CHS: page 4 CHS: Rural COOPERA COOPERA SA/RrlDvlpet May/June2006 USDA /RuralDevelopment 75 andStill Shining 75 andStill Shining TIVES TIVES COMMENTARY

80th Anniversary of Cooperative Marketing Act

On July 2, 1926, President Calvin Coolidge signed the cultural producers “engaged in cooperative marketing of agri- Cooperative Marketing Act into law, formally launching the cultural products, including processing, warehousing, manu- federal government’s role in assisting farmer-owned coopera- facturing, storage, cooperative purchasing of farm supplies, tives. Although USDA first assembled data on farmer co-ops credit, financing, insurance and other cooperative activities.” in 1901 and launched its first official cooperative project in The Act has seven subsections, which direct the following 1912, it was the 1926 Act that really got the show on the activities to be undertaken: road. The first of the program’s subsequent “homes” was the • Promoting knowledge of cooperatives principles and prac- Division of Cooperative Marketing within USDA’s Bureau of tices and cooperating with educational and marketing agen- Agricultural Economics. For six years in the 1930s, it was cies, cooperatives and others in promoting that knowledge; even housed in the Farm Credit Administration before • Making special studies in the and foreign returning to USDA. countries and acquiring and disseminating information and Rather than a regulatory program, the framers of the law findings useful in the development and practice of coopera- envisioned it as a program that would provide education, tives; research and technical assistance to help farmers help them- • Gathering, analyzing and disseminating economic, statisti- selves. Eighty years later, this mission continues, although cal and historical information about cooperative business Mr. Coolidge and Co. would certainly be amazed by the radi- methods; cal transformation of the nation’s rural (and urban, for that • Studying economic, legal, financial, social and other phases matter) areas. The number of farmers is, of course, greatly of cooperation and publishing the results; reduced, and the size of the average farm has greatly expand- • Surveying and analyzing accounts and business practices of ed. But the marketing and other challenges facing farmers are cooperative associations...and publishing summaries of more formidable and complex than ever, and hence the per- results to guide other cooperatives in developing methods formance of their cooperatives is still vital. of business and marketing analysis; To see how a co-op can evolve and grow along with the • Advising committees or producer groups seeking to organ- farm economy, just turn to the coverage on page 4 of this ize a cooperative and making an economic analysis... issue to read about CHS Inc. as it marks its 75th anniversary. • Employing qualified commodity marketing specialists to The history of CHS and its predecessor co-ops is, in many summarize and analyze the information and disseminate it respects, also the history of and co-ops in the to cooperatives and others. Midwest and Northwest. Examples of innovative medium and small size co-ops are, After 80 years, should the Act be updated? Some have sug- of course, also featured in every issue of this magazine and gested expanding the scope to include all types of coopera- demonstrate how flexible the co-op model is. Strategic tives, not just agricultural cooperatives. Should the role of the alliances and joint ventures among co-ops, new-generation program – now housed with USDA Rural Development – be co-ops, use of co-op subsidiaries, co-ops with international expanded to include other types of producer-owned agribusi- members and using outside equity to supplement farmers’ nesses (such as the producer-owned LLCs gaining popularity equity are examples of this flexibility. Co-ops are industry in the biofuels industry)? leaders in identity preservation, niche marketing, develop- These and other questions and issues concerning the ment of new products and services and other ways of provid- future of producer-owned and other types of cooperatives ing member support. will need to be resolved as co-ops position themselves to pro- Despite the passage of 80 years, the scope of activities vide the types of services their members need in order to Congress directed USDA to help farmers pursue through co- prosper. ■ ops still serves as a road map to the types of endeavors farmer co-ops are engaged in today. The Act directed service to be — Dan Campbell, Editor provided to associations, federations and subsidiaries of agri-

2 May/June 2006 / Rural Cooperatives Rural May/JuneCOOPERACOOPERA 2006 TIVESTIVESVolume 73 Number 3

FEATURES

4 CHS at 75: Looking back, looking forward By Dan Campbell Rural COOPERATIVES (1088-8845) is published bimonthly by Rural Business–Cooperative Service, U.S. Department of Agriculture, 1400 Independence 12 Montana forest fuel collection Ave. SW, Stop 0705, Washington, DC. 20250-0705. p. 4 The Secretary of Agriculture has determined that business wins USDA grant publication of this periodical is necessary in the By Tyler Christensen transaction of public business required by law of the Department. Periodicals postage paid at Washington, DC. and additional mailing offices. Copies may be obtained from the Superintendent of 14 Bottling Hope in Africa Documents, Government Printing Office, Washington, DC, 20402, at $23 per year. Postmaster: Land O’Lakes providing boost to Ugandan industry send address change to: Rural Cooperatives, p. 14 By Todd Thompson USDA/RBS, Stop 3255, Wash., DC 20250-3255.

Mention in Rural COOPERATIVES of company and brand names does not signify endorsement over 17 Co-op Conversions other companies’ products and services. Extent of commitment to co-op values key factor in decisions Unless otherwise stated, contents of this publication are not copyrighted and may be reprinted freely. For By Julie Hogeland noncopyrighted articles, mention of source will be appreciated but is not required. p. 17

The U.S. Department of Agriculture (USDA) prohibits 22 A Movable Feast discrimination in all its programs and activities on N.D. farmers to add value and educate the basis of race, color, national origin, age, disabili- consumers with D.C. eatery ty, and where applicable, sex, marital status, familial status, parental status, religion, sexual orientation, By Sheri Aldapi genetic information, political beliefs, reprisal, or because all or part of an individual’s income is derived from any public assistance program. (Not all prohibited bases apply to all programs.) Persons p. 22 24 Agri-Mark, Allied Federation with disabilities who require alternative means for communication of program information (Braille, dairy co-ops join forces large print, audiotape, etc.) should contact USDA’s TARGET Center at (202) 720-2600 (voice and TDD). To file a complaint of discrimination, write to USDA, Director, Office of Civil Rights, 1400 Independence Avenue, S.W., Washington, D.C. 20250-9410, or call (800) 795-3272 (voice), or (202) 720-6382 (TDD). USDA DEPARTMENTS is an equal opportunity provider and employer. 2 COMMENTARY Mike Johanns, Secretary of Agriculture 16 VALUE-ADDED CORNER Thomas C. Dorr, Under Secretary, USDA Rural Development, 21 LEGAL CORNER 25 NEWSLINE Jack Gleason, Acting Administrator, Rural Business-Cooperative Programs 33 PAGE FROM THE PAST Dan Campbell, Editor 35 INSIDE RURAL DEVELOPMENT

Vision Integrated Marketing/KOTA, Design

Have a cooperative-related question? On the Cover: Call (202) 720-6483, or Fax (202) 720-4641, Information Director, On the Cover: Looking a little like flickering birthday cake candles, is This publication was printed with -based ink. CHS Inc.’s petroleum refinery at Laurel, Mont., one of its two refineries. CHS leaders look at the past and future of the co-op on its 75th birthday. Photo by David Lundquist, courtesy CHS

Rural Cooperatives / May/June 2006 3 CHSCHS atat 75:75: LookingLooking back,back, looking looking forwardforward

By Dan Campbell, editor get the supplies they need to produce a crop, then adds value e-mail: [email protected] to those crops to help return more farm dollars to producers and their communities. taying power. That’s what it takes for any busi- CHS predecessor co-ops were founded during the Great ness to survive and thrive for 75 years. Depression, when farming was literally a life-or-death strug- CHS Inc. is observing its 75th anniversary gle for local co-ops and their producers. Farmers — then as S this year as much more than just a survivor. It is now — looked to their co-ops as crucial business partners a diverse and growing Fortune 200 agribusiness whose success or failure was inexorably linked to their own. with $11.8 billion in annual sales. It serves 1,100 local coop- The nation’s newly mechanized agriculture industry was eratives with 325,000 member-producers and is poised to increasingly looking for a dependable, fairly priced source of pursue promising new industries. fuel. Farmers also needed strong cooperatives to get their The success of CHS is testament to the power of what a grain to market and to return a good price for it. producer-owned agribusiness can accomplish with the right Cenex (or Farmers Union Central Exchange) was estab- business strategies and the support of its members. From the lished in St. Paul, Minn., in 1931 to supply farmers with fuel fuels it refines and supplies to member cooperatives, to the and other vital farm supplies. For grain handling, farmers grain it mills into flour and the oilseeds it processes into veg- formed North Pacific Grain Growers Inc. (NPGG) in 1929 etable oil-based , CHS strives to make sure producers in Lewiston, Idaho, and Farmers Union Grain Terminal

4 May/June 2006 / Rural Cooperatives Association (GTA) in 1938, also in St. Paul. These are the back to the members. three “rootstock” co-ops from which CHS sprouted. We operate on the co-op business model, which facilitates NPGG and GTA merged to create Harvest States CHS in returning more value to our members. One measure- Cooperatives in 1983. Harvest States in turn merged with ment of that: in 2006 we returned $151 million in cash Cenex in 1998 to create CHS Inc. (The 1931 founding of including patronage and equity redemptions — a record. Cenex is being used as the official birth date for the com- That is another type of added value that flows back to our bined organization.) There have been many other mergers members and their communities from this cooperative. with smaller co-ops along the way (see the CHS Milestones, page 8) as the co-op has grown and evolved to meet the Q. CHS has grown through mergers, perhaps the biggest being changing needs of its members and the marketplace. the Cenex-Harvest States merger. What factors made that a good In a wide-ranging discussion with Rural Cooperatives in fit, and what were the biggest problems to be resolved to make it early April, CHS Chief Executive Officer John Johnson and work? Board Chairman Mike Toelle, a producer from Browns Valley, John Johnson: “The process started in late 1997 and con- Minn., talked candidly about the past and cluded in June of 1998. There future of CHS, and what its continued suc- was about a 90-percent overlap cess means to their members and rural in the membership of the two America. companies. When we looked at the future of agriculture, it Q. What lesson should we derive from the became pretty clear to us that fact that CHS has lasted for 75 years? integration between the supply Mike Toelle: The basic business philos- side of the business and the mar- ophy that has helped us through 75 years keting and processing side would of success is the same one that is impera- be in the best interest of produc- tive as we move into the future. Really, it’s er-farmers. Leadership — boards very simple: always focus on the organiza- and management — endorsed tion as a whole and make the best deci- the vision for coming together. sions for the co-op and its members. This Some mergers don’t work, but requires a disciplined approach in the deci- this had a lot of strategy behind sions you make in the board room. You it and alignment with leadership. might not be able to solve all the problems All the stars lined up to create a of your members, so you need to focus on very successful merger. From those issues that you can address, position- there, it was all about execution ing the co-op to provide the most value of the strategy. The two CEOs — Noel Estenson at Cenex and myself at Harvest States — were totally aligned regarding what we had to get done to organize the new company. We divided the duties — Noel took on more of the political and board work, while I took on more of the operational aspects. This gave us the focus we needed to execute the merger in a relatively short period of time, with very few hic- cups.”

Q. Some of your local co-ops have grown substantial- ly in recent years, some even attaining the designation of “super local” with $300 million or more of sales annually. How does this change the role of CHS in meeting their needs? Johnson: “Consolidation on the retail side has been ongoing and probably has accelerated in the last 5-6 years, resulting in some “mega” local co- Transporting members’ grain to market by river barge, trucking farm supplies to ops. The unification of Cenex and Harvest States local co-ops and providing on-farm fuel delivery are just three of the many servic- really helped us become a better provider of sup- es CHS performs for its members. All photos courtesy CHS plies and marketing to them. Size and scale

Rural Cooperatives / May/June 2006 5 become very important when we serve “We’re doing by size — dollar sales volume co-ops of that size. The merger of meant everything to Farmland. Cenex and Harvest States was an what the market They leveraged their balance sheet enabler for a lot of other co-ops to con- to accomplish that objective, then sider mergers. A lot of co-ops that were is demanding: pro- got into some business cycles that purely supply or purely marketing have were disastrous for them. been able to unify their efforts to We want to grow, but to grow become an integrated supply and mar- ducing more energy on a profitable basis. Our disci- keting co-op, just as we have done.” pline is to make sure our balance Toelle: “On the supply and output products… as well sheet stays strong, which means side of the business, when we put Cenex the relationship with our bankers and Harvest States together, we looked as reinvesting in remains strong. This enables you to at them as complementary businesses ride-out business down-cycles. that would be better poised for the renewable fuels.” Farmland got heavily leveraged over the future of agriculture as one co-op. I previous 10 years. Then, when a bad believe that is what also happened at cycle hit — in their case it was fertilizer the local co-op level.” and petroleum that were really in the come in every month; some of them tank — they didn’t have the wherewith- happen, some don’t. Many co-ops need- Q. CHS has taken over direct manage- al to get through it. ing to make a change in their business ment of some local co-ops that were strug- There is also a business culture issue. still decide to merge with a larger gling. How has that been working out? We have a philosophy to undersell and neighboring co-op down the road and Toelle: We’ve not only taken over overdeliver. You should try to create remain a part of CHS through their some challenged co-ops and retail loca- realistic expectations, whether with local. What CHS is offering is owner- tions, but in many cases local producers your owners or bankers. Farmland had ship options. Local producers have to have simply decided to merge with a culture that would lead members and do the research and make a decision CHS to gain added efficiencies from its bankers to believe that they were going based on what best serves the interests administrative and support services. to achieve all these fantastic results, and of their producers. Their equity is now directly in CHS then never achieved them. rather than in their local association. Again, I’m a firm believer that it Q. The biggest co-op failure in history We call these CHS Country Oper- wasn’t their co-op business model that occurred a few years ago when Farmland ations, and it has worked very well. created their failure, but it was some Industries collapsed. What lessons did you They still operate just like a tradi- business decisions that they made in the draw from that tragedy? tional local co-op, with a local board 10-year window prior to their failure Johnson: “Don’t ever let it happen! and governance and local management. that caused it.” It was an absolute shame. It comes down That said, this model is not for every- to some very sound principles of run- one. Some people really like it — it has Q. How aggressively has CHS been able ning your business. Some people have been particularly popular in Montana. to move into Farmland’s former trade ter- the idea that it failed because it was a But others want more independence. ritory, especially in places such as Kansas co-op. That is furthest from the truth. There has been slow but steady and southern plains states? Really, it was due to business failures in growth in the program. More requests Johnson: “Big time! It is our highest a company that was driven very heavily

6 May/June 2006 / Rural Cooperatives growth area, for both farm supply and been there for a long time, but we then we can deliver what we say; and there’s grain, although farm supply is growing really stepped-up efforts to provide a a lot of security around our equity and even faster. Farmland’s failure created co-op solution for those local co-ops.” equity-revolvement plan.” an absolute void — from a co-op pres- ence perspective — in those markets. Q. Have you encountered much anti co- Q. Petroleum has been the biggest Some of those co-ops were finding op fallout, with producers saying: “We don’t income earner for CHS in recent years. other partners during that time, private want to deal with any more co-ops?” What is the outlook for that part of the companies that stepped in there and Johnson: “I don’t think so. There is business, and are there any plans to expand created alternatives for them. We had still a very strong co-op philosophy in refinery capacity or acquire oil reserves? those markets. But Johnson: “We hold no oil reserves there is more of a — we are purely a refiner and marketer. “show me” attitude. We buy crude oil from outside, both Union Equity also domestically and globally. failed in that area, Most of our business units have been and then Farmland doing quite well, many having had came in and eventu- record years. But you’re right, our earn- ally failed. So there ings the last few years on refining mar- is a track record of gins have been at points we’ve never regional co-ops there seen before in our history. We’ve rein- not being successful. vested back in these plants. We’ve made CHS’ Venture Foods subsidiary, one of the nation’s leading proces- sors of oil-based foods, has returned more than a 30-percent But they were still sulfur-reduction upgrades at both of our return on equity since formation in 1996. Opposite page: CHS CEO looking for a co-op refineries — at Laurel, Mont., and John Johnson, left, and Board Chairman Mike Toelle. partner. We have McPherson, Kan. We’ve spent about demonstrated that $400 million doing that and, in the

CHS: a snapshot CHS Inc. is a diversified, federated cooperative in the saler and reseller of refined fuels. The Cenex conven- energy, grains and products businesses. It had 2005 ience store chain is one of the nation’s 20 largest, and sales of $11.8 billion and net income of $250 million. It it is the fifth largest propane retailer and produces a has 6,370 employees. CHS is owned by farmers, ranchers wide range of lubricant products. It operates refineries and local cooperatives from the Great and pipelines, has its own truck fleet Lakes to the Pacific Northwest, from the and is now one of the largest suppliers Canadian border to Texas. of -enhanced gasoline and mar- Major business divisions include: kets of biodiesel. • Grains — CHS markets more than 1 • Agronomy — Through Agriliance LLC, a billion bushels of grain annually in 60 joint venture with Land O’Lakes, CHS countries, making it the nation’s largest markets crop nutrients and protectants cooperative grain handler. It operates to producers through local coopera- many grain terminals and retail facili- tives and independent dealers in the ties. United States, Canada and Mexico. • Foods — CHS is a leading processor of • Country Operations — CHS operates value-added foods. Its Ventura Foods, 300 local farm supply and grain facili- LLC (with partner Mitsui & Co.) is a ties, providing ag inputs, grain market- leading manufacturer of margarines and blends, ing and other supplies and services. salad dressings, and vegetable oils. Horizon • Business solutions — CHS is a full-service brokerage Milling (a joint venture with Cargill) is the nation’s lead- and risk management provider through its subsidiary, ing flour miller and supplier of durum wheat. CHS Country Hedging Inc. and its 60-some branch offices. Oilseed Processing refines more than 1 billion pounds Through Ag States Group, it offers insurance and group of soybean oil annually. CHS Sunflower serves more benefit programs; it provides business consultation than one-third of the domestic kernel and in-shell mar- services to 1,400 local co-ops. ket and export markets. • Animal — CHS supplies livestock feed and • Energy — CHS is the nation’s largest cooperative services from the Central U.S. to Pacific Northwest gasoline and diesel refiner and a significant whole- with Payback brand feeds.

Rural Cooperatives / May/June 2006 7 process, we also got rid of some bottle- Johnson: “Our share floats around a finding corn instead going for ethanol. necks to improve capacity. bit. Since making our investment in From our perspective, and that of a lot Now we’re spending $325 million at November 2005, they have added a of our locals, there are two sides of the Laurel, Mont., on a coker — a bottom number of locally organized co-ops that business: one is grain export, the other refiner that converts asphalt into more had been building ethanol plants, and is domestic demand for grain, as well as refined fuel products. It will increase have now merged into U.S. Bioenergy. farm supply. That diversification at the capacity of the plant by about 14 per- With the last round of mergers, our local level will give them tremendous cent. ownership dropped down to 24 percent, staying power going forward. The mar- We’re also taking a lot of the money so we invested another $35 million of ket is telling us it wants more corn pro- that we’ve been earning and reinvesting capital into the business. Now we are a duction. This year the numbers didn’t it in renewable fuels. We’ve invested 24-percent owner of a much larger come out like I thought. But there is a about $70 million in a renewable company than when we had 28 percent lot of new seed genetics technology that fuels/ethanol production company. By of it. I expect to stay stable there for the will expand corn production — maybe the end of 2007, it will have an annual next year or so.” in geographic areas where we don’t capacity of about 550 million gallons, grow a lot of corn today.” making it the second largest ethanol Q. Is biofuels hurting some of your local producer in the United States. So, we’re grain co-ops by taking away corn volume? Q. Does biofuel compete with CHS doing what the market is demanding: Johnson: “I wouldn’t say that it’s like petroleum? producing more energy products and a loaded gun to their heads, but it is Johnson: “They tie together very doing it by tweaking current plants for hurting some. Ethanol is now eating up well. There is some uniqueness there extra capacity, as well as reinvesting in as much corn as the export market. And for CHS. We probably are one of the renewable fuels.” this is a phenomenon that has happened only ethanol producers that are in just the last five years. So a lot of involved in fossil fuels refinement. We Q. Any plans to increase your 28 percent grain facilities that typically handled a are also the only fossil-fuel refiner that share in ethanol producer U.S. BioEnergy? high volume of grain for export are is directly involved in ethanol produc-

Milestones: How CHS became CHS

1929 North Pacific Grain Growers, Inc. 1945 Cenex enters the feed, (NPGG) is organized as a regional cooper- plant food and seed business. ative, based in Lewiston, Idaho, with 60 Plant food operations are affiliated local cooperatives. expanded the next year when it becomes a major stockholder of 1931 Cenex — the Farmers Union Central CF Industries. Exchange — is founded in St. Paul, Minn. 1960 GTA purchases the 1975 GTA adds a branch office in 1938 Farmers Union Grain Terminal Honeymead soybean processing plant and Portland, Ore., and opens a barge-loading Association (GTA) opens in St. Paul, with the Archer Daniels Midland elevator line terminal on the Mississippi River at 121 local affiliated cooperatives. in southern Minnesota. Winona, Minn.

1938 NPGG moves its office to Portland, 1962 NPGG dedicates its new export ter- 1977 GTA purchases Holsum Foods of Ore. minal at Kalama, Wash., on the lower Waukesha, Wis. Columbia River. 1942 GTA moves into wheat milling with 1977 Cenex begins serving Pacific Supply the acquisition of Amber Milling Co. in 1971 Cenex begins supplying 60 coopera- Cooperatives, adding 67 local coopera- Rush City, Minn. tives in the Pacific Northwest formerly tives in Washington, Oregon and Idaho. served by Grange Cooperative Wholesale. 1943 Cenex purchases an oil refinery at 1981 Solar Gas is purchased, making Laurel, Mont., and acquires a one-third 1972 Cenex enters the transportation Cenex one of the top 10 propane suppliers interest in the National Cooperative business by acquiring Northern in the nation. Refinery Association at McPherson, Kan. Cooperative Services of Wadena, Minn.

8 May/June 2006 / Rural Cooperatives tion. So we are fairly unique. We look under the biofuels industry?Does growing out. The technology is not yet very at it as an absolute complement. interest in switchgrass and other non-grain good. When you think of the efficien- If you look at ethanol producers, fuel stocks worry corn producers and ethanol cies of converting switchgrass, corn basically they are just that. They process co-ops? stover and all the other biomass materi- corn, make alcohol and push it into the Johnson: “Long term, biomass tech- als, the question is: how do you collect marketplace. What we can do at CHS nology is probably where it is going to those feedstocks economically so that — because of our involvement in both go. I don’t know if that is 10 or 20 years they can compete with corn? Today, fuels — is link the demand-bases across a lot of refiners who are facing the man- date to produce more ethanol-blended fuel. Whether it is Cenex, Exxon-Mobil, Concoco or Phillips, all these folks need to buy ethanol. We do exchange pro- grams with them on the refined-fuel side, so we are the natural supplier for their ethanol. From a consumption viewpoint, ethanol may be viewed as a somewhat competitive energy source. But in reali- ty, because of the makeup of our busi- ness, it creates an integrated platform that we can successfully operate from.

Q. What are the odds that oil prices could drop sharply and cut the legs out from CHS recently invested more than $725 million in upgrades at its refineries in Montana and Kansas, and has invested another $70 million in a bio-energy business.

1982 Cenex acquires Western Farmers 1992 Harvest States and Continental Grain 1994 Harvest States begins construction Association, based at Seattle, Wash., enter a joint venture, the Tacoma Export of a new mill in Kenosha, Wis., and making it the largest cooperative supplier Marketing Co. (TEMCO) at Tacoma, assumes full ownership of the Rush City, in the Pacific Northwest. Washington, for feed grain shipments to Minn., and Huron, Ohio, mills. Pacific Rim countries. 1983 North Pacific Grain Growers and 1994 Harvest States acquires an export GTA merge to form Harvest States elevator at Myrtle Grove, La., and a river Cooperatives. terminal at Davenport, Iowa, to strengthen its capabilities for originating and shipping 1987 Cenex joins with Land O’Lakes to grain for export. form the Cenex/Land O’Lakes Ag Services marketing joint venture. 1994 Harvest States’ Terminal Agency and Ag Agency at Cenex/Land O’Lakes com- 1988 First Cenex convenience store bine to form Ag States Agency. The joint opens. venture represents more than 1,200 coop- eratives, making it one of the largest 1990 Harvest States’ Holsum Foods divi- cooperative insurance agencies in the sion acquires Albert’s Foods, Omaha, nation. Neb., and Private Brands, Chicago, Ill. The next year it adds Great American Foods in 1995 Harvest States and Wilsey Foods, a Philadelphia, Pa. 1993 Southwest Grain, Gladstone, N.D., subsidiary of leading international trading regionalizes with Harvest States. firm Mitsui & Co. Ltd., form a joint venture, 1992 Cenex acquires majority ownership Regionalization is a unique concept pio- Ventura Foods, purchasing a food pro- of National Cooperative Refinery neered by Harvest States that combines cessing plant at Chambersburg, Pa. Association at McPherson, Kan. local control with the services and mar- keting reach of a regional cooperative. (Continued on page 10)

Rural Cooperatives / May/June 2006 9 that really can’t happen. So I don’t view Margins are very slim. There again, val- soybeans today is produced in South it as a near-term problem. ues we generate from grain marketing America, the other half in North When we look at the between are not dependent on buying and sell- America. corn values and crude oil prices, I think ing grain. That is where you see the We established three origination that spread will stay there for some very low margins. Really, CHS is a offices in about three years ago. time. If I have a fear regarding ethanol logistics provider, which means, yes, we We walked before we ran, and it’s been production, it is around the corn crop. buy and then sell grain to domestic and extremely successful. We supply beans Corn is at something like $2.25 per global customers. But the value we from South America primarily to bushel, but if we had a significant bring is in logistics, risk management Chinese customers. But as soon as we drought across much of the United and transportation. We get paid for know we can be competitive selling States, it could drive corn values to that. To me, the low margin you see in North American beans, we are in there extremely high levels, like $4 or $5 a grain trade is a phenomenon of the selling them to customers. bushel. That could be devastating to business, but the companies that can If CHS is going to be a global sup- ethanol production. Longer term, look- provide the other kinds of attributes to plier of grain and services, we have to ing at averages — with the spread customers can get paid very well for be global in our origination — particu- between corn and crude oil prices — it that.” larly for soybeans.” is a very good economic model. Q. What prompted CHS to get involved Q. Some producers are concerned about Q. Grain marketing margins seem to in Brazilian soybeans? growing competition from Brazil, given low get slimmer all the time. What can CHS Johnson: “As we deal with global land costs and wages there. How can we and its members do to improve efficiencies customers, primarily China — which improve our competitiveness? to make grain marketing more profitable? now demands about 40-plus percent of Toelle: One key advantage for U.S. Johnson: “Our grain marketing has global soybeans — it is pretty evident agriculture is our transportation and been pretty profitable — even stellar that those customers need a supplier logistics systems, which is second to the last couple of years. But on a per that has dependability 12 months per none. I’ve been in Brazil, and I can defi- bushel basis, you are exactly right. year. About half the global supply of nitely tell you it is a competitive advan-

1998 Cenex and Harvest States unite on 2004 CHS purchases remaining Farmland June 1 to become what today is CHS Inc., Industries share of Agriliance LLC. This an integrated agricultural foods system creates a 50/50 joint ownership with Land linking producers to consumers. O’Lakes Inc.

2000 CHS, Farmland Industries and Land 2005 CHS completes $400 million ultra- O’Lakes Inc. form Agriliance LLC, a joint low sulfur diesel project at its Montana venture involving the sales, marketing and and Kansas refineries, and announces a distribution of agronomic inputs and serv- $325 million coker project at its Laurel, ice. Mont., refinery.

2001 CHS announces plans to form a joint 2002 CHS acquires Agway’s Grandin, 2005 Ventura Foods acquires Maries® venture, Horizon Milling LLC., in flour N.D.-based Sunflower business. and Dean’s® dressings and dips. milling with Cargill Inc., with a total of 21 mills. CHS producers will be the primary 2003 CHS opens Harvest States do Brasil 2005 CHS reports record $250 million in supplier of wheat for the alliance. Ltda in Sao Paulo, Brazil, a wholly owned earnings. subsidiary originating and marketing soy- 2001 CHS announced plans to acquire beans from Brazil. 2006 CHS system marks its 75th anniver- Farmland Industries’ share of Country sary and issues a record $151 million Energy LLC, an energy joint venture. 2003 CHS preferred stock is listed on cash and stock disbursement to mem- NASDAQ exchange under “chscp.” The bers. 2001 CHS announces the public sale of next year CHS uses preferred stock to $50 million in preferred stock in an effort redeem $13 million in member equity. to diversify capitalization of the co-op.

10 May/June 2006 / Rural Cooperatives tage for the U.S. But there is also a crit- company in the U.S. today. And it is Toelle: “Part of the vision of CHS is ical need to improve the nation’s - owned by farmers and co-ops. We’ve connecting producers with the con- ways, especially along the Upper been able to put together effective man- sumer, and we’ve been doing that on Mississippi, where we have locks and agement teams through all the acquisi- the food side, especially in grains dams that are antiquated. With the rise tions and mergers. It’s ultimately all through Ventura Foods. When you in energy costs, rivers are by far the about people and putting the best possi- think about the renewable fuels plat- most efficient method of transporting ble people on the job to create a win- form, it presents another aspect of the grain, farm inputs and other freight up ning team. CHS vision: the producer-to-consumer and down the river. Devoting more My biggest disappointment was cer- connection.” resources to improving our waterways is tainly that our Mexican foods division a key legislative priority for CHS. didn’t work out as expected. I had a Q. Can CHS and other co-ops help keep On the trade front, as we negotiate vision of expanding our food business more family farms in business, or is contin- on the World Trade Organization, we and felt very strongly that we could do ued drift toward industrial-scale farming need to be very careful not to disarm it on our own. It turned out that we the only real future for U.S. farming? ourselves with legislation in a new Farm could not. Toelle: “Through our local co-ops Bill that would weaken our negotiating Mexican foods was a great strategy, and country operations, our mission is position. We feel it may well be prudent but we failed at it. We bought some to provide value back to producers. We to extend the current legislation pend- companies at substantial discounts, but think we offer a platform of access to ing the outcome of WTO talks. probably got what we paid for. Another world markets, integration between eye opener for us, as well as for a lot of supply and grain outputs and food pro- Q. John, what have been your biggest other companies, is the need to make cessing. And we drive that value back to successes and disappointments while serving sure that you have the skill sets to be the local level. as CEO? successful in companies that operate in You will continue to have a diverse Johnson: “I’ve been CEO, or the challenging management environments. makeup of farms in the U.S., depending equivalent, for 11 years. That’s a long We ultimately came to the conclusion somewhat on geography and crop mix. time for a CEO. The average in corpo- that we didn’t, so we sold it. When you We certainly spread our value across all rate America is five years or less. I got are not succeeding, recognize it early producers. It is up to them to run their the job at a young age — 44 or 45. So and do something about it. businesses at the size and scale that they there have been some of both during I don’t dwell on mistakes. Everyone think works for their operation.” that time. in the management world is going to I feel very proud of the formation of make mistakes. If you think not, you are Q. There is much debate about states Ventura Foods in 1996. Here is a com- fooling yourself. When you find your- adopting new co-op incorporation laws that pany that has generated a 30-plus per- self in a situation where you can’t exe- allow for a broader definition of what a co- cent return on equity ever since it start- cute, you make an adjustment and move op is. What factors are fueling this move- ed. It was originally a very small organi- forward. We in management — as I tell ment and what does it mean for the future zation, but is now one of largest pack- the board all the time — have got to be of farmer-owned co-ops? agers of oil-based food products in the careful about how hard you punish mis- Johnson: “I’m not sure I even know United States, with 16 plants. And we takes. They will happen, because that’s what a traditional co-op is any more. did it with an international partner, where innovation comes from — it’s There are a tremendous amount of dif- Mitsui & Co. of Tokyo. In 1996, busi- where people go out and look for new ferent structures being used, including ness partnerships were relatively new. ways to create value. The main thing is, by ourselves. We are a traditional co- Going across the ocean and finding a you don’t want to make the same mis- op, but — by the same token — we use partner was somewhat revolutionary at take twice. But when you make a mis- many different capital structures to the time. The company continues to do take, don’t live with it forever. Take cor- accomplish our objectives. An example well, and our relationship with Mitsui rective action and move forward.” is our preferred-stock program that continues to be extremely strong. It has trades on the NASDAQ. This is fairly allowed us to do other things with part- Q. What is on the CHS drawing board unique in the co-op world. But it does- ners. It took a lot of work from our staff right now that you are most excited about? n’t interfere with our core co-op values to put together. Johnson: “Renewable fuels and how because this is non-voting stock. An equal, or even greater, accom- they fit with our company is by far the Control and governance of the com- plishment was the formation of CHS. highlight right now. It is a very exciting pany stays in the traditional form, with Think of it: two of the largest co-ops in area that is growing extremely fast. producers. We use a lot of limited lia- the U.S. were able to look at the future New plants are being considered each bility corporation (LLC) structures. We and had the ability to put together an and every day here. It holds a lot of have LLCs with other co-ops, with pri- organization like this, the 188th largest value for our member-owners.” continued on page 28

Rural Cooperatives / May/June 2006 11 Montana forest fuel collection business wins USDA/RD grant

By Tyler Christensen the U.S. economy,” Dorr said after pre- By allowing businesses to collect that Montana Missoulian senting the check. “I suspect this is material, the forest will benefit from going to be a very successful project, all fewer wildfires and the government will Editor’s note: this article is reprinted cour- because small business people are will- save money by having less slash to burn. tesy of the Montana Missoulian. ing to step in and do their part.” Also, fewer burns means better air qual- All Woody will use most of the ity — which everyone can appreciate. t’s easy to find uses for money to buy more container trucks “In my book, no matter how you cut small-diameter trees and and to launch a marketing program, it, that’s a win-win situation,” Dorr said. woody biomass. It’s not so said Rosalie Cates, executive director of However, the financial heart of the I easy to find a cost-effec- the Montana Community Development business is the central yard, where the tive way of getting that Corp., which has been working with wood material can be amassed on a suf- material from the forest to the people Thomas to test and develop the new ficient scale to be conveniently and eco- who can use it. But Craig Thomas and collection method. nomically picked up, processed or deliv- his Ravalli County business, All Woody Basically, the company uses a system ered, Cates explained. Resources, are working on a method of of trucks and containers to transport log- Thomas, who counts 30 years in the collecting logging debris at the job site ging debris — also called slash — to a forestry business and currently con- using special container trucks capable of central collection yard near Stevensville, tracts with Johnson Brothers, started going wherever logging trucks go — where the woody biomass is sorted for working on the collection system three with the goal of making small-wood sale. This sort of material is usually inac- years ago with the help of MCDC and collection in Montana’s forests econom- cessible and often burned to reduce the several partner-businesses. After exten- ically feasible for the first time. amount of hazardous fuels in the forest. sive study and testing, they decided on The company’s effort got the current method as the a significant boost in April most cost-effective way to in the form of a $228,000 access the greatest quanti- check presented in person ty of woody biomass. by the U.S. Department of “It is actually not the Agriculture’s Undersecre- most economical method tary for Rural Development of collecting slash, but it Thomas Dorr. The check will work where other was part of $4.2 million in methods won’t,” Thomas USDA Forest Service explained. grants given to 18 small It’s been used on businesses whose work restoration projects on helps remove economic Blue Mountain and Pattee barriers to the use and mar- Canyon, he said, and keting of woody material, proved particularly useful Dorr told a wind-whipped on Pattee Canyon roads crowd at the Johnson inaccessible to other Brothers wood recycling machines. yard in Missoula. Forest thinning operations – conducted here by Horizon Tree Service and In fact, logging debris All Woody Resources — will lessen the threat of a devastating forest fire. “Everybody is fully cog- is inaccessible in about 90 The wood chips will provide fuel for generating electricity. Photo courtesy nizant that small businesses percent of all logged Montana Community Development Corp. are the economic drivers of areas, said Chuck Seeley,

12 May/June 2006 / Rural Cooperatives a forester with Smurfit-Stone Container Corp.’s Forest Resources Division. “This makes it a lot more accessible,” Seeley said of USDA awards $4.2 million All Woody’s new collection method. Smurfit-Stone contracts for slash grinding and delivery for wood biomass projects — with Johnson Brothers, among five or six other com- panies — and uses the woody material to generate power Agriculture Under Secretary Thomas Dorr in April and electricity for the mill, Seeley said. The company announced nearly $4.2 million in grants to 18 small enterprises burns through about 30 van loads of such material a day. to develop innovative uses for woody biomass in national “We generate enough power to run our whole mill,” forests as sources of renewable energy and new products. he said. "This grant program helps to reduce the risk of wildfires by Thomas and his grant partners — Levi Cheff of Fire removing built-up fuel hazards and improves forest health," Solutions Inc., Rob Castellano of Horizon Tree Service, said Dorr, in Missoula, Mont., to announce several Earth Day Kit Sutherland of Bitterroot Resource Conservation & initiatives by USDA. "In addition, these projects give an eco- Development and University of Montana assistant nomic boost to our rural communities, increasing the nation's forestry professor Beth Coulter — as well as Montana’s sources of renewable energy." wood products industry in general, are part of the solu- This year's recipients were selected based on a number of tion to having a healthy forest, said Craig Rawlings, factors, including those that make it economical to remove smallwood enterprise agent for MCDC. woody biomass from forest lands and turning it into mar- If not for their harvesting, transporting and processing ketable products, while reducing the costs of recovery. In of very small diameter wood, all that material would be addition, grants were awarded for projects targeted at remov- burned or hauled to a landfill, Rawlings said. ing economic and market barriers in using small-diameter Not only would that be a huge waste, Thomas added, trees and woody biomass. but it would ultimately hurt the forest he and other life- All 18 grant recipients must match the federal portion by at long foresters have to rely on for their livelihoods. least 20 percent. Together with the non-federal matches, “Although I’m a harvester of trees, I’m trying to approximately $13 million will be spent on this effort. For a list enhance the lives of the trees that we leave,” he said. of grant recipients and more information on the program, visit: “What we’re trying to do here is treat the forest with love http://www.fpl.fs.fed.us/tmu/grant/biomass-grant.html. and care.” ■ USDA funds co-op impact research

griculture Secretary Mike to establish cooperative research agree- versity or private nonprofit organiza- Johanns in late April ments with institutions to examine the tions funded by a group of colleges or A announced about impact of cooperatives, in cooperation universities. $495,000 in competitive with USDA Rural Development. Each Application forms, guides and mate- funds are available to agreement will include guidance on the rials for the cooperative agreement can institutions of higher learning to con- development of a methodology for col- be found at: http://www.rurdev.usda.gov/ duct research on the national economic lecting and assembling basic impact rbs/coops/reic.htm or by contacting impact of cooperatives. data; applying the methodology to col- USDA Rural Development at (202) “Cooperatives play an important role lect data and analyze the economic 690-0368; TDD: (800) 877-8339. in the growth of our rural economy,” impact of cooperatives and other appro- Paper applications must be received in said Johanns. “This research will help priate studies to examine the socio-eco- the USDA Rural Development Nat- to measure the full impact cooperatives nomic impact of cooperatives on local ional Office, postmarked no later than are making in rural communities across communities. Projects must be com- June 30, 2006; electronic applications America and provide USDA with an pleted by September 30, 2008. are to be received by the same deadline overview of what is working and how Potential applicants are institutions date via: http://www.grants.gov. cooperative businesses can play central of higher education; public or private For more information, go to: http:// roles in vibrant rural economies.” colleges or universities, research foun- www.rurdev.usda.gov/ and click on The competitive funds will be used dations maintained by a college or uni- “Available Funds.” ■

Rural Cooperatives / May/June 2006 13 Bottling Hope in Africa Land O’Lakes providing boost to Ugandan dairy industry

By Todd Thompson, Country Manager Land O’Lakes Inc. — Uganda E-mail: [email protected]

ost people know Land O’Lakes, Inc. as the pro- ducer of America’s top butter brand, one of the country’s leading farmer-owned cooperatives and M a major player in agricultural supplies. But few are aware that the dairy cooperative giant has an International Development Division that has been helping farm- ers and rural businesses increase productivity in developing countries around the world for 25 years. In the east African country of Uganda, Land O’Lakes has been implementing a private sector-based dairy development project since 1994. The project provides technical assistance at all levels of the dairy value chain — from smallholder farmers to -bulking cooperatives and collection centers to processors of milk and value-added products like and . Land O’Lakes’ presence has helped Uganda’s dairy industry expand and become more efficient, increased the popularity of dairy products among consumers and raised income and profits for smallholder dairy farmers and rural enterprises. Project staff based in Uganda and short-term consultants — Dorcus Inzikuru, Uganda National Athletic Champion in 2004, many of them U.S. farmers and agribusiness experts — offer reveals one of the secrets to his success: the vitamins and miner- als his body gets from milk.

Milk is delivered to market by Masaka farmers, who are averaging an additional $349 per household as a result of participating in a Land O’Lakes-directed project to improve production practices. Photos courtesy Land O’Lakes 14 May/June 2006 / Rural Cooperatives by more than 200 percent. Production efficiency at MADDO was improved with a cooling tower developed by Land O’Lakes’ Sam Sebadduka, supervisor of milk quality and dairy processing in Uganda. Sebadduka developed a water-cooling tower that recycles water used in cool- ing the unit. Adoption of this simple technology cut water usage from 90,000 liters a month to 40,000. It also reduced the share of water as a cost of production from 4.3 percent to 1 percent. Uganda currently produces 1.2 bil- lion liters of milk per year. Of that, 40 percent is consumed on the farm. Of the rest, about 20 percent enters the “Milk is Fun!” is the message at this rally for Ugandan school students. “formal” market in the form of processed and value-added products advice on a wide variety of topics. These farmers (average per capita income is worth $108 million. The remainder include: cooperative development, mar- $270 a year); enters the “informal” market, where keting, milk bulking and handling, • 28 percent increase per day in milk small-volume traders buy milk and sell value-added processing, production, production in participating animals; it unprocessed to consumers, who then policy reform and industry organization. • 45 percent increase in processing- boil it at home. The value of the infor- Funding for the Uganda project and capacity utiliztilization; mal market is about $160 million. other Land O’Lakes economic develop- • 6.5 million-liter increase in domestic ment initiatives overseas comes primari- consumption of processed dairy prod- Central role for co-ops ly from USDA and the U.S. Agency for ucts; Because rural cooperatives play a International Development. • 75,000-liter increase per day in milk central role in Uganda’s dairy industry, Much of the Uganda project’s cur- entering the cold chain; much of the project’s emphasis is in the rent funding came from the recent sale • 89 percent increase in membership in area of cooperative development. Land of 11,100 metric tons of donated producer organizations. O’Lakes’ advisors help all types of American wheat on the local market groups, from those still in the initial under USDA’s Food for Progress A recent success story involves planning stages to large established Program. Under this monetization MADDO Ltd., a company that businesses with turnovers approaching process, USDA takes excess commodi- began operating a 1,200-liter micro- $1 million a year. The project advises ties raised by American farmers and processing plant in the town of Masaka on issues such as governance, member- converts them to cash in developing in 2003. MADDO buys milk from local ship responsibilities, the role of the countries to provide grants to imple- farmer cooperatives and processes it board and legal registration. ment development projects. A study is into flavored milk and yogurt. Like Because many smallholder farmers done before the sale to assure it will not many start-up enterprises, MADDO have no experience running commercial disrupt local production and markets. had good ideas but lacked the knowl- enterprises, Land O’Lakes also provides edge, systems and internal controls assistance in business management. Getting results needed to effectively manage its opera- Many groups, regardless of size, are Stimulating sustainable economic tions. weak in accounting and financial man- growth to alleviate rural poverty is a With Land O’Lakes’ help, agement, leaving them unable to track major goal of the Uganda project. The MADDO’s management turned the their funds and plan for the future. To country’s economy is largely agricultur- company around, instituting financial address this problem, Land O’Lakes is al, and two-thirds of the country’s poor and other reforms that brought it from introducing a common accounting soft- are smallholder farmers. To date, the the brink of collapse to profitability by ware program to the cooperatives it Uganda project has achieved results 2005. Within one year, the amount of advises. that include: milk purchased from area farmers “This will help tremendously in get- • $349 average annual increase in increased from 74,800 to 208,580 liters, ting the cooperatives we work with to household income for participating increasing their income from milk sales continued on page 29

Rural Cooperatives / May/June 2006 15 V ALUE-ADDED CORNER Husker Ag LLC Plainview, Neb.

Type of Business: Number of Husker Ag LLC, Plainview, Neb., is members & a majority producer-controlled ethanol employees: venture. Husker Ag Husker Ag used a Value-Added Producer Grant to help make its dried has more than distillers grains more marketable. DDG and other co-products have con- Business Objective: 500 members, tributed an additional $6 million to the producer-owned business’ bottom The traditional operating procedure about 70 per- line so far this year. Photo courtesy Husker Ag of ethanol plants for processing dried cent of whom distillers grains (DDG) is to mechani- are agricultural producers. Employment cally dry this byproduct (or co-product) has increased from 30 to 32 employees, The Results: from a 70-percent moisture content thanks to the development of the new The ethanol plant has increased the down to 10 percent, and then market it co-product. local demand for corn, resulting in a as livestock feed. This drying process higher local corn price. Farmers used to consumes large amounts of natural gas. How USDA Helped: be paid only a wholesale commodity Husker Ag will market its DDG co- Husker Ag received a $226,850 price for their corn which, in turn, was product as a “modified” product con- Value-Added Producer Grant (VAPG) shipped out of the immediate area. taining about 55 percent moisture, from USDA Rural Development, which Currently, Husker Ag pays an average of thereby reducing the amount of natural was matched by Husker Ag. The money 5-to-10 cents per bushel over the prevail- gas consumed and netting a substantial is being used for working capital to fur- ing corn market price. Since the plant is annual decrease in energy costs. Air ther the development of the value- located closer to the producers’ opera- emissions will also be reduced. added processes for area corn. tions than other traditional markets, local farmers haul their own corn vs. having it Annual Sales: Leader’s comment: trucked for them, saving on trucking As a fuel-grade ethanol production “The USDA Rural Development costs and increasing their income. plant, Husker Ag LLC processes 8.5 grant will allow us to employ a co-prod- million bushels of corn annually into ucts merchandiser and to supplement Major Challenge/ more than 20 million gallons of fuel- the salaries of the plant maintenance Opportunity Facing Co-op: grade ethyl alcohol (ethanol). A sec- manager and plant lab manager to pro- “The biggest challenge facing co-ops ondary product produced is dried dis- ceed with our distillers grain produc- today is finding a nitch to guarantee tillers grains, which are the corn com- tion,” says Seth Harder, general man- profitability and market share in a rap- ponents that remain after the starch is ager for Husker Ag. “This will benefit idly growing industry,” says Harder. converted to ethanol. area feedlots and member-producers. Ethanol production is presently in Additionally, these funds will help to Contacts: excess of 25 million gallons per year, an purchase corn inventory for production Seth Harder, general manager; output which exceeds the facility’s esti- purposes. Shaun Waldow, plant manager; mated projections. Co-product revenues “Feedlots will benefit from the co- Fred Knievel, board chairman. have contributed more than $6 million product produced, as it is an excellent Husker Ag LLC year to date. source of and energy for live- 54048 Highway 20 stock,” he continues. “The plant will Plainview, Neb. 86879 have the capacity to produce co-product Phone: (402) 582-4446 ■ to feed 80,000 head of livestock.” E-mail: [email protected]

16 May/June 2006 / Rural Cooperatives Co-op Conversions Extent of commitment to co-op values key factor in decisions to convert

By Julie A. Hogeland, Ag Economist increasing concentration in the food USDA Rural Development, processing and retailing industries? Cooperative Programs Professor Michael Cook of the University of Missouri says, “The Editor’s note: the author welcomes recent wave of demutualizations raises feedback from readers on the topic of co-op the question of whether the coopera- conversions; their thoughts may be used as tive model can survive in an increas- subject matter for forthcoming articles on ingly concentrated, deregulated, priva- this topic. E-mail her at: julie.hogeland@ tized and global business environ- wdc.usda.gov. ment.” This article focuses on several Economist Edwin Nourse likened co-ops to recent co-op conversions (also called “small business Davids” that enable farmers ince the early decades of “demutualizations”) and some of the to do battle with industrial “Goliaths.” the 20th century, agricul- issues they raise for their former mem- Photo of stained-glass window at First Presbyterian tural cooperatives have bers, as well as a proposed co-op con- Church, Van Wert, Ohio, by Terry Dietsch S been associated with par- version that was defeated. ticular values that have For Diamond Walnut Growers, the stick,” providing competition to raise influenced their marketing strategies. touchstone for conversion was the coop- the prices received by producers. The traditional strength of cooperatives erative brand and the desire to use it to Formulated by economist Edwin is that they help protect producers by attract large amounts of outside capital Nourse, this role emphasized farmers’ creating a reliable and fair buyer for to “grow the brand” and penetrate new collective power or strength in the mar- their products and enabling producers markets. For Ocean Spray Cooperative, ketplace. Cooperatives were the “small to control their destiny by providing a owner of a major consumer beverage business Davids” that challenged the marketing channel that can extend from brand, near-acquisition of its brand by “Goliath of big business.” Competition raw commodity to finished product. PepsiCo became an opportunity to reaf- provided through cooperatives kept Co-ops help establish orderly mar- firm that the 76-year-old cooperative other firms in the marketplace fair or keting channels and bring balance to was to be held in trust for future genera- honest. Even when cooperatives had markets where producers would have tions of growers as a sustainable, value- improved market conditions, Nourse minimal bargaining power in highly added marketer of cranberries. still felt farmer vigilance was required. concentrated industries. Likewise, they Within this increasingly concentrat- Cooperatives should maintain on stand- provide a reliable and fairly priced ed, deregulated, privatized and global by, ready to spring into action to pro- source of production supplies. Co-ops business environment, cooperatives tect farmers as needed. also help strengthen rural communities have sometimes sought to become “just At the core of traditional attitudes is a by keeping more dollars close to home. another business.” This can become a belief that cooperatives are fundamental- What happens to these values when self-fulfilling prophecy. Cooperative ly different from investor-owned or pub- cooperatives convert to a publicly trad- values, and the extent to which produc- licly-traded firms, hence the need for ed corporation? Will producers suffer ers hold them, may make the difference vigilance like that recently expressed by a from narrower marketing choices between conversion, acquisition or manager of a large processing coopera- and/or lower returns? If so, could this remaining under producer control. tive. Any entity that is not farmer owned create fertile ground for new coopera- and controlled is a competitor that tives? Does the decreasing number of Protecting farmers vs. makes it difficult for farmers to compete, producers and changing market condi- building the brand he said. “If a corn grower’s crop fails, the tions lessen the need for cooperatives, Traditionally, marketing cooperatives processing firm doesn’t care as long as or are they more vital than ever due to are often seen as a “competitive yard- they can continue to get corn from

Rural Cooperatives / May/June 2006 17 somewhere to make cornflakes.” ucts — reflects an era that no longer industry observers suggest a focus on Contemporary economic or strategic exists. For that reason, he questions the profit has begun to diminish the other management discourse is, in contrast, need for the Act itself. values provided by cooperatives. In doc- highly optimistic, such that farmer vic- “Why do farmers need Capper- uments filed with the Securities timization would seem to be a thing of Volstead?,” Hansen asks. “When do Exchange Commission (SEC), coopera- the past. “For most global businesses, they need to collectively price a product tives pursuing conversion routinely the days of flat-out predatory competi- compared with selling it individually to state their commitment to market-ori- tion are over,” say Morgan and Hunt Cargill?” In 1921, farmers were not ented values such as growth, improving (1994:20). The new rules of market looking for processing facilities, just profitability and efficiency, and enhanc- competition call for networking, part- product marketing. In that period, the ing the return on the product brand. nering and trust. In this setting, the supply of farmers was essentially “end- The July 2005 conversion of farmer protection provided by coopera- less” compared with today’s very low Diamond Walnut Growers into tives and even cooperatives themselves farm population. And some of them are Diamond Foods, a publicly traded firm, can seem like an anachronism. seeking an exit strategy from farming. offers a commentary on changing coop- This market-oriented school of Capper-Volstead did not address capi- erative values in some sectors. In 1912, thought tries to minimize the difference talizing a significant branded product the California Walnut Marketing between cooperatives and investor-owned into the marketplace, says Hansen. Association, the precursor of Diamond firms by examining how well coopera- How technological aspects of mar- Walnut Growers, initiated orderly mar- tives perform according to some of the keting and procurement will affect tra- keting in the walnut industry through a commonly used standards of investor ditional cooperative issues of equity, federation of local walnut packing owned firms (IOFs). These include: equality of opportunity, disproportion- cooperatives. As the federated structure • Mission clarity — a singleness of pur- ate market power or market access is evolved into a centralized cooperative, pose, such as a drive for profitability Diamond Walnut’s strong marketing that motivates investor-owned firms; orientation emerged. • Global sourcing — buying raw mate- The cooperative became a leading rials wherever they are cheapest in “A co-op has a differ- domestic marketer and distributor of order to lower manufacturing costs; culinary nuts. In the late 1990s, • Growth; ent job than a publicly Diamond Walnut focused on becoming • Efficiency; a more competitive supplier to U.S. • Obtaining sufficient capital to survive grocery chains and, in 2004, launched and grow in an industrialized food traded corporation, its Emerald brand of snack nuts. These system. objectives conflicted with the traditional which lowers the prices cooperative values of “enhancing the In contrast, the values encouraged by raw-product price” and providing a the competitive yardstick are: paid for inputs.” home for growers’ product. • protecting growers; As a cooperative, Diamond Walnut’s • providing an assured market; —Chris Phillips pricing philosophy was, “A rising sea • strengthening rural communities; floats all boats.” Since 1965, Diamond • combating monopoly; Walnut’s average annual premium above • providing support for local growers; the market has been 1.56 cents per • ensuring competitive markets; not clear. Agricultural industrialization pound (source, Diamond Foods). The • providing grower control of destiny brought new values, such as “size and Walnut Purchase Agreement accompa- through ownership. scale” and “being a low-cost producer,” nying conversion requires growers to to agricultural cooperatives. Consumer- deliver their entire crop to Diamond Capper-Volstead still vital? branded products offered growth Foods for the duration of the contract: Market-oriented values are in the opportunities that did not exist for the three, five or ten years. The contract ascendancy, shaping perceptions of the minimally-processed products tradition- offers no price protection or guarantees need for grower protection, or even ally handled by cooperatives. to pay market prices. Indeed, Diamond collective marketing itself. To Mark Now, cooperative managers ask, Foods has cautioned growers that pay- Hansen, an attorney with Lindquist and “How can I take the value of the brand, ments could be reduced compared with Vennum and the architect of several unlock it and make it liquid?” Others the prior marketing agreement. cooperative conversions, the Capper- ask, “How can I get additional low-cost Volstead Act — which provides limited supply to increase product demand?” Producers more vulnerable? anti-trust exemption to farmer coopera- As cooperatives became “market-driv- University of California Economist tives engaged in marketing their prod- en” and “value-added” businesses, some Shermain Hardesty suggests these sin-

18 May/June 2006 / Rural Cooperatives gle-buyer (monopsonistic) conditions at one moment in time the long-term maximum benefit from the market could make the contracting growers value of a cooperative, painstakingly development behind a cooperative’s vulnerable to price manipulation. built up through the ups and downs of brand name. “A lot of growers had in their minds commodity cycles by (in many cases) Cooperatives exist to provide a that they would still be protected even several generations of producers. Total secure market for their members. A co- through the conversion,” commented stock benefits received by a four-mem- op manager facing heightened import one former member. “But the company ber management team at Diamond competition brought by trade liberaliza- will have to decrease expenses. Foods could top $16 million, according tion said this value represented a “huge Management will procure the cheapest to NCBA. To avoid short-circuiting incentive” for his processing coopera- product rather than maximize the price members, Hazen recommends an open tive not to convert. Perpetually on the to a grower, as a co-op does. A coopera- and transparent process, requiring high lookout for cost advantage, any cooper- tive would keep the industry from tak- thresholds of member approval to ative which converts could disenfran- ing advantage of growers.” approve conversion. chise a portion of its former grower- At the time Capper-Volstead members in rural areas where alter- was enacted, the market power native income opportunities may be of each one of the “endless sup- scarce. ply of farmers” was so limited Although the United States is that economics textbooks the leading exporter of walnuts, described the farmers as “atom- Hardesty suggests that to fulfill its istic” compared with the size of mission to maximize long-term the businesses they were up shareholder value, Diamond Foods against. Imbalance and disparity may import walnuts from China, continue to describe agricultural the world’s largest producer. markets. Consolidation of agri- California-grown walnuts could cultural markets in recent then experience reduced demand decades means many farmers and depressed prices as a result. have only one buyer. Caravaggio’s painting shows David with the head of Tr ade liberalization allows ven- National Cooperative Goliath, a story frequently used to symbolize the dors to source globally, to compare Business Association (NCBA) struggle of small co-ops with much larger competitors. prices from many suppliers. This is CEO Paul Hazen says the belief a “low-cost supplier” model of that predatory marketing no longer competition. The economic norm of exists is shortsighted. “Cooperatives When brand becomes paramount efficiency renders such competition have made farmers into price setters, Another inside threat occurs when impartial, even if the impact on raw not price takers. By selling these busi- many cooperatives’ chief asset, the product suppliers of such instability is nesses, we’ve lost this tool.” Hazen product brand, comes to drive the in effect not much different from adds that if farmers’ only option is to cooperative more than the needs of predatory (destructive) competition. sell to one huge agribusiness, “they are members for whom it was founded. In Welch’s, the grape products coopera- at the mercy” of that agribusiness. the mid-20th century, the California- tive owned by National Grape The durability of the cooperative based avocado cooperative Calavo Cooperative, is committed to using the model — which has lasted for more mainly identified with and promoted domestic grapes of National Grape than 150 years — is being threatened Haas avocados (Stanford and members as its “first supplier.” It buys from the inside, many believe. An Hogeland). This restricted its ability to all of the co-op members’ grapes — a NCBA study found that most conver- grow by attracting members with other reflection of the traditional cooperative sions are triggered by management. A varieties. Calavo resolved this by value of finding a home for what is pro- small group of people motivated to aggressively promoting members’ duced by members. This holds true change the business may present mem- and establishing its own brand. whether grower-owners provide as few bers with an ultimatum and only a very Getting full benefit of brand devel- as five tons per acre or as much as nine short period of time to vote. The opment required more and cheaper tons per acre, as long as quality stan- absence of share ownership to compen- avocados than California members dards are met. sate and motivate management can be could supply, so the cooperative turned Supply variation has spurred cooper- an incentive within cooperatives, in par- to non-member supply from Mexico, ative growth. Welch’s, like many co- ticular for incumbent management to and New Zealand. Calavo con- ops, markets globally. Through market encourage conversion. verted in 2001. Outside investment — segmentation, global sourcing may sup- With conversion, select members, e.g., product, equity or foreign-direct plement domestic production to pro- directors or management can cash-out investment — may be needed to derive vide cost and profit advantages that

Rural Cooperatives / May/June 2006 19 define sustainable competitive advan- every aspect of the supply chain. “But staying a cooperative doesn’t tage. But Welch’s commitment to In June 2004, Ocean Spray members mean going it alone. By partnering receive all of the quality grapes pro- rejected an offer from PepsiCo that with others, you can still go global and duced by its grower-owners is the kind would have given the corporation con- set grower returns on a healthy growth of approach that clearly protects trol of the Ocean Spray brand and juice curve. Our returns have more than domestic farmers. business. The Nourse “mythology” — tripled in the last four years. A cooper- Cooperatives ask more of themselves which prized cooperatives as “small ative has a different job than a publicly than competing business models and Davids among Goliaths” — held no traded corporation, which lowers the can risk over-extending themselves on sway for those cranberry producers who price paid for inputs. Ocean Spray’s job behalf of their producers. Almost 20 is to deliver to members a competitive years ago, economist V. James Rhodes commodity price and a dividend for declared, “one of the unique obligations owning a major brand.” For approved, of cooperatives is a commitment to the Protecting the contracted acreage, Ocean Spray takes continuation of past and present mem- all the fruit grower-members produce. ber service that goes beyond that of the market share of IOF” (1987:166). The consequences of Less ownership, more control how this line is drawn may have greater producer-members Within Nourse’s “yardstick” philoso- ramifications now than it did in the phy, farmer control was expressed — or past. When cooperatives pay higher objectified — through investments in than the market price, they can tell starts with the tangible assets such as processing farmers, “We took care of you; you got plants, grain elevators or marketing the money first, so the co-op didn’t selection of a CEO facilities. The mark of ownership was make any money.” Farmers may like often exclusivity, for example, the ability this, especially if they are not necessari- who is willing to to “drop in” on the manager at will or ly concerned about the future of the to conduct site tours that now may be organization. make this commit- precluded by health and safety restric- Before it can take care of farmers, tions (for example, among artificial the cooperative has to be a sound busi- ment. insemination or pork cooperatives). ness. Overpaying market prices to Exclusivity influenced the operating members can lead to “capital starva- philosophy established for CF tion” within cooperatives. Members favored the PepsiCo joint venture. Industries, a fertilizer cooperative. It need a competitive return on both They argued that Ocean Spray could was started in 1946 as a fertilizer bro- product marketed and investment. not survive on its own in a world of kerage operation by a group of regional Making investment proportional to giants. Too small to go it alone, the cooperatives seeking to pool their pur- patronage is one way to achieve this cooperative needed a partner, they felt. chasing power. CF grew to be one of objective. The debate over the joint venture North America’s largest manufacturers was a healthy experience for Ocean and distributors of nitrogen and phos- Using relationships to build a brand Spray. A much deeper dynamic than phate fertilizer products. It was owned By seeing other firms as adversaries, dollars was involved: at stake was the by eight farmer cooperatives: CHS Inc., the Nourse model of cooperation tend- growers’ right to control their destiny MFA Inc., Growmark Inc., Southern ed to segregate cooperatives from the and maintain a multi-generational way States Cooperative, Land O’Lakes, rest of the business community. The of life. Reflecting on the pre- and post- Tennessee Farmers Cooperative, expression “cooperatives as the Fourth debate period, Ocean Spray spokesman Intermountain Farmers Association and Estate” captured this distinction. Chris Phillips said, “You can have it Cooperative Federee de Quebec. Exploiting the concept of the “coopera- both ways—maintain cooperative status Through the end of 2002, CF oper- tive difference,” cooperatives estab- and have a major worldwide brand. A ated as a traditional supply cooperative, lished their own version of the market- lot of people have looked at coopera- focused on providing its cooperative ing or supply channels used by private tives as outdated, but it’s a very bold owners an assured supply of fertilizer. industry. business model. Cooperatives have to SEC documents note that more than 80 Cooperatives tried to “do it all” by be different in how they partner with percent of CF’s annual sales volume was providing an integrated food system others, in distribution, in manufactur- to its cooperative owners. CF diversi- that took the raw product from “farm ing, in how they go to market. A coop- fied into fertilizer manufacturing and gate to plate.” Likewise, Ocean Spray erative needs to maintain majority con- expanded its distribution network, start- tried to “do it all” by going from “bog trol over its brand so at the end of the ing in the 1960s, by acquiring several to bottle,” managing and controlling day it’s still a cooperative. continued on page 30

20 May/June 2006 / Rural Cooperatives LEGAL CORNER Government purchasing co-ops operate tax free

By Donald A. Frederick Case facts Program Leader for Law, Two school districts formed a non- Policy & Governance; profit corporation for the sole purpose of USDA Rural Development purchasing goods and services for public IRS held that the [email protected] school districts and other members. The ruling points out that “Through cooper- entity meets both tate and local govern- ative purchasing power, Taxpayer enables ments that see opportuni- its members to purchase a range of requirements to ties to hold down costs by goods and services at reduced prices.” S procuring goods and serv- The ruling doesn’t discuss who ices through a cooperative became members of the association, its qualify for Sec. should gain assurance from a recent governance structure or its previous tax Internal Revenue Service (IRS) admin- history. But as the basis for submitting its 115 tax status. istrative determination. While no request for a ruling that it is entitled to Subchapter T tax issues are involved, tax-free status, the purchasing association the decision highlights another Internal amended its articles of incorporation to function is to procure goods and servic- Revenue Code (Code) section helpful to provide that its members must be public es at more competitive prices for its public institutions which organize a school districts or other government members. IRS found this to meet the separate entity to engage in joint pur- entities that meet the requirements of test of performing an essential govern- chasing activities. Code Sec. 115. In its request, the entity mental function within the meaning of Code Sec. 115 provides that gross identified current members that did not Code Sec. 115(1). income for federal income tax purposes meet this test and promised to terminate Second, IRS notes Code Sec. 115 does not include income accruing to a those memberships by a specified date. also requires that any income must state or territory, or any political subdi- The article amendments also provide accrue to a state or political subdivision vision thereof, which is derived from a that the entity may not issue shares of thereof. IRS finds that “...income “...public utility or the exercise of any stock nor declare or pay dividends. Also, accrues to its members through the pro- essential governmental function.” This while reasonable compensation can be curement of goods and services for its provision gives state and local govern- paid to individuals for services rendered, members.” It also points out that upon ments the flexibility to create separate no part of net earnings may inure to the dissolution, assets remaining after liabil- entities to perform essential services benefit of any director, officer or other ities are satisfied can be distributed only without incurring federal income tax individual. In the event of dissolution, to qualified members on a pro rata basis liability on earnings that are (1) gener- any remaining assets after liabilities are and earnings cannot be distributed to ated by those entities and (2) retained paid will go only to member governmen- private persons. Under these conditions, within the public sector. tal units on the basis of the prior three the entity’s income also meets the test of In Private Letter Ruling 200610001 years’ patronage. accruing only to states and political sub- (released March 10, 2006), the IRS divisions thereof. determined that income earned by a IRS decision IRS concludes that so long as the nonprofit corporation, formed by public In granting favorable tax treatment, entity operates as represented and cleans school districts for the purpose of coop- IRS held that the entity meets both up its membership rolls by the date eratively purchasing supplies, is not tax- requirements to qualify for Sec. 115 tax promised, it will be eligible for Code able income under Code section 115. status. First, IRS notes that its only Sec. 115 tax treatment on that date. ■

Rural Cooperatives / May/June 2006 21 A Movable Feast North Dakota farmers aim to add value and educate consumers with D.C. eatery

By Sheri Aldape, The company has a USDA Farm Service Agency seven-member board of governors, of which orth Dakota farmers help NDFU President Robert Carlson is feed the nation and the serving as interim president. Carlson, a world with the crops and grain and oilseed farmer near N livestock they produce. Glenburn, N.D., was also an organizing Now, under the umbrella member of the Dakota Growers Pasta of the North Dakota Farmers Union Co., in which he remains an active (NDFU), they are taking it another step member. He is also a former member of forward: they are going to cook up the the USDA-Agricultural Trade Advisory food and dish it out at their own restau- Committee for Grains & Oilseeds, and rant in Washington, D.C. The new recently traveled to China and to establishment, called Agraria, is slated develop niche markets for North to open this summer in Georgetown, a Dakota commodities. ital since “every state in the union primary nightlife and upscale shopping is represented by their congres- area. Direct marketing sional members here,” Prescott Agraria was originally going to open Farmers are eager to capture more notes. Washington is also a hub in Baltimore’s Inner Harbor, but that profits from direct marketing, says Tom for business and industry leaders plan was eventually shelved in favor of Prescott, the project manager and presi- from around the globe. the Washington locale. If successful, it dent of the Magnate Group LLC, the The District was also attractive is hoped that this will be the first of a development firm for Agraria. Running because it is a major tourist desti- number of such farmer-owned restau- parallel to that is the desire of many nation and is home to a relatively rants around the nation. restaurants to source more of their food transient population that dines The project was first conceived in directly from the farmers who grow or out more frequently than average. 2002 as part of the work on an NDFU raise it. “So this takes it to the next level The D.C.-area population also project called the Ultimate Value- — allowing farmers to participate in the has higher-than- average dispos- Added Cooperative. Planners saw bene- ownership structure of the business.” able income. All of this adds up to fits for NDFU members in owning a Information on various farmers and the making it one of the nation’s restaurant that could gain a marketing foods they provide will be available at fastest growing restaurant mar- edge by promoting the fact that its the restaurant. kets. meals are derived from family farmers. “Farmers are important, not just in If Agraria restaurants open in The restaurant will also provide an the overall industry that provides the other cities, Prescott says the opportunity to educate consumers food on our tables, but also as a vital cooperative, farmer-owned character of about how their food is grown. fabric of the American way of life,” the business will stay intact. The restaurant is wholly owned by Prescott says. “So it’s very important for Agraria LLC, a North Dakota-based this business to serve an educational Room with a view limited liability company. NDFU, purpose by promoting farmers, in terms The 14,000-square-foot restaurant, organized as a farmer-owned coopera- of their work and daily life, and the located in the Washington Harbor tive, currently owns about 60 percent of security they bring to the food system.” complex in lower Georgetown, will Agraria, but that share will be reduced Having the first restaurant open in have a beautiful view overlooking the as more family farmers purchase shares Washington is a great opportunity to Potomac River. The décor, being and become direct owners, as many showcase the family farmer to impor- designed by the award-winning have already done. tant decision makers in the nation’s cap- Adamstein & Demetriou architecture

22 May/June 2006 / Rural Cooperatives firm, will be modern, while still grounded in the roots of the family farmers who own and supply it. The restaurant will seat 355 people, but that number can change depend- ing on table configuration and private events. The cuisine will be contemporary American, with some Italian and French influences. Since the food will be sourced from farmers from across the country, the menu will have the ability to change daily to ensure that the freshest products are used. From 30 to 60 percent of the food initially served at Agraria will be sourced from family farms. In time, Prescott says the percent of food sourced directly from family farms will increase. He also hopes to secure food from co-ops in the Washington, D.C., area. “The seasonal aspect is always an issue you have to con- tend with here. When the weather warms, right at the time that we are opening, it will be a prime opportunity for us to source from local farmers. We also encourage farmers to contact us regarding products that they are offering so we can discuss sourcing from them,” Prescott says. The restaurant will also look to source seafood from the Chesapeake Bay to attain the highest quality products possible.

Chef linking with farmers When trying to pick a name of the restaurant, “Agraria” was the natu- ral fit. It is Latin for “one of the fields, or lands,” which was felt to be applicable to farmers’ way of life and to best reflect the restaurant’s slogan: “From our fields to your tables.” Paul Morello, the head chef, was recom- mended for the job based in part on his background of working with farmers and obtaining products from farmers markets. Morello, who has been featured in several publications for his cuisine, was previously an executive chef at Les Halles, a French restaurant in D.C. Morello has been talking to Pennsylvanian farmers who will supply food for some “exotic” dishes, and has met with North Dakota farmers who will supply flour for his home- Agraria’s Executive Chef Paul A. Morello was selected not made gnocchi and lasagna. Morella is also using American only for his culinary art, but because of his experience cheese from Wisconsin and Idaho, and he plans on using procuring food from farmers markets and co-ops. Dishes North Dakota beef, lamb, pork, potatoes, honey and . seen above are his and Tomato Salad and Tuna Agraria, he says, is “a chef’s dream.” ■ au Poivre. Photos courtesy Agraria/North Dakota Farmers Union

Rural Cooperatives / May/June 2006 23 Agri-Mark, Allied Federation dairy co-ops join forces

he Agri-Mark dairy coop- Mexico, Allied/Agri- erative, Methuen, Mass., Mark has more than $75 T and the Allied Federation million invested in four of Cooperatives — a fed- dairy processing plants eration of 26 small co-ops in New York, Vermont in New York — have voted to join and Massachusetts to forces. provide a milk market, About half of Allied’s 800 members maintain stable prices are expected to join Agri-Mark over the and generate value- next several months. Three Allied added products under members have been named to Agri- the award-winning Mark’s 17-member board, and a fourth Cabot and McCadam may be appointed. Rather than calling it brands of cheddar a merger, the two co-ops say they are cheese, butter and other “joining forces” as one cooperative, dairy products,” Adding to McCadam’s New York boosts under the Agri-Mark name, to wield Peterson noted. flavor and helps control the aging process. Agri-Mark greater marketing and political muscle. “We’re making a real bought the plant in 2003 when its foreign owners announced “The farmers of both the Allied financial commitment to plans to close it. Photo by Doug DiMento, courtesy Agri-Mark Federated Cooperatives and Agri-Mark the Northeast,” he con- have voted to come together to protect tinued. “Our goal is dissolve, according to Agri-Mark the region’s dairy industry and work for better dairy markets and better long- spokesman Douglas DiMento. higher farm milk prices,” the two co- term farm milk prices. Farm prices have Though the Allied Federated ops said in a joint statement. “As dairy been up and down the past several years Cooperatives will cease to exist, Barnes farmers, we need to work together to and when you couple that with plants will continue to serve as chairman until preserve what we have left of our closing, you can see why farmers have the transition is completed over the regional industry,” says Mike Barnes, a to work together like never before.” next several months. Agri-Mark had dairy farmer from Mount Upton, N.Y., The small co-ops that operated roughly 1,250 farmer-members who serves as Allied’s board chairman. under the Allied umbrella are dissolv- throughout New and New “This joining of our organizations ing, with most members choosing to York, with more than 500 of its farmers makes us a stronger cooperative than join Agri-Mark, although there is no in the Empire State. As of May 1, the ever before,” says Carl Peterson, a obligation to do so, says Bob Welling- cooperative had 1,530 member farms, Delanson, N.Y., dairy farmer who ton, Agri-Mark’s senior vice president. with more than 775 in New York. serves as Agri-Mark’s chairman. “From Most of the new member-farms are in Agri-Mark bought the McCadam northern Maine to Vermont, and from the northern tier of New York, stretch- Cheese processing plant in Chateaugay, Southern Connecticut to Western New ing from Syracuse to Plattsburgh. N.Y., in 2003 when its foreign owner York, we are going to continue to be By late April, more than 300 former announced plans to close the facility. the voice of the Northeast dairy farmers Allied members had already joined The 150 members of the former and represent them in the marketplace Agri-Mark directly, including 95 per- Chateaugay Cooperative also joined as well as in state legislatures and cent of those in the Northern Tier Agri-Mark at that time. Agri-Mark has Washington, D.C. close to its Chateaugay facility. Another since been marketing additional New “While other companies are closing 50 to 100 more in the central part of York milk and investing in the McCadam dairy plants in the region and investing the state are expected to join in the next brand on behalf of its dairy farmer- in mega-plants in California and New several months as their cooperatives owners. ■

24 May/June 2006 / Rural Cooperatives NEWSLINE

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Aurora Co-op pursuing new 75,000-square-foot warehouse leased by goals of the proposal, without the cre- ethanol, ag-bio multiplex projects Syngenta Seeds Inc. which will occupy ation of this tax consequence. The Aurora Cooperative, Aurora, six acres and have capacity for 500,000 The Wisconsin Federation of Neb., and Aventine Renewable Energy units of seed corn. “The Aurora West Cooperatives (WFC) says it is disap- Holdings Inc. have signed a letter of project, with its contemporary, multi- pointed by the governor’s veto, which it intent to develop a new ethanol plant dimensional uses, has the possibility of said would create a second Wisconsin one mile west of Aurora. In its first becoming the cornerstone for a vision- cooperative law modeled after laws phase, the plant will produce recently enacted in Minnesota 100 million gallons per year, and Iowa, among other states. but plans call for later The bill was intended to pro- expansion to 220 million vide an opportunity for new gallons annually. The business development in ethanol plant is to be con- Wisconsin. “While we do not structed on a 135-acre site, agree with the position taken called Aurora West, adjacent by the Department of Revenue, to the Nebraska Energy WFC appreciates Governor LLC ethanol plant, of which Doyle’s commitment to pass a Aventine is the majority A computer-generated conceptual rendering of what the new new version of the bill in the partner/owner. The plant ethanol plant and ag-bio multiplex near Aurora, Neb., may look like. remaining days of the 2006 will be owned by Aventine, Legislative Session,” WFC said while Aurora Cooperative will be the ary, ag-bio research and development in a statement issued by President Bill exclusive grain supplier to the new facili- campus that Congressman Tom Oemichen and Chairman Ed Brooks, of ty, as well as the exclusive marketer of Osborne has supported for years,” Foremost Farms USA. syrup and wet distiller’s grain with sol- Hohwieler added. Total value of the The Wisconsin Farmers Union has ubles (WDGS). A starting date is still to multiplex could exceed $250 million. been leading the opposition to the bill. be determined. WFU President Sue Beitlich, a dairy In addition to the ethanol plant, the Wisconsin governor vetoes farmer in Vernon County, says the bill project will include what co-op new state cooperative law “would allow cooperatives to form with President and CEO George Hohwieler Wisconsin Governor Jim Doyle as little as one patron and as much as 70 calls “the first ag-bio multiplex in vetoed Assembly Bill 327, which would percent financing from corporate North America.” The site will include a have created a new form of corporate investors...The proposed change in co- state-of-the-art grain-handling facility, a organization, the unincorporated coop- op law cuts the heart out of the mem- fertilizer complex and a double-loop erative association. “I agree with the ber-controlled cooperative,” she wrote railroad system to accommodate grain, intent of the legislation — to help in an editorial posted on the WFU fertilizer, ethanol and DDG shipments cooperatives raise needed capital website, adding that it “contains no accessing the Burlington Northern- through non-patron investment part- protection for existing cooperatives and Santa Fe (BNSF) mainline railroad. ners,” Doyle said. “However, the bill could open the door for foreign The multi-million bushel grain facility creates a tax consequence that was investors to sink cash into patron- will receive and deliver area producers’ unintended by the authors and support- owned cooperatives.” grain to end users in the ethanol, feed ers of the bill. Although unintentional, and food industries. The fertilizer com- I cannot sign a bill with consequences CWT fee raised to 10 cents plex will have the ability to expand, such as these.” Doyle said he will be to counter surging milk supply based on the continued market growth working with the state legislature and To generate more funds to address a Aurora Cooperative is experiencing. supporters of the bill to pass a version surge in U.S. milk production that is Aurora West will also be home to a in the current session that achieves the beginning to depress farm-level prices,

Rural Cooperatives / May/June 2006 25 members of Cooperatives Working for WMP, was added to the list of eli- on our message that raisins are “just Together (CWT) have voted to double gible destinations for that specific grapes and sunshine.” the program’s five-cent per hundred- product. The animated Sun-Maid Girl and weight assessment. The higher assess- • The target price for cheese under the the new television commercials are the ment will begin on July 1, 2006, and export assistance program was moved work of Synthespian Studios, North run through 2007. from $1.40 per pound, to $1.30. The Adams, Mass. Founded in 1912, Sun- “We’ve demonstrated in the past target butter price remains at $1.30 Maid Growers is the world’s largest three years that CWT can help dairy per pound. producer and processor of raisins and farmers address a supply-and-demand other premium quality dried . imbalance, but we need more leverage Sun-Maid girl turns 90 Sun-Maid’s raisin sales of over $200 as we look ahead into 2006 and 2007,” with digital TV ads million and 200 million pounds annual- said Jerry Kozak, president and CEO of The Sun-Maid Girl, famous for her ly are approximately half “Sun-Maid” the National Milk Producers red bonnet and for holding a tray of retail consumer products and half Federation (NMPF), which manages freshly picked grapes, is receiving a dig- ingredient products for such items as CWT. Milk production was up 3.5 per- ital make-over on her 90th anniversary. cereals, breads, and a variety of other cent last year and continues to grow This American icon is taking on an ani- food products. rapidly in 2006. Kozak said that the mated form in nationwide television farmer-funded self-help program commercials, print adver- USDA announces $43.7 million “risks being irrelevant in the market- tising and on a newly in rural broadband system loans place if we don’t have sufficient designed website: USDA Rural Development has resources to do what farmers expect www.sunmaid.com. It was issued three loans totaling $43.7 million of us.” 90 years ago that a young to provide broadband service to an esti- CWT’s current budget does not mated 41,000 rural households and contain sufficient revenue to fund businesses in four states. “Broadband additional herd retirement rounds, service provides an economic engine for Kozak said. The higher assessment, to rural communities, which opens the be collected starting in July, will bring door for business development, in the additional money needed over 18 improved health care and additional months to continue both the herd educational opportunities,” said retirement program and the ongoing Thomas Dorr, agriculture under secre- export assistance program. Even with tary for Rural Development. “The the higher assessment, Kozak expects infrastructure built with these funds is the level of overall participation in an investment in the future of these CWT will remain at 74 percent of the rural communities.” nation’s milk supply. The loans were made to Broadband “Every one of CWT’s 49 member South, which will serve 64 communities The Sun-Maid girl (above) has gone digital cooperatives, along with the hundreds in the co-op’s new TV commercials. in southeastern Georgia and Florida; to of individual farmers paying into the Jaguar Communications Inc., to serve program, recognizes that the stakes eight counties in Minnesota; and to have gotten higher as the extent of the girl named Lorraine Collett posed for Mid-Hudson Cablevision in New York supply/demand imbalance has grown,” the raisin and dried fruit co-op’s trade- State to bring improved and advanced he said. mark in Fresno, Calif. Her likeness service to seven rural communities. In addition to voting for a higher would become one of the world’s best The Rural Development Broadband assessment, CWT’s members also mod- known trademarks and the cornerstone Access loan program authorizes USDA ified several other of the program’s fea- of Sun-Maid’s packaging and advertis- Rural Development to make loans to tures, including: ing. deploy broadband service to communi- • The regional safeguard levels in the “Set to turn 90, the Sun-Maid Girl ties with a population of 20,000 or less, Northeast, Southeast and Midwest deserves a new look for the new century with first priority going to communities were raised to 0.75 percent of each and our continued mission of sharing without broadband service. The loans region’s annual milk production, up the benefits of naturally delicious raisins are low interest and allow for the tech- from 0.5 percent. and other dried fruits with consumers,” nology to be market driven. • Whole milk powder (WMP) was says Barry Kriebel, president of Sun- The Rural Development Broadband added to the list of dairy products eli- Maid, in Kingsburg, Calif. “We’re Access Program has made 56 loans for gible for export using CWT bonuses. excited with the resulting television more than $868 million since the pro- Additionally, Mexico, a major market commercials, which put a modern spin gram was created in 2002.

26 May/June 2006 / Rural Cooperatives DFA re-opens Michigan Kansas co-op director on Today Show came up as an idea, he said he knew just dairy processing plant Larry Hoobler, a board member for who he wanted to cast! Dairy Farmers of America Inc. Farmers Union Cooperative Business (DFA) has re-opened a dairy processing Association in St. Mary’s, Kan., and his California’s Central Valley plant in Adrian, Mich., previously wife Diane, were featured on NBC’s losing best farmland fastest owned by Diehl Inc. City officials and Today Show on April 27. They partici- Most counties and major cities in DFA employees celebrated the plant’s pated in a “City-Country Life-Swap” California’s Central Valley are failing to opening March 13 during a special rib- segment, which contrasted life in the make significant progress at preserving bon-cutting ceremony. The plant, farmland in one of the nation’s most which has been idle since October important agricultural regions, accord- 2005, received its first delivery of milk ing to a new American Farmland Trust on March 14. The plant will create 25 (AFT) study. Many of the high-value new jobs. fruit, and vegetable crops grown “Adrian is a great processing location here cannot be grown anywhere else in because it is located in an area where the United States. “Though local land milk production is increasing,” says use plans are well-intentioned,” said Glenn Wallace, chief operating officer Edward Thompson, Jr., AFT’s of DFA’s Mideast area. “DFA member California director, “the best farmland milk production in Michigan has grown is being paved over the fastest, and the 9 percent a year for the past two years, land is being developed very inefficient- and we expect that trend to continue.” ly in terms of the amount of land used DFA plans to process more than 16.5 Green Acres in reverse: Manhattan, Kan., for each new resident. It’s a waste of a million pounds of milk into condensed farmers Larry and Diane Hoobler got a precious resource.” milk, and non- dry milk pow- taste of life in the other Manhattan on The AFT study, covering 11 coun- NBC’s The Today Show. der each month at the plant. A process- ties from Sutter to Kern, found that ing capacity of over 60,000 gallons per during the 1990s, 53 percent of the day will help to balance the growing sup- Big Apple (Manhattan, N.Y.) with the 97,000 acres that were urbanized was ply of milk being produced by DFA Little Apple (Manhattan, Kan.) high-quality farmland, and that for dairy farms in Michigan. Tr ying out country life was Sarah every eight new residents, an entire The plant will allow DFA to process DiMuro, a -born and acre of land was developed. Urban the excess milk that is produced during raised woman in her twenties, who had development in the Bay Area is about the spring and summer months. never spent time out of the city. While twice as efficient, and in Southern Previously, the milk had to be hauled on the farm, she milked a cow, sheered California it is almost three times as out of Michigan to customers as far , rode in the tractor and planted efficient. AFT also found that away as Kentucky or Wisconsin. sweet corn. Meanwhile, the Hooblers “ranchettes,” rural residences on large Wallace says that the cooperative and navigated the subway system and went lots, are a particular threat to agricul- its members should realize significant to a New York City nightclub. They ture. This fragmentation poses a seri- savings in transportation costs. also took over some of their counter- ous risk to agriculture, not only part’s work duties as a because of the potential for conflict personal assistant. with intensive farming operations, but How did they get so also because it helps to drive the price lucky? The Kansas of farmland above what farmers can Cooperative Council afford, the AFT report notes. reports that four years Current building trends will lead to ago the Hooblers were the loss of another 900,000 acres of included in an MSNBC farmland, more than doubling today’s show on the 9/11 terror- developed area. By 2040, the loss of ism attacks on America, agricultural output due to land con- and how they affected version could top $860 million per agriculture. The pro- year. Though there is still an opportu- ducer, who spent time at nity to save a significant amount of their farm to prepare for farmland, AFT warns that, unless DFA workers celebrate the re-opening of a milk plant in the show, is now a pro- counties and cities encourage more Adrian, Mich. Previous owners idled the plant last October. ducer for the Today efficient development, the Central Show. When this story Valley will reach a “tipping point”

Rural Cooperatives / May/June 2006 27 beyond which it will become too diffi- Cooperative, the majority owner of report in the Des Moines Register. The cult to reach that goal. “The political MGP LLC, voted in late March to sell offer sparked concerns about the state will to change,” said Thompson, 60 percent of the business to Global losing control of a home-grown indus- “becomes harder every day that the Ethanol Holdings of Brisbane, try. The Register quotes David Nelson, a status quo prevails.” Australia. The vote was 717 to 348 in Belmond farmer and MGP chairman, as The AFT study titled “The Future favor of the sale, a vote which repre- saying the sale will clear the way for Is Now: Central Valley Farmland at sented 83 percent of the co-op’s nearly more outside money to come into The Tipping Point?” is available only 1,300 members in10 Midwestern states. Iowa’s ethanol industry. on the Internet at: www.farmland.org. This $100 million sale will provide The company plans to double or shareholders with $3.23 per share now triple the 100-million-gallon ethanol Overseas investors purchase control and another 20 cents a share within two plant at Lakota and a 57-million-gallon of farmer-owned ethanol plant years, and marks the first time an Iowa plant under construction in Riga, Members of Lakota, Iowa, ethanol farmer-owned ethanol plant has been Mich., according to a statement issued producer Midwest Grain Processors sold to a foreign investor, according to a by MGP on March 30. The company is

CHS at 75: Looking back, looking forward continued from page 11 vate companies and even with interna- corporate-governance levels. We use Another key to the success of CHS is tional companies. training programs of the National that we — the board and management The changes in state laws are mostly Association of Corporate Directors and — work very hard to be open and trans- being undertaken to accommodate flexi- the National Council of Farmer parent. We’ve had that culture for many bility on capital formation. When farm- Cooperatives.” years, and it creates a high level of trust ers come together to form a business, Johnson: “Election to our board is a with our members, our business part- whether it is for soy processing or totally democratic process; we don’t ners and customers. ethanol production, they want to access control who runs for board. It really farmer capital and outside capital. In takes the best of the best to get on this Q. How do you keep the pulse of what order to do that, these laws are providing board. We make sure directors have a members want from CHS, and has this more flexibility to attract outside capital. good understanding of the environment changed significantly during your tenure? I don’t see anything bad about that as within the industries we operate in. Johnson: “Communications and lis- long as the best interest of the farmers Four or five times per year, we bring in tening to members is a core value for and producers on a co-op basis is being industry experts to provide an outside this company, and plays a key part in served. I would guess that you will have perspective and share their views of building our business plan. We do that a lot of co-ops that will look at these dif- these industries. Because we are global in a number of different ways. We have ferent structures to see if they will help in outlook, each year we take about a a Members Services group that is linked accomplish their goals. It is really being third of the board on an international to local boards and management on a driven more by the need for capital for- educational trip.” monthly basis, and deals with businesses mation than anything else.” strategies and developing management Q. Mike, any tips on being a good board skills. We have boards that are heavily Q. With such a large, complex business, member and maintaining good relations on involved in director associations. what steps does CHS take to ensure you get the board and with management? “I spend a fair amount of time in the board members with the kind of skills need- Toelle: When you are a producer country at manager association meet- ed to direct it successfully. who also serves as a director, you can- ings. We do 13 mid-year-report meet- Toelle: “Our Member Services Dept. not come to a meeting with your own ings, the idea being to go out to our provides extensive training in the coun- personal business interest in mind. You members midway through the year and try for local co-op directors. Through need to make decisions that are best for provide them an update on how the our communications, we also provide the organization. Many times you will company is doing, rather than surprise education for local directors. That be faced with making a decision that them at the end of the year with good becomes the platform where they might not be best for your area or your or bad news. This usually involves an become experienced on the local level, farm, but you need to make a decision operations report, as well as an exten- and creates opportunity to seek nomi- because it’s best for CHS. sive workshop and question-and-answer nation to the CHS board. Foster a teamwork approach to mak- period. So there are a number of differ- When we become CHS board mem- ing decisions — teamwork among ent touch points at the local board or bers, there is extensive, on-going educa- board members and between the board manager level to make sure we have a tion. Every year, our board participates and management. Treat people with sense of what their needs are and what in education at both the local co-op and respect, even when you disagree. challenges are facing them.” ■

28 May/June 2006 / Rural Cooperatives also pursuing construction of a 100-mil- from $28.3 million in 2004, on total The cooperative’s current ratio was lion-gallon plant in Illinois. Nelson said sales of $1.4 billion — the same total $1.45 in current assets to $1 in current farmer owners have an opportunity to as in 2004. “The dairy industry is liabilities. Member-owners who mar- continue to grow their investment in confronted with some severe econom- keted their milk through Foremost the business alongside Global Ethanol. ic challenges,” said Duaine Kamenick, Farms USA during 2005 will receive a Those who voted against the sale note the cooperative’s vice president- patronage allocation of $5.2 million. that the crucial difference will be that finance. “Commodity prices continue Foremost, based in Baraboo, Wis., farmers will no longer be in the drivers’ to fall as milk production is increas- manufactures many varieties of cheese, seat, and much of the profit from oper- ing. This combination will likely and whey ingredients, packaged ations will go overseas, rather than back result in lower prices for manufac- fluid milk, , butter and into the rural Iowa economy. The tured products in 2006, which will chilled, ready-to-serve fruit juices. In opponents of the sale said they didn’t drive lower prices paid to milk pro- addition, the cooperative sold milk to have enough time to convince other ducers.” fluid milk handlers in four federal milk investors that the deal wasn’t good Foremost President Dave marketing orders. enough to give up local control. Fuhrmann said, “2005 was certainly a very different year than 2004. Lansdale new CEO for Foremost Farms USA However, Foremost Farms’ balance Oregon Hazelnut Growers earns $4.8 million in ‘05 sheet is strong and we are in a position Hazelnut Growers of Oregon Foremost Farms USA had net to meet challenges facing the dairy (HGO) has named Compton Chase- income of $4.8 million in 2005, down industry.” Lansdale as its new president and

Bottling Hope in Africa continued from page 15 the next level of financial management,” the centers on the proper hygienic han- Ugandans promoting the consumption said Abbey Ariong, the project’s super- dling of the milk. Training in standard of milk. visor of cooperative and business devel- milk testing procedures has been con- Other marketing activities include opment services. “Once our role of ducted to improve the milk quality and radio and newspaper advertisements, training in how to use the software on a ensure the product is safe for con- sponsorship of local Dairy Days and the day-to-day basis is done, we will then sumers. nationwide June Dairy Month, and var- begin training them on analysis of the ious market research activities. Based on data.” Improving products, production market research, emphasis is now being The common system not only will Assistance to dairy processors gener- placed on targeting activities to specifi- enable the client cooperatives to do a ally focuses on improving existing prod- cally reach young people in Uganda. more professional job accounting for ucts and production methods, as well as These include advertisements in the their funds, Ariong said, but will also new product development. As with U.S. weekly educational supplement of the allow for comparisons among groups cooperatives, many Ugandan processors two daily newspapers, implementing a and the development of industry norms are looking for ways to increase their wall-painting competition at 100 on profitability per liter and other profitability through value-added prod- schools in and around the capital city of measures. ucts. The technology for making prod- Kampala, and providing assistance to Proper handling and milk safety are ucts like yogurt and (a semi-liquid processors who have targeted schools as other major issues for cooperatives, form of butter) is relatively simple and one of their primary market areas. many of which operate milk collection offers a realistic means of utilizing Uganda’s dairy industry has made centers where members take their milk excess milk and boosting profits. great strides over the past 10 years, but for bulking and chilling prior to pick up The project also has played a major there is much more that can be done. by processors. The major centers have role in generic marketing for the dairy The Land O’Lakes project will contin- capacity in the range of 15,000 to industry, which is not large enough to ue to work to increase the income of 25,000 liters. The system is essentially a handle that function on its own. farmers in the program, increase the spoke-and-hub system, with smaller Generic marketing is one of the pro- size of the formal market in relation to collection centers in the countryside ject’s biggest components. A few years the informal sector, improve the range feeding into the larger centers. The ago, the slogan: “So have you had milk and quality of products, and explore the milk is transported in 50-liter stainless today?” was adopted for the industry. potential for Uganda to become a major steel cans delivered on everything from Similar to the milk campaign in the regional exporter of milk and other trucks to bicycles. United States, a series of posters were dairy products. Land O’Lakes provides assistance to produced featuring prominent ■

Rural Cooperatives / May/June 2006 29 CEO, who replaced retiring president needs “to continue our strong finan- says the company had loan volume of and CEO Len Spesert in March. cial performance and global market $177 million in 2005, and that loan vol- “Compton brings to HGO a deep growth.” ume has increased in each of the past 11 general management and marketing years. The company has been profitable background, having worked with both LO’L Finance Co. turns 25 in all 25 years of its existence. The domestic and international agribusi- with 11th year of loan growth company’s customers reside in 28 states, nesses and food manufacturers,” said Land O’Lakes Finance Co. recently stretching from New York to Jeff Koenig, HGO chairman. “He has marked a quarter century of providing California. Swine makes up the largest held executive positions with corpora- financing to agricultural producers. The segment of the company’s loan portfo- tions such as the NutraSweet division wholly-owned subsidiary of Arden lio. and dairy comprise the next of Monsanto, the Pantaleon S.A. sugar Hills, Minn.-based Land O’Lakes largest industries, respectively. The refining group of Guatemala, and opened its doors Dec. 17, 1980, to help company’s portfolio also includes cus- most recently AVEBE of Holland, a finance agronomy receivables for local tomers involved in aquaculture and large farmers’ cooperative and the cooperatives, as well as offer financing poultry. dominant potato starch manufacturer for LO’L dairy and poultry producers. globally.” Koenig noted that the new Serving a growing base of customers CHS director Keppy CEO possesses the mix of manage- has been the goal of the business ever named to FSA post ment skills, cooperative knowledge since. CHS Inc. board member Glen and international expertise HGO Dennis Bottjen, president and CEO, Keppy — who represents the co-op’s

Conversion Debate continued from page 20 existing plants and facilities. Further Reluctance to source offshore Farmers once had resisted imported expansion occurred during the 1970s Regional cooperative ownership of product because of texture or color. and 1990s. domestic fertilizer assets minimized Over time, however, the quality of Agricultural cooperatives differenti- opportunities for CF to sell outside of imports had improved to be commensu- ate themselves from other suppliers by the cooperative network. Farmer-mem- rate with domestic product. Questioning their service orientation. The Middle bers were also sometimes hesitant to see supply reliability had become less neces- East oil embargo of the 1970s led coop- their cooperatives invest in offshore fer- sary for cooperatives as their size and erative suppliers such as CF and tilizer assets. CF had an operating loss marketplace clout grew. As major cus- Farmland Industries to make customer of $311.3 million in 2004 (Rural tomers, their needs would be met. needs paramount. Cooperatives). Loyally making purchases from CF They would not only provide a reli- The geographic advantage of differ- when a competitor was closer or cheap- able source of fertilizer in time for ent regions for fertilizer production er ultimately created losses for CF’s spring planting, but would also have changes over time, depending on the owners. sufficient inventory to fill orders should price of natural gas, a primary feedstock These developments changed coop- a severe shortage arise. for fertilizer. During the late 1990s erative norms. In 2002, CF reassessed Protecting members was a strong through 2003, high U.S. natural gas its corporate mission and chose to dimension of CF’s organizational cul- prices triggered fertilizer import prices emphasize its financial performance ture and member-owners responded to fall below the U.S. cost of production. over guaranteeing an assured supply to with loyalty. “We stayed in that alliance The energy crisis of the 1970s led to a its owners. “Taking care of customers no matter what,” one co-op official cooperative norm of assuring supply “no no matter what means you lose money,” commented. matter what.” Yet, some 30 years had one co-op manager said. Others com- Loss of flexibility is a drawback of passed without another supply crisis. mented: “Why am I competing for this the “ownership equals control” strategy. Meanwhile, the fertilizer industry business; if the other supplier has a $10 The commitment to protect members had globalized. U.S. or other North transportation rate, he should get the by providing assured domestic supplies American companies were increasingly business.” “I can’t afford to service that reduced CF’s profitability. engaged in offshore production, bring- last truckload,” is more important than, High inventory carryovers resulted ing a degree of control and security to “I will never run out of product.” from the commitment to guarantee that the U.S. industry through these invest- The conversion of CF was an members would not run out of fertiliz- ments. The growth of China and Brazil acknowledgement by its owners that er, raising CF’s cost of production over contributed to making the fertilizer ownership of fertilizer assets was not a time. trade international, further lowering the prerequisite to securing fertilizer sup- probability of supply restrictions. plies. CF has begun to resemble the

30 May/June 2006 / Rural Cooperatives members in Iowa, Missouri and having traveled extensively to promote whose efforts played a key role in the Arkansas — has been appointed by U.S. agricultural exports in various for- formation of the Lake to Lake Dairy President Bush as associate administra- eign markets. Cooperative. It also focuses on “an tor for the USDA Farm Service Agency Keppy, who has been a CHS director intense period of dynamic organization- (FSA). In his new position, Keppy will since 1999, will submit his resignation al change in American agriculture” and oversee management of FSA farm and from the CHS board, at which time a documents Torgerson’s efforts to “con- farm loan programs and commodity decision will be made on how to stantly seek institutional improvements operations. address the vacancy. Keppy has also in governance and representation of “Glen’s expertise in agriculture will served as chairman of National Pork farm interests.” make him a valuable member of the Board’s Foreign Trade Commission; In addition to his work with Lake to USDA team,” said Johanns. “I look president of the National Pork Lake, Torgerson was also a board mem- forward to welcoming Glen, a fellow Producers Association and vice chair- ber of Land O’Lakes, the Wisconsin Iowa native, and I’m confident he will man of the Iowa Ag Value Committee, Council of Agriculture and the National advance USDA’s commitment of service among others. Milk Producers Federation, where he to our farmers and ranchers.” exercised his leadership in defining suc- Keppy and his family have owned Book examines life of cessful principles, practices and policies and operated a diversified crop and live- Wisconsin co-op leader for continuing operations and the better- stock family farm in eastern Iowa for 34 “Truman Torgerson, Leadership ment of the industry. Written by his son, years. He brings both local co-op as Straight from the Shoulder” is the title Randall Torgerson, the former leader of well as international perspective to FSA, of a new book about the co-op leader USDA’s cooperative program, the book

“hunter” cooperative described by starts with the selection of a CEO who Corporation, Value-Added, Rhodes, seeking new customers and is willing to make this commitment. Demutualized: What is Still activities whenever a profit seems likely Maintaining producer loyalty was a “Cooperative” about American because retaining the organization’s critical issue for cooperatives in the Agricultural Cooperatives? original purposes and members will Nourse era of multiple cooperatives Presentation to “The Contribution of result in lack of growth, or even decline competing for the producers’ business. Cooperatives to Community (Rhodes:161). In the contemporary era, some coopera- Culture,” XXI International tives have tried to “think outside the Cooperatives Research Conference, CEO’s key role box” of cooperative values and recruit Cork, Ireland, August 12, 2005. Cooperative conversion offers a CEOs from outside the cooperative sec- • Morgan, R. M. and S. D. Hunt. “The commentary on a growing split between tor. Maintaining the loyalty of the CEO Commitment-Trust Theory of members and cooperatives that would to cooperative values in an era of global- Relationship Marketing.” Journal of have been unthinkable in the era when ization and supply-chain economics may Marketing 58 (1994): 20-38. cooperatives were routinely regarded as be a new challenge for cooperative mem- • Nourse, E. G. (1978). “The Place of an extension of the farm. Conversion bers, but it is one within their control. the Cooperative Community in Our represents an “arm’s length” relation- National Economy” Reprint from ship with former members that may References American Cooperation 1942 to 1945. begin in stages as the needs of the prod- • Chaddad, Fabio R. and Michael L. Journal of Agricultural Cooperation, 7 uct brand — or the brand’s customers, Cook, The Economics of (1978): 105-111. such as retail chains — begin to relegate Organization Structure Changes: A • V. James Rhodes. “Large Agricultural the farmer-owners of the cooperative to US Perspective on Demutualization. Cooperatives: On the Road to a secondary role. The farmer-owners of Annals of Public and Cooperative Where.” Cooperative Theory: New the cooperative can become non-com- Economics 75:4 2004, pp.575-594. Approaches. United States petitive within their own organization • Diamond Executives Due Stock at Department of Agriculture, because they don’t produce enough $.001 per Share. Cooperative Business Agricultural Cooperative Service, product (in the case of Calavo) or Journal. July/August 2005, p.12. ACS Service Report Number 18, July enough equity (Diamond Walnut) to • Hardesty, Shermain D., The Bottom 1987, pp. 155-170. support the growth of the product Line on the Conversion of Diamond • Stanford, Lois and Julie A. Hogeland, brand. Walnut Growers. University of Designing Organizations for a Just as conversion represents an California Giannini Foundation Globalized World: Calavo’s Transition internal threat to cooperative stability Agricultural and Resource Update, from Cooperative to Corporation. and coherence, the solution to creeping Vol. 8, No. 6, July/Aug 2005. American Journal of Agricultural privatization is also internal. Protecting • Hogeland, Julie A., New Generation Economics 86 (No. 5, 2004):1269-1275. the market share of producer-members Co-op, Limited Liability ■

Rural Cooperatives / May/June 2006 31 includes remembrances from more than President Pat Grant said in a statement National Beef to acquire 95 contributors. For more information, issued following the event. “We believe Brawley Beef LLC visit: www.AuthorHouse.com. that this new franchise, PAR Labor, National Beef Packing Co. LLC, formed from H2A workers who will be Kansas City, Mo., and its majority Farm labor co-op signs UFW members, is a giant step forward owner, U.S. Premium Beef LLC agreement with UFW in helping mitigate the shortage of farm (“USPB”), have entered into a non- The Agricultural Labor Cooperative labor in the United States.” binding letter of intent to acquire of America (ALCA), a cooperative Grant said ALCA believes that the Brawley Beef LLC. Brawley Beef is an recently formed to provide laborers to United States faces a shortage of as alliance of cattle producers in Arizona its members, signed an agreement in much as 500,000 farm workers for the and California who supply its meat Seattle on April 11 with the United current growing season. The goal of the packing operations with more than Farm Workers of America (UFW) and agreement, he said, is to simplify the 400,000 animals per year. The company Global Horizons Inc. (a Los Angeles- process of securing laborers who are produces upscale custom cuts to retail based farm labor contractor), under “highly trained, process-focused and customers. Brawley Beef was formed by which the three organizations will compliant with all current immigration its suppliers in 2001 and operates in cooperate to provide laborers to farm- regulations.” Workers will “know that Brawley, Calif., with a new state-of-the- ers. The agreement “creates a franchise their wage and benefits condition meets art beef processing facility. that will allow our member farmers to and exceeds all the requirements set National Beef is the fourth largest have access to productive, accountable forth in the current H2A visa tempo- beef processing company in the United and reliable agricultural labor,” ALCA rary worker program.” States. ■

Four named to Co-op Hall of Fame Four cooperative business leaders were inducted into the Cooperative Hall of Fame in May during a ceremony at the National Press Club in Washington, D.C. The Hall of Fame recognizes those who have made “heroic” contributions to cooperative enterprise. The newest inductees are: • Frank Morton Hunt II, a lifelong leader of the Florida citrus industry and an advocate for strengthening serv- ice to co-op customer-owners. He is the retired presi- Cooperative Hall of Fame inductees, from left: Tom Lyon, dent of Hunt Brothers Cooperative, Lake Wales, Fla., Rebecca Allen (represented by her daughter, Lucy Allen), Dave and a past chairman and president of Citrus World Miller and Frank Hunt. Inc., which owns the Florida’s Natural orange juice brand. He also played a major role in shaping the the local, regional, national and international arenas. Farm Credit System when the Banks for Cooperatives As a board member of the International Cooperative were consolidated into CoBank in the 1980s. Alliance, he has also been the leading American in the • Thomas L. Lyon, retired CEO of Cooperative international cooperative community. Resources International in Shawano, Wis., a member- • Rebecca Allen (deceased) was co-founder of Parent owned holding cooperative of three subsidiaries that Cooperative Preschools International (PCPI), provides artificial insemination services for livestock. Kensington, Md. A teacher, editor and adviser in early He is a leader in the state, national and international childhood education, Allen believed in the co-op busi- cooperative communities and has a passion for co-op ness model and in parent participation and control of development and education. He is a former chair of education. She organized PCPI, an association of the University of Wisconsin Board of Regents and a cooperative preschools, in 1960. She helped launch the trustee of the Ralph Morris Foundation, The Head Start program in the 1960s. Cooperative Foundation and the Cooperative Development Foundation. The Cooperative Hall of Fame was established in • David O. Miller, a farmer, businessman and director 1974 by the National Cooperative Business Association for Nationwide Insurance, a mutual insurance compa- and is housed at its offices in Washington. It can also be ny in the Fortune 100. He is a cooperative advocate in visited on the web at: www.heroes.coop. ■

32 May/June 2006 / Rural Cooperatives PAGE FROM THE PAST

From the archives of Rural Cooperatives and its predecessor magazines 50 Years Ago… From the May and June 1956 issues of News for Farmer Cooperatives

Bulk milk handling challenge Dairy cooperatives face a challenge in converting to bulk milk handling. “A cooperative’s success is measured largely in terms of the degree to which it provides services demanded and May and June 1956 issues needed by producers. Producers need and (in many cases) are asking their cooperatives for assistance in solving problems associated with bulk handling methods. In converting to bulk 30 Years Ago… milk handling, cooperatives have many tasks facing them. By From the May and June 1976 issues of Farmer Cooperatives setting up a successful system, these co-ops can make savings for their members in four principal ways: through the improved Energy to determine status as world power quality of the milk, reduced transportation costs, reduced “At least 10 issues must be resolved if the nation is to solve receiving costs and reductions in the loss of milk and .” its energy problems,” Robert D. Partridge, executive vice president and general manager of National Rural Electric Small rabbit co-op does good business Cooperative Association, told a group of cooperative associa- Demand for rabbit meat in the United States has been tion editors. If the nation cannot solve its energy shortages, it soaring, from 6 million pounds in 1935 to about 50 million runs the risk of perhaps eventually becoming a “fourth- or pounds in 1950. Helping to meet that demand is the Virginia fifth-rate world power.” The 10 issues include: (1) dependen- Rabbit Market Cooperative in Roanoke. The co-op began cy on oil from abroad; (2) failure to conserve energy; (3) business in 1934 with seven rabbit breeder members, with necessity of shifting more to electricity; (4) commitments to sales that year of less than 1,000 pounds live weight. These rapid cleanup of air and water; (5) accelerated research and members were breeding rabbits chiefly for show purposes. development of alternative sources of energy; (6) reliance on But they found themselves with extras and they started look- price as the regulator of the energy field; (7) lack of govern- ing for a market for these healthy young, edible rabbits. In mental commitment and determination to develop a national 1934 it wasn’t easy to sell rabbits for food because of the dan- energy policy; (8) factor of public fear and doubt; (9) monop- ger of contracting tularemia (rabbit fever). But as the years oly in the basic fuels industry; and (10) need for education. passed, consumer demand for rabbit increased tremendously. By 1955, co-op membership had climbed to more than 450 MFC to produce, market Mississippi’s ‘Super Food Bar’ members in West Virginia, North Carolina and Virginia. A “super food bar” developed by Mississippi State food specialists has created a new role for MFC Services, a region- CCA moves supplies to 500,000 farmers al farmer cooperative based at Jackson, Miss. MFC has been Maximum transportation services at minimum costs are an selected by Mississippi State College Board as sole interna- aim of Consumers Cooperative Association (CCA), Kansas tional production and marketing agent for the super food bar. City, Mo., a large regional supply cooperative serving close to The board selected MFC because the cooperative already had half a million farmers in nine Midwestern states. Its farm sup- the marketing machinery and expertise to make the product plies move by rail, steamship, waterways, trucks and pipelines. available worldwide. is planning a school food program Farmers have a right to expect their cooperative wholesalers to and the Shah is interested in a high-protein food supplement keep transportation costs to a minimum and, at the same time, to be included. The Shah’s specifications call for: individually provide maximum services. CCA’s members are concerned wrapped snack bars that provide 200-300 calories of protein, with the movement of supplies from the purchase of raw mate- that no refrigeration be required and that cost per serving be rials through processing and manufacturing, storage and intra- 18 to 20 cents. The team came up with four types of food plant handling, packing and shipping and on to delivery to bars: brownie, toffee, oatmeal and sweet potato, with oatmeal local member associations for distribution to farmers. being the flavor most favored in Iran.

Rural Cooperatives / May/June 2006 33 schedule thanks to dry weather during the early stages of construction, according to Harvest States Cooperatives of St. Paul, Minn. The mill is being built for Amber Milling Co., a division of Harvest States. It will process hard-red winter and spring wheat to produce bread flour. The Houston mill is the second of three new, hard-red winter wheat mills to be built by Harvest States and Amber Milling to bring more of the food dollar back to member-producers. Unlike the coopera- tive’s mill at Kenosha, Wis., which has adjoining grain stor- age tanks, a nearby grain elevator operated by the Houston May and June 1976 issues Port Authority is available for unloading and storing incom- ing grain. The site is served by two rail lines.” Indiana co-op’s 50th year gilded by records “Indiana’s largest agricultural gathering — drawing about Health network enhances services in mountain 15,000 people — observed the golden anniversary of Indiana “A combination of rising health care costs and cutbacks in Farm Bureau Cooperative Association Inc. The 50th annual health and social programs at both the state and federal level meeting was the setting for special observances and reports of has left many rural communities struggling to maintain or the cooperative’s record year in sales and net savings during establish needed health care facilities and related social servic- 1975.” In commenting on the annual meeting’s theme of “50 es. When the health of our rural population is negatively Years in Progress,” Harold P. Jordan, special assistant to the affected, it increases the odds of a general economic downturn. general manager and recently retired as the cooperative’s A healthy community may be able to withstand an economic general manager, noted that agriculture’s advance “did not crisis, but when health services are eroding, economic stress is come by accident or good fortune. It came about because a compounded and the viability of rural communities is threat- lot of people on the farm, at Purdue University, in USDA ened. The reduction or elimination of many costly health and and in this and other cooperatives worked together to make human services programs could have a severe impact on rural agriculture more efficient, to produce more wholesome, America. To plan for even nutritious food for consumers and to provide more adequate the best-case scenario in and equitable income for farmers.” this setting, rural communi- ties need to be innovative and collaborate. They need 10 Years Ago… to begin planning now, if From the May/June 1996 issue of Rural Cooperatives they haven’t already done so. Eagle County, Colo., is Sound co-op business ethics developing an innovative, “Cooperatives were generally organized on a community shared-services agency that basis where social relations, such as kinship and friendship, operates on cooperative provided a basis of trust,” explains Paul Lasley and C. Phillip principles and is surmount- Baumel in an article on ethical standards for co-ops. “Early ing these negative trends cooperative leaders recognized that they needed to sharply and improving the delivery differentiate themselves from traditional private sector busi- of health and human servic- nesses. A key ingredient to achieving cooperation was es to its residents.” ■ establishing rapport and building trust with and among producers. The early organizing efforts stressed the importance of farmer control, honesty, integrity and high ethical standards. This attention to honest busi- ness practices and treating all patrons fairly attracted many new members. Trust and commitment to ethical business practices provide the basis for cooperation and are essential for people to join together and work for mutual goals. Without trust, people do not communi- cate and cooperation is unlikely.”

Harvest States’ Texas mill ahead of schedule “Construction of a new, 10,000-hundredweight flour mill in Houston, Texas, to serve cooperatives is ahead of

May/June 1996 issue 34 May/June 2006 / Rural Cooperatives INSIDE RURAL DEVELOPMENT Wind, biofuel projects funded

By Jack Gleason, energy start up is in the town of Acting Administrator Luverne, Minn., where Agri-Energy USDA Rural Development LLC is located. This company is locat- Business and Cooperative ed in the southwestern corner of Programs Minnesota, surrounded by corn and soybean farms. nergy is a key part of This project began producing President Bush’s domestic ethanol in 1998 as a 12-million-gallon- agenda, and one of the per-year dry-mill plant using 10 million E newer loan guarantee pro- bushels of corn annually from its mem- grams available through bers. In 1998, USDA Rural Develop- USDA Rural Development is the ment provided a Business and Industry Renewable Energy and Efficiency loan loan guarantee on a $5 million loan to program. These loans are designed to construct the plant. This project was encourage agricultural producers and the first of its kind in Minnesota. small rural businesses to create renew- Paul Neppel and his family used a Three years later, Rural Develop- able and energy-efficient systems. Renewable Energy Grant from USDA/ ment was approached by another Two generations of the Neppel fami- RD to erect this windmill on their Iowa lender, Heartland Business Bank of farm. USDA photo by Kate Evans ly operate Neppel Farms Inc., in Wisconsin, to guarantee another $5 Armstrong, Iowa, a 2,000-acre, grain million loan to refinance debts at a and livestock farm, which includes a fessional grant writer. The 1.5 MW tur- lower rate and to expand the ethanol 3,400-head sow confinement operation bine went on-line in August, 2004, and plant. The company has continued to and 16,000 hogs. It also markets 200 is now producing close to 5 million perform in an exceptional manner. cattle annually. kilowatt-hours of electricity annually, Agri-Energy currently has about $24 Faced with an annual electric bill enough to light up 400 Iowa homes for million in annual sales. from their livestock operation that a year. The electricity is being pur- This plant employs local residents, exceeded $200,000 per year, the chased by Alliant Energy under a long- buys approximately 10 million bushels Neppels decided to pursue their own term contract. The family calculates of corn per year from local farmer- windmill after taking a closer look at that is should achieve return on invest- members and increases their income by two wind turbines of the nearby Spirit ment in 15 years. selling a value-added product derived Lake School district. The Neppels say the best way to from corn. The farm received a $402,500 Re- avoid or limit start-up problems is to USDA Rural Development is a ven- newable Energy Systems grant from make sure you “work with a first-class ture capital source for rural America USDA Rural Development to install a contractor” with a solid track record. and has $17 billion to invest in the rural 1.5 MW wind turbine. It also received a They also advise securing power-pur- economy this year. For more informa- $250,000 interest-free loan from the chase and interconnection agreements tion on the Renewable Energy and Iowa Energy Center and a loan for the early in the process, and to secure a Efficiency program or our other guar- balance from their local lender. Total warranty and maintenance contract. anteed loan programs, contact a Rural project cost was $1.6 million. Their success with wind power is also Development office in your state, which In addition to help from USDA prompting interest from others in the you can find listed on our website: Rural Development staff in Iowa, the area to put up their own turbines. www.rurdev.usda.gov. We look forward Neppel family also worked with a pro- Another example of a successful to working with you. ■

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36 May/June 2006 / Rural Cooperatives