Copyright ©2009 Knowledge Impact in Society All rights reserved. No part of this book may be reproduced or transmitted in any form by any means without permission in writing from the publisher, except by a reviewer, who may quote brief passages in a review. Editing: D & S Editing (Neil Soiseth) Formatting & Typesetting: Kathy Larson Cover Design: Kathy Larson Images Courtesy of: iStockPhoto.com Published in Canada by: Knowledge Impact in Society and the Centre for the Study of Co-operatives 101 Diefenbaker Place University of Saskatchewan Saskatoon, Saskatchewan S7N 5B8 www.kis.usask.ca www.usaskstudies.coop University of Wisconsin Center for Cooperatives 230 Taylor Hall 427 Lorch Street Madison, Wisconsin 53706-1503 www.uwcc.wisc.edu The Knowledge Impact in Society gratefully acknowledges the financial support provided by the Agriculture Council of Saskatchewan through the Advancing Canadian Agriculture and Agri-Food Saskatchewan (ACAAFS) program. Funding for the ACAAFS program is provided by Agriculture and Agri-Food Canada. The Knowledge Impact in Society gratefully acknowledges the financial support provided by the University of Wisconsin Center for Cooperatives and the University of Alberta’s Chair for Co-operatives in Marketing and Business. Cooperative Conversions, Failures and Restructurings: Case Studies and Lessons from U.S. and Canadian Agriculture / Murray Fulton and Brent Hueth, editors. ISBN 978-0-9812843-0-9 Contents List of Tables vi List of Figures vii Preface ix 1 Saskatchewan Wheat Pool 1 2 United Grain Growers 19 3 Diamond Walnut Growers 39 4 Pro-Fac Cooperative 53 5 Rice Growers Association 71 6 Tri Valley Growers Cooperative 87 7 West Liberty Foods 101 8 Lilydale Co-operative Ltd. 117 9 United Producers Inc. 131 10 Dakota Growers Pasta Company 143 11 North American Bison Cooperative 155 12 American Native Beef Cooperative 171 13 FCStone Group 189 About the Authors 214 v List of Tables 1 Co-op Case Groupings . xi 3.1 DWG’s financial results, 2000–2004 . 42 4.1 Summary of Curtice Burns & Pro-Fac integrated agreement . 56 4.2 Pro-Fac balance sheet . 60 4.3 Pros & cons of outside equity options for Pro-Fac . 65 5.1 Factors contributing to failure of RGA . 82 10.1 Dakota Growers Pasta selected income statement data . 145 10.2 Dakota Growers Pasta selected balance sheet data . 148 11.1 Comparison of NA Bison Coop and N. Dakota Natural Beef . 162 12.1 ANBC restructuring steps & issues . 184 13.1 FCStone operations & financial performance, 1997–2007 . 194 13.2 Member co-op investment in FCStone: Net gain due to conversion and IPO . 205 vi List of Figures 1.1 SWP net earnings & market share in Sask., 1974–2005 . 4 1.2 SWP B share price on TSE, 1996–2004 . 5 1.3 SWP long-term debt & acquisitions, 1974–2003 . 6 4.1 Pro-Fac’s CMV of raw product deliveries, 1962–2008. 58 4.2 Current Pro-Fac integrated operations . 64 4.3 Pro-Fac shareholder/member capitalization & investment, 1974–2008 67 5.1 RGA and FRC net proceeds, 1979–1991. 78 6.1 TVG’S tomato pool performance, 1983–1995 . 89 6.2 TVG’S peach pool performance, 1983–1995 . 90 6.3 TVG’s operating income and net income, 1970–2000 . 96 6.4 TVG members’ equity, FY 1969/70–1999/2000 . 97 8.1 Lilydale growth rates & problems (1980–2007) . 123 8.2 Lilydale growth problem & D/E ratio trends (1980–2007) . 125 8.3 Lilydale patronage payout and D/E ratio for 5% & 10% growth . 126 8.4 Lilydale trends in growth problems & asset turnover(1980–2007) . 127 13.1 FC Stone Daily Stock Price, 2007–2008 . 202 vii Preface Murray Fulton and Brent Hueth Introduction Cooperatives are an enduring institution in the farm and food economy. Yet, the beginning of the 21st century appears to mark an important period in the history of agricultural cooperatives. Starting in 2000, critical structural changes began to occur among agricultural co-ops in the United States and Canada. A number of large co-ops filed for bankruptcy or converted to investor-owned firms (IOF) to remain financially viable.1 Conversions and restructurings also occurred for other reasons, including the need for the co-op to obtain additional capital, the need to reduce members’ production and price risk, and the desire by members to be able to access their equity or realize the market value of the co-op. Are these isolated events or an on-going trend? What can be learned from these events that can be useful to other cooperatives? The cases considered in this book were assembled to shed light on these and other questions. The case studies are the work of twenty-two researchers from across the United States and Canada with a keen interest in offering explanations as to why some agricultural cooperatives have failed while others have persevered and thrived through the various challenges that the agricultural industry has faced over the last decade. While the included cases represent only a portion of the co-ops that were involved in some kind of restructuring, they do capture many of the types of re- structuring that occurred and address many of the factors involved. As we will outline in this overview, a number of common themes and issues appear through- out the cases. The identification and illumination of these common themes through in-depth case studies was one of the objectives of this book. To ensure that common themes were identified, the case studies were conceived of as research cases, rather than decision cases. Thus, instead of presenting the de- tails of a case and asking – “What should the manager do when confronted with this ix situation?” – the approach taken was to identify a conceptual framework through which the case could be examined and understood. These conceptual frameworks are drawn from the economics of cooperatives literature and include property rights issues, life cycle theories, agency problems, market power, free rider issues and horizon problems. A comparison of the conceptual frameworks used to analyze the various cases allows common themes to be identified. This comparison also allows at least two bigger issues to be examined regarding the stability of the cooperative business form. The first of these involves one of the key questions that runs through economics, namely the nature of the optimal form of business structure. For the economic analysis of cooperatives, the issues are specifically whether the co-op business form is efficient and whether this form will be eventually replaced by the the investor-owned business form. By explicitly examining the restructuring of co-ops to other business forms (and vice-versa), the articles in this book are uniquely placed to assist in addressing this long-standing question of interest. While all the case studies implicitly consider this question, a number of them explicitly raise the question of whether the cooperative failure or restructuring was due to unique co-op features, or whether these changes in business form occurred because of what could be called business factors – i.e., problems such as poor management which can occur in any firm. The second, and related, question that a comparison of the elements found in the conceptual models can shed light on is whether something structural has hap- pened to agriculture in the last 20 years to make cooperatives less organizationally stable. The obvious source for a structural change is the so-called “industrialization of agriculture.” Numerous authors have speculated that agricultural industrializa- tion will, by removing what has historically been the foundation of agricultural cooperatives, namely the independent farmer, create a situation where co-ops are not required to solve the market failures and informational problems that they had previously addressed. As we will argue below, the structure of agriculture does appear to have played a role, although perhaps not in the way that has traditionally been argued. Conceptual Framework Themes Among the co-ops examined in the case studies, there are four examples of fail- ure (defined as bankruptcy, start-up failure, or business closing), five examples of conversion to investor-owned companies, and four examples of significant re- structuring (alliances, innovations in capitalization, and chapter 11 restructuring). One way to classify the cases is to group them into three broad groups: (1) those that went into bankruptcy or converted to an IOF because of poor financial perfor- mance; (2) those that converted to an IOF because of a need to acquire additional capital or a desire to access market value; and (3) those that were in the process of forming or were re-engaging in the market (for example, after bankruptcy). Table x 1 provides a list of the co-ops examined in the case studies and the group to which they belong. As will be seen, these groupings are useful in examining the factors that appear to be at work in the cooperative restructurings that were examined. Not all of the factors, however, lined up with the groupings – there were a number of factors that cut across the groupings. The next three subsections examine insights that emerge from considering the factors that correspond with the groupings, while the remainder explore those issues that cut across groups. Management and Oversight Not surprisingly, all the co-ops that belong to the first group were identified as suffering from poor management and/or a failure to modernize their operations (this includes relocating geographically as production and marketing patterns shifted) – after all, poor financial performance is almost by definition the result of poor management. Rather than re-focus on core values in response to tight markets, the managers of the cooperatives in these cases sought refuge in bold new strategies that were sold as significant new investment opportunities.