says his wife, Shelby, volunteered him for the “match” by grabbing his arm and hoisting it in the air when Gardner asked for someone to help him demonstrate how he achieved his impossible dream. VanderKooy says Gardner’s message — about never giving up even when the odds are stacked against you — resonates with producers who know that feeling all too well. “We’re facing more pressure all the time on our farm from environmental regu- lations, urban growth and rising energy prices and costs in general that just keep going up,” says VanderKooy, who farms 1,000 acres of corn, alfalfa and grass in addition to milking his herd three times daily. “We just have to keep looking for ways to get better.” continued on page 18

Rural Cooperatives / January/February 2006 17 consumer food preferences, nearly cost- those who say the best the industry can McDonald’s and Wendy’s restaurants ing the industry a generation of milk hope for is to halt or slow the slide, and across the country, and milk in plastic drinkers. he predicted that with the right prod- bottles in 3,500 schools today, com- ucts, fluid milk can once again become pared to just 400 schools during the Halting slide of fluid sales a “shining star” of market growth for 2003-04 school year. Based on incre- Gallagher said fluid milk sales have dairy producers. mental sales increases, if milk in plastic been in a 21-year downward slide. Need evidence? Dairy producer bottles were offered in all schools and Why? “Decades of offering milk in investments in foodservice and school major fast food chains nationwide, sales cardboard boxes that kids needed a fork partnerships have led to the introduc- could increase by an additional 1 billion to open.” He disagreed strongly with tion of milk in plastic bottles at pounds — a 1-percent increase in per

A Grip on Success continued from page 17

“One of us” wrestlers who have earned spots on U.S. World and Olympic Many farm conferences include an inspirational speaker wrestling teams since 1976. on their agenda, and Gardner filled that role at the joint meeting of the National Milk Producers Federation, United Against all odds Dairy Industry Association and the National Dairy Promotion Gardner made it to a small college, majoring in dairy man- and Research Board. As a farm boy who grew up on a agement, and later transferred to the University of Nebraska, Wyoming dairy, Gardner knows well the daily battles farm- where he earned a teaching degree in physical education. He ers face, and the strength they draw from rural values and had been told he didn’t have the stuff needed to get an educa- work ethic. tion degree from a major university, especially one like U.N. Building hay stacks and shoveling manure taught him where the academic requirements for teaching majors are rig- hard work and discipline, he said, recalling how he worked orous. But he worked with tutors daily and continued to wres- until midnight during sweltering summers and milked cows in tle, winning his biggest match of all: for his college degree. frigid winter temperatures after the family’s barn burned He was also told he’d never land a spot on the Olympic down. His upbringing also taught him the value of family and team, and would certainly never earn a medal. But the neighborliness, such as when his family’s neighbors all naysayers learned just how wrong they were when the big pitched in to harvest the Gardners’ barley crop so that they farm kid so few had believed in was standing up on the block, could watch him wrestle in the Olympics. the gold medal gleaming around his neck as the Star Span- “He’s one of us,” one delegate was heard to remark. gled Banner boomed across the public address system. Despite being somewhat hoarse from shouting a day Gardner’s time to bask in the glory was almost cut tragi- before at a wrestling event where he had coached, Gardner cally short, when he was lost and nearly died in a blizzard recounted what it was like growing up with learning disabili- while back home on the farm. He followed a frozen river and ties that put him in special education courses where it some- sheltered between two boulders, where he survived 18 hours times seemed as if he was expected to fail. “I’d get pulled out at 25 degrees below zero. His body temperature dropped so of class every day and fall further behind. My family helped low that the emergency medical technicians who treated him me deal with the frustration — they showed me that I could said there was no way he should have lived through the be successful if I gave 100 percent.” When school coun- ordeal. Gardner lost the middle toe of his right foot to frost- selors said he could never go to college, his mother respond- bite, but managed to come back again to compete in the 2004 ed: “how dare you limit my son’s potential” and refused to Olympics in Athens, where he took home the bronze medal. take their advice, he recalled. Gardner offered these tips for success from his own life Other kids would make fun of Gardner for being a poor experience that he believes can reader and slow to learn in other subjects. After he won the help most people, regardless of gold medal, many of them who had treated him so cruelly their specific circumstances: said they were sorry. “Why did you do it? You could have • get back to the basics; destroyed me,” Gardner said. But he instead used those • turn negatives into positives; jeers to motivate himself to success. • enlist the help of others; Gardner says his wrestling skills were developed with a • train hard every day; large measure of help from the Sunkist Kids Wrestling Club, • always take care of business; founded by Arizona citrus grower Art Mortori, who named • aim even higher after a crisis; the club after the Sunkist Growers citrus co-op, of which he • don’t rest on your laurels. is a member. Sunkist Growers has been a regular contributor ■ to the youth program, which has produced more than 150

18 January/February 2006 / Rural Cooperatives capita fluid milk consumption. U.S. cheese sales have grown 300 percent since 1953, far That trend could pick up steam as the nation’s two soft- out-shining stagnant or falling fluid milk sales during most of drink giants — Coke and Pepsi — edge more into the dairy those years, he said. However, since is takes 10 pounds of sector, with products such as Bravo Milk Slammer. To con- milk to make one pound of cheese, that has not necessarily sider the potential impact on sales, Gallagher noted that been a bad trend for dairy producers, Gentine said. Coke has a fleet of trucks second in number only to United He sees cheese and yogurt as providing the biggest oppor- Parcel Service that deliver products daily nationwide. They tunities for dairy sales growth, and urged producers to “ride also maintain more than 2 million vending machines that can the winner,” saying their research dollars should be invested sell milk. The industry’s hope, of course, is that those types of in developing new cheese products. products take market share from soft dinks, not from tradi- But innovation is not cheap, Gentine stressed. He tional milk products. described a process that involves consumer surveys, concept Dairy producers need to keep pursuing strategic partner- development and testing, product development and further ships with suppliers, manufacturers and the food service testing, building or adapting plants and equipment and costly industry, Gallagher said. Retail cheese sales, which for many product launches (including advertising, promotion and slot- years have driven dairy industry market gains, were flat last year. This could be a prime area where producer/processor partnerships could help spread the risk for developing new products, such as snack cheeses and cheeses for the Hispanic market, he noted. Looking at the dairy ingredients mar- ket, there is no bigger need than for a worldwide research and promotion effort to develop nutritional information for dairy whey that will help marketers bet- ter compete with soy-based food addi- tives, he said. Sending large volumes of milk to bal- ancing plants to “turn into powder for the government to buy, then dump on the market is not growing the business,” Gallagher said.

Innovation and passion critical for cheese gains With a reduced-scale Golden Gate Bridge as a backdrop, NMPF staff fielded questions Lou Gentine, CEO and chairman of ranging from the workings of the CWT program to the outlook for the 2007 Farm Bill. the family-owned Sargento Foods in Wisconsin, told how the small company his father started in 1953 to fill a market void for consumer- ting fees). Total costs can run from $10 million to $40 million size packages of Italian cheeses grew into a company that to launch a new food product, “and there is no guarantee of today annually sells 3 billion pounds of cheese worth $550 success.” million — 3 percent of the U.S. retail cheese market. To put Gentine said he thinks branded advertising does more for it in farmer-friendly terms: it takes the milk from 160,000 the industry than generic advertising, saying generic ads are cows each year to supply the raw product for Sargento based on convincing consumers that all cheddar cheese (for cheeses, he said. example) is the same, which means they compete only on Sargento cheeses are produced at four plants in Wisconsin price, and that tends to drive the market down. that employ 1,200 workers. One reason for the firm’s rapid He urged producers “to support innovation” and to con- growth was good timing: Sargento went into business just as sider increasing fees for the Dairy Checkoff program (no the market for pizza and some other Italian foods began to such proposal is currently being pursued by the industry). soar. But its success is also due to the innovation and passion Asked if he would also support a Cheese Checkoff for proces- his family and its employees have for producing cheese, sors to pay, Gentine said his company already spends 20 to 25 Gentine said. Among the elements of the company’s state- percent of its income on innovation and promotion. “When ment of values is to: “Hire good people and treat them like we build our own brand, we also build the dairy industry.” family.” continued on page 45

Rural Cooperatives / January/February 2006 19 Foreign Affairs Co-op leaders share strategies for pursuing global markets

By Stephen Thompson,Assistant Editor

ike other markets, agricultural trade is becoming increasingly international. L Hence, dealing with the globalization of agricultural commerce was the theme of the 2005 Annual Farmer Cooperatives Conference, held Nov. 7 and 8 in Minneapolis. As barriers to international trade, capital flow and communication come down, U.S. cooperatives today are facing up to the necessity of building business relationships outside of our borders to remain com- petitive. Presenters at the conference, sponsored by the University of Wisconsin Center for Cooperatives, offered hope and useful suggestions for participating in the international business arena. But none of them said that doing so will be easy. Participants may have felt that they left the gath- ering with more questions than answers; the picture they were presented was one of increasing change — offering new opportunities, but also greater risk and uncertainty.

Now what? Te rry N. Barr, chief economist with the National Council of Farmer Cooperatives, presented co-op leaders with this question: “The market in which you had prepared to compete no longer exists! Now what?” Barr argued that world markets are changing quickly and drastically, that “the rise of China and India is the most important economic force in the world,” and that the continued growth of those countries will result in massive changes to the world economy. He said that customers are taking advan- tage of increasing competition to demand more services and better quality. Lower transportation costs and increasingly efficient communications are breaking down barriers not only to the flow of goods and services, but to capital and knowledge as well. In fact, capital moves more quickly than physi- cal goods.

20 January/February 2006 / Rural Cooperatives As a result, said Barr, U.S. ag cooperatives purchasing imported goods, such as agricul- will have to participate in riskier overseas tural and other products from the United markets, make new partnerships with foreign States. Thus, both Asian consumers and firms, and even invest in overseas ventures to American farmers are missing out on much properly serve their members. of the potential benefit of globalization. Unfortunately, the huge reductions in Net ag-exporter status ending transportation and As a result of this changing world market, “Farmer coopera- communications the United States’ status as a net agricultural costs that have exporter is coming to an end, Barr said. The tives must be willing encouraged more problem, he continued, is not in the com- Asian imports into modities sector — although bulk exports to forge ties with the U.S. market have fallen. Rather, high-value products are have not stimulated tipping the scales. foreign firms to as rapid a growth in U.S. exports of high-value agricultural U.S. exports. products are actually rising, but, said Barr, While large vol- they are not rising fast enough to offset the compete in the umes of imported rising imports of such items as horticultural goods from Asia products and other high value agricultural markets of today send many dollars goods. Meanwhile, commodity exports from overseas, those dol- Brazil and other sources are continuing to and tomorrow.” lars often don’t increase, and agricultural production contin- return as payments ues to consolidate. – Terry Barr for U.S. exports. A Barr believes that the result will be a combination of fac- growing trend on the part of producers to tors has created this attempt to break out of commodity markets situation. The government of China has pro- through product differentiation — whether vided significant stimulus to investment over by product attribute, delivery capability, or consumption and uses high tariffs on import- some other distinct value added to the prod- ed goods to protect domestic industries, such uct. The use of new life-science technologies as agriculture. At the same time, the income will offer one route, resulting in new food and purchasing power of the Chinese con- and energy products, as well as new pharma- sumers is low and their savings rates are very ceuticals and other health products. high. Serving consumer markets offers another As a result, the money American con- route, but it is an avenue fraught with com- sumers spend on foreign goods is used to plications. Barr pointed out that trends in the purchase U.S. financial assets, such as consumer sector are toward goods that are Tr easury bonds and other securities. Barr customized to individual markets — no pointed out that this is part of a conscious longer can a firm expect simply to introduce growth strategy on the part of many Asian products into one market that have been governments to promote demand for their designed for another. exportable goods in the United States and In addition, retail outlets are consolidating other regions, rather than rely on internal- rapidly — the Wal-Mart phenomenon — demand growth. and food processing companies are consoli- With export income being channeled into dating in response, while at the same time purchases of U.S. securities and assets, Asian diversifying their product lines, using brand countries help keep U.S. interest rates low. names and private labels to meet the Access to debt at lower rates further encour- demands of various markets. ages American consumers to buy more con- The implications of Barr’s presentation sumer products, including imported goods. were clear: farmer cooperatives must be But it also means that the consumption pat- willing to forge ties with foreign firms to terns of Asian consumers don’t reflect the compete in the markets of today and tomor- same benefits: deprived of much of the row. Such relationships may take many export income, they are discouraged by high forms, from straight client agreements to tariffs from raising their standard of living by joint ventures.

USDA graphic by Stephen Thompson; Ship image courtesy Hong Kong Tourism Board Rural Cooperatives / January/February 2006 21 The most important international Further, they must be aware of how some examples of successful interna- markets for agricultural products are changes in domestic farm and interna- tional collaboration. John Johnson, also among the most difficult to deal tional trade policy will affect their posi- CEO of CHS Inc., told the gathering with: China and India, together having tion in the marketplace, and be ready to about that co-op’s experiences with 38 percent of the world’s population. respond. international joint ventures. CHS has a The economies of both countries are well-established, highly profitable rela- developing rapidly, and growing middle Behind the curve tionship with the Japanese corporation classes are demanding more and more Elizabeth Hund of Rabobank told Mitsui — one of the largest publicly processed foods. Joint ventures are the the gathering that the U.S. agricultural traded corporations in the world. most obvious avenue for market partici- economy is “behind the curve” in com- Johnson said that the impetus for the pation in these countries. parison to that of Europe. She pointed partnership came about by accident: a China and India erect high tariff bar- out that the Netherlands, with only a subsidiary of Mitsui, Wilsey Foods, was riers to agricultural imports, considering acquiring some and have laws that prevent of the same smaller compa- foreign firms from partici- nies at which CHS subsidiary pating by themselves in their Holsum Foods was looking. domestic markets. This In addition, it was a large means that American coop- customer of CHS products. eratives seeking to break Both companies decided that into those markets will have a partnership would avoid to develop joint ventures duplication and provide new with Chinese and Indian opportunities. firms. The partnership agreement between CHS and Mitsui was How co-ops can compete signed in August 1996, at Barr listed the implica- which time CHS had $350 tions of these trends for million in annual sales, with farmer cooperatives. To $8.5 million in profits. Nine compete, he said a co-op years later, says Johnson, the must understand what it partnership has paid off big does better than anyone else for the cooperative. Ventura — that is the value that it Foods now has $1.2 billion in offers in any business rela- annual sales. Profits have tionship. It must know the increased more than 800 per- market value of what it Doug Wilson, CEO of Cooperative Resources International, a livestock cent, to between $60 and $70 “brings to the table” in any breeding co-op, makes a point during the Farmer Cooperative million in profits, making for potential agreement — and Conference in Minneapolis. He is flanked by DFA’s Don Schriver and a 25-30 percent return on what it would cost its poten- co-op attorney Mark Hanson of Lindquist & Vennum. USDA photo by members’ equity. Stephen Thompson tial partner to duplicate it. Johnson presented a joint And it must approach the grain-marketing effort in the international market from a position of small fraction of the farm acreage of the Pacific Northwest, called United strength domestically: “Deploying United States, holds the second-largest Harvest, as an example of the synergies scarce capital resources and capital in share of the world ag export market, achieved by the partnership. Mitsui had the world market should not take prece- with 10.6 percent compared to the a global portfolio of customers for dence over domestic strategies,” he said. United States’ 15.5 percent share. American grain, while CHS had access “You need to have an integrated strate- Hund said that the U.S. share of the to the grain at the source. Both firms gy.” market is falling, while European coun- each had an export facility in Cooperative management boards of tries gain, because the European pro- Washington State — Mitsui at directors must develop ways of continu- ducers are exporting high-value, value- Vancouver and CHS at Kalama — both ally finding and evaluating potential added goods. She agreed with Barr that on the Columbia River. Both firms joint partnerships, Barr emphasized. international joint ventures, while needed to build new terminals for large, This must include communicating with involving difficulty and risk, offer single-cargo shuttle trains to feed those customers and suppliers about their important opportunities to U.S. cooper- facilities — an innovation at the time. own global strategies to identify emerg- atives: “If you can’t beat ‘em, join ‘em!” Mitsui at first planned to build shut- ing opportunities and risks. Other presenters gave the audience tle terminals, but turned the task over

22 January/February 2006 / Rural Cooperatives to CHS with its superior expertise in ing from differeing business regula- relationship with a Mexican cooperative. that field. The result, said Johnson, was tions and statutes, including UCO’s Davisson concluded that, when con- a venture that paid off for both parties. commercial dealings with Cuba, which templating international partnerships, are forbidden to U.S. firms. Cultural cooperatives must be true to their basic Making it work issues, including dealing with French- principles and assiduous in calculating According to Johnson, the secret to speaking members and Canadian atti- risks and benefits. If they choose to making an international partnership tudes toward the acquisition of a establish a relationship, they must care- work is a good working relationship Canadian business by a U.S. firm, also fully monitor the results. between top leadership officials. He posed obstacles to success. Relationships must be carefully nur- noted that differences between tured, he said, and local attitudes and Japanese and American cultures make issues must be continually taken into for different management styles, account. which must be taken into account and Paperwork on an adapted to. Gaining access to technology “Here in the U.S., we’re used to Dairy Farmers of America used a doing things by Robert’s Rules of order must be flaw- joint venture with international part- Order, with an up-and-down vote,” he ners to gain access to new technology said. “In Japan, everybody discusses less with foreign cus- and develop new markets at home, Don the issue until a consensus is reached.” Schriver, DFA executive vice president, He said that this resulted in misun- tomers, or they may told the conference. DFA, one of the derstandings, in which the Japanese largest milk marketers in the world, believed a decision had been made think the exporter is represents nearly one third of U.S. while the Americans still anticipated a milk production, but had not developed formal resolution. new fractionated products, leaving it Other problems, said Johnson, ‘trying to pull a fast with limited outlets for its members’ included ambivalence by older CHS production. members who remembered being at one on them.’ “Basically,” said Schriver, “we had war with Japan during World War II. conventional dairy products, dried milk However, a trip by the cooperative – David Fuhrman powder and the government.” board of directors to Mitsui Head- DFA attacked the problem by start- quarters in Japan helped cement cor- ing a joint venture in 2000 with dial relations. Johnson emphasized Fonterra, a multinational dairy compa- that personal relationships between top ny owned by 13,000 New Zealand dairy management must be cultivated, and Personal relationships help farmers that is the largest exporter of that he, as CEO of CHS, regarded his Like Johnson, Davisson emphasized dairy products in the world. The ven- ability to call and discuss issues directly the importance of establishing personal ture, called DairiConcepts, combines with the president of Mitsui as essential. relationships — which in this case DFA’s U.S. production capabilities with The CEO of Growmark, Bill Davis- involved getting Canadian and U.S. advanced technology developed by son, presented his perspective on anoth- leaders and employees together and Fonterra, to produce dairy and cheese er kind of international partnership: allowing them to discover how much ingredients for processed food manufac- having co-op members in other coun- they had in common. turers. tries. Davisson discussed Growmark’s Another Growmark acquisition Items produced by DairiConcepts acquisition of bankrupt United Coop- involved gaining a 44-percent interest include various proteins, fats, dairy- eratives of Ontario (UCO) assets in in MaltaCleyton, Mexico’s second- derived artificial flavors, milk- and 1995, saying that the similarities largest feed company. In the cheese-based modified powders, pow- between UCO and Growmark in struc- MaltaCleyton case, Growmark bought ders for infant formula and adult nutri- ture and core business were a good fit, into an investor-owned, non-coopera- tional beverages and preparations, and and gave Growmark the opportunity to tive firm. The purchase gave Growmark hard Italian cheeses. Many of its prod- expand into an area more or less con- an entry into a growing market for ucts are used in the manufacture of tiguous with its area of operations in grain south of the border through a convenience foods such as snacks, the United States. financially sound investment. ready-to-eat meals, sauces, soups and Problems with the merger included Risks and challenges included a very baked goods. dealing with UCO’s bankruptcy, anti- different political and cultural situation The partners initially each con- trust regulation in both the United from those of Canada and the United tributed about $25 million to the ven- States and Canada, and issues result- States, which might have complicated a continued on page 44

Rural Cooperatives / January/February 2006 23 LEGAL CORNER Bye-Bye Business Judgment Rule?

By Donald A. Frederick borrowed from the developer who had tive should pay a rebate to those mem- Program Leader for Law, owned the building, and signed a 30- bers on the theory that they had over- Policy & Governance; year mortgage repayment agreement paid. After consulting with legal coun- USDA Rural Development/ with the developer. A pro-rata share of sel, the board determined it had no Cooperative Programs the mortgage obligation was assigned to equitable basis to justify the rebates and [email protected] each housing unit in the building, based so voted not to use cooperative funds to on the relative value of the units at the pay the proposed rebates. ooperative directors owe a time. Contracts between the coopera- Tw o members who had prepaid their fiduciary duty to the tive and its members required the mem- obligation, including one person who C membership to exercise bers to make monthly payments on was a director at the time and had their authority in the best their share of the mortgage, which the argued and voted for rebate payments, interests of the association cooperative used to pay its monthly sued the cooperative and the other and all of its members. In lawsuits obligation to the lender. directors for breach of contract and claiming directors violated their duty, The contracts between the coopera- breach of fiduciary duty. They asked for courts have routinely applied the “busi- tive and its members permitted the monetary damages equal to the amount ness judgment rule.” members — at their option — to pre- they alleged they would have saved had In its simplest terms, the business pay their mortgage obligation. Over the they not prepaid their obligation and judgment rule provides that a board first 20 years of the mortgage, a small been treated the same as the other action is protected from challenge if minority of the members prepaid their members, including the other directors. there is a good business justification for obligation. the decision and it isn’t fraudulent or an By the mid-1990s, the developer was Trial court applies abuse of discretion. When the business bankrupt and his assets were controlled business judgment rule judgment rule is applied, the burden of by a bankruptcy trustee. The coopera- Both sides of the case moved for proof to establish the impropriety of the tive had several unresolved claims summary judgment, a decision by the decision is on those challenging it. against the developer. The cooperative court that they will prevail even if the But in today’s environment of had a cash reserve comprised in large facts are interpreted favorably for the heightened concern over the diligence part of payments from members. It other side. The trial court denied the of directors, courts may begin looking struck a deal with the bankruptcy motion of the unhappy members and for another standard for measuring trustee to pay off the remaining balance granted the motion of the cooperative. director conduct. In a recent decision due on the mortgage, less a negotiated First, the court said the unhappy mem- involving a suit against a housing coop- amount for its claims against the devel- bers hadn’t shown it any provision of erative and most of its directors, the oper. their contract with the cooperative that appellate court said the trial court After this deal was completed, the could have been violated by the cancel- should have applied a “reasonableness” directors made two decisions which led lation of the notes covering the mort- test, and the burden of proof should be to a lawsuit. First — since the mort- gage. on the directors to prove their actions gage that was the basis for the contracts As to breach of fiduciary duty, the were indeed “reasonable.” requiring special monthly payments trial court referred to the business judg- from the members no longer existed — ment rule and concluded there was no Case facts the board voted to forgive the amounts evidence that the board acted hastily or In 1974, an apartment building on remaining on those notes. Second — irresponsibly. Thus, a jury could not Wisconsin Avenue in the District of since there were no notes to forgive in rationally conclude the board engaged Columbia was converted to a housing the case of the members who prepaid in any misconduct subjecting the coop- cooperative. The cooperative associa- their obligation — the board deliberat- erative to liability. tion financed the purchase with money ed at length over whether the coopera- continued on page 42

24 January/February 2006 / Rural Cooperatives Largest 100 agriculture co-ops Top✔ 100 post strong margins in 2004

By David Chesnick, Ag Economist percent, to $70 billion. All co-op com- these two sectors, fruit/vegetable and USDA Rural Development modity groups reported increased rev- rice cooperatives paid a higher cost of enue. Dairy and diversified cooperatives goods sold. Thus, it appears likely that The rapid rate of change impacting led the way, accounting for two-thirds these cooperatives returned more to the nation’s 100 largest agricultural of the total revenue increase. their members up front, rather than as cooperatives slowed considerably in Gross margins were up 28.4 percent, patronage later on. 2004 from the previous several years. It reaching $6.9 billion. The largest Operating expenses also jumped 24.2 was not only a year of stabilization, but increase was in the dairy sector, which percent, to $5.4 billion. Dairy co-ops of strong performance, as the top 100 accounted for 61.5 percent of the total again had the biggest jump in operating ag co-ops posted record gains in sales jump in gross margins for the top 100 expenses, which increased $859 million. and margins (table 1), based on USDA’s co-ops. Fruit/vegetable and rice were That jump accounted for nearly three- preliminary survey results. Total operat- the only sectors to record a decline in fourths of the top 100 co-ops’ total ing revenue for the top 100 jumped 19 gross margins. Despite higher sales for increase in operating expenses.

Table 1—Consolidated Statement of Operations, 2003-04, Top 100 Cooperatives; values in $1,000 2004 2003 Difference % Change Revenues Marketing 53,529,034 43,833,692 9,695,342 22.1% Farm Supply 15,957,236 14,504,208 1,453,028 10.0% Total Sales 69,486,270 58,337,900 11,148,370 19.1% Other Operating Revenues 733,875 653,915 79,960 12.2% Total Operating Revenues 70,220,145 58,991,815 11,228,330 19.0% Cost of Goods Sold 63,344,425 53,638,947 9,705,478 18.1% Gross Margin 6,875,720 5,352,868 1,522,852 28.4%

Expenses Operating Expenses 5,450,743 4,388,502 1,062,241 24.2% Net Operating Margins 1,424,977 964,366 460,611 47.8% Other Revenues (Expenses) Interest Expense (424,624) (398,052) (26,572) 6.7% Interest Revenue 18,722 25,582 (6,860) -26.8% Other Income 212,961 345,594 (132,633) -38.4% Other Expenses (194,017) (119,278) (74,739) 62.7% Patronage Revenue 164,601 96,985 67,616 69.7% Net Margins from Operations 1,202,620 915,197 287,423 31.4% Non-Operating Rev. (Exp.) (47,716) (44,709) (3,007) 6.7% Net Margins 1,154,904 870,488 284,416 32.7%

Distribution of Net Margins Cash Patronage Dividends 291,403 285,044 6,359 2.2% Retain Patronage Dividends 502,570 383,756 118,814 31.0% Nonqualified Noncash Patronage 30,055 7,296 22,759 311.9% Dividends 19,172 18,937 235 1.2% Unallocated Equity 194,009 114,182 79,827 69.9% Income Tax 117,695 61,274 56,421 92.1% Total Distribution 1,154,904 870,488 284,416 32.7%

Rural Cooperatives / January/February 2006 25 Top✔ 100 Operating margins soar $1.4 billion revenues are usually one-time situa- higher sales. Operating margins for the top 100 tions, such as accounting changes or Total investments were down a shot up a whopping 47.8 percent, to gains and losses from discontinued slight, 0.7 percent, to $3.4 billion. The $1.4 billion. Leading the increase were operations. drop in investments was mostly due to poultry/livestock cooperatives, a rever- Net margins were up 32.7 percent, investments in other cooperatives, sal of fortune from 2003, when poul- to $1.2 billion. Leading the jump were including cooperative banks. Diver- try/livestock cooperatives were the only poultry/livestock cooperatives. They sified, grain and poultry/livestock coop- commodity group to post operating moved from a net loss of $67 million in eratives accounted for nearly 85 percent losses. In 2004, top 100 cooperatives in 2003 to net margins of $150 million in of the total drop in cooperative invest- this sector had operating margins of 2004. The largest decline in margins ments. $238 million, a 634-percent jump from occurred in the fruit/vegetable coopera- By contrast, investments in other the year before. tives, which declined 28.2 percent, to businesses were up 3.2 percent, to $1.4 Fruit/vegetable and rice cooperatives $154 million. billion. Dairy, diversified, farm supply saw operating margins decline from and grain cooperative accounted for 2003 to 2004, mostly due to lower Assets up 5.5 percent about 99 percent of the total increase in gross margins. However, fruit/veg- Assets for the nation’s 100 largest non-cooperative investment. etable cooperatives still posted solid agriculture cooperatives were up 5.5 operating margins of $204 million. percent (table 2) in 2004. Driving the Modest investment gain Rice cooperatives continue to operate increase were current assets, which for co-op fixed assets with tight margins. climbed 8.3 percent and ended 2004 at Investments in fixed assets were up Despite lower total debt levels, inter- $12.7 billion. Nearly all commodity 0.4 percent for the largest agriculture est expense for the largest 100 agricul- groups had an increase in current assets, cooperatives in 2004. The average ture cooperatives increased 6.7 percent, with the exception of diversified coop- amount of fixed assets purchased was to $425 million. The dairy sector saw eratives. Current assets for diversified $12 million, up from $10 million in interest expense climb 32.8 percent, to cooperatives dipped 0.1 percent, to $3.4 2003. $71 million. Poultry/livestock coopera- billion. Other long-term assets were up $338 tives also saw interest expense rise from Cash assets had the largest percent- million, to $2.4 billion. Dairy coopera- $9 million in 2003 to $37 million in age increase, jumping 23.4 percent, to tives accounted for nearly the total 2004. $1 billion. Cotton, dairy, grain, poul- increase. “Other revenue,” including interest try/livestock and sugar cooperatives all Total liabilities were up 5.3 percent, income and revenue from operating had higher cash balances in 2004. to $15 billion. Driving the surge were sources not directly related to opera- Poultry/livestock cooperatives had the current liabilities, which were up 9.9 tions, was down 37.6 percent, to $232 largest increase, $127 million. percent, to $9.6 billion in 2004. Total million. Nearly all co-op commodity Accounts receivable were up $410 long-term liabilities were down 1.8 per- groups except for cotton, diversified million, to $5 billion. All commodity cent, to $5.7 billion. and grain saw other revenue decline. groups experienced an increase in Despite higher overall liabilities, “Other expenses” were up 62.7 percent, accounts receivable. However, it is debt was lower in 2004. Short-term to $194 million. The largest increase in more likely a result of higher sales than debt was down 2.2 percent, to $2.2 bil- other expenses occurred in the diversi- a collection issue. This is illustrated by lion, and long-term debt less current fied and poultry/livestock cooperatives. the “days sales in accounts receivable” portion was down 3.8 percent, to $4.5 Patronage refunds received from ratio. This ratio divides accounts billion. other cooperatives were up 69.7 per- receivable by the average daily sales. A The decline in short-term debt was cent, to $165 million. However, 78.3 higher number will indicate the longer mostly due to diversified and grain percent of that total increase was due to it takes to collect on sales. This average cooperatives. Diversified cooperatives dairy cooperatives, which received value for all cooperatives dropped from had a large increase in their cash flow $72.4 million in patronage refunds for 28.1 days to 26.8 days. from operations and were able to pay 2004. Fruit/vegetable cooperatives Inventory for the top 100 co-ops was off some of their outstanding short- were the only commodity group to see up $133 million, to $5.3 billion. term loans. They also appear to have patronage refunds decline. Diversified and grain cooperatives were transferred some of their working-capi- The 100 largest ag co-ops suffered a the only commodity groups that had tal financing to vendors in the form of 6.7-percent increase in non-operating declining inventory levels. As with higher accounts payable. expenses, which ended 2004 at $48 mil- accounts receivable, most of the inven- Grain cooperatives seem to have lion. These non-operating expenses or tory buildup is likely a reaction to shifted some of their working capital

26 January/February 2006 / Rural Cooperatives Top✔ 100 loans to longer term debt and member cooperatives actually reduced the through the cooperative. Higher sales liabilities. All the other commodity amount of inventory carried. This indi- of member commodities will corre- groups had higher working capital cates they were funding more of their spond with higher member/patron loans. operations with accounts payable. On liabilities. Accounts payable jumped 10.7 per- the other hand, cotton and sugar coop- The only exception to this was rice cent, to $3.5 billion. Most of the eratives were the only commodity cooperatives. Despite higher sales, increase was in the dairy and diversified groups with lower accounts payable. member/patron liabilities were down groups. It is interesting to note the Members payable and patron and 31.6 percent. jump in accounts payable for diversified pooling liabilities were up for nearly all Other current liabilities were up 13.8 cooperatives. Generally, accounts co-op commodity groups. Generally, percent. All commodity groups had payable are used for short-term financ- these are amounts owed to members/ higher “other” current liabilities. ing of inventory. However, diversified patrons for commodities marketed continued on page 38

Table 2—Combined Balance Sheet, 2003-04, Top 100 Cooperatives; values in $1,000

Assets 2004 2003 difference % change Current Assets Cash 1,039,778 842,342 197,436 23.4% Accounts Receivable 5,017,090 4,606,763 410,327 8.9% Inventory 5,253,630 5,120,194 133,436 2.6% Other Current Assets 1,416,470 1,185,499 230,971 19.5% Total Current Assets 12,726,968 11,754,798 972,170 8.3% Investments Cooperative Banks 264,958 281,697 (16,739) -5.9% Other Cooperatives 1,389,468 1,451,779 (62,311) -4.3% Other Investments 1,792,428 1,737,674 54,754 3.2% Total Investments 3,446,854 3,471,150 (24,296) -0.7% Net PP&E 6,482,415 6,456,628 25,787 0.4% Other Assets 2,447,885 2,110,172 337,713 16.0% Total Assets 25,104,122 23,792,748 1,311,374 5.5% Liabilities Current Liabilities Total Short-term Debt 2,151,072 2,199,392 (48,320) -2.2% Accounts Payable 3,470,214 3,134,431 335,783 10.7% Member Payables 701,620 569,528 132,092 23.2% Patron and Pool Liabilities 1,668,822 1,415,441 253,381 17.9% Other Current Liabilities 1,585,597 1,392,734 192,863 13.8% Total Current Liabilities 9,577,326 8,711,526 865,800 9.9% Long-term Debt less current portion 4,506,261 4,683,228 (176,967) -3.8% Other liabilities and deferred credits 1,145,948 1,069,691 76,257 7.1% Total noncurrent liabilities 5,652,209 5,752,919 (100,710) -1.8% Total liabilities 15,229,535 14,464,445 765,090 5.3%

Minority interest 908,701 944,740 (36,039) -3.8% Member equity Preferred stock 967,812 945,293 22,519 2.4% Common stock 176,689 174,714 1,975 1.1% Equity certificates and credits 6,337,951 6,047,219 290,732 4.8% Unallocated capital 1,483,434 1,216,337 267,097 22.0% Total equity 8,965,886 8,383,563 582,323 6.9% Total liabilities and equity 25,104,122 23,792,748 1,311,374 5.5%

Rural Cooperatives / January/February 2006 27 Top✔ 100 Measuring cooperative performance

By David Chesnick, Ag Economist from 81 percent to 67 percent. Grain cooperatives were USDA Rural Development the only commodity group to rely more on long-term debt than on equity. Their ratio went up from an average of 46 This financial analysis views the nation’s 100 largest percent to 51 percent. This also could be a concern due to agriculture cooperatives, taken as a whole. To get a better an increasing trend since 2001 to use more debt relative to picture of the cooperative landscape, this section will equity for long-term financing of the cooperative. focus on performance measures. Selected average ratios Of course, the use of leverage can be beneficial if the are used for this analysis (table 1). The average ratio is business can generate more margins than it costs to serv- used to mitigate the effects of the largest cooperatives on ice that debt. The times-interest-earned ratio examines the performance measurements. The average ratio gives how many times margins can cover interest expense. equal weight to all cooperatives and provides an additional While interest expense went up for most of the largest perspective on the performance of the nation’s largest agriculture cooperatives, net margins seemed to increase agriculture cooperatives. more. The average times-interest-earned ratio increased Liquidity measurements are used to judge short-term from 3.3 times to 3.9 times. stability of a business. In this analysis, we use the current Rice and sugar co-ops had declining average values of and quick ratios. The current ratio is current assets divided times-interest-earned. Rice showed the largest average by current liabilities. This provides an insight into how well drop, falling from 9.3 to 4.0 the cooperative can meet its current obligations. The quick ratio is similar to the current ratio except that Efficiency ratios inventories are excluded from the current assets. Inventory Efficiency ratios show how a business uses its assets to is usually considered the least liquid of these assets. Thus, generate sales. The average local asset turnover for the excluding them from this analysis may provide a more top 100 increased from 3.2 to 3.5 in 2004. This suggests accurate picture of liquidity. that, on average, every dollar invested in assets generates There was no change in the average current ratio for all $3.50 in sales. With the exception of fruit/vegetable coop- of the top 100 cooperatives. However, there were varia- eratives, all other commodity groups were able to generate tions within the different commodity sectors. Diversified, more revenue on the assets they employed. fruit/vegetable, poultry/livestock and rice cooperatives had Fruit/vegetable cooperatives slipped from 2.4 to 2.2 some loss in their liquidity, as both current and quick ratios times. However, this was due to the restructuring of one fell. The one exception was the diversified cooperatives, cooperative. Excluding it, the average local asset turnover which improved their average quick ratio due to lower actually increased from 3.5 to 3.6 times. inventory levels relative to other current assets. All other Fixed asset turnover focuses specifically on how well commodity groups showed improved liquidity. the cooperative business uses its fixed assets to generate sales. Similar to the average local asset turnover, higher Leverage ratios sales lifted most fixed asset turnover ratios. The average Leverage ratios provide insight into the use of debt to fixed asset turnover for the top 100 cooperatives rose from finance the cooperative. Debt-to-equity examines the per- 16.2 to 17.9 times. Only cotton cooperatives had a lower centage of assets held by outside interests. The average ratio. Cotton cooperatives’ average fixed asset turnover debt-to-equity ratio for the top 100 co-ops remained rela- fell from 22.2 to 21.1 times. tively steady from 2003. There were variations within the One cotton cooperative made a large purchase of fixed commodity groups, but the variations were substantial with assets in 2004. So this decline may be temporary if the the exception of cotton, poultry/livestock and rice. investment can generate higher sales in future years. Substantial changes would be those that move more than 1 percentage point. Both cotton and poultry/livestock Profitability ratios reduced their reliance on outside financing by 3 percent- While cooperatives are generally considered “not for age points. Rice co-ops, on the other hand, showed a jump profit” enterprises, they do need to generate enough mar- in their average debt-to-asset ratio, moving from 47 to 51 gins to compensate for their members’ investment. percent. Therefore, profitability ratio trends that show margins erod- Long-term debt-to-equity focuses more on the long-term ing can indicate that a cooperative is heading for trouble. stability of a business. For all cooperatives, the average The gross margin percent gives an indication of the pric- long-term debt-to-equity improved dramatically, moving ing strategy of the cooperative. If a marketing cooperative is

28 January/February 2006 / Rural Cooperatives Top✔ 100 paying too much for its member’s product or a supply coop- all interested parties, including debt holders and govern- erative isn’t charging enough for its products, there may not ment. The average return on assets for all top 100 ag be enough gross margins left to cover operating expenses. cooperatives increased from 6 percent in 2003 to 6.3 per- The average gross profit margin of the top 100 co-ops cent in 2004. However, fruit/vegetable, rice and sugar all fell from 14.7 percent to 13.9 percent in 2004. This is a good had declining average return on assets. time to point out the influence of some of the largest coop- The fruit/vegetable co-op sector fell from an average of eratives within the top 100 database. Looking at table 1, 14 percent to 8.3 percent, while rice fell from 10.9 percent the increase in total sales for all cooperatives exceeded to 6 percent in 2004. These two commodity groups had the the increase in total cost of goods sold. This resulted in a largest average decline. Sugar fell from 5.6 to 4.8 percent. cumulative gross profit margin increase from 9.1 percent to There was a substantial jump in the average return on 9.8 percent in 2004. This is in direct conflict with the aver- assets for cotton and poultry/livestock cooperatives. age gross profit margin. Cotton cooperatives increased from an average of 13.3 per- The top 10 cooperatives generate 58 percent of total cent to 17.3 percent, while poultry/livestock cooperatives operating revenues for the top 100. Therefore, while the increased from 0.7 percent to 7.4 percent. overall picture has been rosy, there is cause for concern Return on member equity measures the return only to with the top 100 cooperatives. The average gross profit equity investors. In other words, interest and taxes are margin has been slipping deducted from net margins. during the last 5 years. In Table 1—Selected ratios, 2003-04,Top 100 Cooperatives The difference between the 2000, the average gross prof- 2004 2003 return on assets and return it margin was 15.2 percent Current Ratio 1.35 1.35 on member equity illus- and has declined almost Quick Ratio 0.73 0.73 trates the effect of lever- every year since then. Debt-To-Assets 0.64 0.63 age. Looking at the gross mar- Long-Term Debt-To-Equity 0.69 0.81 For example, the aver- gins trend doesn’t tell the Times Interest Earned 3.85 3.31 age return on assets in whole story. While it is true Local Assets Turnover 3.48 3.24 2004 was 6.3 percent while that the gross margins have Fixed Assets Turnover 17.89 16.19 the average return on declined over the past 5 Gross Profit Margin Percent 13.89% 14.72% member equity was 11.8 years, if the cooperatives are Net Margin Percent 1.63% 1.75% percent. This 5.5 percent becoming more efficient in Return On Total Assets 6.28% 5.97% difference represents the use of their assets and Return On Members Equity 11.83% 13.29% returns to members for other inputs, the lower gross using outside financing margins wouldn’t hurt a cooperative. Therefore, members where the cost of borrowed funds was less than the could benefit upfront from the pricing strategy of the coop- returns generated from those funds. The average return on erative. Higher efficiencies will show up in higher net mar- member equity fell from 13.3 percent in 2003 to 11.8 percent gins. in 2004. The net margins percent looks at net margins divided by total operating revenue. For the largest agriculture cooper- Co-ops in good shape atives, the average net margin percent fell 0.1 percentage Overall, the largest agriculture cooperatives are in good point, to 1.6 in 2004. Fruit/vegetable, rice and sugar co-ops shape. There has been some decline in their gross mar- averaged the largest decline in net operating margins, each gins, but efficiencies have been able to keep net margins declining between 1 and 2 percentage points. However, from sliding too far. The level of debt has been reduced. these three commodity groups experienced a substantial However, the use of credit and member payables helped jump in net margins in 2003. The slide in 2004 still left them fund operations. This leverage has given most members of with an average ratio of just under 2 percent, which is high- the largest agriculture cooperatives higher returns on their er than the overall average ratio for the top 100. investment than they would have received if they had been Poultry/livestock co-ops had the largest increase in net able to invest the total amount. Nevertheless, it is important profit margins. They had a net loss of 1.1 percent in 2003, to keep in mind that much of the outside funding is located in but improved to 2.1 percent net margin in 2004. the current account. As long as operations continue to show improvement, this should not be too much of a concern. Return on assets & equity However, if operations should fall short for some coop- Return on assets looks at net margins before interest eratives within the next year or two, there could be a fur- and taxes are deducted. This looks at the total return for ther shake up in the top 100 agriculture cooperatives. ■

Rural Cooperatives / January/February 2006 29 V ALUE-ADDED CORNER Idaho Straw Value-Added Committee Southern Idaho

About the group: Key players: butions by project partners, including The Idaho Straw Value-Added The Idaho Wheat Commission, a Iogen, Diamond Z Corporation, Trinity Committee (SVAC), led by Grant 4D grower-funded market development Trailer Corporation, MacRae Custom, Farms, consists of an 86-member steer- agency, funded a 1995 study to quantify D&L Custom, KM Custom and ing committee of wheat and barley the tonnage of straw available across CaseIH Corporation. growers in the southern and eastern Idaho. Building upon the base knowl- third of Idaho. The group is pursuing edge that more than 2 million tons of The technology: the formation of a cooperative or pro- straw was available for development, the Iogen, with a significant investment ducer-owned Limited Liability Co. commission conducted several outreach from Petro-Canada, began producing (LLC) to develop advanced harvesting, programs to raise awareness of the the world’s first cellulose ethanol fuel for storage, pre-processing and transporta- unused asset. Interested Idaho growers commercial use in 2004. After looking tion systems to supply straw to industri- were informed and, working with a around the world, it identified southern al processors. The systems are being variety of groups — including the Idaho as one of the best locations for a designed to meet the industry standards National Association of Wheat straw-to-ethanol facility. Idaho’s assets that growers and suppliers have to com- Growers, the Idaho Grain Producers, include a highly productive and relative- ply with to supply feedstock for ethanol the Idaho Wheat Commission and the ly dry climate, as well as proximity to and other bio-products. U.S. Department of Energy’s Idaho INL’s energy research center. National Laboratory (INL) — began According to Iogen’s Maurice Business objective: exploring new markets. These efforts Hladik: “Iogen is an enthusiastic partic- The committee’s objective is to have culminated in a “straw tour” of Idaho, ipant in what is probably the most seri- member-growers supply nearly 1 mil- during which Iogen — as an invited ous and practical research effort into lion tons of high-quality straw annually participant — saw the potential of a new fundamental approaches of harvest- to a cellulose ethanol biorefinery. Iogen plant in southern Idaho. ing and transporting massive amounts Corporation, a Canadian firm partially of feedstock for the cellulose ethanol owned by Royal Dutch Shell, is consid- USDA VAPG funding: industry. The cooperative approach by ering the construction of such a refinery The availability and suitability of Idaho farmers that took the lead on this in Idaho. Current plans call for a facility Idaho straw — as well as numerous initiative, along with USDA, the Idaho capable of processing 600,000 to logistical issues associated with harvest- National Laboratory and the private 800,000 tons of straw annually, with an ing and delivering the required 800,000 sector, has proven to be a highly effec- output of approximately 55 to 65 mil- tons of straw annually — were serious tive combination of diverse resources lion gallons of ethanol. impediments to successfully locating a and skills to yield such practical If the committee is successful in bio-refinery in Idaho. Growers decided results.” forming a cooperative and meeting its to seek a USDA Rural Development Iogen officials say their long-term production goals, farmers could collec- grant for a feasibility study on whether plans call for siting additional bio-refin- tively earn an additional $25 million to they could supply a large bio-refinery. ery facilities in biomass-basins through- $30 million annually, by selling straw Grant 4D Farms, serving as lead for the out North America and other conti- products to Iogen. This Idaho industry project, was awarded $450,000 through nents. Other public and private groups could produce up to 65 million gallons USDA’s Value-Added Producer Grant have expressed a similar belief that cel- of ethanol beginning in 2009. This (VAPG) program for planning purpos- lulose ethanol will be viable wherever emerging technology not only would es, including a feasibility analysis, mar- sufficient quantities of feedstock are invigorate and revitalize Idaho’s rural keting and business operations plans. available. Consequently, producers of agricultural economy, it would also con- This initial funding was supplemented wheat, corn, sugarcane, switch grass and tribute to the nation’s energy security. by $475,000 in cash and in-kind contri- other commodities throughout the

30 January/February 2006 / Rural Cooperatives United States will have opportunities to ethanol at its Ottawa, Canada, demon- Apart from these dealings, Iogen is access a new market as cellulose bio- stration plant. working with investors to secure financ- refining comes of age. ing to build a biorefinery. The company Business model: is also working to qualify for loan guar- Collaborative efforts: At this point, the committee has not antees made available for new energy Under this partnership, growers and determined the business structure best technologies through provisions of U.S. other collaborators have identified and suited for the value-added business in energy legislation enacted by Congress resolved issues related to the quantity Idaho. However, it is looking at several in 2005. Current development plans call and quality of straw to be harvested, possibilities, each of which would require for an investment of approximately $300 use and condition of existing harvest- early negotiations and full integration million for the cellulose ethanol plant ing equipment, alternatives for storing into Iogen’s biorefinery operating plan to plus cogeneration and enzyme facilities. straw and transporting it to a potential be successful. Models include: biorefinery. The University of Idaho • A new-generation (closed) cooperative Importance of USDA backing: “The USDA Rural Development grant provided the boost we needed to demonstrate how ideal Idaho is for sit- ing a straw bio-refinery. Even more important, the VAPG is helping to demonstrate that cellulose-based ethanol has a place in the nation’s energy portfo- lio,” says Grant 4D Farms owner Duane Grant. “With this seed money, Idaho farmers demonstrated the feasibility of locating a bio-refinery in Idaho. And in 10 years, we’ll look back and recall that receiving USDA’s grant was the pivotal turning point in our push to launch the cellulose ethanol industry in Idaho. Thanks to the VAPG, we have demon- strated that we can consistently supply straw on an industrial scale to a com- The Idaho Straw Value-Added Committee is pursuing the formation of a producer-owned mercial bio-refinery.” co-op or LLC to supply a proposed ethanol plant that would produce fuel from straw. Here, growers celebrate a milestone in the effort, when they hauled two truckloads of Idaho Major challenge/ straw to Ottawa, Canada, where it was processed into ethanol. Photo by Maurice Hladik opportunity facing co-op: The major problem facing producers characterized and quantified aspects of that follows a model successfully is how to best assemble, store, prepare feedstock production. Southern Idaho proven in other agriculture businesses and deliver nearly 1 million tons of farmers worked with INL and others (such as sugar processing co-ops). straw that would be required by a cellu- to understand and resolve issues relat- Members of the cooperative would losic ethanol facility each year. The ed to harvesting, storing and pre-pro- purchase stock in proportion to the availability and cost of the feedstock, cessing the feedstock; to protecting the quantity of straw each member would the lack of confidence in the conversion integrity of the straw while in tempo- sell to the processor. An advantage of technology and the hesitancy of finan- rary storage; and to clarify methods to this arrangement is the economic cial backers to lend capital are still seen transport biofeedstock in compliance benefit that could be broadly shared, as barriers to this business venture. But, with a refinery’s product specifications. co-opting the broader grower com- with USDA’s assistance and the persist- Iogen has already participated, as an munity in the success of the venture ence of Idaho farmers, these barriers are end-user, to demonstrate the technolo- and increasing the assurance of a sus- being overcome. gy necessary to successfully convert the tainable supply of straw. Other challenges, revolve around the straw into fuels and chemicals, and to • A closely held stock company that successful launch of the cellulose-based define the requirements of the receiv- raises initial investment capitol by ethanol industry. Significant technical ing biorefinery. As part of the feasibili- selling stock to a limited number of and political issues remain to be ty project, Iogen successfully investors or entities currently addressed. Iogen is clearly the world processed two 20-ton loads of Idaho involved in agricultural production in leader in this area, and through ongoing wheat and barley straw into cellulose southern Idaho. continued on page 40

Rural Cooperatives / January/February 2006 31 An Art & Science Revised co-op development curriculum gets test drive in Madison workshops

By Jane Livingston

Editor’s note: Livingston is a Maine-based freelance communicator and marketing con- sultant who specializes in cooperatives. [email protected].

t may not be happening as rapidly as some would like, but it’s happening. I The co-op model is catching the attention of people outside ‘the usual cast of charac- ters.’ In fact, the 21 cooperative devel- opment center-members of CooperationWorks! have seen requests for assistance triple in the past three “Too many development groups and business educators still don’t know enough about the years. co-op business model,” says Audrey Malan, executive director of CooperationWorks!, seen “Cooperatives may be one of the here leading a workshop in Madison. Opposite page: Workshop participants gather for a class photo. Photos by Eric Bowman, NW Co-op Development Center best kept secrets in America, but we’re working to change that,” says Audrey as communities struggle to find solu- two-year process — a co-op can be sab- Malan, executive director of tions to shared challenges in agricul- otaged by its lack of information, CooperationWorks!, whose member- ture, energy, affordable housing, health- access, skills or experience. Co-op centers serve people in 45 states. care, childcare, senior services and the development specialists can make the Interest in the co-op business model creation and retention of good jobs.” difference, from providing technical is coming — as it always has — from business assistance to helping people entrepreneurial types who want to be in Development practitioner learn how to recognize and act on busi- business for themselves, but who lack may hold key ness opportunities. the capital or other resources to do it. Cooperative business development “This can range from demonstrating Others simply prefer to share the risks holds great promise, but it’s a tall order how to operate a business in a demo- and rewards of business ownership. to fill. An effective development practi- cratic and professional way, to linking Increasingly, interest in co-ops is com- tioner is often the key to helping a co-op members with community part- ing from economic development loan group of people implement sound busi- ners and surfacing co-op leadership. A funds, financial institutions, govern- ness practices and help them engage in skilled co-op development practitioner ment officials, community nonprofit running their business in a truly coop- is a valuable community asset.” organizations, religious congregations erative way. and chambers of commerce. “It can be a big challenge to start a Accelerating skill development “Too many development groups and cooperative, especially for those new to To accelerate and increase profes- business educators still don’t know it,” says Malan, who worked as a coop- sional competence of co-op develop- enough about the cooperative business erative business development practi- ment practitioners, CooperationWorks! model,” Malan says. “Yet the potential tioner in Washington state prior to tak- has revised its training program. In two for cooperative enterprise to play a role ing the reins at CooperationWorks! intensive, five-day sessions held in in economic development is enormous “In its formative stages — typically a Madison, Wisc., during May and

32 January/February 2006 / Rural Cooperatives November, 31 participants test-drove explore the nitty gritty of several suc- tems thinking and conflict manage- the revised program. Afterward, partici- cessful cooperative enterprises. A well- ment. pant evaluations were highly positive. planned menu of site visits allowed Anne Reynolds, assistant director of trainees to question and observe how Understanding group dynamics the University of Wisconsin Center for the principles and values of cooperation Understanding the group dynamics Cooperatives, was a consultant for the are practiced “on the ground.” of cooperatives is an evolving field, CooperationWorks! 2005 training pro- “It was a very thoughtful process,” notes Bau, who has helped a number of gram, called ‘The Art and Science of says Margaret Bau, cooperative devel- homecare workers’ co-ops emerge in Cooperative Business Development.’ opment specialist for USDA Rural “We used the theme of ‘art and science’ Development in Wisconsin, who was on to acknowledge that cooperative devel- the planning committee and a trainer in opment is both,” she says. the program. “We asked current coop- “The group dynamic “You’re seen as an expert in some erative development practitioners, co- sense. Like a scientist,” Reynolds con- op attorneys and accountants to identify can bring synergy, or tinues, “you have privileged informa- ‘the perfect training.’ We got all kinds tion. Only your role is not to be the of great ideas, then winnowed them tear things apart.” leader; it’s to identify and develop lead- down to what was manageable.” ership. But it’s even more. It is also to Session One concentrated on the help the whole cooperative group work ‘science’ of co-op development. It —Margaret Bau together. You have to be a good facilita- employed comparative business models; tor, but you also must have the informa- critical development steps (including recent years. She speaks highly of the pro- gram’s team development and the focus on working effectively with groups. “The group dynamic can bring synergy, or tear things apart,” Bau observes. “We can learn what to be aware of, what to look for, how to respond. We can take what we learn back to all the co-ops we work with, and become bridges for all this valu- able experience — from the suc- cesses to the start-ups. “Even though I’ve been doing co-op development for 7 years, the training was a growing expe- rience,” Bau adds. “We did some internal conflict awareness and resolution…that hit home because it was paired with case studies and site visits.” Participant Eric Bowman, of the Northwest Cooperative tion they expect you to have. That’s feasibility analysis and business plan- Development Center, was impressed by what makes the role so complex.” ning); co-op finance, equity and legal the caliber of trainers, the substance of The training program grew from a issues; co-op governance and manage- program content and the flexibility and planning committee comprised of co-op ment, and keys to success. Session Two diversity of its delivery. “Practitioners experts from around the country. It took on the ‘art’ of helping groups of have some of the same challenges, and offered participants a mix of classroom people cooperate to build a successful we can use some of the same techniques work and more experiential learning. business. The curriculum included to mitigate them,” he says. “This pro- Participants are engaged in detailed group dynamics, team development, gram increased my ability to understand case studies during which small groups visioning and strategic planning, sys- the needs of groups, to anticipate pit-

Rural Cooperatives / January/February 2006 33 falls and to cope better with the prise. New co-ops generate new tax rev- Patrie, Malan and others often point inevitable. And it gave me the bigger enue, new jobs and new wealth for rural to electric co-ops as examples of how picture of how our center fits into the America. the business model benefits rural peo- national system. This is a very impor- For example, Minnesota alone — ple. These co-ops were created by tant time for us to be paying attention one of the states where co-op impact farmers and ranchers, who wired rural to one another.” data has been measured — employs America in the early days of electricity Sharing information, insight, nearly 80,000 people in cooperatives, when rapidly growing investor-owned resources, challenges and strategies to and generates about $11 billion in total utility companies didn’t see enough advance cooperative enterprise is the direct, indirect and induced impact. profit in those sparsely populated areas. reason CooperationWorks! was created. And because they are locally owned, In contrast to recent corporate scan- Its member centers have developed these cooperatives’ patronage dividends dals, Malan says “electric cooperatives nearly 400 new rural businesses, owned returned to owners generate another —transparent businesses owned by their and controlled by more than 47,000 $600 million in economic impact. members — stand as a beacons of light, members and created 5,800 new jobs. Many in the co-op world are seeing integrity and high economic and com- Investment in these co-op businesses this as a time of tremendous opportuni- munity value. Clearly, cooperative busi- exceeds $900 million. ty for cooperatives to help strengthen nesses are an effective development local and regional economies. strategy. To make them work, we need USDA provides support CooperationWorks! President Bill effective cooperative business develop- The centers receive core funding Patrie agrees. “As people find ways to ment professionals.” through the Rural Cooperative work together for mutual benefit,” says For more information on Development Grant program of USDA Patrie, “they are reaping huge econom- CooperationWorks!, go to: www.cooper- Rural Development, and use it to pro- ic and social rewards. Cooperation is ationworks.coop, or contact them at vide critical services to those seeking to one of the most powerful development (307) 655-9162; e-mail: [email protected]. start or strengthen a cooperative enter- tools in America.” ■

The Madison Principles Professional standards for co-op development practitioners revised

Editor’s note: The principles were first written by mem- ment of the members’ time, financial resources and loy- bers of CooperationWorks! in Madison, Wis., in 1995, and alty to the cooperative. were recently revised to reflect the consensus of co-op 6. There must be tangible benefits for members. development practitioners. 7. The cooperative’s products and services must generate sufficient revenue so the effort can be financially self- 1. Cooperative developers subscribe to the highest level of sustaining. Provisions must be made to share any sur- ethics and shall declare any conflict of interest, real or plus equitably. perceived, so that they can be a credible source of 8. Each cooperative responds to its unique economic, objective feedback and an articulate advocate of the social and cultural context; as a consequence, each project as needed. cooperative is different. 2. There are essential development steps that must be tak- 9. Cooperative developers link emerging cooperatives with en in a critical path to success. established cooperatives to facilitate mutual communi- 3. An enthusiastic group of local, trustworthy leaders is a cation and learning. prerequisite for providing technical assistance. The 10. Cooperatives are tools for development and promote effective cooperative developer nurtures that leadership social empowerment and economic goals. by helping them shape a vision that will unite members 11. Applied appropriately, cooperatives have value to all and provide ongoing training. population groups and for all businesses and services in 4. Cooperatives only work when they are market driven; the the public and private sectors. cooperative developer works to ensure that accurate 12. Opportunities for human cooperation exist throughout market projections precede other development steps. the world. Cooperative development transcends nation- 5. Member control through a democratic process is essen- al boundaries. tial for success. Success also depends on the commit- ■

34 January/February 2006 / Rural Cooperatives MANAGEMENT TIP

How does your local farm supply co-op rate?

Beverly L. Rotan, Ag Economist, USDA Rural Development may help to determine whether your cooperative is doing well or poorly. as your cooperative fared better, about the same The two tables below contain average financial data com- or worse compared to cooperatives with similar piled from a survey of 263 cooperatives for 2003 and 2004. sales, product mix, etc. Comparisons with other Fill in the blanks and compare these benchmarks with your H cooperatives using trends and industry norms cooperative’s financial data. How’s your cooperative doing?

Compare your farm supply cooperative1 with averages for cooperatives with similar functions. Size (2003) 2,3 Size (2004) 2,3 Your Measure/Item Unit Small Medium Large Super Small Medium Large Super cooperative Sell farm supplies only Number 65 38 22 9 52 43 27 11 ______Total assets Mil. dol. 1.9 3.8 8.0 15.7 1.6 3.7 7.5 16.5 ______Long-term debt Thou. dol. 23.8 274.5 574.8 1,895.2 80.7 201.8 495.2 1,611.2 ______Total liabilities Thou. dol. 559.2 1,326.7 3,257.8 6,334.6 485.6 1,279.0 2,956.3 6,835.2 ______Total sales Mil. dol. 2.9 6.6 13.9 28.7 2.7 6.4 14.4 30.9 ______Total service revenue Thou. dol. 73.3 189.0 363.7 718.7 35.7 175.8 190.5 709.0 ______Total revenue Mil. dol. 3.0 6.9 14.4 28.8 2.8 6.7 14.8 32.2 ______Net income (losses) Thou. dol. 26.7 109.4 266.1 219.9 49.9 170.3 340.1 863.1 ______Labor of total expenses Percent 55 53 54 53 55 52 55 54 ______Patronage refunds received Thou. dol. 4 18.2 45.2 389.3 20.9 61.2 118.6 362.7 ______Liquidity ratios Current Ratio 1.96 1.53 1.37 1.38 1.98 1.57 1.45 1.36 ______Quick Ratio 0.98 0.78 0.74 0.58 0.94 0.78 0.81 0.63 ______Leverage ratios Debt Ratio 0.30 0.35 0.41 0.40 0.30 0.35 0.40 0.41 ______Debt-to-equity Ratio 0.43 0.53 0.69 0.68 0.43 0.53 0.65 0.71 ______Times interest earned Ratio 2.73 4.20 5.03 5.57 5.16 6.34 7.19 6.47 ______Activity ratios Fixed asset turnover Ratio 7.69 6.37 6.25 6.49 9.14 7.42 6.64 7.11 ______Total asset turnover Ratio 1.56 1.73 1.73 1.83 1.72 1.73 1.92 1.88 ______Profitability ratio Gross profit margins Percent 17.96 16.45 16.95 17.71 17.22 15.53 17.69 16.47 ______Return on total assets before interest and taxes Percent 2.42 3.95 4.52 7.08 4.16 6.01 5.84 6.83 ______Return on total equity Percent 2.82 6.00 8.06 11.67 6.22 9.35 11.67 11.93 ______

1 100 percent of sales were generated from farm supply sales. 2 Small = Sales are $5 million or less; medium = over $5 million to $10 million; large = over $10 million to $20 million; and super = over $20 million. 3 There were 263 cooperatives surveyed in both years. 4 Less than $1,000. This may be because of write-offs due to regional’s demise.

continued on page 36 Rural Cooperatives / January/February 2006 35 How does your local farm supply co-op rate? continued from page 35

Compare your mixed farm supply cooperative1 with averages for cooperatives with similar functions. Size (2003) 2,3 Size (2004) 2,3 Your Measure/Item Unit Small Medium Large Super Small Medium Large Super cooperative Market farm products and sell farm supplies Number 10 8 21 22 10 8 21 22 ______Total assets Mil. dol. 1.5 2.7 8.2 19.3 1.8 2.9 7.9 19.7 ______Long-term debt Thou. dol. 144.6 318.0 736.5 2,678.7 108.0 309.2 598.4 2,732.0 ______Total liabilities Thou. dol. 515.8 1,208.8 3,350.7 9,317.6 651.6 1,298.4 2,928.0 9,268.1 ______Total sales Mil. dol. 2.8 5.9 13.7 37.9 2.9 6.4 13.7 43.7 ______Total service revenue Thou. dol. 125.7 345.8 607.4 1,524.7 109.8 340.8 707.1 1,340.6 ______Total revenue Mil. dol. 3.0 6.3 14.6 40.1 3.1 6.8 14.7 45.9 ______Net income (losses) Thou. dol. 42.2 98.9 243.6 766.3 44.6 103.5 274.8 825.4 ______Labor of total expenses Percent 54 50 51 54 51 50 52 50 ______Patronage refunds received Thou. dol. 28.0 65.4 49.7 283.4 30.0 30.0 132.9 351.6 ______Liquidity ratios Current Ratio 2.12 1.50 1.40 1.34 1.94 1.49 1.41 1.35 ______Quick Ratio 1.17 0.80 0.67 0.76 1.05 0.78 0.73 0.77 ______Leverage ratios Debt Ratio 0.34 0.45 0.41 0.48 0.37 0.45 0.37 0.47 ______Debt to equity Ratio 0.52 0.81 0.69 0.94 0.59 0.82 0.59 0.89 ______Times interest earned Ratio 6.87 3.35 3.89 4.18 3.84 3.80 4.89 4.21 ______Activity ratios Fixed asset turnover Ratio 7.21 7.23 6.37 7.03 7.46 7.96 6.59 7.67 ______Total asset turnover Ratio 1.84 2.18 1.67 1.96 1.66 2.33 1.73 2.22 ______Profitability ratio Gross profit margins Percent 12.88 14.63 14.20 14.58 13.41 14.81 13.93 13.54 ______Return on total assets before interest and taxes Percent 3.45 5.43 4.11 5.88 3.54 5.19 4.64 6.25 ______Return on total equity Percent 6.95 10.35 7.07 10.69 5.87 10.42 7.73 10.91 ______

1 50 to 99 percent of sales were generated from farm supply sales. 2 Small = Sales are $5 million or less; medium = over $5 million to $10 million; large = over $10 million to $20 million; and super = over $20 million. 3 There were 263 cooperatives surveyed in both years.

32 states receive $21 million “Renewable energy is also a major conservation technologies. For example, in renewable energy grants growth area for American farmers and a Wasatch Wind LLC will receive USDA Rural Development has top priority for USDA. Energy conser- $500,000 in funding for phase-1 of a awarded 150 applicants with almost $21 vation and renewable fuels are good for wind energy generation project to be million in grants for renewable energy the environment, the economy, and located at Spanish Fork Canyon, Utah. and energy efficiency projects in 32 farmers’ bottom lines.” Combined with matching funds, the states. “Enhancing America’s energy Johanns made the announcement USDA grant will result in the construc- independence is at the core of President prior to a Farm Bill Forum in Salt Lake tion of a 1.5-megawatt wind generation Bush’s comprehensive national energy City that was part of the nationwide lis- tower, the first of 10 towers planned for policy. That makes energy conservation tening tour to gather input from the the site. and clean, renewable sources of domes- public on farm policy. Synthetic Energy, Inc., of Ketchum, tically produced energy more important The renewable energy and energy Idaho, will use its grant of $199,863 to than ever,” Agriculture Secretary Mike efficiency projects involve a wide range purchase wind turbines to power a com- Johanns said in announcing the grants. of wind, solar, biomass, geothermal and mercial hydrogen generator. ■

36 January/February 2006 / Rural Cooperatives ture and rural America.” tives and past chairman of the Graduate implementing strategic plans and posi- Sims managed the bank through 15 Institute of Cooperative Leadership, tioning CoBank for success.” mergers and acquisitions, the opening Lutheran Family Services of Colorado CoBank, part of the $135 billion U.S. of its first representative office outside and the FarmHouse Foundation. He Farm Credit System, specializes in pro- the United States and its first issuance is also a member of the Finance viding financial and leasing services to of preferred stock, which brought $500 Governors of the World Economic cooperatives, agribusinesses, Farm Forum and a founding member of the Credit associations and rural communi- Center for Corporate Excellence in cations, energy and water companies. Vail, Colo. The bank also finances agricultural Engel has nearly 20 years of banking exports. experience, primarily with HSBC Bank USA, and 8 years of accounting experi- DFA’s Hanman, Schriver retire; ence, including an agribusiness specializa- Rick Smith named new CEO tion, with KPMG and Deloitte & Two top executives at Dairy Farmers Touche. During his 14-year tenure at of America (DFA), headquartered in HSBC, he served in a variety of manage- Kansas City, Mo., retired Jan. 1. CEO ment and credit positions, including chief Gary Hanman and Executive Vice credit officer, before being named chief President Donald Schriver are both Doug Simms (left) is retiring in June as banking officer. Engel serves on the ending careers with DFA and its prede- CoBank CEO and will be succeeded by Robert Engle. Photo courtesy CoBank board of directors for the Federal Farm cessor co-ops. They were key players in Credit Banks Funding Corporation, the creation of the co-op and built it Farm Credit Leasing Services Corp. and into the nation’s largest dairy co-op, million of new investment capital into Financial Partners Inc. He also serves on accounting for just under one-third of the bank. the board of trustees for Niagara the nation’s milk supply. Both will con- Sims is chairman of the Farm Credit University, and is a recipient of the Ellis tinue to advise DFA on various pro- System’s Presidents Planning Island Medal of Honor. grams and projects. Rick Smith, who Committee and co-chairman of HORI- “We have confidence in Mr. Engel’s had been president and chief operating ZONS, a system-wide customer experience, expertise and leadership,” officer, has been named as the new research and strategic planning initia- Orton said. “He has a deep under- CEO. tive. He is the current chairman of the standing of CoBank and our customers, “DFA was created by dairy farmers, National Council of Farmer Coopera- as well as a proven track record of who wanted to take control over their

Largest 100 agriculture co-ops post strong margins in 2004 continued from page 27

Long-term debt lower tives were the only commodity group in 2003. As mentioned earlier, long-term debt that saw other liabilities and deferred Allocated equity in the form of stock was lower in 2004. All commodity credit decline. and certificates was up 4.4 percent, to groups had a large decrease in long- Twenty-three top 100 cooperatives $7.5 billion. The only commodity term debt, other than dairy, farm sup- have minority interest. Minority inter- group not to show an increase was ply, grain and rice cooperatives. Grain est represents the amount of interest grain cooperatives, which saw stock and cooperatives had the largest jump in minority-share holders have in a sub- certificate values fall 1.8 percent, to long-term debt — larger than dairy, rice sidiary of a cooperative that is the sub- $808 million. and farm supply co-ops combined. sidiary’s majority share holder. In 2004, Unallocated equity jumped 22 per- Grain cooperatives’ long-term debt minority interest fell 3.8 percent, to cent, to $1.5 billion. Unallocated equity increased $74 million, to $458 million. $909 million. Most of this decline is is generally used as reserve for the Diversified cooperatives had the attributed to diversified cooperatives. cooperative. In 2004, several fruit/veg- largest decline in long-term debt levels, Total equity was up 6.9 percent, to etable cooperatives had net losses along which dropped $141 million, to $1.7 $9 billion. Thanks to near record earn- with some higher taxes. The unallocat- billion. Diversified cooperatives held ings, every commodity group posted ed equity absorbed these negative 31.7 percent of total outstanding long- higher equity in 2004 than in 2003. effects, thus causing a decline of 10.4 term debt. The largest agriculture cooperatives percent in the fruit/vegetable unallocat- “Other liabilities” and deferred cred- retained 70 percent of their after-tax net ed equity accounts. The other com- its were 7.1 percent higher, climbing to margins in both allocated and unallo- modity groups all showed positive $1.1 billion. Fruit/vegetable coopera- cated equity. This is up from 62 percent growth in their unallocated equity. ■

38 January/February 2006 / Rural Cooperatives 2001, was promoted to president and involvement with rural cooperatives in chief operating officer of DFA. In that 1968, when he became director of mar- position, he had oversight over all busi- keting for Georgia Electric Member- ness operations, including economic and ship Corporation. Later, he was elected marketing analysis; member, govern- to serve on his local electric cooperative ment and public relations; human board and remained a board member resources; fluid marketing operations; for 25 years. value-added manufacturing; account- ing/treasury; and legal and risk manage- AMPI dedicates rebuilt plant, Gary Hanman Rick Smith ment functions. solidifies future in industry destiny in a rapidly changing business Associated Milk Producers Inc. environment, and Gary Hanman helped James Andrew to lead (AMPI) dedicated its rebuilt butter us make that a reality,” said Tom USDA rural utility program churning and packaging plant on Dec. Camerlo, DFA board chairman and a Agriculture Secretary Mike Johanns 6. The plant, nearly destroyed by a fire dairy farmer from Florence, Colo. He has welcomed James Andrew as admin- in December 2004, occupies much of a saluted Hanman for “building a market- istrator of USDA Rural Development’s city block in the south central ing cooperative that can compete on a rural utilities program. Andrew will Minnesota town of New Ulm, located global level, while providing a grassroots administer Rural Development’s electric, in the heart of AMPI’s seven-state structure that ensures dairy farmer input telecommunications and water programs. membership area. and control. We look forward to build- In 2005, those programs provided over Minnesota Governor Tim Pawlenty ing on that legacy for the benefit of our $5.5 billion in investment to rural and a host of local, state and federal farmer members.” DFA today markets America. Johanns said Andrew is a strong officials were on hand to congratulate and processes milk for 21,946 dairy leader who “brings a wealth of knowl- AMPI members for reinvesting in the farmer members in 49 states. Minnesota dairy industry. Following A native of north-central last year’s fire, the cooperative’s Missouri, Hanman, 71, has been board of directors chose to rebuild CEO of DFA since its creation in the facility, signaling a long-term 1998. From 1975 to 1997, he commitment to Midwest dairy farm- served as CEO of one of DFA’s ers and the butter business. predecessor cooperatives, Mid- “Minnesotans are strong people who America Dairymen, Inc. (Mid- are resilient in the face of loss,” Am) of Springfield, Mo. Schriver Pawlenty said. “The return of this has also served in his position plant is tremendous news for the since DFA’s inception, and had hardworking dairy farmers of this led Ohio-based Milk Marketing region and the whole Minnesota Inc. prior to then. economy. It’s yet another promise of James Andrew, with his family members, is sworn in as Smith entered the dairy indus- the bright future that lies ahead of the new administrator of the utility programs of USDA try in 1982 when he joined us.” Rural Development by Agriculture Secretary Mike Churning and packaging butter Dairylea Cooperative Inc. as vice Johanns (left). USDA photo president and general counsel. In is one way AMPI dairy farmers add 1988 he became CEO of value to their milk. “This plant will Dairylea, the Northeast’s leading agri- edge and expertise to the position.” enable us to further diversify our milk cultural service and milk marketing Andrew was nominated by President marketing business, offering a complete organization with 5.5 billion pounds of Bush on Aug. 25 and was confirmed line of dairy products to customers,” milk marketed annually for 2,500 dairy unanimously by the Senate on Nov. 10. said Mark Furth, AMPI general manag- farmer-members. A former president of the National er. “We are delighted to have a proven Rural Electric Cooperative Association, During plant reconstruction, AMPI dairy leader like Rick Smith to take DFA Andrew served on the board from 1988 gradually increased production as into the future,” said Camerlo, “He to 2004. As president, he led the associ- packaging equipment was rebuilt. understands the dairy industry, the DFA ation’s effort to overhaul education and Production at the plant is near pre-fire organization and, most importantly, the training programs for member co-ops. capacity. “Rebuilding gave us an priorities of the dairy farmer members A graduate of the University of opportunity to improve our butter whom he serves.” Alabama, he is a former small business packaging equipment and plant. This In August, Smith, who had served on owner and banker and helped to man- butter plant is now more efficient, DFA’s management team since January age a family farm. Andrew began his enabling us to increase overall vol-

Rural Cooperatives / January/February 2006 39 member rural electric energy to this nation’s economy.” systems in nine Fortunately, he continued, there’s a con- Western and Upper tinuing strong recognition of the bene- Midwest states. fits of coal as a generation fuel by policy “We build plants makers and those who believe low-cost because our members and reliable energy is important. need the power. Our Harper said coal gasification will be a membership is growing, part of our energy future. “A great deal our region is growing of the energy bill is focused on gasifica- and we must grow to tion and its benefits for the continued meet the demands (for use of coal,” he noted. The environ- electricity),” Harper mental community supports gasification said. “As we move for- State and co-op officials and employees gather for the grand re-opening of AMPI’s butter plant in New Ulm, Minn., one ward in our resource year after it was devastated by a fire. Photo courtesy AMPI development efforts, we are seeking to under- ume,” Furth said. “This plant will help stand the benefits of all us improve our farmer-owned busi- the various types of generation technolo- ness.” AMPI has about 5,000 members gies, including nuclear. It is our time to who annually market more than 5 bil- make the tough calls and break new lion pounds of milk. ground to ensure a bright future for our region.” Basin Electric CEO says nation Basin Electric’s power requirement must develop new power supplies projections show a demand for electrici- Despite many uncertainties, it is time ty growing at a rate of 3.1 percent Basin Electric Cooperative CEO Ron Harper for the nation to move forward and between now and 2019. “That growth says the nation faces a crucial need to build new power supplies for the future, equals the need for 927 megawatts of develop new energy sources. Photo cour- says Ron Harper, CEO and general generating capacity to meet that mem- tesy Basin Electric manager of Basin Electric Power ber demand,” Harper said. The co-op is Cooperative in Bismarck, N.D. moving ahead on new projects, even because it provides an option to deal Speaking at the co-op’s 2005 annual though there are many uncertainties, with carbon dioxide emissions, he said. meeting, Harper said Basin Electric — such as environmental regulations. However, gasification technologies are a consumer-owned, power generating “One concern I have is for our con- not yet available to reliably generate and transmission co-op — must contin- tinued ability to burn coal,” he said. electric energy. Dakota Gasification ue to manage its energy destiny, which “There are many that would prefer coal Co., a Basin Electric subsidiary, has translates into economic opportunity not be used as a fuel source for any been successfully operating the nation’s and well-being for its region. Basin industrial purpose. They have discount- only commercial-scale coal gasification Electric provides electricity to 121 ed the benefits of low-cost and reliable plant for more than 20 years.

Idaho Straw Value-Added Committee continued from page 31 work at its Ottawa pilot plant, is making equipment costing about $7 million, part of the VAPG indicate that by shift- consistent progress at resolving techni- tractors costing about $11 million, and ing from a bale system to a modified loaf cal constraints. As this new technology handling and hauling equipment total- system, growers can significantly lower requires a large initial investment to ing an additional $13 million. Certainly, per-ton straw harvest costs. Additional construct a facility, Iogen may face diffi- farmers in the area already own or have modifications to the transportation sys- culty securing sufficient private invest- access to some of the required equip- tem promise further improvements in ment capital to launch the first plant. ment, but without question, significant efficiency. Put simply, there will be Idaho’s growers face challenges and investment will be required. ample opportunities for farmer ingenuity opportunities. First among the chal- Perhaps the greatest opportunity to fine-tune the collection system. lenges is capitalizing the equipment offered to farmers, other than that of a For more information , contact: required to bale, handle and transport brand new ag market, is the opportunity Duane Grant, Grant 4-D Farms; (208) the straw. Initial estimates are that to make tremendous gains in productivi- 531-5149, (208) 431-0006 (mobile), growers will need to acquire baling ty over time. Assessments conducted as [email protected] ■

40 January/February 2006 / Rural Cooperatives

South Dakota co-ops merge is expected in Pierpont, where Four Johanns said in announcing the grants. The 600-member Farmers Union of Seasons will offer agronomy services, as “USDA’s partnership with these out- Pierpont and Bristol has merged with did Farmers Union, the American News standing institutions significantly the larger Four Seasons Cooperative. reported. advances President Bush’s commitment “It’s hard for a small co-op to compete to enhance educational opportunities, in today’s world,” Steve Cameron, man- USDA commits $1.2 million encourage entrepreneurship and create ager of Farmers Union Oil Co. in for entrepreneurial outreach jobs in rural America.” Pierpont, told the Aberdeen (South USDA is providing $1.2 million to a The 1890 Institutions have some of Dakota) American News. “So we decided dozen 1890s Land-Grant Universities the finest agricultural science and busi- to be part of a bigger one.” to support technology and business ness education programs in the nation Four Seasons, of Britton, also has development assistance in rural commu- and, in partnership with USDA, they operations in Amherst, Claremont, nities. “The 1890 colleges and universi- have devoted significant resources to Doland, Hecla and Redfield. Four ties play a key role in providing techni- business development and technical Seasons will not have a presence in cal assistance and business development assistance in local communities. Bristol. The Farmers Union service sta- leadership to rural minority communi- At the University of Arkansas-Pine tion there has been sold. Little change ties,” Agriculture Secretary Mike Bluff, for example, funding will be used

Legal Corner continued from page 24

Appellate court applies some members, including a majority of selves, over other members, they forfeit- reasonableness test the board, more favorably than other ed access to the business judgment rule. The District of Columbia Court of members was by itself enough to over- Because member-directors of a coop- Appeals reversed the lower court deci- come the cooperative’s motion for sum- erative are users and investors in the sion and sent the case back to that mary judgment. Then the court said association, they will rarely be voting court for trial, Willens and Niederman v. that where the directors have a personal on matters in which they are personally 2720 Wisconsin Avenue Cooperative interest in the decision, the trial court totally disinterested. Under the Association, 844 A.2d 1126 (DC 2004). should not apply the business judgment approach of this court, even if they The appellate court focused on the fact rule. It should apply a “reasonableness” exercise thorough due diligence in that the notes in question were from test and shift the burden to the directors arriving at a decision, they may be the members to the cooperative, not to prove that they fulfilled their fiduci- forced to defend and prove that their the developer. It said that the cancella- ary duties. The court concluded that it decision was reasonable if it favored one tion of the outstanding notes “...was was not finding that the board acted group of members over another. This conceptually equivalent to the distribu- unreasonably under the circumstances, may be especially true if they are in the tion of corporate assets — the uncol- only that it will have to convince a jury favored group. lected future payment on the notes — that its actions were reasonable. While this may be consistent with to shareholders of the corporation. The court also held that the cancel- the growing concern about directors Significantly, it was a disproportionate lation of the notes may have contradict- exercising their authority in a responsi- distribution. ...the minority of members ed a bylaw provision requiring distribu- ble manner, it places a burden on coop- who had already paid off their own tions of corporate reserves to be in pro- erative directors that often doesn’t apply promissory notes in full did not receive portion to the ownership interests. As to the outside directors who populate their proportionate share of the corpo- bylaws are a contract between the coop- many non-cooperative boards. For rate assets being distributed; they erative and its members, the trial court example, a determination to drop a received nothing, in fact. Meanwhile, also erred in granting summary judg- money-losing line of business or close the majority of members whose debts ment on the breach of contract claims. an unprofitable facility will likely were still outstanding (including impact different groups of members, the...directors other than Willens) Conclusions and directors, differently. received more than their proportionate The court did not question the delib- Cooperative leaders and advisers will share of the distribution; collectively, erateness or the integrity of the direc- need to be vigilant in making sure both the received all of it....” tors, and noted that the board had relied board and management decisions are as The appellate court noted that direc- on the advice of counsel in reaching its equitable as possible. And when a deci- tors have a duty of loyalty, which means decisions. Nonetheless, the court found sion that discriminates among the they must act in the best interests of all that because a majority of the directors members is made, the strongest possible of the members (court’s emphasis). The had an interest in the issue before the justification for the decision should be court held that a showing by the unhap- board and voted for a policy that reflected in the minutes and other writ- py members that the directors treated favored some members, including them- ten records supporting that decision. ■

42 January/February 2006 / Rural Cooperatives for business enterprise creation, special- and value-added products. The com- record for the second straight year. izing in technology-based products and mon mission, preservation through prof- That compares to $10.8 billion in sales services. Funds will also be used to itability, links the three Chesapeake for fiscal 2004. establish a business incubator that will Fields organizations together, but they CHS Chairman Michael Toelle, a house a dozen or more new and start- are three distinct entities, each with its Browns Valley, Minn., producer, said up businesses. Southern University and own function, purpose, mission that — based on the record earnings — A&M College in Louisiana will receive approach and leadership. CHS expects to return a record $151 funds to provide outreach and technical Chesapeake Fields’ three entities have million to owners in cash patronage, assistance to entrepreneurs, businesses the common goal of developing an agri- equity redemptions and preferred stock, and cooperatives in four rural commu- culture business park to house their beginning in January. nities and parishes. operations and develop a visitor center “During my nearly 30 years with this Florida A&M University will receive to tell agriculture’s story. The visitor organization, I can’t remember a year in funds to provide business and economic center could be a key economic busi- which we made so many pivotal deci- development outreach to eight rural ness-driver for the Delmarva (Delaware sions,” John Johnson, CHS president counties in northern Florida. A com- and Eastern Maryland and Virginia) and CEO, told the 2,500 members and plete list of the grants is available at: region’s destinations and attractions. guests who gathered for the coopera- http://www.rurdev.usda.gov. “Since its inception, CFI has recog- tive’s annual meeting in Minneapolis. nized a need for a significant multiplier Key business decisions included: Chesapeake Fields Institute investing $325 million in its Montana launches equity drive fuel refinery to yield more gasoline and Chesapeake Fields Institute Inc. diesel from crude oil; expanding its role (CFI) is launching an equity drive to in renewable fuels manufacturing with raise $1.4 million to purchase property an investment in US BioEnergy; selling for an agriculture business park/visitor its Mexican foods production business center. The nonprofit organization (which had a loss of $16.8 million) to works to help farm families increase instead focus food manufacturing profits and educate citizens on the efforts in its Ventura Foods LLC joint important role agriculture plays in their venture and in supplying grain and community’s health and economy. grain-based ingredients to other food CFI’s work has resulted in the develop- companies; and supporting the conver- ment of a community-based food system sion of the cooperatively owned CF enterprise that is owned locally, operated Industries fertilizer joint venture into a with environmentally sound practices and publicly traded company, of which CHS which promotes both human and eco- CFI President John Hall, left, and Kent remains both a minority owner and nomic health through its educational County (Maryland) Commissioner and (through Agriliance LLC) a customer. entities. This 501(c)(3) nonprofit organi- grower Roy Crow review the visitor center CHS earned $9.6 million for its sale of zation completed market research and site plan. Photo courtesy CFI shares in CF Industries. feasibility studies to identify marketing Strong refining margins, combined opportunities for locally grown grains to educate citizens of the importance with improved performance by CHS and oil seeds. It located several niche and value of preserving and investing in lubricants, contributed to the highest markets and is completing its fourth year America’s existing farmlands,” explains energy segment earnings in company of shipping specialty identity-preserved John Hall, CFI’s president. history. The company’s Ag Business soybeans to Japan. In 2004 this project For more information, visit: segment — consisting of its grain mar- added $60,000 above commodity-priced www.chesapeakefields.com, or call (410) keting, country retail locations and 50 beans to the local economy. 810-2082. percent ownership in the Agriliance CFI launched the for-profit LLC — earnings were up 46 percent. Chesapeake Fields Farmers LLC in CHS reports record sales and income CHS Processing operation results 2003, which has developed a line of CHS Inc. reported record net income were down 55 percent. Within that seg- artisan breads, soy and popcorn snacks of $250 million for fiscal 2005, marking ment, earnings increased for the co-op’s now marketed in the Chesapeake Bay its second consecutive year of record 50 percent ownership of the vegetable area. Chesapeake Fields Farmers earnings and the highest ever recorded oil-based food manufacturer Ventura Cooperative Inc. was incorporated in by a U.S. agricultural cooperative. In Foods. However, earnings in oilseed August as the crop production arm of 2004, CHS earned $221.3 million. processing declined due to weak crush CFI to give farmers a way to increase Fueled by higher energy prices, net margins; wheat milling results fell due their profits through whole-grain sales sales of $11.8 billion in 2005 also set at to overcapacity and soft demand. ■

Rural Cooperatives / January/February 2006 43 Commentary continued from page 2 program to help clear the market. Apart from helping to improve the twin pressures of federal budget limita- Cheese prices have not lingered below economic situation for every dairy tions and potential World Trade CWT’s target level of $1.40 per pound farmer in the country, CWT has helped Organization restrictions, self-help pro- since the program began. As 2006 to counter nay-sayers who said farmers grams such as this will be an important begins, and butter prices begin to sag, wouldn’t be willing to work collectively tool for dairy farmers in the future. CWT has also facilitated the sale of on such a program. As traditional gov- — Jerry Kozak, CEO butter for the first time. ernment-run farm programs face the National Milk Producers Federation

Foreign Affairs continued from page 23 ture, Schriver said. However, later expected to generate $350 million in meets the letter of the agreed specifica- financing was fully secured by the ven- sales annually while processing 7 mil- tions. While the firm receives com- ture’s own assets, with no guarantees lion pounds of milk per day. plaints about less than 1 percent of its by the partners. DairiConcepts cur- product sold domestically, it gets com- rently has annual sales of about $400 Changing negative product perception plaints on about half of its overseas million. None of the conference presenters shipments. In such an instance, he said, portrayed working in the international “The customer is always right.” Reducing transportation costs marketplace as easy. David Fuhrman, Overall, exporting product is Another successful DFA alliance is president of Foremost Farms USA, said “tedious, time consuming, and leaves no with Ireland-based dairy processor that the export market continually pres- margin for errors,” Fuhrman said. Des- Glanbia PLC. DFA was looking for ents challenges. Foremost exports most- pite the problems and the fact that the ways to deal with surplus milk produc- ly whey, beginning with the 1984 acqui- co-op receives less than 1 percent of its tion in the Southwest, the transport of sition of a firm already engaged in that revenues from exports, exporting has which out of the region was costing at business. Its largest whey customer is been profitable, and has improved least $40 million per year. China. Foremost’s overall business. Glanbia is a major international Fuhrman says that the co-op had to cheese manufacturer, with annual sales overcome a negative reputation of U.S. Capper-Volstead & foreign trade of more than 2.3 billion euros. It is the whey, because of the tendency of U.S. USDA Rural Development largest cheese producer in the producers to “dump” inferior whey Cooperative Programs law specialist Northwest United States and a major product on foreign markets, while keep- Donald Frederick explained how the producer of lactose, whey protein and ing high-quality product for domestic Capper-Volstead Act's limited anti-trust other bulk dairy products. DFA entered sale. Other challenges include packaging protections affect cooperatives which into a cheese making venture called the product to protect quality over the accept foreign producers as members. Southwest Cheese Company LLC. long distances and less than ideal condi- Frederick said that Capper-Volstead is Unlike the DairiConcepts venture, tions of overseas transport. silent about whether non-domestic pro- DFA is not involved in a direct relation- Paperwork on an order must be flaw- ducers may join a U.S. co-op, but that ship with Glanbia, but instead shared less with foreign customers, said legal rulings and precedents have en- participation through an agreement Fuhrman, or they may think the dorsed such relationships. with other American cooperatives, exporter is trying to “pull a fast one.” In Given the increasingly concentrated including Select Milk Producers, repre- addition, local cultural quirks can add and global economy, large buyers are senting dairy farmers in the Southwest. problems. In Mexico, for example, entry the ones with substantial market power, DFA holds a 30 percent share in into ports is sometimes complicated by Frederick noted. They can negotiate Southwest Cheese, while Glanbia con- requests for bribes. In China, “negotia- down prices paid to farmers by playing trols 50 percent. tions never seem to end,” he said, farmers in one country against those in Governance of the venture reflects adding that Chinese customers often other countries who produce the same the ownership split, with three board look for ways to deduct from the agreed product. Foreign members in farmer members from Glanbia and three from price even after delivery. marketing cooperatives and alliances the co-ops. Regarding quality, said Fuhrman, with foreign producer associations are The $190 million Southwest Cheese “Expectations are not the same as speci- important tools for creating economic processing facility, in Clovis, N.M., fications,” meaning that customers may balance in the markets of the 21st cen- began operations in December, and is not be satisfied even if the product tury. ■

44 January/February 2006 / Rural Cooperatives Trade, Farm Bill, co-op structure challenges eyed at dairy conference continued from page 19

Dairy knowledge in a region where new oil fields could be high school education. By 2005, college short supply in Congress tapped — a proposal that has sparked a graduates made 85 percent more, on U.S. Rep. Devin Nunes, who grew bitter fight with wilderness advocates. average. up on a Tulare, Calif., dairy farm, said Nunes described flying for two hours Thredgold said the world economy he has his work cut out for him repre- over the region without ever seeing a is doing well, having grown 4 percent, senting the dairy-intensive San Joaquin single animal or person. Out of this vast after inflation, last year, and is poised Valley in the Capitol, where it often region, Nunes said drilling would occur for similar growth in the coming year. seems that “there are only about three on just 2,000 acres, but would produce Two-thirds of world economic growth people who understand U.S. dairy poli- enough oil to fill the Alaska pipeline for in the next 20 years will likely occur in cy.” That was brought home to him 30 more years and meet 5 percent of the Pacific Rim nations of Asia, he pre- when, after just two weeks on the House the nation’s annual petroleum needs. dicted. Ways and Means Committee, he was Nunes agreed with one questioner Japan still accounts for 60 percent of named as its designated dairy expert. that the lack of new U.S. oil refineries that region’s economic output, and it “That’s kind of scary,” said Nunes, is part of the problem, but he said this was clearly the economic victor of the whose Fresno-based district is the mostly contributes to short-term oil 1980s, Thredgold said. However, he nation’s largest agricultural district price spikes. The main long-term cause, called Japan the “economic basket case (based on farm income). “Few people in he said, is still over-reliance on Middle of the 1990s.” Japan has lately been Washington understand agriculture, Eastern oil. making some progress in restoring its and fewer still understand dairy.” economy (thanks mainly to increased There are “strong feelings in Pacific Rim seen as exports to China), but Japanese banks Washington to throw out” the existing world economy hot spot are still saddled with $500 billion in bad dairy program, and “that sentiment Jeff Thredgold, noted economist loans. The Japanese national debt is 150 seems to be growing,” he warned. It with Thredgold Economic Associates percent the size of its economy, vs. 63 will take a strong coalition to defend in Utah, provided a lively, wide-rang- percent in the United States. He called the program, Nunes said, praising ing outlook on the national and global that the worst debt level in the history NMPF for its efforts to bring the dairy economies. He disputed those who say of the world. Japan’s salvation has been industry together on the legislative the U.S. economic recovery has been a its people’s $13 trillion in savings, he front and for its accomplishments with “jobless one.” Small business creates noted. the CWT program. most new jobs, and was largely respon- China’s economy has grown an aver- Nunes said he is sponsoring a bill sible for 2.2 million new jobs created age of 9 percent, after inflation, during that would provide up to $300 million last year, he said. U.S. worker produc- the past 25 years, the largest sustained to help spur growth of the U.S. MPC tivity was up an average of 3.7 percent gains in history, although that growth (milk protein concentrates) industry, the past three years, the highest occurred from a very low starting base- and is supporting another bill that growth rate in 50 years. Further, he line, Thredgold said. China’s economy would impose a tariff on imported continued, the nation has enjoyed 10 is so hot that one in four major building MPCs until the U.S. MPC industry is consecutive quarters of economic cranes in the world have been working better established. growth exceeding a 3 percent annual in Shanghai, which he said has been The United States needs to look rate, after inflation. described as “New York on steroids.” closely at what New Zealand did in Just 12-14 years ago, the U.S. econo- Virtually all of that growth, however, building and subsidizing MPC plants — my was “a bloated dinosaur — the Ger- has been along China’s east coast. The a strategy which Ireland and Holland mans and Japanese were kicking our interior of the nation is still home to have followed suite on, Nunes said. If tails,” Thredgold said. “Today, we have a about 850 million struggling farmers, the United States does not do some- re-charged, flexible, dynamic economy.” and 115 million Chinese people are thing similar, it will put its dairy indus- The Internet has been a tremendous constantly on the move looking for try at a disadvantage, he warned. boon to business, he said, helping to jobs, Thredgold said. Nunes also spoke of the energy crisis reduce the cost of doing business glob- India (while still saddled with mas- facing the nation, noting that renewable ally by $1.25 trillion during the past 3 sive poverty) now has the largest middle energy — even growing as rapidly as it years. class in the world and has more IT is — can do only so much to relieve the The economy is increasingly reward- graduates annually than any other need for oil. He expressed the fear that ing those who attain higher education, nation, Thredgold said. without more action, “someday we may Thredgold said, noting that in 1980, Europe is struggling along with be back to milking cows by hand.” college graduates averaged 25 percent “pathetic” 1 percent annual economic He recounted a trip to Alaska to tour more income than those with only a growth, he said. ■

Rural Cooperatives / January/February 2006 45

INSIDE RURAL DEVELOPMENT Rule changes should ease applying for USDA co-op grant programs

By Peter Thomas, USDA period, the window was timed to meet Based upon applicant feedback, we the demanding time schedule of agri- also increased the maximum amount of SDA Rural cultural producers. grant award for working-capital funds, Development’s In past years, this process began dur- from $150,000 to $300,000. In addition, Cooperative Programs ing the spring, with applications due a separate allocation of funds up to $1.5 U experienced another suc- during the summer. However, this year million is available for grant requests of cessful year in 2005, and I it was published during the winter, $25,000 or less. These grants are hope your co-ops did too. As we begin when most producers are not in the designed to assist agricultural producers 2006, I want to discuss some changes in middle of their planting or harvesting. who need just a few dollars to aid in a couple of our funding programs their value-added venture. that help agricultural cooperatives Many of the same positive in rural America: the Value-Added changes made in the Value- Producer Grant (VAPG) and Added program will be intro- Rural Development Cooperative duced in the Rural Grant (RCDG) programs. Due to Cooperative Development increased Congressional support Grant program. Once again, for fiscal 2006, the VAPG pro- based upon applicant feed- gram was appropriated $19.5 mil- back, we intend to open the lion, the RCDG program received FY 2006 Rural Cooperative $4.5 million and an additional $1.5 Development Grant program million was appropriated to assist application process much ear- minority producers. lier in the fiscal year. Rural Development is making We will also introduce pro- Idaho wheat and barley straw may someday be processed into changes to both programs in an cedures to allow applicants ethanol, aided by a VAPG from USDA Rural Development. For effort to make them more accessi- who submit substantially more on this project, see page 30. Photo by Maurice Hladik ble and to improve their overall complete applications by the administration. These changes deadline to submit any for- were developed from applicant input, For the first time ever, USDA Rural gotten or incomplete items after the which included surveys and teleconfer- Development has also established pro- application deadline and will make an ences regarding program requirements cedures to allow applicants who submit electronic application template available. and administration. Comments from substantially complete applications by Much of the duplication of program Rural Development field office employ- the deadline to submit any forgotten or requirements that appeared in previous ees were also considered, as they work incomplete items after the application applications has been eliminated. directly with the program applicants. deadline. An electronic application tem- We believe these changes will signifi- One of the most immediate changes plate is also available to assist applicants cantly improve the application process in the Value-Added application process in submitting a complete application. and allow for the awarding of more is the opening of the application win- Our goal is to have a significantly high- grants. As always, our state and national dow. The application window opened er percentage of completed applica- office staffs are available to answer any Dec. 21, 2005, and will close March 31, tions, ensuring that all eligible projects questions. Happy New Year, and best 2006. Not only does this provide pro- have the opportunity to compete for wishes for a healthy and successful 2006. ducers with an extended application these critically important grants. ■

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