Rural

USDA / Rural Development May/June 1999

Hogging the Market

How Co-ops are Responding to Hog Price Crisis The 11th Hour for Structural Change

We recently reported that so much dramatic struc- The beef, pork and sheep subsectors have been tural change had occurred in the cooperative community slow to embrace cooperative marketing as a strategy in 1998 that it was not likely to soon be repeated. Yet — that could bring them closer to the consuming public just halfway through 1999 — we have already seen dra- and generate the extra income that would result. As matic proposals for structural changes of equal or shown in the article on the hog industry (page 8), there greater magnitude. Cooperative leaders are being chal- are numerous ongoing attempts to build on existing lenged to respond to the unprecedented wave of con- cooperative pork marketing channels and to create solidation in the food sector and the “corporate-ization” new co-op business structures. process which, if unchecked, could well displace con- These are positive steps that address the indus- ventional, family-farm producers or leave them as piece- try’s core problems. Others are being taken. In fact, wage growers who are paid by huge corporations. some far-reaching proposals are being discussed that This would be a tremendous loss for the nation would bring further producer ownership and control of and especially for our rural people and communities. the livestock system closer to reality. When rural people lose control of their resources, Recent proposals to merge Cenex/Harvest States more dollars are siphoned away from rural towns to and Farmland Industries, and the purchase of Terra corporate headquarters. Industries’ crop nutrient and protectant distribution Cooperatives are a natural answer to the challenge system by the Cenex/Land O’Lakes Agronomy Co., are of maintaining a dispersed ownership of our nation’s pre- just two examples of cooperative restructuring on the cious agricultural resources. Cooperatives allow farmer- horizon. Each portends a re-visit to existing coopera- entrepreneurs to join together to increase their market- tive institutional relationships, including ownership in ing and purchasing power in organizations that provide inter-regional cooperatives and joint ventures. them market access. Co-ops allow rural farmers, craft- The Page from the Past feature (page 31) in this makers and others to practice self-determination through issue is also timely, describing the acquisition of Welch democratically controlled businesses. Foods by the National Grape Cooperative. This pre- As we prove with every issue of this publication, sents another approach to establishing a strong mar- the cooperative business structure is certainly not out- ket presence for a farmer-owned cooperative. Similar dated. Indeed, cooperatives are on the cutting edge of conversions of investor-owned firms to cooperatives necessary change. But for many livestock and com- have been achieved by other co-ops. modity sectors, we have reached the eleventh hour. In an era of rapid consolidation and deep public pol- Change must be forthcoming, or the opportunity to icy concerns about concentration in the food industry, maintain producer control of some sectors of the econ- cooperative ownership represents a choice that the farm omy may be lost forever. sector needs to give further consideration and to active- Within the livestock industry, only the dairy sector ly pursue. But time is running out in some sectors. has made extensive use of cooperatives to provide producers entry into certain markets and a voice that is heard in industry circles and in the halls of Con- gress. The Prairie Farms Dairy article in this issue (page 16) shows that it is possible for a farmer-owned Jill Long Thompson cooperative to perform well in an industry typified by Under Secretary, USDA Rural Development intense competition and by low profit margins.

2 May/June 1999 / Rural Cooperatives Rural

May/June 1999 Volume 66 Number 3

RURAL COOPERATIVES (1088-8845) is published bimonthly by 4 Improving Their Worth Rural Business–Cooperative Service, U.S. Department of Agriculture, Washington, DC. The Secretary of Agriculture has Farmer co-ops’ 1997 value-added activities rise to $10.1 billion determined that publication of this periodical is necessary in the Charles A. Kraenzle transaction of public business required by law of the Department. Periodicals postage paid at Washington, DC. Copies may be obtained from the Superintendent of Documents, 8 Hogging The Market Government Printing Office, Washington, DC, 20402, at $3.00 domestic, $3.75 foreign; or by annual subscription at $11.00 How co-ops are responding to hog price crisis domestic, $13.75 foreign. Postmaster: send address change to: Catherine Merlo Rural Cooperatives, USDA/RBS, Stop 3255, Wash., DC 20250- 3255. 15 The Prime of Prairie Farms Dairy Mention in RURAL COOPERATIVES of company and brand Midwest dairy co-op has producers asking to become members names does not signify endorsement over other companies' products and services. Catherine Merlo

Unless otherwise stated, contents of this publication are not 19 Transworld Traders copyrighted and may be reprinted freely. For noncopyrighted articles, mention of source will be appreciated but is not With 1997’s record exports, U.S. farm cooperatives prove their required. ability in the global marketplace

The United States Department of Agriculture (USDA) prohibits Tracey L. Kennedy discrimination in all its programs and activities on the basis of race, color, national origin, gender, religion, age, disability, politi- cal beliefs, sexual orientation, and marital or family status. (Not 22 A Fight for Survival all prohibited bases apply to all programs). Persons with disabili- Co-op members hope extra profits will help preserve a way of life ties who require alternative means for communication of pro- gram information (braille, large print, audiotape, etc.) should con- they see rapidly disappearing on the prairie tact USDA’s TARGET Center at (202) 720-2600 (voice and TDD). Valerie Berton

To file a complaint of discrimination, write USDA, Director, Office of Civil Rights, Room 326-W, Whitten Building, 14th and 7 A CLOSER LOOK AT… Independence Avenue, SW, Washington, D.C. 20250-9410, or 14 IN THE SPOTLIGHT call (202) 720-5964 (voice or TDD). USDA is an equal opportu- nity provider and employer. 18 LEGAL CORNER 24 NEWSLINE 30 PAGE FROM THE PAST 32 NEW PUBLICATIONS

Dan Glickman, Secretary of Agriculture

Jill Long Thompson, Under Secretary, Rural Development

Dayton J. Watkins, Administrator, Rural Business–Cooperative Service

Randall Torgerson, Deputy Administrator, RBS Cooperative Services On the Cover: Donna Reifscneider, an Illinois hog farmer and former president of Catherine Merlo, Editor the National Pork Producers Council, per- forms health inspections with her veterinari- USDA Design Center, Design an on her Smithton, Ill., farm. For a report on the hog-price collapse and how co-ops are Have a cooperative-related question? Call helping pork producers compete and survive, (202) 720-6483, or FAX: Information Director, see page 8. Photo courtesy of the National Pork (202) 720-4641. Producers Council.

This publication was printed with vegetable oil-based ink. Story on pages 8-14. Improving Their Worth Farmer co-ops’ 1997 value-added activities rise to $10.1 billion

Charles A. Kraenzle Cooperatives add value to the prod- farmer cooperatives. For this study, Director, Statistics, USDA/RBS ucts they market, to the supplies they sell value-added was calculated by adding co- David E. Cummins and the services they provide in a num- ops’ reported (1) wages and benefits, (2) Agricultural Economist, USDA/RBS ber of ways. They gather raw commodi- net income before taxes, (3) interest paid ties and farm supplies in one place. They on borrowed capital and (4) depreciation. dding value to agricultural com- change the form and location of such com- The first three components equal net modities by organized coopera- modities into products available for sale, value-added (NVA). All four components, A tives has been receiving increas- thus adding value to what they do. The collectively, represent gross value-added ingA attention from farmers and ranchers. research presented here measures the (GVA), which is NVA plus depreciation. This has been demonstrated by coopera- value-added by these activities during In simple terms, this method of measur- tives increased involvement in processing 1994-97. ing GVA is equivalent to subtracting cost farm commodities into crop and livestock In 1997, the net “value-added” of of goods sold and total expenses from products, such as beef, pork, sugar and farmer cooperatives totaled $10.1 billion, total net sales and adding service ethanol. The idea is to capture more an increase of nearly $1.5 billion, or 17 receipts and other income. income for producer-members by inte- percent, since 1994. Value-added income Why calculate cooperatives’ value-added grating further up the marketing chan- represents the earnings from land, labor, activities? Cooperatives’ value-added: nel. capital and management contributed by • Better represents the contribution made

Table 1—Cooperatives’ gross and net Table 2—Farmer cooperatives' net Table 3—Average of components and 1 value-added, by component, 1994-97 value-added, by type, 1994-971 average total net value-added, 1994-97

Type of co-op Wages Net Income Interest Total net Component 1994 1995 1996 1997 Type of cooperative 1994 1995 1996 1997 & benefits before taxes paid value- added Million dollars Million dollars Million dollars Cotton 70 84 30 184 Wages and benefits 6,057 6,542 6,720 6,846 Cotton 173 172 193 198 Dairy 1,052 340 74 1,466 Net income before taxes 1,963 2,358 2,248 2,332 Dairy 1,377 1,452 1,471 1,565 Fruit & vegetable 1,115 157 146 1,418 Grain and oilseed2 871 376 195 1,441 Depreciation 1,355 1,394 1,432 1,594 Fruit and vegetable 1,263 1,453 1,507 1,450 Livestock 259 151 67 477 Interest paid 653 857 1,012 971 Grain and oilseed2 1,284 1,437 1,569 1,475 Poultry3 342 35 24 402 Rice 102 11 16 129 Gross value-added 10,028 11,151 11,412 11,743 Livestock 367 464 492 585 Sugar 196 7 33 236 Net value-added 2 8,673 9,757 9,980 10,149 Poultry3 319 387 451 449 Other marketing4 440 70 71 580 Farm Supply 1,796 852 207 2,855 Rice 118 130 130 138 Cotton gin 88 113 6 207 Percent of gross value-added Sugar 174 213 212 344 Other Service 210 30 4 244 Other marketing4 461 691 531 638 Total 6,541 2,225 873 9,640 Wages and benefits 60.4 58.7 58.9 58.3 Farm supply 2,714 2,867 2,969 2,872 Percent Net income before taxes 19.6 21.1 19.7 19.9 Cotton 37.9 45.9 16.2 100.0 Cotton gin 197 210 184 238 Depreciation 13.5 12.5 12.5 13.6 Dairy 71.7 23.2 5.0 100.0 Other service 227 281 272 197 Fruit & vegetable 78.6 11.0 10.3 100.0 Interest paid 6.5 7.7 8.9 8.3 2 Total 8,673 9,757 9,980 10,149 Grain & oilseed 60.4 26.1 13.5 100.0 Gross value-added 100.0 100.0 100.0 100.0 Livestock 54.4 31.6 14.0 100.0 Poultry3 85.3 8.7 6.0 100.0 1 Totals may not add due to rounding. Rice 79.2 8.5 12.3 100.0 Percent of net value-added 2 Excludes cottonseed. Sugar 83.1 2.8 14.2 100.0 3 Includes eggs, turkeys, ratite, squab and related products. Other marketing4 75.7 12.1 12.2 100.0 Wages and benefits 69.8 67.1 67.3 67.5 4 Includes nut, tobacco, wool and mohair, dry bean and pea, fishery and miscellaneous marketing cooperatives. Farm Supply 62.9 29.8 7.2 100.0 Net income before taxes 22.6 24.2 22.5 23.0 Cotton gin 42.6 54.4 3.1 100.0 Other Service 86.1 12.1 1.8 100.0 Interest paid 7.5 8.8 10.1 9.6 Total 67.9 23.1 9.1 100.0 Net value-added 100.0 100.0 100.0 100.0 1 Totals may not add due to rounding. 2 Excludes cottonseed. 3 Includes eggs, turkeys, ratite, squab and related products. 1 Totals may not add due to rounding. Data for 1994 and 1995 4 Includes nut, tobacco, wool and mohair, dry bean and pea, were revised. fishery and miscellaneous marketing cooperatives. 2 Gross value-added less depreciation.

4 May/June 1999 / Rural Cooperatives by cooperatives to value-added from agric- From 1994 to 1997, it contributed about 59 value-added, farm supply, 28 percent and ultural commodities by function and type; percent to GVA and about 68 percent to related-service cooperatives, 4 percent. • Helps cooperative leaders and policy NVA. Net income before taxes was the sec- Marketing cooperatives increased their share makers improve decision-making by showing ond major component. It contributed about of both GVA and NVA during 1994-97. In where value-added may be enhanced; 20 percent to GVA and about 23 percent to 1994, marketing cooperatives accounted for • Yields time-series data that will help NVA during the four years. The relative nearly 64 percent of NVA and farm supply track cooperatives’ progress and trends; proportions of the components making up cooperatives, 31 percent. and both GVA and NVA were fairly stable over Wages and benefits accounted for 68 to 73 • Provides additional information to the four years (table 1). percent of marketing cooperatives’ total NVA further educate producers and others on How did changes in co-ops’ NVA com- during the study period. In comparison, wages the cooperative way of doing business. pare to changes in co-ops’ net business vol- and benefits ranged from 61 to 64 percent of ume? Year-to-year changes in NVA were total NVA for farm supply cooperatives. Co-ops’ GVA and NVA increased somewhat different from changes in net Marketing cooperatives, especially those In 1994, co-ops’ GVA totaled more than business volume. Co-ops’ NVA increased involved in further processing of farm com- $10 billion. GVA grew, and totaled more 12.5 percent from 1994 to 1995, while net modities, generally employed more full- and than $11.7 billion in 1997. NVA (GVA business volume was up only 5 percent. part-time employees than did farm supply minus depreciation) also grew, from $8.7 However, NVA increased only 2.3 percent cooperatives. Interest paid also contributed a billion in 1994 to $10.1 billion in 1997 (fig- from 1995 to 1996, while net business vol- larger proportion to NVA for marketing coop- ure 1). ume increased 13.2 percent, mainly due to eratives than for farm supply cooperatives. Wages and benefits represented the increased marketing of grains and oilseeds Consequently, net income before taxes con- major contribution to co-ops’ value-added. and higher prices. NVA was up 1.7 percent tributed a noticeably larger proportion to NVA in 1997 and net business volume was for farm supply cooperatives than for market- about the same as in 1996. ing cooperatives. Table 4—Net value added per dollar of Gross and net value-added are also used sales by type of co-op, 19971 NVA by type of cooperative to measure the performance of other sec-

Type of co-op Co-ops Net Total Net value tors of the economy. USDA’s Economic Dairy, fruit/vegetable and grain/oilseed value- sales added per Research Service (ERS) uses the value- cooperatives accounted for $3.9 billion, or added $1 sale added format to present the farm income 45 percent, of co-ops’ total NVA in 1994 and No. Million dollars Percent accounts. According to ERS, the value- $4.5 billion, or 44 percent, in 1997. Each Cotton 16 198 3,004 0.07 added format makes it much easier to dis- contributed about equally during the peri- Dairy 236 1,565 23,374 0.07 cern what forces are driving the changes od. Although their total contribution to Fruit & vegetable 259 1,450 9,268 0.16 and trends in farm income. In addition, the NVA increased during the study period, 2 Grain & oilseed 1,014 1,475 24,639 0.06 value-added format is accepted and utilized their proportion decreased due to increased Livestock 88 585 7,460 0.08 internationally, thereby facilitating com- contributions to NVA by livestock, poultry, Poultry3 20 449 2,118 0.21 parisons among countries. sugar and “other marketing” cooperatives Rice 18 138 930 0.15 The value-added contribution to the (table 2). Sugar 51 344 2,087 0.16 U.S. economy by the agricultural, or farm 4 Wages and benefits major compo- Other marketing 239 638 4,765 0.13 sector gives some perspective to the value- nent of NVA Farm Supply 1,386 2,872 25,181 0.11 added contributed by farmer cooperatives. Service5 464 435 3,647 0.12 Net value-added for the U.S. agricultural Total co-ops’ wages and benefits aver- Total 3,791 10,149 106,474 0.10 sector totaled $85.3 billion in 1994, nearly aged nearly 68 percent of total NVA dur- 10 times the NVA of farm cooperatives (fig- ing 1994-97. Net income before taxes 1 Includes marketings, farm supply sales, service receipts and ure 2). In 1995, NVA contributed by the (NIBT) accounted for 23 percent and other income. Excludes business done between coopera- tives. Totals may not add due to rounding. agricultural sector dropped to $74.8 billion, interest paid the remaining 9 percent 2 Excludes cottonseed. 3 Includes eggs, turkeys, ratite, squab and related products. due to lower output of crop and livestock (table 3). Wages and benefits averaged 4 Includes nut, tobacco, wool and mohair, dry bean and pea, volume. In 1996, it reached $96.3 billion, the largest proportion (all above 80 per- fishery and miscellaneous marketing cooperatives. 5 Includes trucking, cotton ginning, storage, grinding, etc. before dropping to $92.8 billion in 1997. cent) of net value added for “other ser- related to the marketing of farm products and the sales of farm supplies. In 1997, marketing cooperatives accounted vice,” poultry and sugar cooperatives. The for nearly 68 percent of co-ops’ gross and net proportion was in the 70s for rice,

Rural Cooperatives / May/June 1999 5 fruit/vegetable, “other marketing” and contribute a larger percentage to NVA tures, involving other cooperatives. dairy cooperatives. among co-ops highly leveraged and/or To examine how the various types of Net income before taxes was the major financing a large inventory. cooperatives compare in adding value to component of NVA for cotton ginning and the products and services they provide, net Where can cooperatives improve cotton cooperatives, at 54 percent and 46 value-added per dollar of total sales was value-added? percent, respectively. Among the types of calculated (table 4). Net value-added per cooperatives listed in Table 3, NIBT was In recent years, much interest has been dollar of sales ranged from a low of 6 cents the lowest for sugar, rice and poultry coop- generated by farmers in adding value to for grain/oilseed cooperatives to a high of eratives. What does this mean? It’s diffi- their raw commodities through greater 21 cents for poultry cooperatives. cult to say without further study of the involvement in marketing and/or further Cooperatives with lower ratios tend to be industry in which the various types of processing. In many cases, this vertical traditional buy-sell. Several of the poultry cooperatives compete. For example, a low integration further up the marketing cooperatives, which includes eggs, turkeys, contribution of NIBT could be due to coop- chain has been accomplished through the ratite and other related products, are high- erative objectives or goals, such as bar- organization of new generation coopera- ly involved in processing and other value- gaining versus processing, competition tives, like United Spring Wheat added activities. with other co-ops or investor-owned firms Processors, 21st Century Alliance and U.S. What are the implications? within the industry, management and/or Premium Beef. These co-ops add more cooperation with other cooperatives. value to the raw commodities than do the Farmer cooperatives have been The proportion of interest paid to NVA traditional buy-sell ones. However, there is increasing the value of traditional raw was highest among cotton, sugar, livestock much more value that farmer cooperatives commodities they market as well as the and grain/oilseed cooperatives, all above can add to what they market. A popular supplies and services they purchase. 13 percent. Interest paid, of course, is a vehicle for accomplishing this is the forma- However, according to the NVA per dollar function of debt and would be expected to tion of alliances, particularly joint ven- of sales, it appears there is considerable potential for adding value, especially in the marketing of grains/oilseeds, milk and Figure 1—Co-op’s Gross and Net Value- Figure 2—Comparison of Co-op’s NVA cotton. If farmer cooperatives could, on Added, 1994-97 with U.S. Ag. Sector NVA. 1994-97 average, add even an additional $.01 of Bil.$ Bil.$ net value-added per dollar of sales 12 120 through greater involvement in process- ing and other value-added activities, net value added could be increased by more GVA 100 than $1 billion. 11 Farmer cooperatives have the opportu- U.S. Sector nity to enhance their members’ income through greater involvement in value- 80 added activities, not only by doing more 10 processing and marketing of the volume of NVA commodities moving through their cooper- 60 atives, but also by increasing the share of 9 products marketed and supplies pur- chased through cooperatives. In 1997, 40 farmer cooperatives marketed only 31 per- cent of the farm products moving off the 8 farm and 30 percent of the major farm 20 supplies — feed, seed, fertilizer, petroleum Co-op Sector and crop protectants — purchased by farmers. ■ 7 0 1994 1995 1996 1997 1994 1995 1996 1997

6 May/June 1999 / Rural Cooperatives A CLOSER LOOK AT…

Calcot, Ltd. Bakersfield, Calif.

Co-op type: Cotton and in Latin America. Almond almond marketing. markets are primarily Euro- pean. Geographical area served: California and Arizona. What’s new: After 62 years of marketing strictly cotton, CEO/President: Tom W. Calcot expanded into almond Smith, since 1977. marketing this year. “This is a historic moment for Calcot,” Facilities: Three locations: says Smith. “Adding almonds headquarters and warehouses to our marketing functions is Calcot president Tom W. Smith is leading the co-op from a 72- in Bakersfield, and warehous- a move that will propel us year tradition of marketing only cotton to handling almonds as es in Hanford, Calif., and into the future and allow us well. Photos by Catherine Merlo Glendale, Ariz. Capacity is to better maximize return to 145 warehouses, or about 1.2 producers of both crops.” Cal- is one of the ways we can add operation, make the most of million bales of cotton. cot does not plan to venture value to the process,” he adds. our marketing opportunities into the retail snack foods and maximize returns to Annual sales and consumer market. “Blue Biggest changes taking growers.” Calcot remains revenue/product volume: Diamond Growers already place? The U.S. cotton indus- active in industry affairs and Yearly sales of $600 million does an outstanding job in try is experiencing a period of the legislative process, “since from a typical annual volume that area,” Smith says. relatively low prices and low- government programs and of 1.3 million bales of cotton. er profits. The net effect has policy are today a very large Number of members: 2,200 Philosophy that drives been a reduction in acreage, part of farming,” Smith says. cotton — and 31 almond — Calcot: “Our members count particularly for California Plans to keep viable in the growers. on Calcot as an extension of growers. “It has caused us to 21st century: Beyond Calcot’s their own operations and we re-examine our core values, diversification into almonds, Number of employees: 104 believe we must always repre- mission and practices, which, the co-op will continue to full-time. sent their best interests,” in the long run, is a good work on the challenges that Smith says. “That drives thing,” Smith says. In the face its membership. These Largest markets: About 85 everything we do.” meantime, dealing with lower include timing of sales, devel- percent of Calcot’s cotton is volume has necessitated some oping dependable markets, exported. In 1998, Calcot was What’s unique about Cal- changes, such as adding delivering exceptional cus- the largest shipper by volume cot: “Our export focus and almonds, and closing and sell- tomer service, working with of all cotton marketed in the desire to service customers’ ing a couple of facilities Cal- legislators to build fair and U.S. Major cotton markets needs,” says Smith. Calcot cot no longer operates. better governmental policy include Japan, South Korea, owns its own warehouses, and programs, and improving Taiwan, Indonesia and (some unusual in the cotton indus- How is Calcot making a overall demand and thus rais- years) China. In 1998, Calcot try, which allows the co-op to difference for its members? ing consumption of members’ exported to 39 countries, ship its cotton bales excep- “We will continue to develop cotton. “There really aren’t including Ecuador, Italy, tionally fast with maximum new technologies and prac- any new challenges in our Switzerland, Turkey, Mexico service. “That also permits tices and control our ware- business,” Smith says. “There and Brazil. Currently, the co- growers to keep more of the housing facilities,” Smith are just more of the old ones, op is developing new markets value of their production and says. “We can run a very lean all at the same time.” ■

Rural Cooperatives / May/June 1999 7 Hogging The Market For many farmers, the hog-price crisis confirms their shrinking control of agriculture. Can co-ops help producers survive the age of corporate farming?

Catherine Merlo small hog operation told me he received Missouri pork producer and Farmland Editor $97,000 less income in 1998 than he had member Jim Phillips (right), his the previous year.” son Martin Phillips (center) and Martin’s innesota pork producer Dennis John Adams, a North Carolina pork son Nathan Phillips got some relief Timmerman will not soon for- producer, concurs. “In the last year, many from the hog crisis late last year when MMget the fall of 1998. hog producers have lost what they worked Farmland, for the first time, set a Like thousands of hog producers across a lifetime to gain,” Adams says. floor price for live hogs. Photo by Jim Barcus, the nation, Timmerman found himself in The 1998 hog market crisis followed Kansas City Star the middle of “an economic disaster,” “a cri- two years of historically high prices, and Producers Council (NPPC) board of direc- sis” and “a national emergency.” Late last caught many producers blind sided. By tors agreed in November that farmers year, hog prices across the United States the spring of 1999, the situation had begun were producing too many hogs for the plunged to their lowest levels in nearly 60 to ease, with prices rebounding closer to existing slaughter capacity in the United years. By December, hog prices to farmers the break-even point. Yet industry ana- States, it believed the source of the indus- had dropped to as low as 8 cents a pound, lysts, producers, trade groups and profes- try’s troubles lay elsewhere. a 70-percent dive from year-earlier levels. sors continue to analyze the hog industry’s “It is not that we are producing too The break-even price for most hog farm- price collapse. They cite multiple reasons much pork,” NPPC’s board told producers ers is about 38 cents a pound. for the crisis. Chief among them, many in an open letter. “Domestic consumer “It’s the worst year by far I’ve ever agree, has been that hog supplies have far demand and exports are actually up sig- seen,” says Timmerman, whose 150-sow exceeded the slaughter capacity of U.S. nificantly compared to 1997.” farrow-to-finish farm is located near Boyd, packing plants. The real problem, the board said, is that, Minn. “We can’t begin to service any finan- In reality, however, over-supply wasn’t “producers have lost bargaining power.” cial requirements, and we’ve lost a lot of the root problem, insist some producer rep- equity. One of my neighbors who has a resentatives. Although the National Pork

8 May/June 1999 / Rural Cooperatives Loss of bargaining power ducing more than 50 percent of the hogs in the U.S.,” says Gregory Beck, president Minnesota gover- From pork, poultry and cattle produc- and CEO of Equity Cooperative Livestock tion to other farm businesses, such as grain Association in Baraboo, Wis. nor Jesse Ventura and soybeans, farmers worry they are los- The shift has squeezed thousands of ing control of agriculture. Many say indus- independent family farmers out of the salutes Prairie try control now lies in the hands of huge business. corporate entities, which have the size and Pork producers who have remained in Farmers Cooperative financial backing to control everything the business have increasingly turned to from production to processing to the all- Recent efforts by Prairie Farmers contract farming, where they own no hogs important market access. In farmers’ Cooperative to gain more market but raise them on contract for a few large minds, American agriculture, with its access for independent pork produc- corporations. In many states, it’s often the entrepreneurial heritage, is now vulnera- ers may not have reached as many only way farmers can afford to stay in the ble to the dictates of global conglomerates. farmers as Farmland has, but they ag business as tobacco and other tradi- “Farmers complain today that they tional crops decline or face uncertain have earned the accolades of have little leverage, little say, little con- futures. Minnesota’s new governor, Jesse trol,” writes Dr. Joe Coffey, in the March Contracts not only take the opportuni- Ventura. In his State of the State 1999 issue of Cooperative Farmer, a South- ty out of farming, but some say they force address to the Minnesota Legislature ern States Cooperative publication. Coffey a farmer into servitude, forcing the farmer is a retired vice president of economics and in March 1998, Ventura drew atten- into a minimum wage worker. And con- strategic initiatives for Southern States, tion to the efforts of Lyle Haroldson, tractors can pull a contract. based in Richmond, Va. who organized the new cooperative Independent producers have found it Indeed, many segments of agriculture so that area pork producers could increasingly difficult to raise hogs as eco- are moving from the family farm tradition become self-sufficient. nomically as the corporate “hog factories” to the vertical integration and contracting or large-scale confinement operations that “Today, as we celebrate that the system adopted by large global agribusi- hold thousands of hogs. Unlike the swine State of the State is great, let us cele- nesses. These huge players, some financed conglomerates, few farmers have the finan- brate five people who are reforming by Wall Street, have gone whole hog into cial strength to survive the kind of mar- agricultural production and marketing, Minnesota for the better every day ket downturn the hog industry has recent- prompting critics to say the U.S. market- through their good works,” Ventura ly experienced. And few independents can ing structure has become too concentrat- said. “They are here today to receive compete with the corporate giants in the ed, with control of the food chain in too few the first Governor’s Awards for a marketing arena. hands. Better Minnesota.” “It’s becoming more and more difficult The “poultry-ization” of the swine every day to maintain a live cash market,” Ventura told Haroldson, who was industry says Beck. “You’ve got more hogs tied up seated in the gallery, to rise and be in vertical integration and fewer hogs recognized. “With prices at crisis The hog business, in particular, has traded on the open market.” lows,” Ventura said, “Lyle helped 80 recently — and rapidly — shifted to cor- Minnesota farm families rally under a porate, industrialized production. Like the Looking for survival poultry industry before it, the swine busi- vision of building a hog processing Faced with the industry’s growing cor- ness is undergoing major structural facility near Dawson. The major porate domination, many family farmers changes that involve corporate ownership, emphasis will be on value-added are seeking ways to keep their indepen- vertical integration, total confinement items that satisfy a consumer market. dence and ensure their survival. Efforts housing and contracts with farmers. Large are underway across the Hog Belt to help When this project is done, there will corporate entities such as Murphy Fami- farmers compete and increase their mar- be 45 new jobs and great promise for ly Farms, Iowa Beef Processing, the Swift ket access. Realizing they must look a better future for 80 farm families.” & Co. unit of Con Agra Inc., Smithfield beyond production expertise, many farmers Foods and Cargill’s Excel now dominate Prairie Farmers’ plant could be are banding together to expand into pro- the hog business. completed late this year. cessing, packing or marketing — where “Fifty (production entities) are now pro-

Rural Cooperatives / March/April 1999 9 the biggest profit margins lie. their members compete and survive. Many ing stages,”says Board Chairman Dennis In fact, what may have galled indepen- are focusing on increased volume, niche Timmerman. dent pork producers most in the past year markets and delivering quality products. The Dawson-based facility will slaugh- is that while prices they received fell to his- Others have set live-hog price floors or ter hogs and prepare the meat into pre- toric lows, packers and retailers profited. hiked up their promotional efforts at the mium products. While Prairie Farmers Co- That has spurred hog farmers to look more retail level. All are seeking to increase op has not yet developed a label or product closely at value-added operations for new farmers’ share of profits in the hog-pork name, it will promote itself as a producer of streams of income. Many feel that if farm- industry chain. high-quality, wholesome food directly from ers can own the entire chain, they too can small farmers. Minnesota efforts capture the margins beyond the farm gate. “Prairie Farmers is an opportunity for Farmer-owned and controlled co-ops One effort that has drawn accolades producers to band together to build a small may be the answer to helping producers from no less than Minnesota Governor operation to gain access to niche markets position themselves for survival. Several Jesse Ventura [see sidebar] is Prairie that aren’t currently being served,” Tim- cooperative efforts have emerged, not only Farmers Cooperative of Boyd, Minn. Born merman says. “Among natural foods, the to help independent producers weather the one evening in 1995 when 47 pork pro- current hog crisis but to help them gain ducers gathered to discuss how they might Members of Farmland Industries benefit- more market access. increase market access, Prairie Farmers ted from their co-ops’ bold moves to sta- Today, co-ops — both old and new — is on its way to building its own small pork bilize hog prices. Photo Courtesy Farmland are taking closer looks at ways to help processing plant. “We’re now in the financ- Industries

10 May/June 1999 / Rural Cooperatives most rapidly growing section is in meat. er, independent producers. culture,” Timmerman adds. “If there is no People are concerned about quality and “I believe in a widely diversified system change, a lot of us are going to have to exit drugs or additives.” of agriculture that provides a better food the industry.” Timmerman believes co-ops and direct source for the nation,” Timmerman says. “I Farmland steps in marketing programs are the way for pro- also know that the really large producers ducers to survive. But he acknowledges who raise livestock in concentrated condi- Farmland Industries, one of the nation’s that cash-strapped farmers have trouble tions run into waste disposal and contam- largest farmer-owned cooperatives, also raising equity for new ventures. He also ination problems. And I can’t believe that if has taken steps in the past year to bring recognizes the difficulty of generating an industry is controlled by one large seg- relief to its pork-producing members. They enough volume to access the market. Still, ment of industry, prices will stay cheap. are among the more than 600,000 inde- he believes there must be a place for small- “It’s a critical time in the history of agri- pendent family farmers Farmland repre-

A crisis unfolds According to Al Tank, CEO of the NPCC, the crisis cause “The nation’s pork producers are experiencing an eco- could be simply stated. “Hog production is up 10 percent, nomic disaster,” Donna Reifschneider, an Illinois pork pro- slaughter capacity is down 8 percent, and Canadian live ducer and president of the National Pork Producers hog imports to the U.S. are up 37 percent,” Tank noted in Council (NPPC), wrote to President Clinton last November. early January 1999. “Most pork producers are currently losing $50 to $75 per The crisis was not due to poor pork demand, Tank said. hog sold. “Pork demand has been good this past year,” he said. “Retail “We believe the economic crisis facing America’s pork consumer demand is 7.1 percent higher than a year ago, producers must be viewed as a national emergency, war- even though average retail pork prices have remained ranting immediate intervention by the government,” about the same. The average American consumed an esti- Reifschneider noted. mated 5 pounds more pork in 1998 than in 1997. The crisis Reifschneider wrote of began, in part, in 1997, “Moreover,” Tank added, “pork was the only meat protein when many slaughterhouses closed down as hog supplies to register any significant increase in domestic consump- exceeded the nation’s packing plant slaughter capacity. At tion during the year. least 37,000 head of daily hog slaughter was lost due to the “The crisis is not a pork issue,” Tank insisted. “It is a live closures of four packing plants -- an Iowa Beef Processing hog issue.” plant in Iowa, South Dakota’s Dakota Pork, Georgia’s In fact, USDA had estimated that pork producers were Premium Pork and Thorn Apple Valley of Michigan. This receiving about $144 million less per week on average than helped create a massive bottleneck in the industry and they did during the previous five years. Moreover, their drove prices to historic lows. share of the consumer’s dollar spent on pork had fallen to Dr. Joe Coffey, a retired vice president of economics and an all-time low, despite strong prices at the supermarket. strategic initiatives for Southern States, a Virginia-based For example, in September 1998, producers received a cooperative, cites at least 10 causes for the recent price col- record low 21 percent of pork retail prices, compared to lapse of the hog market. They were, Coffey wrote in the their normal share of 37 percent. Retailers’ share rose to 60 March 1999 issue of the co-op’s Cooperative Farmer maga- percent, compared to their usual 47 percent. Packers’ aver- zine: “the unexpected increase in hog marketings; the clo- age take was 19 percent of the average retail price, fairly sure of pork processing plants; the environmental permit close to their normal 16 percent. limits on hog kills; the flood of hogs from Canada due to NPPC has pushed packers to increase plant efficiencies, strikes and a weak currency; cheap corn and mild weather pay overtime, add second shifts and even operate on week- that hiked hog weights to record highs; the moratoria on ends to increase capacity. NPPC believes the industry must expansion of swine facilities that caused a frenetic building increase its 2-million-head slaughter capacity, and has pre- boom to beat the ban; the long string of profitable produc- vailed on the federal government to raise its limits. The tion months that persuaded producers and their lenders organization has asked packers to increase their slaughter that the hog cycle had crumbled and collapsed; the large capacity. It also has encouraged packers and retailers to supplies of competing meats; the economic crisis in Asia and narrow their margins to more reasonable levels. Russia; and the slowness of the federal government to act.”

Rural Cooperatives / March/April 1999 11 sents, either through direct memberships the total solution,” Evans says, “but we to develop new value-added and leaner for livestock producers or locally owned believe it helped change the direction in pork products. cooperatives. One of the largest indepen- which the price of live hogs was moving. Farmland also has taken steps to help dent businesses in the pork industry, Establishing a price floor was an essential producers market their hogs more effec- Farmland owns several livestock process- step to help our farmer-members through tively. In October, Farmland and the Nation- ing and packing facilities, including four one of the toughest economic periods in the al Pork Producers Council launched a vol- pork slaughtering plants in Nebraska, Illi- history of the pork industry. We felt com- untary, hog-price reporting service on the nois and Iowa and nine further-processing pelled to help producers contain their loss- Internet. This reports the plant price locations. es until we could work through the over- received on cash sales on the previous mar- In December 1998, when live hog prices supply of hogs.” keting day. The Web-based service fell to $8 to $10 per hundredweight, Farm- Another step Farmland took to help (www.farmland.com) reports the plant price land did something it had never done move hogs through the market was to sig- received on cash sales on the previous mar- before — it set a floor price for live hogs. nificantly increase its plant operating lev- keting day as well as other quality factors. “Farmland agreed to pay our producers els. Starting in August, Farmland bumped “The expanded information helps pro- no less than $15 per 100 pounds (live up operating levels among its packing and ducers make better informed marketing weight) for hogs that met our weight and processing facilities to as high as 120 per- decisions,” says Evans. quality specifications,” says Gary Evans, cent over previous-year levels. At the same Additionally, Farmland has asked Con- executive vice president and chief operat- time, it increased plant operations to six gress to help livestock producers and agri- ing officer of Farmland’s Meats Group. days a week. culture by aggressively pursuing market- The price-floor idea stemmed from “That moved an additional 70,000 to and trade-expanding initiatives, granting ideas offered by the co-op’s farmer-mem- 100,000 head each month,” says Evans. negotiating authority, renewing normal bers during Farmland’s annual meeting in At the consumer and retail level, Farm- trade relations with China and reforming Kansas City, Mo., earlier that month. land has worked to stimulate consumer sanctions and embargo policies. Farmland typically buys hogs at competi- demand for pork by increasing advertis- tive prices, markets pork products under ing of its products, offering coupons, run- Pork production in America climbed 10 the Farmland brand and then pays out its ning specials on pork, and urging retail percent in 1998, to 19 billion pounds, top- profits to livestock producers and local co- and food service businesses to feature pork ping the previous record set in 1995 by 7 ops in the form of patronage refunds. and pork products. To meet changing con- percent. Photo courtesy Equity Livestock “We recognize that a price floor is not sumer demand, Farmland also is working Exchange

12 May/June 1999 / Rural Cooperatives “Our intention is to help producers weather this economic storm,” Evans says. “If we succeed in doing that, we’ve done our job as a producer-owned company.” Price risk management Equity Livestock Co-op has begun developing programs that can help its members with price risk management in the hog market. The co-op has 60,000 members in the Upper Midwest and mar- kets $500 million worth of livestock annu- ally. Its marketing volume includes 250,000 hogs each year. Equity Livestock has added a licensed commodity broker to help make direct arrangements with packers. It’s also work- ing to open more doors for price-risk man- agement for its members through the futures market. “We’re seeing a huge interest from pro- ducers in these programs,” says Beck. assisting members with purchasing inputs. The total inventory of all hogs and pigs in “Today, it’s not just an option but a neces- “It’s a challenge for individuals in the the United States on March 1, 1999, was sity to eliminate price risk.” hog business today,” says John Adams, an 59.9 million head, about 1 percent lower Beck adds, “Co-ops need to help pro- Eastern Foods member who produces than in March 1998. Photo courtesy Equity ducers band together for better economic 6,000 hogs a year in Greene County, N.C. Livestock Exchange clout in the marketplace.” “Producers must come together in size and Producers form co-ops scope to compete.” up the playing field for independent pro- Eastern Foods is looking at a number ducers.” In Kentucky, a small group of hog pro- of possibilities, some of which involve pack- But beyond the short term, farmers are ducers who saw opportunity formed their ing opportunities. The co-op has even con- learning from the harsh lesson of the own cooperative in 1992. Today, Central sidered “moving to branded products to recent crisis that they must band together. Kentucky Hog Marketing Association assure consumers of the integrity of our Through farmer-owned and controlled (CKHMA) counts 30 members who mar- products,” says Adams. cooperatives, producers can increase their ket 30,000 hogs per year through the coop- bargaining power, access helpful market erative. CKHMA pools shipments of hogs Lessons for the future information and stay in the game. for its members. The hogs are purchased While there are no quick and easy cures Many industry observers say farmers by Swift’s, the Louisville packer, which to hog producers’ problems, there is hope. need to stop thinking that they only pro- seeks consistently high-quality hogs from For starters, USDA projects that invento- duce commodities. They say producers CKMHA. Members are saving on shipping ries will decline in 1999 and the rate of must stop thinking of live hogs, and start costs, benefiting from packer incentives for production increase will slow. thinking of more value from bacon and hog quality and obtaining other services Following pleas to state and federal offi- ham. With pork producers still reeling from offered by the co-op. cials, proposals have emerged for govern- the recent price disaster, there may be no In North Carolina, the nation’s No. 2 ment assistance for hog farmers. A federal better time to re-examine the cooperative hog-producing state behind Iowa, a group mandatory price reporting proposal also principle that by working together, farmers of independent farmers has formed East- ■ is being discussed. “That’s important,” says can position themselves to survive. ern Foods, Inc. to increase the marketing Equity Co-op’s Beck. “That will help level alternatives for its 70 members. It’s also

Rural Cooperatives / May/June 1999 13 IN THE SPOTLIGHT Stanley W. Dreyer cooperative statesman

guided by cooperative principles. In value of and need for an informed 1981, NCB was restructured as a pri- membership and employees on the vately held financial institution. It is values of cooperatives. He advocates owned today by more than 800 mem- more attention to understanding why ber-users. “Stan was instrumental in application of time-tested principles the formation of the bank,” says NCB adds strength to the entire system. president Chuck Snyder. “A visionary, a moderator Says Dreyer, “NCB’s creation was Future for cooperatives? “I see a and a statesman, who has a coalition building effort. It’s been a broader based cooperative system done much to advance the force in non-agricultural co-op growth with new cooperatives being formed influence and effect of co- and it’s been supportive of the coop- among non-agricultural groups to pre- erative community in general.” serve their ability to stay in business ops in the United States Dreyer also takes pride in his or to pursue the need for services,” and in the world.” efforts to facilitate cooperative devel- says Dreyer. He also expects to see opment abroad and to help bring larger and more diverse co-ops to Involvement with cooperatives: cooperatives together. meet competition and to continue to Stanley W. Dreyer spent 45 years be an effective yardstick for their directly involved in cooperatives Latest honor: To recognize Drey- members. “There will also be a grow- before retiring in January 1999 as an er’s contributions, lifelong beliefs and ing adaptation to international mar- officer of the National Cooperative support of cooperatives, NCB this kets and conditions,” he says. Bank (NCB) in Washington, D.C. Dur- year created “The Spirit of Coopera- ing that time, he devoted his business tion Award.” A medallion, cast with Personal future plans? “I plan to and personal energies to organizing, Dreyer’s image, will be awarded annu- find satisfaction and rewards in more developing and promoting co-ops ally to an NCB employee who exhibits personal things such as family, read- everywhere. His roles have included Dreyer’s cooperative spirit. “Stan is a ing and a simpler but active life,” president of the Cooperative League senior statesman of the co-op com- Dreyer says. “I had nearly 50 years to of the United States (now the Nation- munity,” says Snyder. “His dedication make whatever contribution I could al Cooperative Business Association), to the spirit of cooperation is one of to the cooperative movement and it board member of the International the ideals we try to promote with has been very kind and generous in Cooperative Alliance, and interna- NCB.” On April 22, 1999, NCB man- return.” ■ tional cooperative developer at NCB. aging director Barry Silver received Stan Dreyer’s image is cast in a new Dreyer also was the founder of the the first-ever award. “Spirit of Cooperation” medallion, which Cooperative Hall of Fame, into which the National Cooperative Bank will award he himself was inducted in 1997. The What new developments are tak- annually. Photo by Catherine Merlo ceremony at the National Press Club ing place within cooperative com- honored him with these words, munity? “The most striking area of “Throughout his tremendous career new cooperative formation has been with cooperatives, Dreyer has been a in retailer-owned purchasing cooper- visionary, a moderator and a states- atives,” Dreyer says. He also points to man, who quietly but effectively has innovative programs in senior hous- done much to advance the influence ing and healthcare, and education and effect of co-ops in the United and cooperative approaches to the liv- States and in the world.” ing wage.

Career achievements: Dreyer Biggest co-op concerns? “The counts his role in creating NCB as limited cooperation among coopera- one of his greatest accomplishments. tives, which underutilizes their poten- Congress chartered NCB in 1978 to tial influence and effectiveness,” provide financial services to commer- Dreyer says. He’s also concerned cial and real estate ventures that are about the limited appreciation of the

14 March/April 1999 / Rural Cooperatives The Prime of Prairie Farms Dairy With its focus on earnings and its profitable track record, this Midwest dairy co-op has producers asking to become members

Catherine Merlo ducers,” says Kuenstler, who was elected Farms’ lucrative business with its five Editor board president in late January. joint-venture partners. Those partnerships And that’s just what Prairie Farms did brought in more than $685 million in sales s Fred Kuenstler settles once again last year. Celebrating its “sixti- in 1998, an increase of nearly 4 percent into his first year as board eth and best year ever,” Prairie Farms from 1997.) president of Prairie Farms achieved record earnings and sales. For its And more high-water marks are expected. ADairy,A he’s finding the transition to fiscal year ended Sept. 30, 1998, Prairie “When I took over 12 years ago, I told be as smooth as a drink of the coop- Farms reported all-time high earnings of the board and management that Prairie erative’s chocolate milk. slightly more than $50 million, an increase That should come as no surprise. After of 13.5 percent over the previous year. Dol- Although its largest product is fluid milk, all, this dairy farmer has been a member of lar sales also made history at $933 million, Prairie Farms also churns out ice cream, the cooperative’s board for 31 years, and a whopping $50 million over the year before. cottage cheese, sour cream and yogurt. its treasurer for the past 11 years. (Those figures don’t include Prairie Photos courtesy of Prairie Farms. Furthermore, his predecessor, Melvin Schweizer, is only a seat or two away, hav- ing remained on the Prairie Farms board after 26 years as its chairman. But if one thing makes Kuenstler’s job easy, it’s the very cooperative he is charged with leading. Prairie Farms Dairy is con- sidered one of the most successful dairy cooperatives in the United States. Based in Carlinville, Ill., the 800-member co-op is recognized across the Midwest for its high-quality dairy products. From its hum- ble beginnings in 1938, Prairie Farms has grown to become one of the nation’s top five fluid milk bottlers, and, until recent- ly, held a place on the Fortune 500 list of American companies. In the often dissenting dairy industry, there’s a general agreement that Prairie Farms knows how to operate efficiently and profitably, says Ed Coughlin, senior policy advisor for the National Milk Pro- ducers Federation. “Prairie Farms has a unique ability to run a very profitable operation in bottling fluid milk,” Coughlin says. “Most other cooperatives haven’t had the success that Prairie Farms has had in that endeavor.” From his farm in Olney, Ill., where he milks 120 cows and grows grain on 1,000 acres, Kuenstler offers his answer for Prairie Farms’ success. “What makes Prairie Farms unique is that its management and board have always been interested in making a profit, and returning that profit back to the pro-

Rural Cooperatives / March/April 1999 15 Prairie Farms member Merritt Fitschen (second from right), seen here with his sons and grandson, has won numerous milk quality awards. He began milking in 1939 with three cows.

Farms would reach $1 billion in sales in All counted, there are 4,300 employees the year 2000,” says Leonard Southwell, who add value to 3.8 billion pounds of raw the co-op’s executive vice president and milk each year. For Prairie Farms last year, success stems from its capable manage- CEO. “But it’s possible we’ll do that in the co-op’s Grade A producer-members ment team. Throughout its history, Prairie 1999.” supplied about 75 percent of the needed Farms has benefited from a small but volume. The rest was purchased from oth- Growth through acquisitions capable team of managers who have nav- er co-ops, which also shared in the patron- igated the company on its profit-making Early members of Prairie Farms might age earnings. course. It started with Fletcher Gourley, hardly recognize their co-op today. Orga- All together, Prairie Farms partners the visionary pioneer who helped create nized originally as Producers Creamery of and subsidiaries help the co-op produce a the co-op in 1938. Carlinville, it was later renamed Prairie complete line of dairy products. Their “There is no doubt he was the guiding Farms Creamery of Carlinville. Today, after largest use of raw milk — 80 percent — is light behind much of the success of Prairie more than 50 mergers, consolidations and for fluid bottled milk, equaling more than Farms,” Southwell says. And there was acquisitions, it’s Prairie Farms Dairy Inc. 3.35 billion pounds of milk. Other products Schweizer, under whose 26-year guidance “When we put Prairie Farms Dairy Inc. include 30 million gallons of ice cream per the co-op saw tremendous growth. together in 1962, our total yearly sales year, 63 million pounds of cottage cheese “Prairie Farms has the best managers were about $16 million,” Southwell says. (or some 7 percent of the nation’s output), in the dairy industry,” Kuenstler says. “In the last 10 years, our growth has been 30 million gallons of sour cream and dips, “They’re completely dedicated. I can call about $500 million.” and 7 million pounds of yogurt. Orange Leonard Southwell on a Saturday morn- Southwell attributes much of the co-op’s juice and other non-dairy drinks total 46 ing, and he’ll be there in the office, not out growth to its acquisitions. On its own, million gallons per year. on the golf course. And the management Prairie Farms operates 17 plants and 36 Why orange juice? “Many customers team is like that, all the way down the line.” distribution centers, and employs 2,100 peo- only want to do business with one dairy,” Southwell has been Prairie Farms’ ple in eight Midwest states. But add in its Southwell says. “Orange juice processing manager since 1988. For years, he served five joint ventures and the numbers soar. is compatible with milk processing.” as the co-op’s No. 2 man behind the leg- Today, Prairie Farms, its subsidiaries Its diversified line of products accounts endary Gourley. But Southwell has been and joint ventures operate 30 plants, three for a large part of the co-op’s strength, connected with Prairie Farms since 1951, warehouses and 68 distribution points for according to Kuenstler. “Prairie Farms has when he managed a small Illinois co-op a total of 101 profit centers. You can find long taken producers’ milk and turned it that later merged with Prairie Farms. them in Illinois, Indiana, Missouri, Iowa, into a product that can be marketed for “Prairie Farms has been successful Kentucky,Tennessee, Michigan, Ohio, Okla- added income,” he says. “We were into val- because we have avoided making any cata- homa, Arkansas, Nebraska, and Kansas. ue-added long before it became a buzzword.” strophic mistakes,” says Southwell. “We Including subsidiaries and joint ventures, Capable management leads to don’t shoot from the hip. We put a great deal Prairie Farms operates 30 plants, three loyalty of time and effort into any program we warehouses and 68 distribution points embark upon. If it’s not going to do anything Kuenstler also believes Prairie Farms’ across the Midwest. for the producers, we’re not interested.” That may be why so few members have left the co-op. “I could count on one hand the number of members who’ve quit and gone somewhere else,” Kuenstler says. “That should give you some idea of the loy- alty members have toward Prairie Farms.” In fact, the co-op’s blue-ribbon reputa- tion is so strong, “there are producers in all areas where we procure raw milk who are asking to join Prairie Farms,” says Southwell. But asking doesn’t always lead to membership. “Prairie Farms is not a co- op that invites all producers in,” says

16 March/April 1999 / Rural Cooperatives A new, 1,500 gallon milk tank is pushed inside the milk barn at the Merritt Fitschen dairy in central Illinois.

NMPF’s Coughlin. and-half cream for Prairie Farms’ retail Holland Dairy of Holland, Ind. More acqui- Says Southwell, “We don’t want surplus sales. It will begin operations in June 1999. sitions remain a possibility. “We’re always milk. We take on members only as we need Prairie Farms keeps its operations as interested in pursuing acquisitions that fit them. We pay top prices for quality milk cost-effective as possible. Its management with Prairie Farms,” says Southwell. because our products must be top quality. staff is small. “You’d be amazed at the small Kuenstler himself has given thought to We’re selective in taking on new producers.” size of our corporate office when you look how the relatively small Prairie Farms will For the producers who are fortunate at the size of our sales,” Southwell says. survive in the world of mega-mergers and enough to be members, the rewards are In more than two dozen rural commu- dairy giants. “But when I look at Prairie high. Their pay price, quality and patron- nities in several Midwest states, the best- Farms’ management, our diversification age averaged $16.70 cents per hundred- paying jobs can be found at the Prairie and our quality,” he says, “I know our weight in 1998 — 80 cents above the pre- Farms dairy plant. Much of the co-op’s suc- future is great.” ■ vious fiscal year. Prairie Farms saw not cess is due to the “Prairie Farms family,” only historic earnings in 1998 but a record says Southwell. “We work as a team from patronage of $28 million as well. Sixty per- plant to plant. Very seldom do our employ- cent of the patronage payment — or $1.37 ees leave our employment. Many work Subsidiaries and per hundredweight — was made in cash beyond the retirement age.” joint ventures June 1 of this year. In the past five years Southwell also stresses that plant man- alone, Prairie Farms has paid out more agers are given major responsibility for As part of its operations, Prairie than $110 million in patronage dividends. their operations. “We don’t try to call the Farms has several wholly- owned “By law, a cooperative must pay at least shots from the corporate office,” he says. subsidiaries and joint ventures. One 20 percent of patronage dollars in cash,” “They’re responsible for the bottom line.” subsidiary, Ice Cream Specialties, Prairie Farms notes in its 1998 annual manufactures and distributes all Not ready for a merger report. “Prairie Farms has paid out at least types of frozen treats, many with the 50 percent for the past 15 years.” So far, Prairie Farms has not consid- popular North Star brand. Ice Cream In addition, Prairie Farms operates on ered a merger with mega-cooperatives. Specialties has operating divisions in a 7-year basis in paying back allocated That isn’t to say that Prairie Farms won’t St. Louis, Mo., and Lafayette, Ind. earnings. It considers this “a remarkable work with the dairy giants. Already, it has PFD Supply is a non-dairy sub- accomplishment” for the dollars involved. three joint ventures with DFA. Land sidiary operation. As a one-stop dis- “We know of no other cooperative, strictly O’Lakes is one of Prairie Farms’ members, tributor of products to fast-food out- in dairy, that has returned to the producers as are Foremost Farms USA and Associ- lets, PFD Supply has more than the amount of money per hundredweight ated Milk Producers Inc. 170,000 square feet of refrigerated on their milk than has Prairie Farms,” the Prairie Farms is closely watching the warehouses in Granite City and annual report says. industry’s formidable challenges — a Lebanon, Ill. It delivers more than 7 One other strong pull for member loy- changing customer base, the declining role million cases of products each year alty is the black-ink basis on which the co- of government, maintaining per-capita con- throughout the Midwest. op operates. There is no debt. There is no sumption of dairy products, and the ongo- Another subsidiary, Pevely Dairy, check-off for capita retains or stock. “This ing struggle to remain competitive. It won’t was founded in 1887. The Pevely co-op is financed strictly on earnings,” be an easy road. Prices, which reached all- name became renowned for quality Southwell says. “We currently have no mon- time highs of about $19 per hundredweight dairy products with the 1904 St. ey borrowed from banking institutions.” in January, are dropping. “It would be Louis World’s Fair, and has since For 1999, Prairie Farms’ capital expen- unrealistic to believe that the coming year, remained a market leader. Its distri- diture budget totals $14 million. That’s 1999, would be as successful as 1998,” the bution points are located in St. down noticeably from $17 million last year, co-op’s annual report says. Charles and St. Clair, Mo. when the co-op began building an ultra- But as this little giant in the dairy East Side Jersey Dairy, its fourth high-temperature processing plant in industry moves ahead, it will continue the subsidiary, is a fluid-milk operation Granite City, Ill. The $8 million plant will strategy that has worked so well for so long. in Anderson, Ill. produce the co-op’s soft-serve ice cream In August 1998, it acquired the Roelof Prairie Farms’ members also are mix, half-pints of milk for vending compa- Dairy at Galesburg, Mich. In January 1999, half-owners of five joint venture com- nies, 5-gallon milk dispensers, and half- Prairie Farms acquired another company, panies.

Rural Cooperatives / May/June 1999 17 LEGAL CORNER

obvious to the court that plaintiffs’ com- Supply Co-op Faces Robinson- petitive opportunities may be harmed when it is forced to incur $16-17,000 dol- Patman Act and Antitrust Liability lars in costs to pick up feed that its com- petitors have delivered at no cost. This is Donald A. Frederick power to purchase goods at lower costs clearly the type of competitive injury the Program Leader/Law, Policy & Governance than their smaller competitors. Nonethe- Robinson-Patman Act was designed to USDA Rural Business-Cooperative Service less, the legal onus is placed on sellers. discourage and prevent.” Charging a lower price to some buyers Thus the judge rejected the coopera- ur Breeders Agricultural Cooper- is allowed in some situations, such as to tive’s motion to dismiss the Robinson- ative supplies feed to breeders of meet an equally low price offered by a Patman Act charges. FFfur bearing animals. It has deliv- competitor or where the difference in ery routes that serve areas with a high price can be justified by differences in the Antitrust issue concentration of members. The co-op costs of serving customers. Fortunately Finally, the court addressed plaintiffs’ delivers feed to these members free of for our purposes, these complex defense charge that the cooperative’s delivery pol- charge. Other members must pick up issues aren’t involved in the case covered icy also violates federal antitrust law, their feed at the co-op’s facility. in this article. subjecting the co-op to triple damage lia- Two of the cooperative’s members, The Robinson-Patman Act has not bility. It reviewed the charges in plain- whose ranch is approximately 80 miles been a major restraint on cooperatives. tiffs’ compliant and stated that since it from the nearest delivery route, sued the The Act specifically provides that paying was ruling on the cooperative’s motion to cooperative. They asked for an injunction patronage refunds to members and other dismiss, it had to construe all allegations requiring the cooperative to deliver feed patrons is not price discrimination. 15 in the case in favor of the other party—in to them, claiming that the policy of deliv- U.S.C. ‘ 13(b). However, this decision is a this instance the disgruntled member ering feed free of charge to some mem- reminder that cooperatives are not total- plaintiffs. bers but not to others constituted price ly exempt from Robinson-Patman. The court concluded that where, as in discrimination in violation of Section 2(a) Robinson-Patman Act issues this dispute, a cooperative’s conduct of the Clayton Act (as amended by the increases the costs of some customers Robinson-Patman Act). They also asked The court first discussed whether the and those customers can’t raise their for triple damages based on lost profits, cooperative’s delivery practices could affect prices to recover the cost differences litigation costs, and attorney’s fees under the “price” members paid for feed. It found between themselves and other competi- Section 4 of the Clayton Antitrust Act. that “price” encompassed more than the tors receiving the same product at a The cooperative asked the court to dis- invoice price. “Price” was de-fined as also lower cost, the harm to the disadvan- miss the litigation on the grounds that the including other terms of sale that allowed taged customers is something the plaintiffs’ claims, even if true, didn’t allege some customers to purchase something at antitrust laws are designed to prevent. anything illegal. A United States District a lower overall cost than other customers. The cooperative’s motion to dismiss the Court Judge in Utah denied the co-op’s The court determined that the additional antitrust allegations was also denied. motion, holding that the delivery policy could cost incurred by the plaintiffs in picking up be found to be unlawful price discrimination their feed could amount to illegal indirect Implications for cooperatives and a violation of antitrust law entitling price discrimination. While this case involves a dispute plaintiffs to triple damages and costs. Bell v. Next the court looked at whether the between a cooperative and some of its Fur Breeders Agricultural Cooperative, 3 F. cooperative’s delivery policy might result members, it raises a broader issue. Other Supp. 2d 1241 (D. Utah 1998). in a substantial reduction in competition. than paying patronage refunds what, if The court observed that since fur is sold Robinson-Patman primer anything, can a supply cooperative offer at auction, the cooperative’s practice its customers as inducements to become Federal antitrust and trade regulation could not result in a lower price for the members? Is every member-only dis- laws do not give the government authori- plaintiff’s products. count or service a possible Robinson- ty to tell a business what prices to charge, However, it said plaintiffs could estab- Patman and antitrust laws violation? but they do forbid discrimination among lish that the discrimination resulted in As for the charges of antitrust law vio- buyers in those prices, under certain con- lower profits for themselves. The court lations, perhaps they will resurrect inter- ditions. One element of those laws, noted that fur breeders operate on a rela- est in whether the Capper-Volstead Act Section 2(a) of the Clayton Act as amended tively low profit margin and the coopera- defense to anticompetitive conduct by by the Robinson-Patman Act, makes it tive’s delivery policy provided plaintiffs’ agricultural producers covers providing unlawful for a seller “to discriminate in competitors with a significant competi- supplies to producers. Certainly any prices between different purchasers” of the tive advantage. This, in the court’s mind, issue that poses the possibility of triple- same products “where the effect of such was enough to justify an inference of com- damage awards against cooperatives discrimination may be to substantially petitive injury. requires consideration of all possible lessen competition....” 15 U.S.C. ‘ 13(a). While the opinion addresses this issue defenses. ■ The intent of Section 2(a) is to prevent in vague terms, a footnote is more to the large buyers from using their market point. Here the judge states, “It seems

18 May/June 1999 / Rural Cooperatives Transworld Traders With 1997’s record exports, U.S. farm cooperatives prove their ability in the global marketplace

Tracey L. Kennedy While trends in U.S. exports point to the Export markets Ag Economist, USDA Rural Development increased importance of differentiated prod- Asian markets were by far the most ucts relative to bulk commodities, coopera- important for cooperative exports in 1997, Editor’s note: The first in an annual series tives have shown growth in both categories taking in $3.9 billion or 49.7 percent of the of surveys of cooperative involvement in during the latter half of the 1990s (figure total, compared to 43 percent of all U.S. international markets began in 1997. Prior 2). Fueled by consolidations and alliances exports to those destinations (figure 3). to that, cooperative exports and imports in grains and oilseeds, cooperative exports European destinations followed with $1.39 of bulk commodities posted a sharp increase had been measured at five-year intervals. billion or 17.7 percent of cooperative of 43 percent from $3.8 billion in 1995. Sim- The new survey was also the first attempt exports, while Latin American markets took ilarly, sales of consumer-oriented products, to measure cooperative involvement in in $796 million or a little more than 10 per- which remained relatively steady during activities other than exporting and import- cent. Canada accounted for almost 9 per- the first half of the 1990s, rose 39 percent ing. These include foreign memberships cent of cooperative exports at $684 million. from 1995 to 1997, largely on the strength and ownership of assets in other coun- of increased sales of horticultural products. Non-agricultural exports tries. An overview of survey findings for Intermediate products sales continued their Seven cooperatives reported non-agri- 1997 is presented here. consistent increase, rising 15 percent from cultural exports valued at $227 million in 1995 to 1997. Co-ops set record for exports in 1997 1997. Non-agricultural products consist mainly of farm inputs such as fertilizer, Riding brisk sales in pre-recession Asian Export sales concentrated among largest co-ops petroleum products, equipment and other markets and sharp increases in sales of supplies, and forestry products as well as bulk commodities, U.S. producer-owned Cooperative export sales continue to be seafood and fisheries products. heavily concentrated among a few large cooperatives reported record agricultural Ninety percent of these exports ($204.7 exporters. In 1997, only five cooperatives, exports in 1997. During 1997, 95 cooper- million) are comprised of fertilizer, petro- each with exports of greater than $250 mil- atives reported exports of agricultural leum and chemical products (figure 4). lion, accounted for 76.7 percent of all commodities and food products valued at Nine percent ($20.5 million) comes from export sales reported, roughly the same more than $7.8 billion, up from $5.6 bil- other products, primarily fisheries and amount reported in 1995. Another 16 per- lion in 1995 and accounting for more seafood products, forestry products and cent, or $1.3 billion, came from 14 cooper- some services. Machinery and equipment than 13 percent of all U.S. agricultural atives having export sales ranging from ($1.2 million) and miscellaneous farm sup- exports. Seven cooperatives also reported $50 million to $249 million. The largest plies — mainly fencing and animal health exports of non-agricultural products — number of cooperatives in any sales range products ($890,000) — account for less fishery and seafood products, fertilizer was 34, selling between $1 million and $9.9 than 1 percent, respectively. and other farm inputs, equipment and million but accounting for less than 2 per- Canada was by far the leading market machinery — valued at $227 million. cent of all export sales. for cooperative exports of non-agricultural Seventy percent ($5.48 billion) of Record cooperative share products at more than $202.8 million, or 89 cooperative exports in 1997 were bulk percent of the total. Asia was the second Cooperatives accounted for 13.8 percent commodities: grains and oilseeds, cotton, largest market at $15.2 million, or 7 per- of all U.S. agricultural exports in 1997, the pulses, and peanuts (figure 1). Con- cent of the total, followed by Europe at $6.1 largest cooperative share recorded since sumer-oriented products — fresh and million, or 2.6 percent, and Latin America cooperative exports have been surveyed by processed fruits and vegetables, red with $2.7 million, or about 1 percent. USDA. Sharply higher levels of coopera- meats and poultry, dairy products, and tive exports, coupled with a downturn in Export tools tree nuts —accounted for 25 percent total U.S. export sales, are primarily A variety of tools are available to coop- ($1.98 billion). Intermediate products — responsible for this increase. In terms of eratives to facilitate the sale of member partially processed or intended for use commodity categories, cooperatives post- product overseas. These include GSM by other than the final consumer — such ed a 23.3 percent share of U.S. bulk loans; Foreign Sales Corporations (FSCs), as feeds, oils, flours and meals, and sug- exports, 9.5 percent of all U.S. consumer- a tax incentive mechanism for U.S. oriented exports and 3.2 percent of inter- ars and sweeteners, accounted for about exporters; export trade Certificates of 5 percent ($406 million) of the total. mediate export sales.

Rural Cooperatives / May/June 1999 19 Review (COR), a provision providing lim- Cooperatives import range of 5 percent consisted of intermediate agri- ited antitrust exemptions for joint export goods cultural products: feed components, sug- activities; and export promotion programs ars and sweeteners, and bovine semen. Cooperatives source products from such as USDA’s Market Access Program around the globe for a variety of purpos- Countries of origin (MAP) or those available through various es. Farm supply cooperatives purchase fer- state and regional organizations. U.S. cooperatives purchased more than tilizer, petroleum, feed, animal health prod- On the surface, survey results indicate 61 percent of their imported goods from ucts, twine, and equipment and machinery that only a relatively few cooperative NAFTA partner Canada in 1997 (figure 6). to provide member-producers with the best exporters make use of these programs: 14 Most of the Canada-sourced products con- value in farm inputs. Marketing coopera- of 95 reported using FSCs; three partici- sisted of farm inputs such as fertilizer, petro- tives import ingredients for further pro- pate in the COR program; 13 have received leum products, and other farm supplies. cessing, complementary products to MAP funds; nine use GSM loans, and 13 Latin American countries originated 22 enhance their product lines and occasion- participate in state, regional, or commodi- percent of cooperatives’ imports in 1997, ally to augment member production. ty-based export promotion programs. How- consisting mainly of fresh and processed In 1997, 24 cooperatives reported more ever, some of these programs are limited fruits and vegetables, as well as some farm than $507 million in imports. Seventy-two to specific commodities and countries, and supplies. Europe provided 7 percent of the percent of cooperatives’ imports were farm virtually all are geared to exporters of a total: processed fruit products, farm sup- supplies and other agricultural inputs such certain size and continuity in terms of mar- plies and machinery, and frozen bovine as petroleum, fertilizer, and machinery and ket presence. The survey did not attempt to semen. The origin of 9 percent of imports equipment (figure 5). Twenty-three per- measure cooperative awareness of these was not identified, while Asia, the Middle cent of cooperatives’ imports were of high- programs. East and Oceania (Australia, New value food products, primarily fresh pro- Zealand) provided less than 1 percent of duce and juice concentrates. The remaining imported products.

Figure 1— Agricultural Exports by Figure 2— Agricultural Exports by U.S. Figure 3— 1997 Cooperatives Exports by Cooperatives, 1997 Cooperatives, 1990 Ð 1997 Destination

1990 1995 1997 Total Exports: $7.88 billion Africa 5.2% Oceania 0.7% $ million 8,000 Unidentified 5% Intermediate Total Middle Products 5% East 7,000 3%

6,000 Canada Bulk 8.7% Latin Consumer 5,000 America Products 10.1% 25% 4,000 Bulk Europe Commodities 3,000 17.7% 70% Consumer Oriented Asia 2,000 49.7%

1,000 Intermediate 0 1990 1995 1997

20 May/June 1999 / Rural Cooperatives Beyond exporting and importing In 1997, six cooperatives reported hav- eratives reported ownership of assets in ing producer-members in other countries, those countries where they also had joint In the past, cooperative involvement in most in Canada, Mexico and South Amer- processing activities. international activities has largely been ica. Five cooperatives had member coop- Thirteen cooperatives reported owner- limited to exporting and importing, though eratives outside the United States, pri- ship of foreign assets (excluding offices). a few engaged in manufacturing, brand marily in Canada. A majority of the co-ops These assets ranged from wholly owned licensing and the like. Although still rel- with foreign producer-members are processing and manufacturing facilities to atively few, an increasing number of coop- engaged in the production of consumer-ori- minority shares in other companies. Nine eratives within the last decade have ented products, while those with foreign cooperatives had assets in only a single evolved into more truly international com- co-op members are producers of bulk com- overseas location, while four reported panies through a variety of other involve- modities and farm inputs. assets in multiple countries. ments in world markets. Today, coopera- Twelve cooperatives — primarily pro- Cooperatives have demonstrated, year tives increasingly seek foreign producer ducers of consumer-oriented products — by year, that they can be effective players members, engage in joint manufacturing reported licensing arrangements. Most of in a global marketplace and their 1997 or distribution with foreign firms, and seek these cooperatives were active in multiple results illustrate that. However, as 1997 out partnership and investment opportu- markets if not worldwide. drew to a close, many of the markets on nities abroad. Marketing cooperatives facil- Six cooperatives reported joint pro- which U.S. cooperatives most depend expe- itate the sale of member products and cessing or manufacturing arrangement rienced a sharp decline in economic con- enhance the visibility and value of mem- overseas. Most were active in multiple loca- ditions from which they still have not ber-owned assets such as brand-names tions, with the heaviest concentrations in recovered. This, coupled with the maturity through licensing and distribution Europe and Asia. Though not asked to of markets for some commodities in which arrangements. Farm supply co-ops have specify whether these activities involved cooperatives are basic, will continue to increasingly integrated back into primary contractual arrangements (such as co- challenge the cooperative presence inter- production through foreign member coop- packing) or asset ownership, three coop nationally. ■ eratives or the acquisition of foreign assets.

Figure 4— Nonagricultural Exports by Figure 5— Imports by U.S. Cooperatives, Figure 6— Cooperatives Imports by Cooperatives, 1997 1997 Country of Origin, 1997

Total Non-Ag Exports: $227.4 million Total Imports: $507.8 million

Unidentified Other Machinery 9% 1% 1.2% Farm Supplies 0.89% Intermediate 5%

Other 9% High value Europe food products 7% 23% Canada Nonagricultural Latin 61% 72% America 22% Fertilizer, Petroleum & Chemicals 90%

Rural Cooperatives / May/June 1999 21 A Fight for Survival Co-op members hope extra profits will help preserve a way of life they see rapidly disappearing on the prairie

By Valerie Berton Information Specialist USDA Sustainable Agriculture Research and Education banking on the willingness of consumers ers rather than price-takers” in the fluc- to pay for beef raised on a protein-rich tuating beef market. Editor’s Note: USDA’s Sustainable Agri- grass that has been the envy of other The key, they say, is spreading the word, culture Research and Education (SARE) ranchers for generations. Until the 1940s, finding the niches where they can sell their program has funded 1,400 grants since in fact, Texas ranchers used to truck their different brand of beef. They attend con- 1988 to help producers improve profits cattle north to finish them on Kansas ferences, workshops and trade shows, land grass. stories in the local press, write for newslet- and stewardship. As part of its education- Aided by a SARE grant, the co-op ters and talk up their product to whoever al focus, SARE recently helped launch a worked with the Kansas Rural Center to will hear them. “Farming for Profit, Stewardship & Com- hire staff to create labels, coordinate pro- Their first customer was a local hospi- munity” campaign for small-scale produc- duction and, above all, market beef. They tal, where the staff dietician was wowed ers. The campaign centers on “tip sheets” now sell beef to a hospital, restaurants, by the lower fat content of co-op beef. A listing free and low-cost resources on small groceries and directly to individuals. restaurant in Wichita specializing in low- subjects ranging from alternative market- At the ‘Buy Kansas’ Expo 1997, Tallgrass fat food soon followed. ing to improving soil to networking. To Beef was voted best Kansas product. learn more about SARE and how to apply “It’s a great effort by people trying to for a grant or to view SARE project live by their principles, and have their results, tip sheets for small farmers or oth- product reflect that,” says Dan Nagengast er educational materials, see of the Kansas Rural Center. “There’s a big striving in this country for ‘real’ things. www.sare.org Pepperidge Farms will never be a farm, but here’s a product that is what they say s beef prices spiraled down- it is.” ward like a Kansas twister Most U.S. beef comes from cattle fin- throughout the 1980s and ear- ished in feedlots, where they eat large AlyA 1990s, ranchers in the Great Plains amounts of grain. By finishing beef on pas- began selling their spreads to agricultural ture, co-op members cut out the extra, corporations and housing developers. energy-intensive process of planting, har- Watching some of the best grassland in the vesting and shipping grain. Instead, their world be subdivided for second homes, a production model keeps land in grass, con- group of Kansas ranchers decided to take serving soil and water quality. Their ani- action. mals are raised without hormone implants Thus was born the Tallgrass Prairie or antibiotics. Producers Co-op, ranchers who figured a The resulting leaner cut of beef has collective strategy had a better chance of yielded impressive nutritional test results, weathering the storm. and, Tallgrass Beef producers boast, tastes “Ranchers are very independent—we’re better. An average cut of Tallgrass beef not used to working together,” says Annie breaks down to 116 calories, 1.5 grams of Wilson, a co-founder of the Kansas beef fat and 0.7 grams of saturated fat. Co-op cooperative and its fledgling effort to obtain members feel sure once that information better prices for sustainably raised beef. gets out, their product will bring a better But when struggling ranchers heard about price in the marketplace than convention- preliminary meetings of the group, “They ally raised beef. kept showing up.” “We’re trying to break out of the Today, Tallgrass Prairie Producers Co- corporate-industrial mold,” says Pete op consists of nine ranching families Ferrell, a local rancher and the co-op’s sec- throughout the state who produce beef on retary-treasurer. “We want to capture the grass and market it accordingly.They are value of what we’re doing, to be price-mak- Annie Wilson, rancher and business manager of th

22 May/June 1999 / Rural Cooperatives More recently, the co-op landed its first underway, and cutting through what in winter,” Wilson wrote for The Land out-of-state customer. A Baltimore trade seemed like yards of bureaucratic red tape Report, a Land Institute publication, in show brought co-op representatives in con- to establish a logo, business plan and mar- 1995. “The best that most young people tact with a Hudson Valley, N.Y., distribu- keting strategy tried their patience. wanting to stay on the land can hope for tor that supplies food clubs and natural Yet, co-op members are heartened by is to find a job as a manager or hand for food stores in New York, Connecticut, the potential of Tallgrass Prairie Producers one of the absentee ‘mega-ranchers.’ I Pennsylvania and New Jersey. to reach consumers all over the country. grieve for their loss of a personal, long- “They called us as soon as we got home They hope the extra profit will help pre- term stake in the land—the bonding and and said they were ready to go,” says Wil- serve a way of life they see rapidly disap- commitment that comes from knowing the son, the co-op’s business manager. The co- pearing on the prairie. hills and grasses they manage are truly op began shipping frozen beef from Kansas “Though our community life may be ful- their home[s] and must be preserved for in late 1997. The effort was not without filling and supportive, it belies the under- their children.” ■ tough initial challenges. A severe drought lying economic crisis in this area, where plagued Kansas just as the co-op got young ranchers are rare as thunderstorms

the Tallgrass Prairie Producers Co-op, says co-op members are raising “healthy animals on healthy land.” USDA Photo by Vada Snider

Rural Cooperatives / May/June 1999 23 N EWSLINE

Next century will see new wave of electric co-ops as is a reality we will no longer have an obligation to serve,” he consumers seek protection from deregulation said, quoting an official of the power company. “Companies like that help define who we are,” said Consumers will increasingly turn to cooperatives for ener- English, urging the delegates to strengthen their adherence gy services if the electric utility industry abandons its long- to the seven business principles that put the consumer at the held obligation to serve all customers, predicts Glenn English, center of the cooperative enterprise. “Changes in our industry chief executive officer of the National Rural Electric will increase the need by consumers for electric cooperatives. Cooperative Association (NRECA). According to the cooperative principles, we have a responsibil- Speaking to more than 12,000 representatives from the ity to meet those needs,” he said. nation’s cooperative electric utilities in Anaheim, Calif., English also warned of business and political forces at March 8 for the 57th NRECA Annual Meeting, English sin- work to undermine the cooperative business structure, calling gled out energy suppliers that have either threatened to or on cooperative officials and consumers to remind their elected have abandoned residential electric customers in states that officials to recognize the uniqueness of electric cooperatives. have allowed some form of electricity deregulation. “There are forces at work whose goal is to eliminate com- “Remember Enron? Today, that company has turned its back petition by attacking the cooperative form of business,” on consumers in every residential market they entered,” he said. English said. “Legislators and regulators must tailor restruc- Warning that the concept of choice can mean that some turing legislation in a way that preserves and keeps the coop- consumers “won’t get chosen,” English read from an employee erative business model whole. We are not asking to be newsletter published by an investor-owned power company exempted. We are asking to be treated differently, because we that promised to focus its resources on “those customers who are different. We must have the ability to continue to provide will give us the targeted rate of return. In a deregulated mar- consumers with an alternative that allows them the opportu- ket, we shouldn’t try to keep all customers. After deregulation nity of choice and self-determination.

Number of U.S. dairy farms plunges Measuring the decline in farm numbers as a percentage, The number of the NMPF analysis shows that many Western states have dairy farms in the lost a significant portion of their dairy farms, at rates higher U.S. has dropped by than in traditional dairying areas like the Midwest and more than one-fourth Northeast. For example, New Mexico lost 54.5 percent of its in the past six years, farms between 1993 and 1998. Washington state was next according to a new with a decline of 48 percent of its dairy operations. Arizona at analysis conducted a loss of 37.5 percent, Texas at 36 percent and Utah at 35.7 by the National Milk percent, rounded out the five major states with the most Producers Federation severe rate of decline in their dairy farm numbers. (NMPF). California, which produces the most milk of any state in NMPF reviewed the nation, lost 1,300 farms, or 32.5 percent, of its operations USDA data on the number of dairy farms in major dairy during the 6-year period. The No. 2 dairy-producing state, states during the period 1993-98. During that 6-year period, Wisconsin, lost 23.3 percent of its farms — a rate slightly the total number of U.S. dairy operations dropped from under the national average attrition rate of 25.9 percent. The 157,150 in 1993 to 116,430 in 1998 — a decline of 40,720 other largest-producing dairy states lost farms at close to or farms, or 25.9 percent. The USDA defines a dairy operation below the national average attrition rate: No. 2 New York as any farm with at least one milk cow during a given year. down 20.9 percent, No. 4 Pennsylvania down 11.4 percent, The state losing the largest number of farms during this and No. 5 Minnesota down 28.1 percent. period was Wisconsin (down 7,000 farms). Minnesota was Jerry Kozak, NMPF’s chief executive officer, said the second with a loss of 3,800 farms, New York third with 2,300 analysis “clearly illustrates the economic pressures on indi- fewer farms, Ohio fourth with 2,000 farms lost, and Texas vidual dairy farmers as our industry consolidates. Across the and Missouri tied for fifth with 1,800 less farms. NMPF’s country, milk is coming from fewer but larger farms. As dairy analysis did not examine the individual loss of dairy farms producers continue to be exposed to volatile swings in the in 16 of the 50 states that do not have significant dairy market price for milk, we will continue to see dramatic drops industries, although these states together lost a total of in the total number of farms in the U.S. — even in major 7,270 farms during 1993-98. dairy states like California and Wisconsin.”

24 May/June 1999 / Rural Cooperatives N EWSLINE

“Together we will aggressively pursue the right of any elec- lion and a net margin of $70 million. DFA’s joint ventures per- tric cooperative to enter into any business that any other util- formed very well, returning $41 million to the bottom line.” ity company is allowed to enter in a restructured electric util- Hanman also saluted DFA’s consolidated and restructured ity industry. Legislative language addressing this specific manufacturing operations, its merged and restructured work point must be a part of any overall restructuring measure we force, its recently created business alliance with Leprino support,” he said. Foods, and the continuing expansion of its joint venture bot- English praised the electric cooperative network’s bold tling operations. He also recognized DFA completed merger move in establishing the Touchstone EnergyR brand and its with California Gold Cooperative Creamery, DFA’s marketing standards for consumer protection and service. “Touchstone strategy for Borden Cheese, and its successful pursuit of polit- Energy represents the integrity of the trust and the bond we ical initiatives. have with those we serve, and it is a significant contributor to the new sense of unity developing within electric coopera- Two eastern dairy co-ops merge tives,” he said. More than 95 percent of the voting members of Maryland English urged cooperative directors and staff to reaffirm and Virginia Milk Producers Cooperative Association of their commitment to consumers by rallying behind an Reston, Va., and Carolina-Virginia Milk Producers Association “Electric Consumer Bill of Rights,” which would declare, in of Charlotte, N.C., have approved a merger of the two coopera- part, that all electric consumers are entitled to the right of tives. Effective April 1, the merger created a cooperative that affordable electric power, of self-reliance, the right to economic serves more than 1,550 dairy farmers in 11 eastern and south- independence, to fair treatment, the right to ownership, the eastern states, from Pennsylvania to Alabama. It will market right to additional services, and the right of cooperation. about 3 billion pounds of milk a year. The newly merged oper- Representatives from cooperative electric utilities across ation has the Maryland and Virginia Milk Producers the nation who attended the NRECA annual meeting, March Cooperative Association name. Headquarters are in Reston, 7-10, in Anaheim set NRECA’s legislative and organizational Va. A regional office is located in Charlotte, N.C. agenda for 1999. In addition to considering and acting upon policy resolutions, delegates received reports from NRECA Foremost Farms USA earns $27.4 million officials, heard addresses by key public figures and attended Aided by strong markets and reduced costs, Foremost Farms panel sessions on major issues affecting electric cooperatives USA earned $27.4 million in net income from $1.38 billion in and their consumer-owners. total revenues for the year ended December 31, 1998. NRECA is the national service organization that repre- In comparison, the Baraboo, Wis.-based dairy cooperative sents the nation’s nearly 1,000 consumer-owned electric coop- earned $4.5 million in 1997 and had $1.19 billion in total rev- eratives, which provide electric service to more than 32 mil- enues. In 1996, Foremost Farms earned $16.9 million in net lion people in 46 states. income and had $1.36 billion in total revenues. “What was different about 1998 is the market didn’t have Dairy Farmers of America celebrates first annual multiple peaks and valleys like it did in 1997, when it took meeting in Kansas City two large dips,” said Duaine Kamenick, Foremost Farms’ vice In a message outlining 1998’s accomplishments, Dairy president of finance. “During the past year, the market made Farmers of America (DFA) president and chief executive a steady climb and never really fell.” officer Gary Hanman told an audience of 1,700 members and Foremost Farms president Donald C. Storhoff announced guests that DFA members can be proud of what they have that patronage allocation for 1998 averaged 53 cents per hun- accomplished by working together. dredweight on all member milk marketed during the year. Noting that 1998 was a year of record milk prices and a During those 12 months, members marketed 5.1 billion period of restructuring and change for the cooperative, pounds of milk. Hanman said the year was challenging but rewarding for the As in prior years, Foremost Farms will pay 25 percent — this cooperative and its members. He noted that the year opened year averaging 13 cents per hundredweight — to member-own- with the Basic Formula Price (BFP) at $13.25 per hundred- ers in cash. The remainder will take the form of equity credits. weight (cwt) and ended at a record high BFP of $17.34. The Foremost Farms operates 27 manufacturing facilities and average BFP for 1998 was $14.20 per cwt. three milk transfer stations for dairy farmers in Wisconsin, Hanman pointed out several DFA accomplishments. “We Minnesota, Iowa, Illinois, Indiana, northwestern Ohio and set a goal of earning $70 million on total sales of $7 billion in southern Michigan. The cooperative employesd 1,750 people 1998,” he said. ADFA completed the year with sales of $7.3 bil- as of Dec. 31, 1998.

Rural Cooperatives / May/June 1999 25 N EWSLINE

NICE conference set for July 26-29 in Utah vice chairman — he is CEO of Plains Cooperative Oil Mill, a cottonseed cooperative in Lubbock, Texas. Orton, a vineyard The 71st National Institute on Cooperative Education owner and fruit tree grower from Ripley, N.Y., was re-elected (NICE) will be held July 26-29 at the Snowbird Resort in as second vice chairman. Orton is also past chairman and Snowbird, Utah. The theme of the annual conference on coop- director of Welch’s Foods of Concord, Mass. Orton and Martin erative education is “Achieving New Heights Through have held their vice-chairman positions since 1997. Cooperatives.” The program will focus on the opportunities As a customer-owned bank, CoBank is governed by a 22- cooperatives afford their members and the challenges farmers member board of directors. Customer-stockholders elect 21 of and farmer-owned cooperatives face as they enter the new the directors, and an additional director is elected by the millennium. The conference is sponsored by the National board as an outside director. Also, CoBank’s board adopted Council of Farmer Cooperatives Education Foundation. several new bylaws affecting director eligibility. An age limi- AMPI sets operational records in 1998 tation was added requiring directors to be under the age of 70 on or prior to the date the term of office is to begin. Residency Associated Milk Producers Inc. (AMPI), the Midwest dairy requirements were modified. Formerly the bylaws required cooperative, announced record earnings and sales, and gains director candidates to reside in the CoBank district or region in milk volume and membership, at its 30th annual meeting for two years before running — this requirement was changed March 23. to require the director to reside in the district or region as of “In 1998, AMPI’s first year as a Midwest-based cooperative, July 1 of the election year. In addition, a requirement for U.S. we realized record milk checks, earnings and return on equity citizenship was eliminated. invested,” AMPI president Wayne Bok told 600 AMPI mem- While two-thirds of the directors are farmers, producers, bers and staff attending the annual business meeting. growers or commercial fishermen, the board also includes AMPI reported earnings of $14.9 million on $1.1 billion in rural utility managers and directors, agricultural co-op lead- dairy product sales. “This is the largest profit in the history of ers and commercial banking experts. AMPI,” said AMPI general manager Mark Furth. “But more “CoBank’s board members reflect the bank’s customer important, we gained a record number of members and paid a base,” Molz explains. “Our directors bring diverse back- record price to our member-owners.” grounds, expertise and industry knowledge to the boardroom. In 1998, AMPI processed 4.6 billion pounds from 5,000 Eliminating the requirement for U.S. citizenship reflects the dairy farms in several Upper Midwest states. international scope of our business. And easing district and DFA forms joint venture with Madison Dairy region residency requirements acknowledges that directors represent all stockholders rather than a particular geographic Kansas City-based Dairy Farmers of America (DFA) and area or industry.” Madison Dairy Inc. of Madison, Wis. have agreed to form a Under the CoBank board structure, seven of the director posi- joint venture to produce and market butter and related prod- tions are elected for three-year terms by stockholders each year. ucts at DFA’s plant in Winnsboro, Texas. Nominations for expiring terms for elected positions are accepted DFA’s corporate board approved formation of the venture in the summer of each year for a 60-day period. Nomination bal- during a March 24 meeting in Kansas City. Operational lots were sent to eligible voting stockholders in May. agreements were expected to be completed by May 1, 1999. In other news, CoBank invites U.S. agricultural coopera- Dr. Lonnie Spurgeon, chief operating officer for DFA’s Dairy tive leaders to attend its 1999 Customer Meeting in Foods Group, says the Winnsboro plant is ideally located to Nashville, Tenn., on July 7-8. With the theme “Building on a serve the joint venture’s plans to increase butter sales. Decade of Accomplishment: Leading Rural America in the “This area is producing increasing quantities of cream, which 21st Century,” the meeting will cover issues of interest to the are available to convert into high-quality butter,” Spurgeon says. bank’s 2,100 customers, which include U.S. agricultural coop- “This new business relationship will allow DFA and Madison eratives, rural utilities, Farm Credit associations and other Dairies to expand services to many valued customers.” businesses serving rural America. The bank also provides CoBank board re-elects officers and adopts new export financing for the benefit of U.S. agricultural coopera- director election bylaws tives and American agriculture. CoBank’s board of directors in April re-elected Otis Molz as its Michigan Milk Producers votes to remain on its own board chairman, and Wayne Martin and Roy Orton as officers. After a thorough evaluation of combining operations with Molz, CoBank board chairman since 1993, is a farmer and Dairy Farmers of America (DFA), the board of the Michigan rancher from Deerfield, Kan. Martin was re-elected as first

26 May/June 1999 / Rural Cooperatives N EWSLINE

Milk Producers Association (MMPA) has voted to keep the co- after June 30 included availability of computer software and op as its own milk marketing entity. While the MMPA board other outside vendor upgrades after the June goal. found many similar characteristics with DFA, including mar- Different from the two previous quarterly surveys were keting philosophies and cooperative principles, the board questions included by NRECA to determine if its member determined it would be in the MMPA members’ best interest cooperatives were having resource problems in achieving Year to remain on its own at this time. 2000 readiness. Only eight cooperative electric systems indi- cated some problem with resources to fix the Y2k problem, but NCBA members inaugurate a new NCBA at 1999 all eight expected controls that keep the lights on to be ready Cooperative Conference by Dec. 31, 1999-Jan. 1, 2000, according to Ron Greenhalgh, National Cooperative Business Association (NCBA) Paul NRECA chief engineer and chairman of the association’s Year Hazen introduced “the new NCBA” at the 1999 Cooperative 2000 Task Group. Conference April 21-23 in Washington, D.C. The meeting fea- “The survey data show that cooperative electric utilities, tured the theme, “Moving Cooperation into the 21st Century.” large and small, rural and not-so-rural, are on schedule with The conference included the annual meetings of the remediation of the Y2k problem,” said Greenhalgh. Cooperative Development Foundation, the National The NERC report also showed that fewer than 3 percent of Cooperative Bank and NCBA. In his remarks, Hazen dis- all components tested for the Year 2000 problem had required cussed NCBA’s Strategic Plan for 1999-2004. “As we enter the Y2k fixes; errors that had appeared had been mostly cosmetic 21st century, NCBA’s 20-year goal is to make cooperative or nuisance-type errors, such as incorrect dates in logs. “In enterprise a strong, distinct and unified sector of the economy nearly all instances, Y2k does not affect functions that keep recognized by the U.S public.” the lights on in homes or businesses,” NERC said. Hazen detailed NCBA’s four strategic initiatives for the next Electric distribution systems may be “least sensitive to Y2k five years: Cooperative Education, International Cooperative anomalies,” according to NERC, because most equipment is Development, Cooperative Public Policy and Cooperative mechanical, meaning there are relatively few digital controls Business Development. “By focusing on these strategic initia- and relatively few embedded chips. tives, NCBA ensures that cooperatives are the better way to do Greenhalgh echoed this observation, adding, “Electric coop- business as we move into the 21st century,” he said. eratives, most of which are distribution-only utilities, have been working continuously with their power suppliers, regula- Most electric utilities will be ready ahead of schedule tors, grid operators, vendors and manufacturers to identify for Year 2000 date roll-over real and potential problems, test and fix critical systems, and The nation’s electric utilities show substantial progress in then ensure their contingency plans are in place. their Year 2000 (Y2k) readiness efforts, and most will be ready “We’ve been in the reliability business for more than 60 well in advance of the Y2k date rollover. years and under the toughest conditions in the business. We According to the latest assessment ending March 31, 1999, expect to deliver the same reliable service in the year 2000 by the North American Electric Reliability Council (NERC), that we deliver now,” he said. millennium-related date problems in most of the electric utili- Cenex/Land O’Lakes Agronomy Company to purchase ty industry will be tested and fixed by June 30, 1999. In a Terra distribution business report delivered April 30 to the U.S. Department of Energy, NERC expressed continued confidence that the lights would Cenex/Land O’Lakes Agronomy Company has agreed to remain on come Jan. 1, 2000. purchase the distribution business of Terra Industries Inc., Electric utility trade associations, including the National Sioux City, Iowa. Rural Electric Cooperative Association (NRECA), continue to The purchase will include Terra’s approximately 400 farm help gather data from their member utilities for the quarterly supply retail facilities, seed and chemical distribution and reports to DOE, which the federal agency requested last year. other related businesses, employing more than 2,600 people NRECA’s latest survey of the 858 electric cooperatives in that in 31 states and Canada. The purchase also includes Terra’s sector of the industry showed that 646, or 82 percent, of the portion of ownership in the Omnium chemical formulation 794 electric cooperatives responding expected to complete plants in St. Joseph, Mo., and Blytheville, Ark. their readiness work by June 30. The remaining 18 percent The agreement does not include purchase of Terra’s nitro- reported that work to keep the lights on would be complete on gen manufacturing facilities. or before Dec. 31, 1999. “This opportunity to purchase Terra’s distribution business Reasons electric cooperatives gave for achieving readiness enhances our total cooperative agriculture supply business,”

Rural Cooperatives / May/June 1999 27 N EWSLINE

said Al Giese, president, Cenex/Land O’Lakes Agronomy Northeast farmers, announced in April that it is combining its Company. “We’re continually looking for ways to improve effi- agricultural products and retail services businesses. Robert A. ciency as we source and supply products and services to farm- Fischer, Jr. of Milford, Del., has been named president of the ers through local cooperatives. Our regional cooperative’s agron- new agriculture and retail group. Fischer previously served as omy business growth and profitability depend on increasing vol- president of Agway Agricultural Products. ume and maximizing our distribution and service capabilities.” “The unification of our agriculture and retail businesses Specifically, the acquisition of Terra’s distribution business will allow us to better leverage our talent in serving the would bring the Agronomy Company and the regional coopera- needs of our existing customers and winning new customers,” tive system an additional $1 billion in crop protection product said Fischer. “Both businesses share many of the same cus- sales, 2.5 million tons of plant food business, and over $100 tomers and are dealing with similar marketplace changes.” million in seed sales. The transaction is expected to be final- Agway’s agriculture business operates through six geograph- ized by mid-summer. Giese says farmers currently doing busi- ically based enterprises within 12 Northeast states. The enter- ness with Terra should not experience operational changes. prises manufacture and distribute dairy and livestock feed, seed and agronomic products and services, and operate 58 farm sup- Isom named Co-op Farmer of the Year ply stores. The enterprises also produce many Agway-branded Howard Isom, Blue products that are distributed through more than 100 company- Diamond Growers’ board owned retail stores and more than 300 dealers in the Northeast chairman, has been named states. The combined agriculture and retail business, which Co-op Farmer of the Year accounts for about one-half of Agway’s annual sales and rev- by the Agricultural Council enues, will be managed through the six enterprises. of California. The award Under the unification plan, Agway’s River Valley was presented at the asso- Enterprise, headquartered in E. Syracuse, N.Y., will provide ciation’s annual meeting in overall leadership for the combined group’s advertising, pro- March. curement, operations, customer service and dealer relations A long-time member of functions. Agway’s Keystone Enterprise, headquartered in Blue Diamond, Isom has Shippensburg, Pa., will manage these functions, in collabora- served on the board since tion with River Valley, for the agriculture and retail group’s 1988 and as chairman southern territory. since 1991. He is also a Also as part of the unification plan, Agway’s Western New Howard Isom member of Sunsweet York Enterprise, based in Batavia, N.Y., will be responsible for Growers and Diamond Walnut Growers. During Isom’s tenure, expanding the company’s coordinated dairy systems activities Blue Diamond has made major strides in increased efficiency, across enterprise boundaries and providing technical leader- membership growth, new product development, grower ser- ship to ensure that Agway is a leading dairy foods company. vices, leadership development, and technological change. His Agway’s Southeast Enterprise, headquartered in Milford, Del., prominence in agriculture and business led to his election to will lead efforts in the agronomic sector to ensure that Agway the board of directors of CoBank in 1998. remains a leader in nutrients, nutrient management and relat- In addition to managing 1,400 acres of almonds and serv- ed information technology. Each enterprise will oversee retail ing as a partner in Matsom and Isom Accountancy Corp., dealer relations and store management within its territory. Isom serves on the California State University, Chico, School The unification plan includes a workforce reduction of of Business Advisory Council, the Research Institute Board, approximately 40 positions or 2 percent of the combined agri- and on the Superior Ag Board for the School of Agriculture. In culture & retail group’s current workforce of 2,158 employees. 1988, he received the Business Person of the Year Award from Agway added that it will move forward with a planned consoli- the university. He has received numerous other awards and dation of its Salina Meadows office facility in Syracuse, N.Y., recognitions for his service to local colleges and organizations, into Agway’s corporate headquarters location in DeWitt, N.Y. and is a member of the board of directors of North State National Bank. Cattle marketing joint venture becomes reality: Blue Grass Marketing Systems of Kentucky and Southern Agway announces unification of its agriculture and States retail businesses Blue Grass Marketing Systems of Kentucky, the livestock Agway Inc., an agriucltural cooperativer owned by 75,000 marketing joint venture bringing together Eugene Barber &

28 May/June 1999 / Rural Cooperatives N EWSLINE

Sons, S&B Cattle Co. and the MLE Marketing Division of Lexington. Southern States Cooperative, has become a reality. MLE Marketing’s Indianapolis yard will begin conducting The Bluegrass Stockyards in Lexington and MLE’s yards a special feeder calf sale on the last Friday of each month. at Irvington, Owenton and Paris will all operate as part of the This event is in addition to the Tuesday sales regularly sched- new enterprise, according to Tom Reed, the Southern States uled at that yard. vice president who heads livestock marketing. “This will give Reed noted that beef cattle producers should be aware of the state’s beef cattle producers access to the broadest possi- two other recent developments. MLE is currently pursuing ble scope of marketing opportunities,” he said. the development of an auction facility in southern Indiana in “We believe that this has the potential of becoming the partnership with Indiana Farm Bureau. It is also expanding biggest news to hit the feeder cattle industry in the last its recently developed backgrounding and feeder calf procure- decade,” says Gene Barber, one of the partners and a past ment system, which allows farmers to gain added value by president of the National Livestock Marketing Association. producing for a specific market. Bourbon Stock Yards in Louisville closed after its March The MLE chief said many of the changes have resulted 29 sale, Reed noted. But he added that the new venture offers from “literally hundreds” of suggestions from cattlemen in the several viable alternatives to growers who had been taking area. Most came as a result of a December letter asking them animals to the historic Louisville yard. how they believed MLE could best serve them. At Irvington, the yard now offers a 1 p.m. Sunday drop-off, Reed said Barber & Sons and S&B are Kentucky’s oldest followed by a Monday sale. Thursday sales continue at both feeder cattle procurement firms, highly respected among cattle Irvington and Paris. In addition, there are Wednesday sales at ranchers. Their joint venture with MLE Marketing creates the Owenton and sales each Monday, Tuesday and Wednesday at largest marketing organization of its kind in the country. ■

Kansas Honors First Co-op Hall of Fame Inductees Cooperatives, and helped established several marketing and Five prominent cooperators have been inducted into the farm supply cooperatives. new Kansas Cooperative Hall of Fame sponsored by the Clayton R. Rock was secretary-treasurer and general Kansas Cooperative Council. Joe Lieber, executive vice presi- manager of Kansas Farmers Service Association (KFSA) for dent, said the five inductees honored at the council’s recent 32 years until his retirement in 1979. KFSA provides audit- annual meeting had promoted cooperative businesses during ing, accounting and insurance services for its member cooper- their careers. Cited were: atives and was one of the first companies to offer computer- U.S. Sen. Arthur Capper, owner and publisher of the ized data processing services to cooperatives in the 1960s. He Topeka Daily Capital, founder of the Capper Foundation for was president of the National Society of Accountants for Crippled Children, former governor, and a five-term senator Cooperatives and was honored by them for his distinguished who cosponsored the Capper-Volstead Act signed by President services to cooperatives. Warren Harding in 1922. The cooperative education and Ivan Strickler, a progressive dairy farmer from Iola, research center at Kansas State University was named after Kan., gained recognition as national dairy and international him in 1984. good will ambassador for the dairy industry. He served sever- Henry L. Peterson, a credit union pioneer who helped al terms as elected president of Mid-America Dairymen, led it organize more than 200 credit unions in four States including through a series of mergers and consolidations that made it Kansas plus the forerunner of the Kansas Credit Union the nation’s largest dairy marketer, and helped pave the way Association and served as its president from 1945-54. He also for its eventual consolidation with other dairy cooperatives to founded the Credit Union of Dodge City in 1940. form Dairy Farmers of America. He chaired the National Gene W. Porter, a farmer from Viola, Kans., who became Dairy Promotion and Research Board; served on the executive known as Mr. Rural Electric Cooperative for his 23 years as committee of the National Milk Producers Federation; was a president of the Sedgwick County Electric Cooperative frequent delegate to world agricultural trade talks; served as Association, 19 years on the board of Kansas Electric president and director of the National Holstein Association; Cooperatives, and service on the board of National Rural earned a reputation internationally as a skilled cattle judge; Electric Cooperative Association including a term as presi- and was past president of the World Dairy Shrine. He dent. He helped establish the Rural Electric Conference authored a book, “Holy Cow—We Did It!,” which traced the Center at the Agricultural Hall of Fame at Bonner Springs, evolution of dairy cooperatives and his leadership role in the Kans.; chaired the advisory board of the Wichita Bank for dairy industry.

Rural Cooperatives / May/June 1999 29 PAGE FROM THE PAST From Corporation to Cooperative One man’s dream becomes Welch’s legacy

Donna F. Abernathy also by North East Fruit Grow- DLF Communications Services ers. He knew from his experience in the molasses business that suc- Editor’s note: Abernathy, a freelance writer based in Murfrees- cess hinged on developing a close boro, Tenn., has broad experience working for and with cooper- relationship with the growers. atives. By buying exclusively from these six groups, Kaplan saw an opportunity to upgrade the finan- t was a time of crisis. In 1933, the country’s devastating cial status of the growers. He economics hit with full force the once-thriving Concord insisted on, and got, a five-year grape growing and processing industries. Demand for pre- contract guaranteeing grape ImiumI quality grape juice gave way to the necessity for basic food deliveries of 5,000 tons a year, staples. Vineyards were abandoned. Weeds were growing where 2,000 more than the cooperative grapes should have been. Plants and equipment fell into disre- had produced in any previous pair. Poor yields and even poorer processor prices were reflected Jack Kaplan year. The agreement gave grow- in the faces of dispirited growers. ers the incentive they needed to revitalize their industry. From this bleak period emerged the future of the Welch Grape The businessman’s ideas worked. In seven years, the Brocton Juice Company (now Welch Foods Inc.) and its ultimate cooper- facility had doubled in size and the growers were receiving ative ties. It came in the unlikely form of successful New York increased prices for their grapes. businessman, Jack M. Kaplan, who, by his own admission, start- Then came World War II and commodity price ceilings. Private ed out just looking for a way to make some money. But what his- processors like National Grape were forced to compete with coop- tory records is his influence on Concord grape growers and how eratives that were exempted from the price controls. When grow- he inspired one of the most significant events in the annals of ers began forming or joining small cooperatives, Kaplan quick- the fruit juice industry. ly voiced his opinion that they were “crazy to form all these little co-operatives.” To make his point, he made a most unusual offer. Seizing opportunity If the growers would form one big cooperative, he would sell the Kaplan, an astute businessman, viewed the grape juice indus- very profitable Brocton plant to the newly created farm organi- try’s woes as an opportunity. In 1933, he purchased a small, zation. financially strapped grape processing plant in Brocton, N.Y., and The National Grape Co-operative Association was soon in organized it into the National Grape Corporation. Though he business, but buying the processing plant from Kaplan took a had no knowledge of the grape juice business, Kaplan had all little longer than planned. Only two months after signing the the ingredients of success: the capital needed to revitalize the agreement to purchase National Grape in 1945, a circumstance local grape-growing industry, business experience to compete occurred which held even greater promise for the growers. with established competitors and a solid management team. Grapes for his operation were supplied by the five small grow- A cooperative destiny ers’ cooperatives, from which he had purchased the plant, and The Welch Grape Juice Company was for sale. And Jack Kaplan wanted it. He knew the new owner of the company would have “the only nationally advertised name” in grape juice. As Kaplan explained: “What Ivory was to soap, Welch was to grape juice.” In addition to the well-publicized brand, the deal would deliver an estab- lished market along with production and distribution facilities in five states. Once again, Kaplan saw opportunity and he encouraged the new co-op members to support him. It meant the co-op would forego the purchase of the Brocton plant and instead concen- trate on eventually buying Welch from Kaplan. It would take In the early 1900s, the Welch Grape Juice Co. funded aggressive promotional campaigns that established it as a household name. Photo and artwork courtesy welch Foods Inc.

30 May/June 1999 / Rural Cooperatives PAGE FROM THE PAST

more than a decade for the umph. In a sense, it was Jack Kaplan’s enduring monument deal to be finalized, but toward achieving his articulated goal: ‘I have a long interest in Kaplan remained unwaver- the betterment of humanity.’ ” ing in his conviction that “in Kaplan’s long-cherished dream became a reality and the the end the only viable form uniquely organized cooperative would go on to achieve great of ownership of this business things. Today, the National/Welch organization is the world’s was ownership by the farm- leading marketer of Concord- and Niagara-based grape prod- ers through the cooperative.” ucts. The National Grape Cooperative Association’s 1,497 patrons Kaplan bought controlling supply its principal raw products from more than 44,000 acres of interest in the Welch Grape Juice Company and quickly reversed vineyards in Michigan, New York, Ohio, Pennsylvania, Wash- negative trends in the sluggish business. By 1949, he was ready ington and Ontario, Canada. to sell to the growers, but three years would pass before an In its 1998 annual report, Welch reported net sales for 1998 acceptable plan was presented. The five-year plan called for were a record $599.7 million and patron net proceeds were a Welch to accept the growers grapes, process them, manufacture record $72.4 million. Over the past four years, at a time when and market the products, and give the farmers the full net pro- the food store industry and the total fruit juice industry have ceeds that would accrue towards the $15 million purchase price grown less than three percent, Welch’s sales have increased 41 for the company’s land, buildings and equipment. percent, or at a growth rate 14 times faster than the industry The plan was a generous one by many accounts. Still, there in which it competes. Patron proceeds have increased an aston- was fierce opposition from some growers. One argument that ishing 46 percent. Since 1995, Welch’s has more than doubled emerged was the belief that farmers should stick with growing its share of market in the juice category. ■ grapes and leave the processing, manufacturing and selling to Some information for this article taken from: “Welch’s Grape Juice: From Corpora- private industry. Bigotry also emerged as a theme since some tion to Co-operative” by William Chazanof (1977). distrusted Kaplan because of his Jewish heritage. Despite these arguments, the growers approved the plan by the end of 1952. In three years, the growers amassed their $15 million and made a deal with Kaplan to finance the additional $13.5 million needed to buy Welch’s current assets and good will. On Sep- tember 1, 1956, at 11:31 a.m., with a vote of the directors, Nation- al Grape Cooperative Association, Inc. became the sole owner of Welch Grape Juice Company Inc. To govern the new business relationship, a two-board system was established by the cooperative. National’s board of directors would concern themselves with delivering grapes, while Welch’s board concentrated on converting the fruit into marketable prod- ucts and selling them. Today, this unique arrangement continues and serves as a model for other cooperative ventures. A dream fulfilled In selling Welch, Kaplan realized his initial goal of personal profit, netting about $13 million. But turning Welch into a mate- rially successful company and transforming it into a coopera- tive gave him an even greater personal satisfaction, Kaplan told William Chazanof (author of a history of Welch’s) in a series of interviews about his experiences in the grape juice industry. During his years as a businessman, Kaplan became deeply concerned about how people were exploiting one another. “We have never been able to get together to have a system by which we are all cooperating for the common good,” he said. Also, his years of friendship with the growers gave him the ability to understand the unequal position of the individual farmer in dealing with processors. As Chazanof noted: “To Jack, the sale of Welch to National was both a personal and philosophic tri-

Rural Cooperatives / May/June 1999 31 NEW PUBLICATIONS FROM USDA

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Local Farm Supply, Top 100 Cooperatives Cooperative Pooling Financial Performance Marketing Co-ops 1997 Financial Profile Operations Of Local Farm Supply, Financial Trends Dave Chesnick Research Report 168 Marketing Co-ops, 1997 Research Report 171 Andrew A. Jermolowicz Research Report 172 E. Eldon Eversull A reprint of three articles that Beverly L. Rotan appeared in “Rural Cooperatives” The marketing practice of pool- The balance sheet and income magazine in late 1998. These arti- ing as used by cooperatives is out- This report analyzes the balance statements of 208 local farm sup- cles provide an overview of busi- lined in this report. Pools are sheets and income statements of ply and marketing cooperatives ness trends among the nation’s most prevalent in the fruit, veg- local farm supply and marketing are analyzed, comparing infor- 100 largest agricultural coopera- etable, nut, rice and dairy indus- cooperatives, comparing 1996 and mation from 1991 through 1997. tives, based on fiscal 1997 data. tries. Pooling practices of fruit 1997, and fiscal years and trends The data represents four cooper- These articles provide a snapshot and vegetable cooperatives are over the past 10 years. The data ative sizes and types. Common- of the fiscal status of the cooper- discussed as a marketing alter- in the report represents four coop- size income statements and bal- atives, which suffered their first native for their producer-mem- erative sizes and types. Income ance sheets are used to compare sales decline since 1992 but still bers. The report clarifies pooling statements and ratio analyses are and contrast these cooperatives. managed to strengthen their over- practices and presents the struc- used to compare and contrast Charts are used to look for trends all financial position. tural, managerial, financial and cooperatives by size and type. in balance sheet and income state- coordination aspects of a success- ments and financial ratios. Price: Domestic $2; ful pooling program. Price: Domestic $4.50, foreign $3; foreign $5.50 Price: Domestic $4.50; Price: Domestic $5; foreign $5.50 foreign $6

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