Rur Coop Jan/Feb 05 PRINT - USDA Rural Developmentgies needed to convert bio-mass into bio-based products and bio-energy in a manner which is cost-competitive in large national and

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lCOOPERATIVESCOOPERATIVESUSDA / Rural Development January/February 2005

How to keepmembers fromflying the cooppage 4

2 January/February 2005 / Rural Cooperatives

As the second term of the Bushadministration begins, I want toexpress USDA Rural Develop-ment’s continued commitment tothe positive agenda the Presidenthas outlined for rural America. Amajor component of the adminis-tration’s domestic agenda contin-ues to be forming a new energypolicy with the development ofrenewable energy technology play-ing a key role. This ties into ourbio-based and bio-energy pro-grams. Both the nation’s farmerand utility cooperatives are playinga major role in this effort, and thatrole will certainly grow in the yearsahead.

This effort includes theRenewable Energy Systems andEnergy Efficiency ImprovementsGrant Program (9006) from the2002 Farm Bill. This initiativemakes it possible to finance thepurchase of renewable energy sys-tems and to make energy improve-ments for agricultural producersand rural small businesses throughgrants offered through our businessprograms. Other efforts includeUSDA Rural Development electricloans that encourage the inclusionof renewable energy sources to helppower America’s rural electric grid.

To help achieve this goal, USDARural Development has forged apartnership with the Environmen-tal Protection Agency to promotedevelopment of new, agricultural-based renewable energy projects(see Newsline, page 40). This pro-

gram will benefit the environment,will help reduce our dependence onforeign oil and will boost revenuesfor farmers and their co-ops, whichin turn bolsters the entire ruraleconomy.

President Bush has said Americamust have an energy policy thatplans for the future, but meets theneeds of today. This will be ourgoal as we finance new technolo-gies needed to convert bio-massinto bio-based products and bio-energy in a manner which is cost-competitive in large national andinternational markets. U.S. produc-tion of ethanol from corn was 60million gallons in the mid-1970s; in2004, the U.S. produced an esti-mated 3.4 billion gallons.

USDA has also made greatprogress in the implementation ofthe President’s management agen-da, including the e-GovernmentInitiative; our services are nowavailable on the World Wide Web.As a result, our programs are more

user-friendly to consumers and pro-ducers.

In the 1890 Land Grant Collegesand Universities Initiative, we added30 new 1890 scholars in December.Our goal is to hire some of these1890 scholars for exceptional careershere at USDA.

One of the more competitiveprograms available through USDARural Development’s CooperativePrograms is the Value-AddedProducer Grants (VAPG). Thesegrants consist of planning or usingworking capital to establish a value-added agricultural marketing ven-ture, many of which are owned bycooperatives. For an example, seethe Value-Added Corner on page15 of this issue for a look at GoldenRidge Cheese Cooperative in Iowaand the article about Crooked Bowbeef strips on page 7. Last year,approximately $13.2 million ingrants were available for up-and-coming cooperatives in ruralAmerica.

As you can see, our USDA RuralDevelopment team is committed toproviding strong leadership toincrease economic opportunitiesand improve the quality of life forcitizens living in America’s ruralcommunities. We look forward toworking with you to bring suchopportunities to you and yourcommunity. ■— Peter J. Thomas,Administrator, Business & Cooperative Programs, USDA Rural Development

C O M M E N T A R Y

Rural America’s role in the energy economy

President Bush hassaid America musthave an energy policythat plans for thefuture, but meets theneeds of today.

Rural Cooperatives / January/February 2005 3

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Gilbert Gonzalez, Acting Under Secretary,USDA Rural Development

Peter Thomas, Administrator, Rural Business-Cooperative Service

Roberta D. Purcell, Deputy Administrator,USDA Rural Business-Cooperative Service

Dan Campbell, Editor

Vision Integrated Marketing/KOTA, Design

Have a cooperative-related question?Call (202) 720-6483, orFax (202) 720-4641, Information Director,

This publication was printed with vegetable oil-based ink.

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COOPERATIVESCOOPERATIVESJanuary/February 2005 Volume 72 Number 1

p. 4

p. 8

p. 22

p. 27

F E A T U R E S & N E W S

4 Flying the coop Why members leave co-ops and ways to prevent it By Catherine Merlo

8 Leaving home? Reasons vary for co-op conversions; critics remain waryBy Nancy Jorgensen

12 Co-op stock exchange Why choice of trading rules matters for new-generation co-op stockholdersBy Steven J. Holland & Robert King

17 Of necessity & invention Conference shows diversity of responses by co-ops to changing markets By Kimberly Zeuli

22 Charley’s Angels Co-ops show true colors sending aid to Hurricane Charley-ravaged Southern states By Stephen Thompson

26 Retail co-ops advised to foster member identification, not force conformity By Janet Ciccone

27 Paper or plastic? For single-serve milk market, the answer is plastic By Dan Campbell

D E P A R T M E N T S2 COMMENTARY

15 VALUE-ADDED CORNER 20 LEGAL CORNER 34 NEWSLINE 44 NEW USDA CO-OP PUBLICATIONS

O n t h e C o v e r :

Our cover story discusses strategy for preventing members from “flying thecoop.” Greg Spalenka’s art has also been featured in Time, Newsweek, TheWall Street Journal, New York and Los Angeles Times and many other publi-cations and books. To see more, visit: www.spalenka.com.


By Catherine Merlo

Editor’s note: Merlo is a freelancewriter and former co-op communicationsdirector based in Bakersfield, Calif., whospecializes in issues pertaining to coopera-tives.

n August 2002, growerGreg Palla rose beforethe board of directors ofa major regional market-ing cooperative and

made a startling announcement.Standing before the group during

executive session, Palla announced hewas resigning from the 50-memberboard after nearly 10 years as one of itsdirectors.

“They were shocked,” Palla remem-bers.

But they shouldn’t have been, saysthe 49-year-old, whose family hadbeen with the farmer-owned co-opsince the 1930s. Palla himself had beena member for more than 20 years.

“For months, I had been urging theco-op to reconsider its process forselecting a new chief executive officer(CEO),” he says. “It was faulty. Also,the co-op had exhibited poor perfor-mance. I felt the board did not haveproper oversight on the co-op’s policyor management.”

The co-op, accustomed to annu-al sales of $500 million and high-er, had come through a roughmarketing season the yearbefore. For the first time indecades, it had been forced to ask fora return on payment advances made tomembers. That had caused widespread

consternation. Coincidentally, the co-op’s long-time CEO was preparing toretire, and the search had begun fornew management.

Palla had expressed his views aboutthe board’s “inherent deficiency in itsoversight of management.” He hadrecommended more emphasis onstrategic planning. He had even sug-gested the board consider adding anoutside director to offer a differentperspective. He had been met withwhat he calls “cross looks.”

“The board was not inclined tohear my message,” says Palla.

Changes weren’t made. Sixmonths after his resignation from

the board, Palla ended his connec-tion with the association during theco-op’s annual membership sign-outperiod.

F ly ing the coopWhy members leave a co-op and ways to help prevent it

I


Lack of response promptsco-op members to quit

Palla wasn’t alone in his departure.Three more long-time directors soonresigned from the co-op’s board andmembership. Numerous members alsowithdrew, angry and disappointed overhaving to pay back the advances theco-op had overpaid on its marketingpools.

The co-op’s management troublesdeepened. Nine months after hiringhim, the board fired the new CEO.

The experience hasn’t soured Pallaon co-ops. He remains a member oftwo other co-ops and serves as boardchairman for one of them.

“I still believe in growers bandingtogether to enjoy economies of scaleand have ownership in their particularactivity,” he says. “But what happenedmade me aware there are inherentconcerns at co-ops.”

Today, the co-op Palla left hasrebounded with a new CEO, a returnof many previously departed membersand successful results. But both Pallaand the co-op have learned hardlessons from the experience.

Reality of member departuresThe case illustrates the reality that

few cooperatives publicly like to talkabout: members do grow unhappy andwithdraw from their cooperatives.Certainly, not all member withdrawalsstem from frustration. A co-op can losemembers when they die, retire or leavethe business.

But co-ops also lose members formore sharp-edged reasons, such aspoor performance by the association,questions about its credibility or lead-ership, or inadequate products and ser-vices. In an era of fewer farmers andfarmer-owned co-ops, membership losscan pose serious problems for a co-op.

According to USDA’s FarmerCooperative Statistics for 2002, U.S.farmer cooperatives number 3,140,down 89 from 2001. This includeslosses from mergers, closures and con-versions. Between 1993 and 2002,memberships in U.S. farmer coopera-tives dropped from 4 million to 2.8

million. This decline reflects thedecreasing number of farms, farmersand ranchers in the United States. Butthese numbers also drive home theimportance of sustaining cooperativemembership when the overall pieshrinks — at a time when volume mat-ters and markets have become morecompetitive.

Performance firstA co-op’s performance is paramount

in retaining members, says DanVincent, president of Pacific CoastProducers (PCP), a 176-member fruitand vegetable processing and market-ing cooperative based in Lodi, Calif.

Vincent, who became PCP presi-dent in June 2004, says, “The bestadvice I’ve had came from our previouspresident: Run the co-op like a busi-ness. In today’s market, members areinvesting in us and expecting a decentreturn. If they’re not getting it, they’lltake their business somewhere else.”

Palla agrees. “A co-op can buy adsand give out hats and toys, but perfor-

mance speaks much more loudly,” hesays.

Problems can develop when mem-bers perceive their co-op isn’t doing aswell as a competitor or the open mar-ket, or if its performance has laggedbehind the industry average for threeor four years.

“A co-op can lose members whenthere’s no real or perceived value in theco-op,” says Joe Huffine, manager ofmember services for TennesseeFarmers Cooperative, a federated farmsupply co-op with 64 members repre-senting 70,000 farmers.

“It’s very important to evaluate theservices offered to determine if they’rebeing utilized or meeting currentneeds,” Huffine says.

Not meeting members’ needs cancreate indifference to the co-op, addsHuffine. Members can also drift awaywhen they perceive the co-op is notfocused on profitability or futuregrowth and needs.

“When you’re not returningpatronage, when they see little or novalue or your co-op’s services are notcompatible with their needs, memberscan become disenchanted,” Huffinesays. “Then the co-op becomes likeany other business and members mayseek out someone else. Perceived indif-ference to members can create a wallof obstruction for any business, espe-cially a cooperative.”

Co-ops that have strayed too farfrom their original purpose or aren’t intouch with member needs, Huffineadds, “are often the co-ops with themost problems and least loyal mem-bership.”

Contending with competitionCo-ops also may lose members to

competing businesses or even otherfarmer-owned organizations.

“Competition is legitimate and canbe healthy for business,” Huffine says.“But it can also be a death sentence forco-ops not willing to adapt to currentmembership and market demands.”

He points out that many co-ops nolonger have just local competitors tocontend with. With the advent of

Co-ops that havestrayed too far from their originalpurpose or aren’t intouch with memberneeds “are often theco-ops with the mostproblems and leastloyal membership.”

—Joe Huffine


national companies through attritionand consolidation, competition haswidened to a national scope. Farmersand ranchers can even turn to theInternet for products and services. Allthat’s created an atmosphere of “sur-vival of the fittest,” Huffine says.

Competitors looking to boost theirmarket share can do more than offerpromises of better prices, products orservices. They can sabotage a co-op’sefforts, undermine its relationship withmembers or deliberately attempt towoo them away.

Dr. Shermain Hardesty, Extensioneconomist for cooperatives and mar-keting at the University of Californiaat Davis, has seen that happen betweenco-ops.

“There were two rival co-ops inCalifornia,” Hardesty says. “One co-ophad been struggling, and the other saidall kinds of negative things about it.This just added fuel to the fire.”

The negative campaign createdmore doubt in the minds of membersat the struggling co-op. As a result,Hardesty says, many members left thetroubled co-op, further weakening it.In time, it closed its doors for good.

The role of the boardA co-op’s board plays an important

role in member retention. In fact, “theboard can make or break a co-op,”Huffine says.

“A board member plays a significantrole because he or she representsmembers,” Hardesty agrees. “It’s his orher duty to be in touch with them.”

“If board members are fulfillingtheir responsibilities so that a co-opachieves its performance objectives,why would a member go anywhereelse?” asks Palla.

But too often, board members failin their responsibilities.

“The majority of board membersare often there for the ride,” says Palla.“Too many directors view their rolemore as an honor rather than perform-ing a fiduciary responsibility represent-ing the membership. It becomes asocial club.”

That happens frequently because

farming communities, where directorsusually live, are small and close-knit,Palla says. Farms are so often steepedin family tradition that it can be hardto separate the family farm from theco-op.

Palla recalls hearing one long-timedirector emphatically state that the co-op’s board had only to hire a CEO, notquestion his or her management deci-sions.

“That doesn’t sit right with me,”Palla says. “If a board member is notquestioning management, he’s not ful-filling his fiduciary responsibility.”

Further, he says, “I maintain thatthe board needs to review its strategicplan and the performance of its CEOon an annual basis. That is the mini-mal fulfillment of a director’s fiduciaryresponsibility.”

Communications are essentialWhether it’s between directors and

members, or directors and manage-ment, or management and members,

communications are essential to solidmember relations. Forthright andstraightforward communications arethe best way to earn members’ trustand support, says Palla.

“Make sure the membership under-stands how the co-op is attaining itslevel of performance,” says Palla. “Ifthe performance is less than targeted,explain why — not with excuses, butwith reasonable, plausible explanations.That’s the best way.”

The small service co-op where Pallaserves as board chairman is doing a“great job” of member retention, hesays, despite fewer producers as aresult of retirements and consolidationof farming operations. Its success ispartly due to a board that “sets asideits own personal objectives in favor ofthe co-op’s objective.”

The co-op also does a good jobcommunicating its performance statusto members. “The books are open tothem,” Palla says. “We go through allfinancial statements in detail at least

In addition to delivering a strong financial performance, co-ops can helpretain their members in other ways, such as: • Listening. Board members and management should listen to members to be

aware of what they want and need. Create opportunities by holding meet-ings or roundtable discussions or simply visiting with members.

• Educating. Whether it’s through face-to-face meetings or a regular newslet-ter, keep members informed about performance, policy decisions, co-opprocedures or industry development. “Many co-ops today have memberswho are third and fourth generation owners,” says Joe Huffine of Ten-nessee Farmers Cooperative. “The younger generation has no sweat equityin the co-op. It’s always had the co-op in the community. It’s imperative for aco-op to educate the next generation of members and employees.”

• Being involved in the community. “If you’re an integral part of the communi-ty, people will support you better,” says Huffine. “Publicize the good you dofor your community.” Those efforts might include scholarships, support ofyouth organizations like FFA or 4-H, or volunteering activities by co-opemployees.

• Taking a fresh look. A co-op may need a face lift in its mission, strategy ormarketing efforts. Maybe it’s time to reintroduce your co-op to its communi-ty with a name recognition campaign. Annual meetings may also need somerevising. “Co-ops need to take a close look at their annual meetings,” saysHuffine. “Are you getting enough bang for your buck at them? Are you happyor satisfied with them?” He suggests co-ops may want to plan annual meet-ings with more member education on the agenda. ■

Actions that help retain members


he newest addition tothe made-in-Montanapantry, Crooked Bowsmoked beef strips, hadan impressive debut in

September when it was sold at theSmithsonian Institution’s newNational Museum of the AmericanIndian in Washington, D.C. Themuseum gift shop’s first consignmentof 200 packages sold out almostimmediately. Crooked Bow’s beefstrips — a very old recipe in a brandnew package — are made of grass-fedbeef raised by Salish, Kootenai andPend O’Reille tribal members of theFlathead Native AgriculturalCooperative. The beef is hand-stripped and seasoned with locallygrown huckleberries and chokecher-ries, a touch of apple cider vinegarand honey, then smoked over alder.

Helping in the development of theproduct was a $100,000 Value AddedProducer Grant awarded in 2002 forworking capital for the project byUSDA Rural Development.

The agricultural cooperative is aresult of work done by Joel Clairmontof the Salish tribe, who is the MontanaState University Extension agent on

the Flathead Reservation. Clairmontwas “the key player” in pulling togeth-er the cooperative, according to JanTusick, a manager with the MissionMountain Market CooperativeDevelopment Center in Ronan. Fiveyears ago, Clairmont began talkingwith the ranchers about ways theymight combine forces and develop

value-added products from what theyproduce.

The co-op now has six members,owns the Crooked Bow brand and itsmembers raise the beef that is smokedand turned into strips. Other FlatheadReservation producers have shown aninterest in joining. The beef strips areprepared and packaged in MissionMountain Market’s licensed commer-cial kitchen and certified organic foodprocessing center. The facility was cre-ated to help area entrepreneurs test,develop, refine and prepare and marketvalue-added food products of all kinds.

A nonprofit entity, the market isalso a business incubator that providesexpertise on food-related regulatoryissues and business and cooperativedevelopment, including possibilitiesfor capitalization. Other MSU facultyhelped develop the product, adapt theoriginal recipe for commercial pro-duction, and train the people whoprepare the strips in food handlingand food safety. The Crooked Bowproduct line is to be enlarged soonwith the addition of a beef stick prod-uct. For more information, contact theFlathead Native Agricultural Co-op,(406) 745-7500, ext. 2202. ■

once a year with members.”Whether a co-op is large or small, it

needs the support of its members tosurvive. Member retention takes work,commitment and a willingness to adaptto the needs of your members, Huffinesays.

“If you’re losing members, if you’renot getting growth or your margins are

eroding, it’s time to reevaluate the ben-efit of your co-op to members today,”he says. “Maybe you need a third partyto analyze your co-op. Problems maybe invisible to us but obvious to others.It may be time to adopt a new businessor marketing strategy.”

As for Palla, he remains confidentof his decision to leave the co-op. “I

have no regrets whatsoever,” he says,“except that I wasn’t able to be moreeffective in getting the board to recog-nize the problems I saw. The rank-and-file member who’s not inside theleadership is dependent on those lead-ers to lead. Having seen it from theinside, I can say it’s often not adequateat all.” ■

USDA, MSU Extens ion he lp Crooked Bow beef take a bow

T

Very old recipe, brand new package: thejust-introduced Crooked Bow brandsmoked beef strips. MSU photo by Erin Raley.


By Nancy Jorgensen

Editor’s Note: Jorgensen worked forCoBank in Denver for 13 years beforeestablishing her own communications andmarketing consulting business inPomerene, Ariz., which specializes in coop-eratives.

o-op conversions aren’texactly sweeping thenation — only a handfulhave converted to limitedliability companies (LLCs)

or other business forms in recent years.And of these, most proudly say thatthey are still producer controlled.

Regardless, co-op conversions con-cern some co-op leaders, who say therisk is great that converted co-ops willeventually wind up under the controlof outside investors.

Promoters of the concept counterthat co-op conversions give producersanother avenue for raising capitalneeded to become players in value-added agriculture markets and can helpthem gain other operating efficiencies.

The debate involves many of thesame principles and issues that arise inthe sale of co-ops to non-cooperativebusinesses, recent examples being thesale of Minnesota Corn Processors andthe now-scuttled sale of FCSAmerica(see Nov-Dec. issue of this magazine).Are producers sacrificing their long-term good and that of producers whofollow them for short-term gains? Isthe conversion being undertaken pri-marily for the benefit of managementstaff or a select few members withlarge amounts of stock, rather than theoverall membership? Or will the con-version open the door to greater mar-keting clout for producers? Should thedefinition of “cooperative” be expand-ed to include producer-owned LLCs asa new type of co-op, and should theyreceive Capper-Volstead protection?

These are just examples of the ques-tions raised by some co-op conver-sions. This article does not examineall of these questions, but it will focuson why several co-ops have recentlyconverted to LLCs or other corporatestructures, and how some co-op lead-ers view co-op conversions.

Why some co-ops convert Attorney Mark Hanson is viewed by

some as an “evangelist” in the cause ofco-op conversions, having been thearchitect of several. “We’re supportiveof co-ops,” says Hanson, an attorneywith Lindquist and Vennum, aMinneapolis-based firm with 13 attor-neys devoted to co-op law. “We stillhelp form more new co-ops than weconvert. But some successful co-opshave outgrown the form.”

C

A load of soybeans arrives at the South Dakota Soybean Processors (SDSP) plant inVolga, S.D. Photo courtesy SDSP

Reasons vary for co-op conversions; critics remain wary of producers losing control

Leaving home?Reasons vary for co-op conversions; critics remain wary of producers losing control


Hanson says co-ops convert forthree major reasons: “To gain capital,to gain liquidity or to access enterprisevalue — the value of the business as agoing entity. In successful co-ops, thevalue of the farmers’ commodities issmall compared to the co-op’s enter-prise value.”

Hanson estimates that only a dozenco-ops have converted to LLCs orother business forms in recent years.This doesn’t include conversions of co-ops which have all their membersresiding in only one state. These areharder to track because they aren’t reg-ulated by the federal Securities andExchange Commission. However, thenumber of such “one-state” co-op con-versions is thought to be very small.

On the other side of the “conver-sion aisle” is E.G. Nadeau, director ofresearch, planning and developmentfor Cooperative Development Servicesin Madison, Wis. Nadeau is a defenderof the traditional co-op model whosees serious problems ahead if thesmall number of co-op conversions anddemutualizations becomes a trend.

In a report on demutualization (theterm commonly used for conversion ofconsumer co-ops — such as housing,utility, insurance, food and credit co-ops — to investor-owned business)which he co-authored for the NationalCooperative Business Association,Nadeau noted that Australia once hada large co-op business sector, but expe-rienced “massive privatization” inrecent years.

While such occurrences are stillrare in the United States, “growingeconomic pressures to demutualizerequires a coordinated response ifwidespread loss of member choice andcontrol is to be avoided,” he wrote.Lack of capital is often used to justifyco-op conversions, he adds, saying thisunderscores the need to find new waysto help co-ops gain access to capital.

The four co-ops discussed beloweach started out as new-generation,value-added co-ops. Adding value tofarm commodities usually requiresbuilding capital-intensive processingplants, and that means sizable invest-

ments by producers. In these fourcases, the minimum investmentrequired for membership ranged from$1,500 to $20,000.

Farmer-members of all four co-opsvoted to adopt new structures thatallow for non-farmer investment. Ineach case, more than 80 percent votedfor the conversion. It is important tonote that all but one of the companiesremains 100 percent farmer-owned andcontrolled. Dakota Growers raisedoutside capital, but farmers still ownmore than 90 percent of the shares.

Golden Oval Eggs LLC; Renville, Minn.

One of the top 10 producers of liq-uid eggs in the nation, Golden OvalEggs owns more than 5 million layinghens and had sales of $80 million in itslast fiscal year. In 1994, when GoldenOval formed, the co-op required its700 farmer-owners to deliver a mini-mum of 2,000 bushels each of feedcorn annually, and to invest $3.50 perbushel, with each bushel representing ashare.

The desire for greater transferabili-ty of co-op stock was the major reasonit converted to an LLC.

“A lot of our shareholders areretirement age,” says Marie Staley, vicepresident and chief administrative offi-cer for Golden Oval. “They’d like the

company to remain farmer-owned, butthey want to pass shares down to theirchildren, even if the children aren’tfarmers.”

The new LLC structure bringsshareholders more liquidity, since theycan sell shares to non-farmers. Sharesrecently traded for $6.

“Farmers are proud to own thebusiness, but at the end of the day,they want to make money,” says Staley.“Even if that means a different [busi-ness] structure.”

Staley adds that under the LLCstructure, farmer-owners continue tobenefit from the market the companycreated for grain, but they are nolonger obligated to deliver grain to thecompany. This benefits those who nolonger farm, or who can’t meet theirobligation in times of poor production.

U.S. Premium Beef, Ltd., (an LLC); Kansas City, Mo.

Steve Hunt, CEO of U.S. PremiumBeef (USPB), says liquidity of memberinvestments ranks as the top reason forUSPB’s conversion. “The LLC struc-ture increases liquidity and flexibilityfor our members,” says Hunt. “As theirbusinesses change, they may want toslow down, divest or expand.”

USPB’s 1,900 members includeranchers and feedlot owners in 36states. At its initial stock offering in1996, owners purchased a minimum of100 shares at $55 per share, with eachshare representing the right and oblig-ation to deliver one finished animal toUSPB’s processing company.

Today, the company owns thenation’s fourth largest beef processor,National Beef Packing Co. It had beenpartners with Farmland Industries inthe company before buying outFarmland when the latter filed forbankruptcy.

Since converting in late 2004,USPB has offered two classes of stock,of which only Class A stock owners areobligated to deliver cattle. A memberwho owned 100 shares before the con-version now owns 100 Class A unitsand 100 Class B units, which combinednow trade for $170.

Dakota Growers Pasta Co. inCarrington, N.D., is now the nation’sthird largest producer of dry pastaproducts. Photo courtesy DakotaGrowers Pasta


Owners of Class A units also benefitfrom receiving a dividend based on theprofitability of the company, and addi-tional premiums based on the qualityof beef they deliver. Class A unitsreceive 33 percent of dividends, whileClass B units earn 66 percent.

“A rancher nearing retirementcould sell Class A units to a niece whoraises cattle, for example, and hold onto his Class B units,” Hunt says,

USPB, which had $800 million innet sales for 2003, continues to seemajor benefits in remaining a produc-er-owned business. “Surveys of USPBcustomers show that consumers trust aproduct that’s directly tied to the pro-ducer,” Hunt says. “They trust howwe treat our animals and theenvironment, our animal healthpractices, and the quality of ourbeef.”

South Dakota SoybeanProcessors LLC; Volga, S.D.

Rodney Christianson, CEOof South Dakota SoybeanProcessors (SDSP), cites taxes asthe No. 1 reason his co-op’s2,100 members voted to becomean LLC in 2002.

A co-op may pass tax liabilities onto its members based on business donewith each member — based on patron-age. However, the South Dakota com-pany expects to handle more non-patronage business in the future, andco-op members would be double-taxedon that business — both at companyand individual levels.

In an LLC, Christianson says “Allprofits and tax liabilities are passed onto the member or partner.” He saysthe LLC structure better meshes withSDSP’s goal to maximize memberprofits. Christianson estimates 2004sales at $240 million.

Based on members delivering 28million bushels of soybeans per year,the company produces 620,000 tons ofsoybean meal, 50,000 tons of hulls and310 million pounds of oil. “What ifSDSP develops a market for 40 millionmore pounds of oil?” Christiansonasks. “It would be difficult to develop a

patronage relationship with our mem-bers for the added soybeans we wouldneed.”

Christianson says members haveseen their original minimum invest-ment of $5,000 increase two to threetimes. “Our goals remain steadfast:adding value and returning that valueto our members. The direction is inthe hands of our members and theboard of directors. The organizationbuilds and keeps loyalty only if it addsvalue to its membership.” SDSP’s gov-ernance has retained many co-op fea-tures, such as one-member, one-vote.

USPB owners also responded to taxconcerns. “As a co-op, anythingdeemed non-patronage income wasdouble-taxed,” says Hunt. “As an LLC,we can pass through all taxes to theproducer.” Non-patronage revenues inUSPB’s future might come from apply-ing food safety additives to the carcassin the processing plant, he adds.

Dakota Growers Pasta Co. Inc., (a C-corporation); Carrington, N.D.

Durum growers in North Dakotaand Minnesota formed DakotaGrowers Pasta in 1991, before theterm “new generation co-op” had evenbeen coined. About 1,000 producersagreed to purchase a minimum of1,500 shares in the new co-op for

$3.85 each, and to deliver 1,500bushels of durum each annually to theco-op.

Back then, the Durum Triangle ofnorth-central North Dakota producedmost of the nation’s durum, a wheatused to make pasta. But years of heavyrains in the area following the forma-tion of the co-op caused the spread ofa plant blight known as scab. As aresult, durum production declined inthe co-op’s primary membership area,so production moved west to otherparts of North Dakota and Montana.

“Mother Nature wasn’t kind to thefarmers who originally put up themoney,” says Timothy Dodd, CEO ofDakota Growers. “Our members no

longer had the ability to deliverhigh-quality durum.” Members

tried to swap grain with the newproducers. “Still, we ran therisk of being called on thecarpet [for failing to sourcethe majority of their cropfrom members] with nosource of durum.”

Despite this chal-lenge, ownership in DakotaGrowers proved profitable.“We paid back farmers’ origi-nal investment long ago

through dividends and stock splits,”Dodd says.

Since the conversion in 2002,investors have owned two types ofstock: common stock, which can besold to anyone, and Series D stock, apreferred stock conveyed exclusively toco-op members before the conversion.Series D stockholders own a first-come, first-served privilege to deliverdurum. They can transfer D stock toother producers, subject to boardapproval.

Dakota Growers, the third-largestmanufacturer of dry pasta products inNorth America, generated net rev-enues of $145 million in 2003, despitemore consumers trending toward low-carbohydrate diets. Through a part-nership with another firm, DakotaGrowers has responded with a newproduct offering that reduces the num-ber of digestible carbs found in tradi-


tional pasta. This pasta will be market-ed under the Dreamfields brand.

Meanwhile, Dakota Growers refusesto give up on a production revival inthe Durum Triangle. “We created anagronomy department, and workedwith breeders to develop a varietythat’s resistant to blight,” Dodd says.

While the other three co-ops con-verted to LLCs, Dakota Growersbecame a C-corporation. “The compa-ny took this route because it couldreorganize on a tax-free basis, com-pared to the LLC option,” says EdIrion, the pasta company’s vice presi-dent for finance. “It also providesgreater opportunities for liquidity andaccess to capital.”

Lindquist and Vennum’s Hanson— who represented three of the fourco-ops (all but SDSP) — weighs in onthe tax issue: “LLCs are tax-efficientfor distributing income over time,while C-corporations increase publicinvestment and liquidity,” he says. C-corporation status is preferable ifleaders foresee the business becominga publicly traded company. A co-opshould become an LLC if generatingincome takes precedence over growth,and if it wants to broaden access tocapital.

New investors bring added capital Of the four co-ops discussed above,

only Dakota Growers has sought out-

side capital since its conversion. In2004, MVC Capital provided $5 mil-lion in equity financing to the pastacompany.

“We expect to use the funds to capi-talize on what we feel are excellentopportunities to promote a healthylifestyle using the new Dreamfields[low-carb] technology and to bolsterour position in the traditional pastamarket,” Dodd says.

“We missed out on some veryappealing opportunities, especiallywhen Borden Foods exited the pastabusiness,” said Dakota GrowersChairman Jack Dalrymple in 2002when the co-op converted. “We’re

According to a study commissioned by the NationalCooperative Business Association, co-op conversionsare rarely driven by members or by perceived benefitsto members. Rather, conversion is more often driven“by co-op staff, leadership or outside consultants”who stand to gain from a switch, according to thereport, Strengthening Cooperative Business Struc-tures: Lessons Learned from Demutualization andCooperative Conversions.

Cooperatives that have high voting thresholds, thatengage their members in their activities, and that stayconnected to the community are less likely to fall preyto even the most aggressive conversion tactics, thestudy says. The report, issued last year, was commis-sioned by a coalition of organizations including the Con-sumer Federation of America, Credit Union NationalAssociation, CUNA Mutual Group, National CooperativeBank, National Cooperative Business Association, andthe National Rural Electric Cooperative Association.

It was co-authored by E.G. Nadeau, a director withCooperative Development Services in Madison, Wis.,and Rod Nilsestuen, long-time president of the Wis-consin Federation of Cooperatives and now WisconsinSecretary of Agriculture, Trade and Consumer Protec-tion.

“The best way to avoid demutualization is to haveactive members engaged in the cooperative who rec-ognize the role of the co-op in their economic well-being,” says NCBA President Paul Hazen.

Even though conversions are relatively rare, thereport said they merit attention because of their impacton their consumer-members. “The economic disadvan-

tages of co-op conversion for consumer-members areobvious,” it says. “When the business is motivated byprofit, rather than by member service, most memberswill pay more for the services or products they buy.” Toslow the conversion trend, the study recommends across-sector campaign to communicate the benefits ofmember-owned businesses and state and federal leg-islative or regulatory changes to prevent co-op leader-ships from gaining financially from conversions.

The study says rural electric cooperatives and retailfood co-ops have a near total immunity to conversion,while mutual insurance companies, particularly thosethat offer life insurance, have the highest susceptibilityto conversion. Credit unions and housing cooperatives,constrained by outdated laws and regulations fromdealing with increasing economic pressures, arebecoming conversion targets more often, the studyadded.

Among the study’s sector-specific findings was thatlack of liquidity, financial difficulties and financialincentives to management and directors have fed thepressure on farmer-owned co-ops to convert. Membersof a converting farm co-op may enjoy short-term finan-cial gains, but they face longer term losses as they losecontrol over the price they are paid for their products.As a result, the market imbalance that led to creation ofthe cooperative in the first place may reemerge.

Strengthening Cooperative Business Structures:Lessons Learned from Demutualization and Coopera-tive Conversions is available from NCBA, 1401 NewYork Ave., NW, Suite 1100, Washington, DC 20005. Con-tact Art Jaeger, (202) 383-5462 for more information. ■

Study: co-op conversions rarely member-driven

continued on page 36


By Steven J. Holland

Macalester College

Robert P. King,

University of Minnesota

Editor’s note: Holland is policy associate,Macalester College. King is professor andhead of the Department of AppliedEconomics, University of Minnesota.Please e-mail questions to:[email protected]

he new-generation coop-erative (NGC) is aninstitutional innovationthat has helped manyfarmers establish value-

added processing operations thatwould have been impossible to capital-ize with a traditional cooperative.NGCs — with well-defined deliveryrights/obligations and tradable shares— were a driving force in the sharpincrease in the number of cooperativesformed during the 1990s. Morerecently, though, concerns have begunto emerge about the long-run viabilityof NGCs.

In 2002, for example, members ofMinnesota Corn Processors approvedthe sale of their cooperative ethanoland corn sweetener business to Archer-Daniels-Midland, and members ofDakota Growers Pasta Co. approvedconversion of their cooperative to aninvestor-owned corporation (see page8). Should these and other takeoversand conversions be considered aberra-tions, or do they reveal an inherentvulnerability of the NGC organiza-tional form?

Each takeover or conversion case isunique, with a sequence of events and

decisions that led to organizationalchange. In order to explore the ques-tion of whether there are fundamentalforces common to all situations, wedeveloped a simulation model of coop-erative formation and the market forcooperative stock.

Our model is “populated” by farm-ers who produce a crop that can be theraw product for a value-added process-ing facility. These farmers differ in theamount of land they farm, location andrisk attitudes, but all manage theirresources and make investment deci-

sions in a way that maximizes theirlong-run welfare.

The model also includes a non-cooperative firm that is not involved infarming but can build a processingplant or purchase a cooperativelyowned plant. The farmers in themodel can join together to create acooperatively owned value-added pro-cessing plant, and the procedures fortrading cooperative stock can be modi-fied in the model in order to explorethe implications of these organizationaldesign decisions.• We use our model to investigate

three questions:• Why do cooperatives often lead in

the development of new types ofvalue-added processing?

• When is an NGC most likely to bevulnerable to takeover by a non-cooperative firm?

• How do rules and procedures fortrading NGC stock affect coopera-tive formation and vulnerability totakeover?

Our findings help explain NGCtakeovers and conversions. They alsopoint to some practical steps coopera-tive boards can take to make an NGCmore attractive to new farmerinvestors and more robust when facedwith takeover threats.

Why do co-ops often lead in thedevelopment of new types of value-added processing?

A significant, but rarely mentioned,advantage of farmer investment in anNGC value-added processing facility isthe benefit of diversification. Considerthe case of corn producers who have

Co-op s tock exchangeWhy choice of trading rules matters for new-generation co-op stockholders

The diversification of stock benefits is onereason so many ethanol cooperatives arebeing organized on the new-generationco-op model.

T


an opportunity to invest in an ethanolplant. These farmers always face therisk of large downward swings in theprice of corn.

However, low corn prices increasethe operating margin for an ethanolNGC, yielding higher patronagerefunds. While investment in anethanol plant carries its own risks, itcan also result in a moderation of amember’s overall exposure to uncer-tainty by blunting the impact of down-ward corn price fluctuations. In short,the NGC provides benefits to mem-bers beyond the ability to share in theenterprise’s profits.

The opportunity to diversify helpsmembers, but it also helps the cooper-ative. If cooperative investors benefitfrom the diversification offered byshares of an NGC, then they should be— and they apparently are — willingto invest in an NGC processing plantthat is slightly less profitable thanwould otherwise be necessary to attractinvestment. The practical implicationis that it is easier for the cooperative tosell shares when the benefits of diversi-fication are known to potentialinvestors.

The diversification benefits ofNGC stock ownership may helpexplain why so many ethanol plantsare NGCs. For example, according tothe Minnesota Department ofAgriculture, 11 of Minnesota’s 14ethanol plants are NGCs — account-ing for over 85 percent of totalethanol production in the state.

As a general rule, investor-ownedfirms (IOFs) invest in ethanol produc-tion because it promises to be prof-itable — not because it helps to diver-sify their portfolios. Consequently,they will build an ethanol plant onlywhen it promises a level of profitabilitysufficient to fully recoup the cost oftheir investment. New-generationcooperatives, on the other hand, cantolerate lower profitability becausethey offer the added benefit of diversi-fication to their members. It followsthat NGCs can raise the money tobuild processing plants under condi-tions where IOFs would shy away.

Figure 1: Investment thresholds for anNGC and an IOF

Figure 1 illustrates this point. Anethanol plant is highly profitable whenthe ethanol price is high and the cornprice is low. This corresponds to thearea in the upper left corner of thefigure, which represents conditionsunder which investment is desirablefor anyone. In the lower right corner,the ethanol price is low, the corn priceis high, and the ethanol plant is likelyto be losing money. Here, no onewants to own an interest in the plant.The “investment thresholds” in figure1 represent the conditions underwhich an NGC and an IOF will firstfind investment in an ethanol plantdesirable.

Because of the benefits of diversifi-cation, potential NGC members arewilling to invest in value-added pro-cessing facilities under less favorablecircumstances than IOF investors. As aresult, there should be market condi-tions (those between the two invest-ment thresholds) where NGC mem-bers would be willing to invest in aprocessing facility when IOF investorswould not. This can give a start-upNGC the opportunity to form withoutinterference from a competing IOF.

When is an NGC most likely to bevulnerable to takeover by a non-cooperative firm?

One of the reasons NGCs offerdiversification benefits is becausemembers can constantly adjust theirexposure to risk by trading their NGC

shares. Of course, this argument failswhen the member’s shares cannot beeasily traded. This is called the “thinmarket” problem.

In most cases, only a limited num-ber of individuals are in a position tobuy NGC stock because cooperativelaws require that members produce theproduct being processed. Among thosewho can buy stock, even fewer actuallywill want to.

For example, many corn producersconsidering investment in an ethanolplant will be too far from the ethanolplant to make membership in theNGC a viable investment. Some sim-ply will not be interested in investing.

The thin market problem is madeworse by the fact that members tend tohave the same general objectives. Forexample, when an ethanol plant isdoing very well, there will be manypotential investors but there might bea shortage of sellers. On the otherhand, when an ethanol plant is notprofitable, many members may be will-ing to sell but few will be willing buy-ers.

In either case, little NGC stock willbe traded unless there are largeincreases or decreases in share prices,and investors will begin to fear thatthey will not be able to get out of theinvestment. In other words, a thinmarket can make the decision to investirreversible.

This irreversibility can have twoimportant effects on an NGC. First,potential investors may hesitate to buyshares if they anticipate the investmentmay be irreversible. This sort of think-ing makes it much more difficult forthe NGC to raise initial capital.

The second problem occurs whenthe NGC is able to form, but the mar-ket for NGC shares becomes thin lateron. Our model suggests that this is adistinct possibility.

Generally, when an NGC makes itsinitial offering, there are interestedinvestors who are not able to buystock. Over the first few years after theNGC forms, both the volume of stocktrading and the share price arepropped up because producers who did


not invest initially are trying to buyinto the NGC. Once most availableinvestors have achieved a level ofinvestment that fits their needs,though, fewer people want to buy andsell NGC stock and the thin marketproblem sets in.

Our analysis suggests the tradingvolume and share price of an NGCwill remain relatively high as investorsadjust their holdings of NGC stock.However, trading volume and shareprice will settle to much lower levelsafter this initial period of adjustment,and this may present an opportunityfor an IOF looking to invest.

If the NGC share price drops farenough, the cost to an IOF of purchas-ing an existing processing plant will belower than the cost of building a newone. This might be sufficient to pullthe IOF into the market. At the sametime, NGC members who have beenfrustrated about their inability to sellshares to other producers might see anoffer from an IOF as too good to passup. This response to the thin marketproblem may help explain why NGCsare sometimes taken over by IOFs orchoose to convert to legal forms thatallow investment by non-producers.

How do rules and procedures fortrading NGC stock affect co-opformation and vulnerability totakeover?

The thin market problem reducesthe demand for NGC shares, makes itmore difficult for NGCs to raise capi-tal, and increases the chances oftakeover by an IOF. If NGCs are tofully realize their advantage over IOFs,they must find a way to alleviate thethin market problem. Here are threestrategies that can help.

1) Choose trading procedures carefully.NGCs use a variety of procedures

to trade their stock. In some cases thecooperative acts as a clearinghouse thatputs willing buyers in touch with will-ing sellers. Many other NGCs orga-nize periodic stock auctions. Whenestablishing rules for trading stock, fewboards consider the effect on the coop-

erative’s ability to raise money or sur-vive a takeover attempt.

Economists often refer to a “per-fect” market, with many buyers andmany sellers shouting out the prices atwhich they are willing to buy or sellthe good. If the quantity offered forsale at the prevailing price is less thanthe quantity demanded, buyers will bidup the price in an effort to buy thelimited supply before their competitiondoes so.

The same process brings the pricedown when supply exceeds demand.The immediate and accurate exchangeof information makes this process hap-pen quickly and results in an equilibri-um “market price” at which supplyequals demand. This is called a per-fectly competitive market.

For a perfectly competitive marketto exist in the real world there must bemany buyers and sellers and freeexchange of information. However, thepool of potential buyers and sellers forNGC stock is often small. Also,despite an NGC’s best efforts, theremay not be a free flow of informationwhen information about memberswishing to buy or sell shares is simplylisted on a bulletin board or a Website. This does not provide a mecha-nism for potential buyers and sellers toquickly adjust price or quantity toreflect market conditions.

Some NGCs have tried to over-come their inability to create a perfect,liquid market for their stock by hold-ing frequent stock auctions. But thedesign of the auction format can have asignificant effect on market liquidity.We used our model to evaluate twotypes of auctions.

The first is called a “discriminatory”auction. Potential sellers submit areserve price and potential buyers sub-mit a bid price. The cooperative thenmatches buyers who submit high bidprices with sellers who submit lowreserve prices until no more matchesare possible. Inevitably, some peoplesubmit bids or “asks” that are unsuc-cessful. The defining characteristic of adiscriminatory auction is that success-ful buyers pay their bid price.

While a discriminatory auction is aconvenient and easy way to match buy-ers and sellers, it may not be the bestway to increase market liquidity. Buy-ers, knowing they will pay their bidprice, have an incentive to submit a bidthat is lower than the amount they aretruly willing to pay. However, lowerbid prices can mean that trades thatcould have taken place if bids had been“honest” will not take place. Thisincreases market thinness.

An alternative to the discriminato-ry auction is a “competitive auction.”Under a competitive auction mecha-nism, successful bidders do not paytheir bid price. Instead, everyonetrades at the same market clearingprice — that is, the price at which thenumber of shares with bids at orabove the market clearing price isequal to the number of shares withreserves at or below the market clear-ing price.

With this rule, successful biddersare guaranteed to pay an amount thatis lower than or equal to their bid, sothey have no incentive to bid belowtheir true valuation of the stock.Higher bids imply more trading, andthis increases market liquidity. Resultsfrom our modeling analysis indicatethat the shift from a discriminatory toa competitive auction can significantlyincrease market liquidity and reducethe likelihood of takeover by an IOF.

2) Diversify the NGC membership.Recall that a thin market can arise

when investors all have the same gen-eral objectives. Another way, then, toimprove liquidity in the NGC stockmarket is to increase diversity amongmembers.

For instance, when the NGC isprofitable, a young farmer may want toincrease the level of his or her invest-ment. Normally, he or she would havetrouble finding a seller, but if theNGC has a number of members near-ing retirement, some of them mighttake that opportunity to sell theirshares. In this way, diverse ages canimprove market liquidity.



Copyright 2004, Des Moines Register

ike the blue cheese itproduces, the GoldenRidge Cheese Cooper-ative had to age a whilebefore it was ready to go.

Founded five years ago by 40 OldOrder Amish dairy farmers in northernIowa and southern Minnesota, GoldenRidge was plagued by a series of pro-duction problems before the first bluecheese wheels were shipped from its12,500-square-foot plant north ofCresco, Iowa, last January.

The Amish farmers invested moreof their own capital into the plant, fora total of $1 million, and brought inNeville McNaughton, a New Zealandnative and cheese consultant whonow lives in St. Louis. Like the bluemold that turns the Amish milk intocheese, McNaughton’s addition asgeneral manager has turned theGolden Ridge co-op into a goingoperation.

The co-op got a big boost in Julywhen its Schwarz und Weiss naturalrind blue cheese tied for first place inthe blue cheese category of the

American Cheese Society’s annualcontest held in Milwaukee.

The competition is “consideredone of the world’s most influentialand prestigious competitions in rec-ognizing the art of specialty cheese-making,” according to the AmericanCheese Society’s Web site. Since the announcement of the award,McNaughton said, “Cheese is nowflying out of here. People are callingus.” Prospects at the co-op weren’t sorosy when McNaughton first showedup at the Golden Ridge plant.

“This was a stalled project,” he said.

V A L U E - A D D E D C O R N E R

Iowa cheese co-op he lpspreserve a way of l i fe

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

L


“They couldn’t decide how to get thisup and running.”

McNaughton did a three-day assess-ment of the operation and re-wrote theco-op’s business plan. The co-op hadbeen focused on making whatMcNaughton called commodity bluecheese. “We refocused the plant onmaking a quality product that plays tothe strength of the milk,” he said.

A $2 million loan guarantee wasobtained from the U.S. Department ofAgriculture’s rural development agency[USDA Rural Development]. Thatloan guarantee allowed the co-op’sbank to advance it more money toreconfigure the plant.

Dan Gingerich, an Old OrderAmish dairy producer fromLanesboro, Minn., said the co-opmembers “didn’t realize what we weregetting into” when they decided toform the co-op and make cheese. Thedairy producers milk their small herdsby hand and sell the milk in stainlesssteel cans weighing 80 pounds thathold just under 10 gallons of milk.The number of dairy processors will-ing to handle their milk cans haddropped from five to one, Gingerichsaid, narrowing their marketingoptions considerably.

“I’m trying to hang on to the dairy,”he said. “It got tougher to make a liv-ing on the farm than 20 years ago.”

Forming a cooperative to producecheese in a modern plant needed to beexamined by leaders of the Old OrderAmish, Gingerich said. For religiousreasons, Old Order Amish do not usemany kinds of modern machinery.Their lifestyle is best known for thehorse-and-buggy transportation onwhich the Amish rely.” Our eldersthought that in order to keep the fami-ly farms going, we needed to change,”Gingerich said.

“We needed something like this soour children won’t have to live on oneor two acres and become factory work-ers. On the one hand, it might be amodern concept, but on the otherhand, we needed to have somethinglike the cheese plant to keep our wayof life going.”

With McNaughton on board andthe American Cheese Society award,Gingerich said he thinks Golden Ridgehas turned the corner. Golden Ridgemakes three cheese products: Schwarzund Weiss, which means “black andwhite” in German; Harmony Blue,which has extra cream added, andUltimate 50, which is half Amish cowmilk and half goat milk supplied by Joy

Peckham, whose Peckview DairyGoats operation is near the plant.

Peckham sells the Golden Ridgecheese and her other dairy goat prod-ucts at the Metro Market in DesMoines and the Des Moines FarmersMarket.

“Last weekend, I sold everything Ibrought in from Golden Ridge in thefirst hour,” Peckham said. “I wish I hadbrought more.” Peckham said shehopes the Ultimate 50 cheese takes offso she can eventually sell to GoldenRidge all of the 500,000 pounds ofgoat milk produced annually by hergoats. Now, she sells almost all of hergoat milk to a plant in Illinois.

Steve Logsdon, owner of the BasilProsperi Bakery in Des Moines, saidSchwarz und Weiss is selling well outof his dairy case.

“We carry European blue cheesesand Australian blue cheeses, and we’vehad a really good response to theGolden Ridge cheese,” Logsdon said.“People like the fact that it’s from Iowaand that they are using their ownmilk.” The Golden Ridge cheese alsois priced competitively, he said, with ahalf-pound selling for $7 to $8, aboutthe same as the nationally knownMaytag blue cheese, the only otherblue cheese made in Iowa.

Swiss Valley Farms, a farmer-ownedcooperative with operations in Iowa,

makes blue cheese at its plant inMindoro, Wis. Myrna Ver Ploeg, pres-ident of Maytag Dairy Farms, said shedid not think the Golden Ridge andMaytag blue cheeses can be compared.“Ours is so different because it is madeby hand,” Ver Ploeg said. “They arevery different cheeses, and they satisfydifferent markets.”

The Maytag Dairy Farm, which wasfounded by Maytag appliance familymembers in 1941, no longer is con-nected with the company. The dairy isprivately owned by 12 Maytag familymembers. The dairy does not releaseits sales numbers, Ver Ploeg said, but itmakes 1 million pounds of blue cheesea year and buys 27,000 gallons of milka day from small dairy farms within 15miles of Newton. The Maytag dairy isexpanding its aging calves to allowproduction to increase, Ver Ploeg said.

“We don’t make enough cheese tomeet the demand,” she said. “We don’twant to be a big cheese company. Wejust want to be a good one.”

Gingerich, chairman of GoldenRidge, said the same thing about theAmish co-op.“We want to keep itsmall,” he said.

McNaughton said Golden Ridgenow buys about 20,000 pounds of milka day from its Amish producers. Butonly about 5,000 pounds of the milkbought by Golden Ridge is processedinto cheese, McNaughton said. Therest is sold to AMPI, a large regionaldairy processor [and also a farmer-owned cooperative]. The co-op’s goal,Gingerich said, is to make all theAmish milk into cheese.

Editor’s note: this article is reprintedcourtesy the Des Moines Register. In addi-tion to the $2 million USDA Business andIndustry (B&I) Guaranteed loan men-tioned above, Golden Ridge CheeseCooperative also received a $500,000Value Added Producer Grant (VAPG)from USDA Rural Development. To learnmore about both programs, visit: www.rur-dev.usda.gov, and follow the links for busi-ness programs. Or call (202) 720-4323,and press “1” to be connected to yourUSDA Rural Development state office. ■

“Cheese is now flyingout of here. Peopleare calling us.”


By Kimberly Zeuli,

Assistant Professor

University of Wisconsin-Madison

Editor’s note: More highlights of the2004 Farmer Cooperative Conference willbe included in the March-April issue ofRural Cooperatives.

“Innovation is rarely rocketscience…in the past few decades,most of the companies that havecreated truly extraordinaryamounts of wealth have done soby inventing great processes, notgreat products.”

(The Economist, April 24, 2004)

usiness innovation can bedefined as any new activ-ity related to firm struc-ture, production andoutput. Today, many

cooperatives are at the forefront ofagribusiness innovation. Cooperativesare being created in new sectors, suchas renewable energy, to help farmerscapture the full rewards of technologi-cal innovation. Established coopera-tives are modifying their financial andownership structures to seek strategicadvantage in today’s global market-place while continuing to meet theneeds of their diverse memberships.Recent changes in state laws allowunprecedented prospects for the evolu-tion of the cooperative model.

The seventh annual Farmer Coop-

eratives Conference — CooperativeInnovation — highlighted some uniqueand successful examples of innovativeagricultural cooperatives. The annualconference, most recently held Nov. 1-2 in Kansas City, was established bythe University of Wisconsin Center forCooperatives (UWCC) in 1998, withfinancial support from the FarmFoundation, to provide an open forum

for critical thinking about the majortrends and issues affecting agriculturalcooperatives.

New energy for co-opsIt seems that everyone is talking

about ethanol these days, spurringgreat expectations for corn and grainproducers. According to theJuly/August 2004 issue of USDA’sRural Cooperatives magazine, 75 ethanolplants operate in the Midwest andGreat Plains, with another dozen ormore under construction. Most ofthese ethanol plants are farmer owned.Raymond Defenbaugh, president andCEO of Big River Resources Ethanolpant, and John Eggleston, board presi-dent of Northeast Missouri Grain

Processors LLC, provided insight intohow farmers can successfully securethe returns ethanol promises.

They both agreed that farmers needto commit to success and be willing tosacrifice much for achievement. As leg-endary football coach Vince Lombardionce said, “winning is everything.”Success also requires patience. Tenyears of planning went into the

Northeast Missouri ethanol plant. Defenbaugh suggested that farmers

and co-ops might not be attacking theright enemy: “The enemy in agricultureis not other farmers and not other com-panies. It is poor prices. Farmers needto work together to combat this enemy.”

The statement that agricultural co-ops needed to work together to succeedwas reiterated throughout the confer-ence. As Benjamin Franklin said, “Wemust all hang together…or assuredlywe shall all hang separately!”

Practicing what they preach, BigRiver Resources Ethanol members arewilling to share the lessons they learnedwith other farmers interested in start-ing an ethanol plant. As Defenbaughnoted, his co-op has also certainly ben-

Of necess i ty & invent ionConference shows diversity of responsesby co-ops to changing market conditions

B


efited from the experiences of othersalong the way. He also stressed theimportance of partnerships. Big Riverhas pursued several joint-ventureopportunities, with very positiveresults. “Most people want to worktogether, so don’t hesitate to look intojoint-venture options.”

Defenbaugh and Eggleston alsoissued a perennial warning to all newco-ops: make sure you raise sufficientcapital — the “life blood” of any orga-nization. If co-ops are not adequatelycapitalized, they are not managing riskwell. However, those interested instarting an ethanol co-op can’t assumecapital will flow to the co-op, evenwith a good business idea.

With all the interest in ethanol, isthere a risk of producing excess supply?Defenbaugh believes that this is a pos-sibility, but legislation and the increas-ing popularity of ethanol fuel will bal-ance supply and demand. He comparedethanol to the computer, which wasahead of its time at first, but today isused by most of the population.

Necessity: the mother of cooperative innovation “If necessity is the mother of invention,

then resourcefulness is the father.” — Beulah L. Henry (The inventor of

a type of umbrella.)CHS Inc. provides compelling evi-

dence that cooperatives can innovatewhen it comes to changing traditionalstructure. John McEnroe, vice presi-dent of Country Operations for CHS,provided one specific example of thiswith his presentation on the CHS“regionalization” concept.

Regionalization refers to the situa-tion when a local co-op is essentiallyconsolidated with CHS (the localbecomes a CHS business division), butit may maintain its own name andretains its local producer board andconsiderable local control.

The CHS regionalization concept,under which it has consolidated with27 local co-ops, was born in 1993 inNorth Dakota. At that time, a local co-op there in CHS’ trade territory wasstruggling, but the board didn’t want

to sell the co-op or invest in new assetsbecause of the risk posed to its patronequity. Eventually, it agreed to mergewith CHS to gain CHS’ oversight onstrategic management decisions at thelocal co-op level.

In addition to its fully autonomousmember co-ops, CHS currentlyincludes 27 “regionalized” local co-ops(business units). All 27 pool theirpatronage with CHS. The patronagerefunds are then distributed back to thelocals, based on local use. CHS worksclosely with these units in terms ofmajor decision-making and mar-keting.

For example, the CHS boarddecides the percentage of cashpatronage refunds and the levelof equity redemption. The localco-op’s employees become CHSemployees, although the localco-op retains daily authority.One of five regional directorsfor CHS attends the local boardmeetings.

McEnroe acknowledged thatthere are pros and cons to thisconcept. On the positive side, itbrings financial stability to thelocal co-ops, which are affordedtimely equity redemption andprotection. The local co-op stillmaintains significant control anddirection at the local level, whilealso achieving economies ofscale as part of CHS. On thedownside, members may per-ceive that the co-op is “sellingout,” although in actuality mem-bers retain considerable localcontrol, as well as the ongoingeconomic benefits of being part of aco-op.

Authority for a few decision-makingabilities — such as how equity is paidout, which is decided by the CHSBoard — is also lost and, ultimately,the local co-op’s fortunes are tied tothose of CHS.

In contrast, as CHS would be thefirst to acknowledge, many local co-ops are doing just fine on their own,implementing their own innovativestrategies.

Jeff Nielsen, general manager ofUnited Farmers Cooperative (UFC),presented such a case. UFC is a highlydiversified local cooperative. Risk man-agement and the desire to provide“customer-driven solutions” guided itspioneering effort to create a member-owned alternative insurance company:Parthenon Risk Partners. According toNielsen, “the cost of insuring our peo-ple, property and assets had becomealmost unbearable.”

Parthenon is a captive insurancecompany; this means it is owned and

controlled by the insured parties. It issimilar in design and operations to acooperative business. In 2002, therewere over 4,500 captive insurancecompanies operating in the UnitedStates. This new insurance programhas helped UFC lower insurance pre-miums and increase coverage for itsemployees.

Nielsen believes that: (1) a pro-active and engaged membership and(2) a pro-active and visionary board arethe two essential components for

All 27 of CHS’ ”regionalized” local co-ops retain dailyoperational authority, but the CHS board decides thepercentage of cash patronage refunds and the levelof equity redemption. Above, grain loading at theCorson Co-op in southeastern South Dakota. Photocourtesy CHS.


cooperative innovation. “When mak-ing a commitment to find a solution,you need to decide whether to create aquick fix or the correct fix.”

Market stress leads tocooperative formation

In 1972, the Michigan factory thatlocal cherry farmers sold their crops towas closed. One of those farmers wasDon Nugent, who — along with othercherry growers — responded to theclosure by forming Graceland FruitCooperative, which purchased the fac-tory.

The dual problems of oversupplyand the short, 12-hour shelf life of ripecherries provided the momentum tocreate an innovative food product:infused dried cherries. Nugent, nowpresident and CFO of Graceland Fruit,overcame food poisoning and a caraccident to close a marketing deal forthis product with Ocean Spray, vividlyillustrating the principle that persis-tence pays off.

In 1998, the IRS ruled thatGraceland no longer qualified as a co-op because of its level of non-memberbusiness, so it converted to a C-corpo-ration. The cherry growers created anew co-op (still using the old name,Graceland Fruit Cooperative), whichsupplies all of the cherries to Graceland.Nugent believes that growing an innov-ative co-op depends upon a good strate-gic plan, a solid management team thatcan implement marketing strategies, aswell as alliances for inputs, manufactur-ing and sales.

As the instigator of a new Wyomingcooperative state law, the MountainStates Lamb Cooperative (MSLC) isoften featured in co-op news. MSLC isa Wyoming-based, vertically integratedmarketing cooperative for lamb andwool. It has 125 members in 10 west-ern states.

By the turn of the last century, lambproducers had suffered through 20years of dismal prices. A core group ofproducers decided to form a verticallyintegrated marketing and processingoperation, but were confronted amajor road block: lack of capital. Non-

producers who considered agriculturevital to their rural communities wantedto invest in such a venture, but theycould not if it was organized as a coop-erative. Some members also wanted toinvest more but did not want to haveto supply a proportionate amount ofproduct.

Brad Boner, board chairman ofMSLC, said the cooperative created aseparate co-op in 2001, the MountainStates Lamb & Wool Cooperative(MSL&W), which is organized underthe new Wyoming co-op statute. MSLCis the sole member of MSL&W. The

latter was formed to provide marketing,processing and other services to bothpatron and possibly non-patron mem-bers.

This co-op’s structure (referred toas “the Wyoming model” or the“Patron Investor Cooperative”) is simi-lar to an LLC in that it allows outsideinvestment without a delivery require-ment, but the business also receives thebenefit of co-op tax laws while beingable to provide a return greater thanthe standard co-op limit of 8 percenton contributed capital. MSL&W nowsells its products on both coasts and

has a joint venture with a New Yorklamb wholesaler. A cross-country sup-ply ensures year-round, consistent-quality products.

According to Mark Hanson,Attorney & Partner at Lindquist &Vennum PLLP and the primary archi-tect of the new Wyoming cooperativestatute, “The changing demographicsof producers in the United States andelsewhere and the consolidations in thefood industry generally will provideopportunities, nudge and even forcechanges in business structure.” Fromhis perspective, the traditional co-opmodel was designed to enhance farmer-member income, not provide increasedreturns to investment. Therefore, amodified structure is necessary fortoday’s value-added cooperatives.

Co-op conversion — is it worth it?Gene Carbone, former CFO for

Calavo Growers, spoke previously atthe Farmer Cooperatives Conferencein 2000, when his California-based avo-cado-growers’ co-op was in the midstof converting to a C-Corporation.With hindsight, has his perspective onthe conversion changed?

Carbone said he believes it was asuccess, in the sense that it providedmuch needed liquidity to members andprovided a market-driven firm valua-tion. After conversion, shares were ini-tially offered at $5. Shares are current-ly trading at $10.80 and there is ahealthy turnover rate.

“Today, Calavo members are drivingLexuses and Mercedes,” he said. “Theshareholders are very happy.” Originalmembers have probably been sellingsome of their stock to new investors,but former members are also returningto the company. This suggests that thecapitalization issue was an importantimpediment to Calavo members.

Under the current corporate struc-ture, the company no longer has totreat all growers equally. Carbone feelsthis flexibility is another positive out-come from the conversion. However,Calavo has to offer competitive returnsfor the fruit producers (dividends per


“The enemy in agriculture is notother farmers andnot other companies. It is poor prices.Farmers need towork together tocombat this enemy.”

—RaymondDefenbaugh


By Donald A. Frederick,

Program Leader for Law, Policy & GovernanceUSDA Rural Development/RBSe-mail: [email protected]

Editor’s note: this article does not repre-sent official policy of USDA, the InternalRevenue Service, the U.S. Department ofthe Treasury or any other governmentagency. It is presented only to provideinformation to persons interested in the taxtreatment of cooperatives.

n Oct. 22, PresidentBush signed into law theAmerican Jobs CreationAct of 2004. The prima-ry impetus for the new

law was a World Trade Organization(WTO) ruling that certain export taxbenefits in our existing tax code violat-ed international trade agreements wehad signed. The WTO authorizedEuropean countries to collect specialtariffs on American products theyimported, until we repealed thoseexport tax benefits.

While the original purpose of thelegislation was to repeal the exportincentives in question, numerous otherchanges to the tax code were addedduring the legislative process. The endresult is a long, complex statute thatincludes several provisions importantto cooperatives.

Extraterritorial Income Exclusion repeal

The offending export incentive,called the extraterritorial income (ETI)

exclusion, is repealed for transactionsafter Dec. 31, 2004. This includes thelanguage allowing agricultural andhorticultural marketing cooperatives topass ETI benefits through to theirpatrons. Transition rules provide coop-eratives and other taxpayers with 80percent of their otherwise-availableETI benefits for transactions during2005 and 60 percent of their other-wise-available ETI benefits for transac-tions during 2006.

Transition relief is also available forincome realized under certain con-tracts in effect on September 17, 2003.

U.S. Production Deduction enactedTo encourage United States domes-

tic economic growth, the law providesa new, phased-in deduction from tax-able income for a portion of “qualifiedproduction activities income” (QPAI)generated by businesses, includingcooperatives. The new deduction canbe as much as 3 percent of QPAI fortax years beginning in 2005-2006, 6percent for 2007-2009, and 9 percentfor 2010 and later.

The range of income that can quali-fy is broad, including most taxableincome realized on manufacturing,producing, growing and extractinggoods in the United States. Specialrules of interest to cooperatives pro-vide that:• Income from food processing (but

not retail operations) is included,• Income from storing and handling

(but not transporting) agriculturalproducts that are used in manufac-turing, producing or growing other

goods is included, and• Income from the production (but not

the transmission or distribution) ofelectricity, natural gas and potablewater is included.Two limitations apply to this deduc-

tion. First, the deduction that may beclaimed is the lesser of QPAI or tax-able income for the year. So, if a coop-erative or other taxpayer loses moneyon other activities, that could reduceor eliminate this deduction. A specialprovision in the law says cooperativesthat allocate the deduction to their patronscan compute “taxable income” for thispurpose without taking into accounttheir deductions for qualified patron-age refund and per-unit retain alloca-tions and the redemption of non-quali-fieds. The allocation rules are dis-cussed later in this article.

Second, the QPAI deduction maynot exceed 50 percent of the W-2wages paid by the taxpayer for the year.

Cooperative Pass-through Provision The report of the conferees who

drafted the final version of the lawmakes it clear that income derivedfrom manufacturing, production,growth or extraction of any agricultur-al or horticultural product by a coop-erative, or from marketing agriculturalor horticultural products by a coopera-tive, may be included in the coopera-tive’s QPAI. A note to that reportstates that the term “agricultural orhorticultural product” includes “fertil-izer, diesel fuel and other supplies usedin agricultural or horticultural produc-tion that are manufactured, produced,

L E G A L C O R N E R

New tax law inc ludes severa lcooperat ive p rov is ions

O


grown or extracted by the coopera-tive.”

The law provides that patrons ofagricultural and horticultural cooperativescan take a deduction on their taxreturns for QPAI allocated to them aspart of a qualified patronage refund orqualified per-unit retain. The amounteach patron can deduct must be com-puted by the cooperative and a writtennotice must be provided each patronexplaining the computation.

A special rule says a cooperative maynot take a patronage refund deductionfor amounts passed through to patronsthat can be deducted by those patrons.As this amount is already eligible forthe QPAI deduction at the cooperativelevel, this language merely makes itclear cooperatives can’t deduct thesame amount twice.

Example caseThis example illustrates how the

deduction and the pass-through mightwork at a typical agricultural or horti-cultural cooperative. Assume Co-op Chas $100,000 of QPAI. Also assume itis a tax year beginning in 2005 or2006, so the available deduction is 3percent of QPAI, or $3,000.

Co-op C allocates the $100,000 toits member-patrons as a qualifiedpatronage refund. It is allowed todeduct the $3,000 in QPAI under thenew law and the remaining $97,000 asa traditional patronage refund. Thus,the result is the same for the coopera-tive as it was before the new law wasenacted, the entire $100,000 isdeductible.

Now, assume Patron P does 10 per-cent of the business with Co-op C inthe tax year. Patron P receives apatronage refund of $10,000 in QPAI,all of which is taxable income to PatronP. However, under the new law PatronP can deduct the applicable percentageof QPAI (3 percent in 2005 and 2006),or $300. The value of this benefit willincrease significantly when the QPAIdeduction increases to 6 percent in2007 and again to 9 percent in 2010.

Another provision states that anyqualifying activity of patrons who mar-

ket agricultural or horticultural market-ing through a cooperative may beattributed to that cooperative for pur-poses of computing its QPAI deduction.

Planning suggestionsHere are some points to remember

in planning how best to use this newdeduction. First, the legislative lan-guage is not always entirely clear. Taxexperts have many unanswered ques-tions about determining what incomeis eligible for the deduction. So, allcooperatives will want to work withtheir tax adviser to keep abreast ofInternal Revenue Service rulings andother interpretations of this program.

Second, the deduction is first avail-able for tax years beginning on, orafter, Jan. 1, 2005. Many cooperativeson a tax year that begins sometime inthe summer or fall will thus have near-ly two years to become familiar withthe intricacies of computing and allo-cating it.

Third, it is a deduction, not a cred-it. Tax credits, such as the energy-related credits discussed later in thisarticle, can be used dollar-for-dollar tooffset taxes due. Deductions can onlybe used to reduce taxable income, sotheir value depends on each taxpayer’stax bracket.

Dividend Allocation Rule repealThe dividend allocation rule was an

Internal Revenue Service (IRS) inter-pretation of the tax code requiringcooperatives that paid dividends ontheir equity investments to allocatethose dividends on a pro rata basisbetween their patronage and non-patronage income. Under the new law,cooperatives can pay dividends onstock entirely out of non-patronageincome. This allows cooperatives toreduce the tax cost of paying dividendson their equity investments and, at thesame time, return more of their mar-gins to patrons as patronage refunds.

To take advantage of this change,the new law requires cooperatives tohave appropriate language authorizingthem to pay stock dividends out ofnon-patronage income in their articles

of incorporation, bylaws or marketingcontracts with their members andother patrons. Many cooperatives willwant to amend one or more of theseorganizational documents to includesuch a provision.

Declaratory Judgment reliefFarmer cooperatives that want

access to the special tax deductionspermitted under Internal RevenueCode section 521 and other benefitsthat come with section 521 status,must apply for, and receive, approvalfrom IRS. In the past, the only ways acooperative could get a court to reviewa rejection of its application was claima deduction IRS said they weren’t enti-tled to, or pay some tax they didn’tthink they owed and then sue for arefund. This provision enables afarmer cooperative to seek judicialreview of the denial without first creat-ing a tax controversy or being subjectto immediate tax liability.

Marketing includes value-added processing involving animals

One of the activities that allows afarmer cooperative to qualify for sec-tion 521 tax status is to engage in“...marketing the products of membersor other producers.” IRS interpretedthis language to include value-addedprocessing involving a mechanicalprocess (converting corn to ethanol)but not a biological process (feedingcorn to hens and selling eggs andchickens).

The new law makes it clear thatunder both section 521 and regularcooperative tax rules, marketing prod-ucts of members and other producersincludes feeding products of membersand other producer to cattle, hogs,fish, chickens or other animals andselling the resulting animals or animalproducts.

Small ethanol producercredit, co-op pass-through

Current law provides a 10-cents-per-gallon tax credit for each gallon ofethanol produced and sold by so-called



By Stephen Thompson,

Assistant Editor

or people in the areaaround Wauchula, Fla.,located on the state’smid-Gulf Coast, 2004was not the best of years.

On Aug.13, Hurricane Charley roaredin from the Gulf of Mexico, bringingwinds of 140 miles per hour andspawning tornadoes. The stormknocked down trees, power lines andpoles in the Peace River ElectricCooperative subscriber area.

Damage was huge, according toBrad Kimbro, Peace River’s vice presi-

dent of marketing and member ser-vices: “Two-thirds of our system suf-fered significant damage; and one-third of that was simply gone.”

That wasn’t all. Two weeks later,just as soon as Charley’s damage hadbeen repaired, Hurricane Francesmarched through with huge amountsof rain and extensive flooding.Mercifully, it did less damage thanCharley, but still knocked out power toa significant number of customers. AndFrances was followed three shortweeks later by Hurricane Jeanne,whose high winds pummeled the areawith a vengeance, toppling powerpoles like bowling pins.

$42 billion in damage While Peace River was the hardest

hit, power co-ops in Georgia, Florida,Alabama and Mississippi all sufferedvarying amounts of damage in the2004 hurricane season from four majorstorms in rapid succession: Charley,Frances, Ivan (which missed PeaceRiver) and Jeanne. The 2004 hurricaneseason, which totaled nine hurricanesaltogether, caused more than $42 bil-lion worth of damage — the mostcostly hurricane season in history.Damage was even greater than in1992, when Hurricane Andrew devas-tated southern Florida, causing $35billion in damage.

Char ley ’s AngelsUtility co-ops show true colors sending aidto Hurricane Charley-ravaged Southern states

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

F


Despite widespread damage topower distribution systems, electric co-op customers had their power restoredin surprisingly quick time in all cases,an outcome that was made possible bythe dedication of their maintenancepersonnel and the help of fellow co-ops around the country. More than100 co-ops from 15 states sent hun-dreds of linemen and other workerswith equipment to rebuild distribution

infrastructure. And while the scopeand severity of the damage were muchgreater than anyone was used to, theway it was handled was in many waysroutine.

As the path of Hurricane Charleybegan to develop, a call for help wentout from state electric cooperativeassociations in the threatened areas.Rob Land, the director of risk manage-ment for the Association of MissouriElectric Cooperatives, was attending aconference in Savannah, Ga., withDoug Drake, the association’s fieldtraining director, when Charley hit.Both put in long hours on their cellphones in their hotel rooms, keepingnotes on scraps of paper as they gath-ered information about available

resources from member co-ops,matched it up with assistance require-ments, and put together a workabledeployment plan. “One problem wasthat we only had one cell-phone charg-er between us,” chuckles Drake.

Quick assessment crucial Drake points out that if the affected

co-ops do damage assessments asquickly as possible, it helps the assist-ing co-ops allocate the resources athand most effectively.

As the co-op managers were noti-fied, they in turn asked their employ-ees for volunteers to pack up and movetheir equipment to the affected areas.“We never have a problem getting helpfor this kind of thing,” says Drake.“Most of the people are anxious togo.” This is despite the fact that work-ers know they will be facing long hoursof hard work in difficult conditions —

up to 18 days, in this case — and thatthey may have to put up with less-than-ideal sleeping and bathingarrangements.

The biggest problem, he says, is notin getting people to go, but in decidingwho is going to stay behind. “When

we’re dedicating resources, we have toremember that something could hap-pen at home while we’re away.”

Regardless of the irregular condi-tions under which Land and Drakewere working, they managed to puttogether an expedition to the souththat arrived in Mississippi just in timeto start putting things back together inCharley’s wake.

“We’d never worked in that kind ofenvironment before,” Drake says.“The damage was similar to that we’veseen with tornadoes, but it was muchmore widespread. And the workingenvironment was different, too, withlots of sand and marshland. Our guyshad to learn how to get their trucksaround in the sand by lowering theirtire pressures.”

Being from the Show-Me State didhave its advantages, though, as a localline crew found out when they werefaced with the job of digging a hole ina concrete slab. “They didn’t knowwhat to do, because they weren’tequipped for it,” says Drake. “But ourguys have to dig through rock all thetime, so our augurs have tungsten-car-bide teeth on them.” It was one case ofpeople from Missouri showing some-one else. “They drilled through thatconcrete with no trouble at all.”

Co-op aid from near and farAmong other states that sent help

to hurricane-affected areas wereOklahoma, Illinois, New Jersey andPennsylvania. Kentucky alone sentalmost 100 workers and 60 trucks from12 rural electric cooperatives. Manywho stayed home also put in longhours: the Kentucky Association ofElectric Cooperative’s transformermanufacturing plant and the UnitedUtility Supply Cooperative, also head-quartered in Kentucky, put in longhours of overtime, including weekends,to make rewiring supplies and replace-ments for damaged distribution equip-ment.

Bill Davis, Service Manager ofWhite River Valley ElectricCooperative in Branson, Mo., agreeswith Drake that getting linemen to

Employees from Poplar Bluff, Missouri'sOzark Border Electric Cooperative and otherout-of-state co-ops had to adapt to workingin Florida’s high humidity, soft sandy soil andmarshes.

Clouds of bugs bothered linemen workingto restore power on the Gulf Coast, includ-ing this one from White River ValleyElectric Co-op.


volunteer for the trip wasn’t hard.“The guys knew there’d be problems,that they might have to sleep in thetrucks,” he says. “Even when we havestorms at home it’s not easy — theyhave to work 15 or 16 hours a day.They knew we had a job to do, and sothey just went and did it!”

Davis says that it took the trucksalmost two days to travel the 750 milesto the storm area because of govern-ment commercial driving regulations.“They waived the rules in Alabama andMississippi, so we were able to drivestraight through,” he says.

Their first stop was Singing RiverElectric Cooperative, headquartered inGautier, Miss. Singing River was dam-aged relatively lightly by Charley, soafter a couple of days of work, crewsheaded east into Alabama, where theyspent 12 days repairing damage toClarke-Washington ElectricMembership Corporation, headquar-tered in Jackson.

John Davis of Ozark ElectricCooperative in Mount Vernon,Missouri, says that the first lodgingsoffered his linemen in Singing River

Co-op’s subscriber area were “prettybad.” It wasn’t the fault of the local co-op, he says. The problem was that somany people had been forced out oftheir homes, the only rooms left werein an old motel that had recentlyreopened after being closed for a longperiod. But the reactions of the localpeople to the appearance of the out-of-state crews helped make up for thegrubby conditions: “They were realhappy to see us.”

Small, 4WD trucks prove valueWhen it came to choosing which

equipment to take south, White Riverwent against the grain. While most of

the assisting co-ops brought large “linebucket” trucks and other heavy equip-ment, Bill Davis’s crew brought small“service” buckets mounted on four-wheel-drive vehicles, which allowedthem to reach downed lines in areasthe heavier trucks couldn’t reach.

Meanwhile, back in Peace River’ssubscriber area, power was almostcompletely knocked out. So it was withrelief, tinged with amazement, thatresidents watched help arrive in theform of a parade of almost 100 buckettrucks, augurs, pole setters and otherequipment. In all, about 700 co-opmen and women from 15 statesdescended on Wauchula to help cleanup after Charley.

With almost all power knocked out,Peace River had figured it would takemonths to get all its subscribers backon line. But with the help of their fel-low co-ops, power was back on foreveryone in only two weeks.Unfortunately, nobody had much of achance to enjoy it.

“Just as soon as we got cleaned up,Frances came in,” says Kimbro.Compared to Charley, which had

“They finished thejob in 5 hours. If we’d done thatstretch by ourselves,it would have takenus 5 weeks…”

—Brad Kimbro


brought mostly high winds and torna-does, Frances was less powerful, butmoved much more slowly. As a result,it dumped a terrific amount of wateron the area, causing extensive floodingand, again, many downed lines.

This time the help wasn’t as plenti-ful, because Frances cut a much widerswath, covering most of Florida, andco-ops all over the state needed help.Nevertheless, as many as 200 outsideco-op personnel showed up again tohelp put things right.

Ivan followed soon after. Projectedto take the path of Charley, it swung tothe west instead, sparing Peace Riverbut hammering Alabama and theFlorida panhandle before moving northand east over land toward Virginia.Later, it moved out to the Atlantic,looped south and west to cross Florida,and finally expired in Texas.

Spared by Ivan, and with things upand running for the second time, PeaceRiver sent some of its crews to the pan-handle to help out there. Unfortunately,however, Mother Nature was far fromfinished with them.

Hurricane Jeanne pounced from adifferent direction than the others —

the east. Its winds, while not quite asstrong as Charley’s, were still strongenough at 120 miles-per-hour to doextensive damage to an area still recov-ering from the previous two storms.“We had a four-mile stretch of high-way where every single pole wasdown,” says Kimbro. About 140 three-phase distribution poles on that high-way alone had to be replaced or reset.

Again, outside co-ops came to therescue, with about 250 linemen andother workers. “We had 75 trucksworking to restore those lines. Theyfinished the job in 5 hours. If we’ddone that stretch by ourselves, it wouldhave taken us 5 weeks,” Kimbro says.

Co-op staff also hard hitWhile the volunteers made sacrifices,

the employees of the affected co-opswere hit hard — working long hours, insome cases, for weeks on end, as inPeace River. On top of the extra work,Peace River employees had to deal withthe effects of the storms on their ownlives and those of their families.

The co-op had over 70 employeeswho suffered losses from the storms —and 13 of them lost everything. “Our

communications manager was one ofthose,” says Kimbro. “She noted in aTV interview that Peace Riveremployees had suffered losses, andnever hinted about her own.” Kimbrothinks that the shared ordeal hasstrengthened the employees’ relation-ships with each other and the co-op asa whole.

Kimbro also remembers with grati-tude the support Peace River receivedfrom co-op personnel who were unableto be on the scene. “Central EMC inNorth Carolina couldn’t spare person-nel, but they sent a big care packagewith soap, sunscreen, deodorant and soon,” he says. Other co-ops donatedclothing, and the National RuralElectric Cooperative Association sent$4,500 for Peace River employees whosuffered damage. “I was reallyimpressed when I found that themoney was from NRECA employees.”

Brad Kimbro says he is “really hum-bled” by the effort made by his own co-op’s employees and by hundreds ofemployees of fellow co-ops to get PeaceRiver’s subscribers back on-line. “I hopethey never need help like we did,” hesays, “But if they do, we’ll respond.” ■


By Janet Ciccone,

Director of Communications,

College of Human Ecology,

The Ohio State University

e-mail: [email protected]

etail cooperatives wanti-ng to retain membersand encourage their par-ticipation in programswould do best to foster

feelings of identification within thegroup to increase interactions, ratherthan force conformity to group goals.

This is according to a study byLeslie M. Stoel, assistant professor ofmerchandising management at TheOhio State University, College ofHuman Ecology. The results of herstudy, which appeared in the Journal ofSmall Business Management, apply toretail cooperatives in other industriesand to many types of franchises, eventhough data were collected from thehardware industry.

U.S. retail hardware cooperativegroups have increased their member-ship in the last decade, some as muchas doubling. This is in part due to co-op mergers, and in part due to inde-pendent retailers joining cooperativesto work toward results that they can-not achieve individually.

Cooperatives offer a variety of pro-grams that, in the past, were all volun-tary. Today, however, co-ops increas-ingly rely on prescribed programs.

“From our study, we found thatstrength of identification by the co-op

member with the co-op influences the like-lihood that memberswill participate in thevoluntary co-op pro-grams,” Stoel says.“Specifically, if theyidentified stronglywith the co-op, if theyconsidered their roleas co-op membersmore important thantheir role as a storeowner, they weremore likely to adhere to the norms ofthe group, such as adopting a new signprogram or a new computer program.”

At the same time, however, Stoelnotes that identification with the co-opshould not be confused with conformi-ty. “High levels of forced conformityto group goals can be divisive,” Stoelsays. “Care should be taken in order-ing conformity, because it may lead towithin-group conflict, ultimately split-ting the group.”

Hardware stores surveyedStoel surveyed 147 retail hardware

store owners that had five or feweremployees and less than 10,000 squarefeet of retail space. Half of the storeshad a sales volume of under $1 million.

The stores answered a series ofquestions about being a member of theco-op group and about their competi-tive situation. Each store was locatedin a geographic area where it compet-ed with a hardware store that belonged

to another hardware cooperative. Stoel also looked at how belonging

to the co-op affected members’ per-ceptions of rivalry toward stores intheir geographic area belonging to adifferent co-op. She asked: If Ed’s Tru-Value Hardware is competing for cus-tomers against Fred’s Ace Hardware,to what extent will belonging to theTruValue cooperative influence Ed’sperceptions about Fred as a rival forlocal customers?

Stoel found that the importance aco-op member attaches to being amember of the group influenceshis/her perception of conflict with arival party and beliefs about whatbehavior was appropriate in response.

“The majority of respondents con-sidered their primary competitive rivalas being the Big Box stores (e.g., HomeDepot, Lowe’s), despite the proximityof the store belonging to the rival co-op,” Stoel said. “Another small fraction

Retai l co-ops advised tofos te r member i den t i f i ca t i on ,not fo rce conformi ty


RSome 20,000 U.S. hardware stores belong to a cooperative, withAce and Tru Value being two of the largest. Photo courtesy AceHardware


By Dan Campbell, editor

onald McDonald wasn’tofficially registered as aguest or a speaker, buthis presence was certain-ly felt during the joint

annual meeting of the National MilkProducers Federation (NMPF) andDairy Management Inc. (DMI), theplanning and management organiza-tion formed by the National DairyPromotion and Research Board(NDB) and United Dairy IndustryAssociation (UDIA). The meeting,held in Reno, Nev., was filled withgood news for dairy producers andtheir co-ops. Some of the best reportsconcerned the rapidly increasing salesof single-serve milk containers at two

of the nation’s largest fast foodrestaurant chains: McDonalds andWendy’s.

Wendy’s led the way by offeringsingle-serve milk in plastic bottles as asubstitute for soda in its kid-mealpacks. Within a year of introducingthe new milk packaging, sales shot upfrom about 65,000 milk cartons tomore than 1 million plastic bottles ofmilk per week, according to DMICEO Thomas Gallagher. McDonaldssoon followed suite, and saw its milksales rocket from 600,000 cartons to4.2 million bottles weekly.

Other fast food chains are expect-ed to join the party as productioncapacity is ramped up to meet thesurge in demand, producers were toldat the meeting, held in late October.

R

Paper o r p las t ic?For single-serve milk market, there is no debate asplastic sales soar, bringing smiles at dairy conclave

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


Many reasons to cheer There were plenty of other reasons

for good cheer at the conference,including big wins on the legislativefront, higher on-farmmilk prices thanks tothe industry’s supply-balancing actions, andan increasing numberof school districts get-ting back on the milkbandwagon.

Another cause foroptimism was the waythe entire industry —producers and theirco-ops, food processors, retailers andnutrition and health experts — areuniting behind the “3-A-Day” promo-tional campaign. That effort builds on

the newest version of the USDA foodpyramid, which has bumped up thenumber of recommended daily serv-

ings of dairy products fromtwo to three per day. Newdietary studies are alsoshowing that milk can play apart in fighting the obesityepidemic.

The 3-A-Day campaignshows that producers canlook at food manufacturers“not as the enemy, but aspowerful partners,”Gallagher said. And to thosewho think food pyramid

placement doesn’t mean much, hepointed out that it helps to triggergovernment food purchases for use infeeding programs and the menu choic-

es made by school districts and healthprofessionals. Last year alone, schoollunch and Women, Infants andChildren (WIC) feeding programsmade about $16 billion in purchases.

DMI Chairman Paul Rovey said theindustry has traditionally been slow torespond to changes in the fluid milkmarket and has not been active enoughin meeting the challenge as “othershedged-in on dairy’s calcium advan-tage.” But the dairy industry hasbecome more flexible and proactive, asthe marketing gains of the past yearshow, said Rovey, an Arizona dairy-man.

Now the industry needs to capital-ize on the finding that dairy calcium isa useful tool in fighting obesity, whichmay prove to be “the most powerful

Doug Sims, CEO of Denver-based CoBank, told nationaldairy conference attendees that consumer-driven co-opswill be the winners in the years ahead because “the con-sumer is driving the bus that all of agriculture is riding on.”For many, the ability to capitalize on market niches will alsobe crucial as is their capability to work together to strength-en the market position of co-ops. Co-ops must further showhow they are different and what makes them unique — todemonstrate that they add value for members, customersand employees, saidSims, who grew upon a dairy farm.

CoBank and itsaffiliated agriculturalcredit associations inthe U.S. Farm CreditSystem support thedairy industry withmore than $2 billion inloans outstanding toagricultural coopera-tives, dairy proces-sors and dairy farmoperators.

Sims told atten-dees at the annualmeeting of the National Milk Producers Federation, UnitedDairy Association and National Dairy Promotion andResearch Board that the dairy industry today has “more

influence than any other livestock industry because you areworking together.” For example, Sims pointed to the milksupply/demand balancing program of Cooperatives WorkingTogether (CWT) as “a real success that shows the industryis united.”

He encouraged continued cooperation, noting that co-ops need to collaborate to fund research and development— as the dairy industry is — and should even try workingwith competitors.

At a time when only a hand-ful of retail chains controlapproximately 40 percent offood sales in the U.S., Sims saidthrough cooperation, co-opscan and must create marketpower. The rate of concentra-tion in food retail markets islikely to accelerate rapidly, hepredicted, and co-ops mustestablish market position withthese top food retailers.

“Investing in new ways tocollaborate, investing in newproducts, new markets andnew ways of thinking aboutyour value proposition are criti-

cal success factors,” Sims said. Sims added that the dairy industry’s willingness to fund

new, innovative products is paying off. He pointed to the

CoBank CEO: Gear co-ops to consumer demand

“The consumeris driving thebus that all ofagriculture isriding on.”

—Doug Sims

“The consumeris driving thebus that all ofagriculture isriding on.”

—Doug Sims


dairy nutrition message ever,” Roveysaid.

“Five years ago, we saw that obesitywould be ballooning as a health issue,and we wanted to make sure dairy waspart of the solution, not the problem,”Gallagher said.

The point hammered homethroughout the conference was thatmost of these marketing successes canbe traced back to work funded by theDairy Checkoff program, under whichproducers pay 15 cents per hundred-weight to fund promotion andresearch.

CWT helps balance supplyUnder the NMPF banner, dairy

producers helped to boost on-farmmilk prices this past year by using the

industry’s success in introducing “low-carb” products tosatisfy changing consumer preferences as one example.Citing research from Productscan Online, Sims noted that inthe first five months of the past year, dairy processors intro-duced 62 “low-carb” ice creams. In contrast, there wereonly 19 “low-carb” ice creams in 2003 and in 2000 therewere none.

“Consumer-driven co-ops will be the global winners,” hesaid. “The consumer by far is the key driver in the food sys-tem. In the U.S., the consumer is “king and queen.”

Sims also acknowledged the changing global market-place, noting that governments are reducing barriers toentry and providing access to U.S. markets. Specificallywith regard to the Farm Credit System, Sims said that FCSowes thanks to the dairy industry for supporting efforts tooppose the sale of a key Farm Credit System lender to Dutchbanking giant Rabobank this past year. He stressed theimportance of farmers having a locally owned and con-trolled cooperative lender.

Another key factor to watch in today’s business environ-ment, according to Sims, is the effect of recent scandals onthe image of corporate America. Good governance practicesby co-ops will help avoid such scandals, he advised. Heposed a series of questions to encourage co-op attendees toengage in critical self-examination of their business prac-tices, governance policies and business focus. “What do youoffer members that they value? Why should retailers takeyour products? Why do employees want to work for you?What is the difference between your co-op and the businessdown the road? What training do you provide your directors?

If patronage returns are the only way a co-op returnsvalue to members, it will ultimately prove to be a losing

proposition, Sims continued. Co-ops must also deliver supe-rior service and convenience, and provide access to domes-tic and global markets at a competitive price.

He further urged co-op leaders at the meeting to deter-mine whether their capital plan will meet demands of equityretirements, business growth, product research and devel-opment and other needs. If outside capital is being raised,how will it affect the governance of the co-op? “And doesyour co-op have the right skills on the board? Do directorsunderstand the co-op’s strategic plan? How is the co-opmeasuring progress?”

If directors lack skills, get training for them, he stressed,and remember that every meeting is a director-trainingopportunity. Sims said he is a proponent for using outside(non-member) directors to bring valuable expertise to theboard, which can range from help with product developmentto greater financial acumen.

The most important function of a co-op board is hiring theCEO or manager, Sims continued. To do it right, and to moni-tor his or her performance, directors must be able to ask theright questions.

“The keys to success today and in the future is all aboutinvesting in the right things — people, strategy and businessexecution,” he emphasized. “Co-ops need to criticallyexamine the combination of expertise reflected in theirboards and management teams, re-evaluate their businessfocus in light of changing markets and challenges, and col-laborate in efforts to deliver innovative products quickly andefficiently.

“Working together, co-ops can invest in a better future,and continue to make a definitive difference in the market-place,” he concluded. ■ — By Dan Campbell

“After 18 months ofdepressed milk prices,doing nothing was theriskiest course of all…”

—Jerry Kozak


CWT program to better balance milksupply with demand. CWT is an indus-try-funded, self-help program underwhich some producers contribute to aspecial fund that helps reduce excessmilk production capacity by payingsome producers to retire from theindustry and by providing export assis-tance for selected dairy products.

“To some, CWT was a crazy, bet-the-farm wager,” said Jerry Kozak,NMPF president and CEO. “But oth-ers were confident that it was a soundinvestment for the dairy industry, andthey were proved right.” Indeed, theprogram was renewed on July 1 foranother year.

“After 18 months of depressed milkprices, doing nothing was the riskiestcourse of all,” Kozak said. No one isclaiming CWT was entirely responsi-ble for higher on-farm milk prices lastyear, but it was definitely a “tailwind”that can probably take credit for aprice increase of 60 cents per hundred-weight, he noted.

“CWT needs to be part of theindustry’s long-term portfolio,” Kozakstressed.

There were also key successes onthe legislative front, including a full-court-press lobbying effort that result-ed in no major increase in dairy prod-uct imports from “down under” as aresult of the Australia Free TradeAgreement. NMPF Chairman CharlesBeckendorf said that trade deal wouldhave been “anything but free for ourdairy producers.”

NMPF staff and co-op representa-tives spent “countless hours” knockingon doors on Capitol Hill to carry thedairy producer’s message to Congressand the Bush administration. Theyeven bought a full-page ad in theWashington Times to run an open letterto President Bush, telling him howcrucial trade and other legislativeissues are to dairy producers.

Beckendorf said that there will stilllikely be a slight rise in dairy importsinto the United States in coming years,but that it will be “a drop in the bucketcompared to what it could have been.”

Politics and government policy will

always be a big part of the dairy indus-try, Kozak said, quoting CharlesDeGaulle’s comment that “politics istoo serious to leave to politicians.”Campaign finance reform has notremoved the need for political actioncommittees, he added. “Federal offi-cials want to know what people arethinking, and you must stand out fromthe crowd to be counted.”

Working in partnership with IDFA(International Dairy Foods Assoc., afood processors’ trade group) was “arisky gamble,” given that the organiza-tion “has so often been at odds withus,” Kozak said. But successes inschool lunch lobbying and other areashas proven it to be a good businessmove, he added.

School sales gaining The dairy industry successfully sup-

ported legislation passed by Congressearlier this year that requires schooldistricts to offer students at least twotypes of milk and would forbid schoolsfrom entering into exclusive contractswith soft drink companies that restrictthe sale of milk products at schoolfunctions.

Beckendorf said the industry’s abili-ty to work with schools is vital, becauseimproved milk products must beplaced in front of the nation’s youth ata time when they are forming lifelong

dietary habits. As one speaker said, “ifthey drink milk at 16, odds are theywill still be drinking it at 86.”

Test marketing showed that in-school milk sales would jump 30 per-cent when the switch was made to re-sealable plastic bottles. But last year’sresults were even better, up 34 percentin schools where the change was made,Gallagher said. And this year the num-ber of schools offering the improvedpackaging will jump from 1,200 to3,000, meaning the industry needs“more processors to step forward” withthe product, he added.

Mad Cow responseThe discovery of mad cow disease

(BSE) in a single animal in Moses Lake,Wash., in December 2003 could havebeen a disaster for the dairy industry,but a crisis communications plan was inplace for that eventuality, leading to theflow of the type of prompt, reliableinformation needed to reassure thepublic and media about the safety of thenation’s dairy foods and herds.

Beckendorf said the biggest out-come of the BSE discovery will be theeventual creation of a national animalidentification program that will enableany disease problem to be traced backto the exact source so that it can benipped in the bud.

With a lean staff of only 17,Beckendorf said he knows of no otherag commodity organization that does asmuch for its members at does NMPF.

New direction for promotion William Siebenborn, a Missouri

dairyman and UDIA chairman, saidforging a single dairy marketing planand vision will help boost worldwidedemand for U.S. dairy products. Underthis effort, what had been primarily anadvertising and classroom-based dairypromotional program has transitionedto one that leverages partnerships withthe industry. It was not a quick or easytransformation to complete, he said,adding that the effort starts with localdairy promotion boards.

“Kids don’t read or study the foodpyramid,” he said, so product presenta-

While dairy foodsare very nutritious,they are being “out-marketed and out-scienced by the com-petition.”

—Kevin Toland


tion to them is all important. “Milkwon’t be cool just by saying it is inads,” he continued. “We need the rightproducts in the right places — avail-ability is the key.” So emphasis hasswitched from running health-orientedads to creating milk products withmore pizzazz.

“Now the concept is to work withinmarketing chains to get improvedproducts into more outlets,” Gallaghersaid. He cited Yoplait Yogurt as anexample, noting that it will print the 3-A-Day logo on all of its yogurt lids.“That’s 2 billion packages annually thatmoms all across the country will beseeing,” he said.

William Ahlem, Jr., a Hilmar, Calif.,dairyman and NDB chairman, said ittakes an enormous logistical effort toget new dairy products into stores andfast food restaurants. The industry hasfelt “tremendous frustration” for manyyears with school districts for not beingmore willing to include more milk anddairy products on their menus.

A door of opportunity was thrownopen to the dairy industry when theSurgeon General issued a warning thatthe nation is facing a calcium-deficien-cy crisis, Ahlem continued. The reportsaid 7 of 10 boys and 9 of 10 girls aredeficient in calcium. Other reportsindicate that the nation’s epidemic of

obesity is increasingly spreading to ourchildren. Dairy Checkoff-fundedresearch shows that calcium helps burnbody fat, Ahlem noted.

Low-carb milk?About 7 percent of the U.S. popula-

tion is now on a low-carb diet, and 24percent say they are watching theircarbs, it was noted.

John Kaneb, CEO and chairman ofHP Hood, a New England dairy com-pany with seven national dairy brandsand $2.3 billion in annual sales, saidHood spent $25 million in 2004 todevelop a new low-carb milk, calledCarb Countdown. That effort was

Former Louisiana Rep. Bob Livingston, who chaired theHouse Appropriations Committee during his tenure, toldproducers they must continue to find effective ways tomake their needs known to their elected officials. “You maybe convinced in the righteousness of your position, butthere is always someone just as fervent on the other side,”said Livingston, who retired from Congress in 1999 and nowoperates a lobbying firm.

“You need to frame and condense your message so thatthey listen to you, rather than the other guy. That’s why weband together in tradeassociations and hirelobbyists and attorneys— to study, advocateand lobby.”

Congressional repre-sentatives are incrediblybusy, he said, so youcan’t waste their time.“You must be ready tomake your case in 15 to30 minutes.” He advisedletting elected officialsknow that a large num-ber of their constituentsfavor the position youespouse, and hammer that point home by having con-stituents contact the official prior to, or immediately follow-ing, your meeting. “It is incredibly important to have grass-roots activity back home support your position,” Livingstonsaid.

He advised producer groups to find out when one of theirelected officials will be back home, and then volunteer to

host a fact-finding session for them. These can take the formof a town hall-type meeting with constituents, a tour of farms,etc. Having your political action committee hold a fund-rais-ing barbecue on a member’s farm is also a good idea. Suchan event can be 90 percent fun, but the critical time “is thehalf-hour you spend discussing your key concern.”

Members can also become activists in campaigns, henoted.

“Tighter budget caps are coming for farm programs,which means you must make your voice even louder,”

Livingston said. He noted that the dairy

industry failed last year toclose a loophole that is allow-ing imported casein-proteinto enter the United States,which means the industryneeds to worker harder nextyear to close the loophole.

“Continue to work to makesure free trade means fairtrade, and work to hold yourseat at the table so you don’twind up as the main course,”Livingston advised. “Opposeunilateral disarmament [in

trade talks]. Keep pressure on your elected officials allyear long.”

Congressional oversight of agriculture is critical, butover-regulation is not, he said. “If government does notprovide sufficient oversight, you get monopolies and lack ofcompetition.” But too much regulation will stifle the indus-tries it is supposed to help. ■

“Tighter budget capsmean you must makeyour voice even louder…”

—Bob Livingston

Livingston gives producers legislative tips


launched following a request fromWal-Mart in 2003 for such a product.Kaneb, whose family purchased Hoodin 1995, said even a company ofHood’s size can’t go on putting thatkind of money into new product devel-opment indefinitely.

Hood would like to find ways it canwork with dairy co-ops and NMPF toget more help in the early stages ofproduct development, he said. “Dairy’scompetitors have many advantages.They either control raw materials, orthe raw materials are so cheap — as inthe case of soda — that they don’tneed to control them,” he said.

Kaneb indicated that help fromdairy producers might come in theform of allowing processors to avoid

having to pay Class I prices for milkbeing purchased for use in some ofthese promising new products.

Hood also makes Lactaid, a best-selling, lactose-free milk. It too isexpensive to process and package, as itmust be processed with enzymes.Hood has to buy five gallons of milk tomake four gallons of Lactaid, Kanebsaid, “so producers should love it.”

Other meeting highlights:• U.S. Agriculture Trade Ambassador

Allen Johnson said the goal in ongo-ing trade talks is to establish the levelplaying field that farmers demand.He said President Bush has made agtrade a priority, and that “withoutagriculture, there is no trade agen-

da.” He urged farmers to continue tomake their voices heard, noting thattheir coffee shop discussions funnelup to farm and co-op meetings thateventually help set trade policy. Henoted that the EU and some othercompetitors far out-spend theUnited States on export subsidiesand trade-distorting domestic sup-ports, and they erect far more tariffand non-tariff barriers.

• Emphasis is being placed on devel-opment of new cheese snacks, whichis important because a slowdown isexpected in the growth in demandfor cheese from pizza makers.

• Almost all consumption gains in thebeverage category are being achievedby health beverages, led by bottled

didn’t seem to perceive a rivalry at all,instead focusing on their customers.”

However, 28 percent of the respon-dents perceived that their No. 1 com-petitor was the other hardware storethat belonged to a rival cooperative.With 20,000 hardware stores belong-ing to cooperatives in 1996, this num-ber is noteworthy. For these members,feelings of identification with thecooperative group resulted in increasedperceptions of conflict with the mem-ber of the competing cooperative.These feelings influenced their beliefsabout the importance of competitivebehaviors relative to that rival.

“It is critical that we understandhow belonging to the group can influ-ence perceptions and behavior,” Stoelsaid. “Hardware retailers must com-pete on two fronts — against “categorykillers” and group-affiliated retailers.They will want to make careful choic-es, especially since research shows thatintense rivalry is associated with poorperformance.”

Strategies for retail co-opsTo help cooperatives operate to

maximum advantage, Stoel recom-

mends that they focus on helpingmembers develop a sense of belongingand appreciation for their membership.She suggests that co-ops could consid-er the following:• Offer programs that accommodate

members in diverse competitive situ-ations, i.e., allow variations in pro-grams to keep them relevant to dif-ferent situations. Examples of varia-tions for different competitive situa-tions are as follows:a. An advertising/promotion pro-

gram (or store interior and signageprogram) for stores that competeheavily with Big Box stores,another program for stores thatcompete mostly with another coopstore, and perhaps another forthose that compete mostly withWal-Mart or other general mer-chandise discounter.

b. Merchandise/inventory assort-ment programs for rural stores,urban stores and suburban stores,or programs targeted by region(e.g., southern vs. midwestern ornorthern, due to climate differ-ences, housing differences, etc.).

c. Human resource development/

training programs based on educa-tion level/workforce readiness ofpotential workers (e.g., programneeds for rural and urban storesmay differ in some cases from sub-urban needs).

• Educate members about benefits ofconforming to co-op programs, espe-cially in terms of customer appeal(e.g., answer the question: how willthis program improve customer per-ceptions and responses?). One methodof education would be to obtain andpublicize customer response to pilottests of new programs.

• Provide opportunities for co-opmembers in similar competitive situ-ations to network with other mem-bers and with co-op management(e.g., using online bulletin boards ordiscussion boards).

Stoel’s recommendations aboutrivalry are to be aware of it in order tostay sharp but focus on your cus-tomers. What can you do, with thehelp of your co-op, that your rivalcan’t do? Or what you can do betterthan your rival, with the assistance ofyour co-op? ■

Retail co-ops advised to foster member identification, not force conformity continued from page 26


water, which has doubled its salessince 1998. Low-carb drinks are up67 percent, while milk is up onlyabout 1 percent since 1998. Drink-able yogurts have been a bright spotfor dairy, with sales quadruplingsince 1999.

• Soy beverages “tried to grab a biggerpiece of the action” from real milk in2004, which the dairy industry iscountering with efforts to keep the soydrinks from being labeled as “milk.”

• Some soda-pop companies, includ-ing Coke and Schweppes, are experi-menting with dairy soft drinks con-taining about half milk. This islargely seen as negative for dairyproducers, in that these drinkswould be marketed as a milkreplacement (and would thus canni-

balize existing milk sales). On theplus side, these companies have theability to get the drinks into conve-nience stores and vending machines,where dairy struggles for a biggerpresence. One speaker said softdrink companies may have designedthese products simply as “placeholders” to fulfill school contractsrequiring that dairy beverages beoffered to students. Both companieshave currently pulled their dairy softdrinks off the market, but others arelikely coming.

• Kevin Toland, executive director withIrish dairy co-op Glanbia PLC,reported on a major new cheese plantbeing built in New Mexico as a jointventure with DFA. The new factorywill be one of the largest and most

efficient cheese plants in the world,processing over 2.4 billion pounds ofmilk and producing in excess of 250million pounds of cheese and 16.5million pounds of high-value-addedwhey proteins annually. Variety, con-venience and healthful nutrition fac-tors are driving consumer choices, hesaid, calling nutrition a “worldwidemega-trend.” While dairy foods arevery nutritious, they are being “out-marketed and out-scienced by thecompetition,” he said. “Even on cal-cium, we are being beaten by raw-calcium supplements.” He said usingmore dairy products, such as whey, asfood ingredients and nutritional sup-plements, looks very promising, andhe gave a detailed overview of thepotential market. ■

Greater stock market liquidity canalso be gained by making sure theNGC membership has a balance oflarge and small farmers as well asfarmers from a wide geographic range.If members are affected differently byweather conditions, local prices andchanges in production costs, then it ismore likely that at any point in timesome will want to buy shares and somewill want to sell shares. This kind ofdiversity helps keep the NGC stockmarket healthy.

3) Grow the pool of potentialinvestors.Internet auction Web sites, such as

eBay, put sellers of myriad products intouch with a large audience of poten-tial buyers, greatly increasing thechances of finding someone withwhom to trade. Analogously, the mar-ket for NGC stock can be made moreliquid if steps are taken to expand thepool of potential NGC investors.

The Internet can create opportuni-ties for the inexpensive and timelyexchange of information betweenfarmers who have never met eachother and live hundreds of miles apart.

It can also allow potential traders toquickly and easily adjust their pricesand quantities to reflect market condi-tions. While an NGC might never beable to replicate the trading pit modelof exchange, prudent use of technologymight allow it to get closer to thatmodel than it ever could before.

Two key constraints that limit thenumber of potential NGC investorsare: legal rules that prevent non-pro-ducers from investing in an NGC andthe cost of delivering a crop from adistant farm to the NGC. NGCs cando little to change the legal rules, butthey can often circumvent theserestrictions. The most commonmethod of expanding the pool ofpotential investors is for the NGC toenter into a joint venture or partner-ship with non-producers.

In fact, many ethanol plants areLLCs or LLPs that are partially ownedby the NGC and partially owned byoutside investors. Some NGCs havegone a step further and chosen to con-vert to a non-cooperative businessform.

Other NGCs are uncomfortablewith partnerships with non-producers

because it is feared that the organiza-tion can stray from its cooperativenature. Another possibility that doesnot require outside investment is toallow distant farmers to arrange fordelivery of corn through the exchangeof warehouse receipts at cooperatinggrain elevators. This practice is cur-rently used by some NGCs to expandthe area from which they find rawproduct and has the added benefit ofincreasing the number of stock marketparticipants.

ConclusionsThe NGC model makes it easier

for farmers to invest in value-addedprocessing facilities, creating newopportunities for profit-making anddiversification. But thin markets forNGC stock can limit farmers’ abilityto adjust their holdings and can leave acooperative vulnerable to takeover byan IOF. The thin market problem can-not be eliminated, but it can be allevi-ated through careful design of stocktrading procedures, diversification ofmembership and expansion of the poolof potential investors.

■

Co-op stock exchange continued from page 14

small ethanol producers, includingcooperatives. These are companieswith production capacity that does notexceed 30 million gallons of ethanolper year. The credit can be claimed onproduction of up to 15 million gallonsof ethanol per year.

The new law allows cooperatives tochoose to pass some or all of the smallethanol producer credit through totheir patrons. The credit is to be appor-tioned among patrons on the basis ofthe quantity or value of business donewith, or for, such patrons during the taxyear. Any credit not passed through topatrons is treated as a general businesscredit by the cooperative.

Small, low-sulfur diesel fuel producer credit, co-op pass-through

The act creates a new, 5-cents-per-gallon tax credit to small petroleumrefiners who must incur capital costscomplying with the EnvironmentalProtection Agency’s rules limiting thesulfur content of diesel fuel. Eligiblerefiners may claim the credit untilthey have recovered 25 percent ofsuch costs. For these purposes, asmall refiner is one that employs notmore than 1,500 persons directly inrefining and has less than 205,000barrels per day (average) of totalrefining capacity. The credit isreduced for refiners with a capacity

between 155,000 and 205,000 barrelsper day. The conferees’ report statesthat when capacity “differs substan-tially” from average daily output ofrefined product, capacity should bemeasured by reference to averagedaily output.

Cooperatives may also choose topass some or all of this credit throughto their patrons. As with the smallethanol producer credit, any pass-through is to be apportioned amongpatrons on the basis of patronage andany credit not passed through topatrons is treated as a general busi-ness credit by the cooperative.

■


New tax law includes several cooperative provisions continued from page 21

TFC’s $447-million sales yearsets record; income also climbs

A good year for Tennesseefarmers, bolstered by excellentgrowing conditions, translatedinto record sales for TennesseeFarmers Cooperative (TFC), aregional farm supply and serviceorganization owned by 64 localco-ops across the state. TFC’ssales topped $447 million for thefiscal year ending July 31, 2004.That’s a gain of $35 million from2003. Net income before taxesand member programs was nearly $11million, an increase of more than $2.7million since 2003.

TFC, following a five-year planenacted in August 2002, also strength-ened its financial standing by increas-ing working capital to $17.1 million —a $3.6 million increase over 2003 andup $10.7 million in two years. TFCalso returned more than $6.5 million

in cash to member co-ops through itsmember marketing allowance, perfor-mance and patronage programs.

Both Board Chairman Larry PaulHarris and CEO Vernon Gloverpraised the efforts of management andemployees in a banner year for the co-op as they reported the results atTFC’s annual meeting Nov. 29 inNashville, attended by nearly 1,000. Inaddition to outstanding crop yields,

farmers statewide also received goodprices for crops and livestock.

Glover said fertilizer volume was462,000 tons, while feed sales wereup $860,000, with increases in miner-als and beef, horse, goat and sheepfeeds. The Home, Lawn, SpecialtyDepartment recorded the most prof-itable year since 1997. All of the AgDistributors Inc., (ADI) subsidiaryoperations were profitable and hadsales increases. Sales of FFR seedincreased, as did sales of crop protec-

tion, hardware, TBA (tires, batteries,accessories) and animal health prod-ucts. “As we have grown our business,we have also emphasized expense con-trol, inventory management and thereduction of long-term debt.”

Harris challenged management andthe membership to work together tomaintain the momentum as theyaddress the issues of a “changing agri-cultural climate that holds a lot of

N E W S L I N ESend items to: [email protected]

TFC’s member store construction projects have con-tinued at a record pace. Henderson Chester FarmersCooperative was rebuilt after a tornado destroyed theold one in 2003. Photo courtesy TFC


pound), otherwise it risks losing sup-plies. This is a source of tensionbetween shareholders, who receive div-idends per share, and growers.

Carbone cautioned that convertinga company does not happen overnight.The three-stage conversion processwas, in his words, “a long and painfulprocess.” It took almost nine-monthsto complete. There are also downsidesto the process. At the top of his listwas the loss of heritage, or co-op cul-ture. A potential change in directorsand, therefore, company vision, wasanother risk. Further, the registrationrequirements for a public company canbe onerous and costly.

Sale means veggie growersno longer control own destiny

William Harris, a long-time Pro-Fac Cooperative member and investorin Birds Eye Foods, provided a grow-ers’ assessment of his co-op’s sale ofthe majority of Birds Eye stock. Over70 percent of Harris’ gross farmincome depends on his sales to thecooperative. Pro-Fac has always beeninnovative, he noted. Like the cherrygrowers in Michigan, the vegetablegrowers established a “new age” co-opin 1961 to buy failing processing com-panies in the region.

In this case, however, a privatecompany — Curtice-Burns (whicheventually became Birds Eye Foods)— leased and operated the processingfacilities and marketed the finishedproduct for the co-op. According toHarris, the profit and losses wereshared equally between Pro-Fac andCurtice-Burns through a series ofagreements. “The business modelworked extremely well and throughacquisitions the company grew.”

Perhaps it grew too quickly, or toolarge. In 1994, Pro-Fac purchasedCurtice Burns. By 1999, Pro-Fac washighly leveraged and poorly posi-tioned to take advantage of futuregrowth opportunities. In hindsight,Harris acknowledged, Pro-Fac did notretain enough of its earnings. It alsohad issued a lot of preferred stock,which led to a cumulative dividendissue.

Even with “their backs against thewall,” Harris said that the decision in2002 to sell approximately 60 percentof its processing company and brand,Birds Eye, to Vestar Equity Investmentwas only made “after a lot of soulsearching.”

Was it the right decision? Birds EyeFoods is certainly more financiallyviable today than it was in 1999, mean-

ing that Pro-Fac is also more stablefinancially. However, as Harris some-what wistfully noted, Pro-Fac nolonger controls its own destiny.

If Vestar wants to sell Birds Eye, theco-op can’t stop it. Grower-membershave limited input into the company’sdecisions. They now have a legal, con-tractual relationship with their proces-sor. Pro-Fac members are left out of theloop at the corporate level and decisionsare not as transparent as in the past dueto stronger confidentiality conditions.As a result, Harris feels that “whatwould have been small disputes betweengrowers and Birds Eye have nowbecome protracted disagreements.”

Dave Swanson, Partner at Dorsey& Whitney LLP, counseled coopera-tives to exhaust other options beforecommitting to a business conversion.“Identify your goals and examine theoptions. Can you get additional capi-tal from your members or throughjoint ventures?” Alternative optionsinclude sale of preferred stock, jointventures and consolidation. Each co-op’s situation is unique. The potentialpitfalls and benefits of alternative cap-italization methods need to be kept inmind in order to preserve the politicaland social aspects of the co-opinvolved. ■

Of necessity & invention continued from page 19

uncertainty.” He noted that the 2002Farm Census shows that the numberof Tennessee farms has climbed from75,067 in 1992 to 87,595, but the aver-age size decreased from 149 to 133acres. Just 11 percent of the farms pro-duced 86 percent of the state’s agricul-ture in 2002. Some 78 percent of thestate’s agricultural operations had lessthan $10,000 in annual sales of agricul-tural products.

“More and more, we’re providingproducts and services to the row-cropfarmer growing hundreds or eventhousands of acres of corn, soybeansand cotton,” Harris said. “And, at thesame time, we’re finding ways to help a

growing number of goat producers andselling pet and horse feeds to thosefarmers’ neighbors. We’ll always behere for our farmer owners — that’sour focus — but we must continue tomeet the needs of all those involved inTennessee agriculture.”

Humboldt Creamery acquiresWestFarm’s ice cream division

Humboldt Creamery Association, aFortuna, Calif.-based dairy co-op, hascompleted acquisitions that make itone of the nation’s largest ice creammanufacturers and have nearly doubledits size. Rich Ghilarducci, Humboldt’spresident and CEO, says the co-op has

chosen to remain independent bysecuring its future through acquisitionsand consolidating all of its operationsin California.

Recent acquisitions include: TheAug. 1 purchase of a 40,000-square-foot distribution facility and nine acresin Stockton, Calif., from P&O ColdLogistics; The Nov. 1 acquisition ofthe ice cream division of WestFarmFoods, which has facilities in Seattle,San Jose and Los Angeles, and a licenseof the WestFarm Foods/Darigoldbrandof ice cream, and the Nov. 1acquisition of Arctic Ice Cream inSeattle, including its Arctic andVitarich Ice Cream brands.

“Humboldt Creamery will become afull-service frozen dessert supplier tothe retail grocery industry and one ofthe largest ice cream manufacturers inthe United States,” said Ghilarducci.“This company expansion will allow usto preserve our members’ pasture-based family dairies and protect greenspace in Northern California for gen-erations to come.”

In conjunction with the expansionannouncements, Ghilarducci alsoannounced the national launch of anew Humboldt Creamery brand oforganic super-premium ice cream. Theproduct is expected to begin retail dis-

tribution in the first quarter of 2005.Humboldt Creamery is a co-op associa-tion owned by 62 Northern Californiadairy families and is the oldest activedairy cooperative in the state. Thecompany, which celebrated its 75thanniversary in October, produces a fullline of dairy products, including fluidmilk, powdered milk, ice cream andfrozen novelties, both conventional andorganic.

Record crop returns for Blue Diamond members

Almond growers who deliver toBlue Diamond received 2003 crop


now in a position to attract newinvestors and additional capital,” addsDalrymple, who is lieutenant governorof North Dakota.

Neither SDSP, USPB nor GoldenOval plans to raise outside capital now,but their new structures allow for thepossibility. Says Golden Oval’s Staley:“Farmers make up less than 2 percentof the population. We can’t continueto go to farmers for equity in order togrow or keep strong.”

“It puts us in a position to protectourselves from difficult times whenprices might go down,” adds USPB’sHunt.

Of the four co-ops examined above,only USPB requires farmer control. AtUSPB, owners of delivery rights hold amajority of the seats on the board ofdirectors. “The premise of a producer-owned entity remains intact,” saysHunt.

Neither Golden Oval nor SDSPrequires farmer control.

At Dakota Growers, the 10-memberboard must include five North Dakotaresidents and three agricultural pro-ducers. Currently, nine board membersfarm, while an MVC representativeholds the tenth seat.

“We’re still a farmer-owned busi-ness, just not a farmer co-op,” Doddsays.

Caution urged Many co-op advocates take a dim

view of co-op conversions, especiallythose that don’t require a majority offarmers to control the business.

The National Cooperative BusinessAssociation (NCBA) in Washington,D.C., opposes conversions even whenmembers retain control.

“We think the co-op form of busi-ness remains the best model for pro-ducers and consumers,” says PaulHazen, NCBA president and CEO.NCBA represents all types of co-ops,including farmer, food, housing andinsurance co-ops as, well as creditunions. “When any non-member hasownership, that’s not a co-op.”

James Baarda shares that view. “Myoverall concern is when farmers start tothink of their own organization as aninvestment,” says Baarda, an agricultur-al economist with the CooperativeServices branch of USDA RuralDevelopment in Washington, D.C. In cases where the business has outsideinvestors, it is those investors who getpaid first, he notes. “Farmers get what-ever’s left. That’s why farmers formedco-ops in the first place [to ensure thatproducers come first]!”

Baarda says co-ops on both sides ofthe “success spectrum” can wind up ascandidates for conversion. If the busi-

ness is unsuccessful, leaders may bedesperately looking for some way tosave the business. If a co-op is success-ful, farmers may not be able to capturethe co-op’s value, and can seek anotherbusiness form that would allow themto tap into the value.

“Some successful co-ops, ratherthan generating equity to farmers, puttheir dollars into unallocated reserves,”he says. “How does a farmer cash outtheir value if they can’t get their handson it?”

Hanson points to GoldKist Inc., thenation’s largest integrated chickencompany, as an example of a traditionalco-op that converted so that memberscould access enterprise value growthand public market liquidity. After theconversion, he says, the 2,300 formerfarmer-members converted $360 mil-lion of patronage equities to stock, plusadded cash and stock of $140 million.GoldKist issued publicly traded stockas part of the conversion, and farmer-held stock will be publicly tradable aswell after a holding period.

E.G. Nadeau expresses disappoint-ment in co-op conversions, including allthe examples cited above. “But I under-stand some of the motivations,” saysNadeau. “Some co-ops have convertedfor the wrong reasons: based more onfinancial benefits to management and

Leaving home? continued from page 11

Photo courtesy Humboldt Creamery


returns that were 35 percent higher, ona per-pound basis, than in 2002. Theco-op’s average payment of $2,900 peracre shattered the old record of $2,500per acre, set in 1997. The co-opreported near-record net sales of$541.9 million

“This new revenue record is aremarkable performance because the2003 crop was the second largest cropin the industry’s history and the secondbillion-pound crop in a row,” BlueDiamond President and CEO DougYoungdahl told owner-members attheir 94th annual meeting in Fresno,Calif. “As a result, global consumptionreached new levels and industry ship-ments exceeded one billion pounds forthe first time in history — the fifthconsecutive year of record shipments,”

Youngdahl said.“The days of looking at large crops

with trepidation are over,” addedYoungdahl. “Ever-larger crops will beneeded in the future to support globalconsumption growth.” The co-op had43 percent growth in retail brand salesin 2003 and has achieved more than $9million in annual savings since 2001from new technology and processenhancements.

Youngdahl said almond tree planti-ngs are projected to exceed 50,000 netnew acres per year through 2010,resulting in a dramatic increase inalmond supplies beginning in 2007and 2008. Additional tonnage deliv-ered to Blue Diamond will support“new products markets and additionalconsumption and will keep your busi-

nesses profitable” in years ahead, henoted.

USDA awards $8.8 millionin rural broadband grants

USDA has announced that $8.8million in broadband community con-nect grants will be awarded to 16 com-munities in 10 states to connect essen-tial community facilities in rural townsand communities where no broadbandservice exists. USDA believes thattechnology is key to the ability of ruralbusinesses and rural economies tocompete in the global marketplace.Extending broadband technology toallow more families and communitiesto access business, education, publicsafety and heath services is part of theBush administration’s effort to expand

board members than on benefits tomembers,” he says. He notes that someformer members of Minnesota CornProcessors are suing the former manag-er, alleging that he “walked away withmore than $1 million as a result of hissupport for the merger.”

In its Nov. 7 issue, the ChicagoTribune ran a detailed account of howMCP’s then-CEO began secretlymeeting with its chief rival — ArcherDaniel Midland Co. — to lay thegroundwork for the sale of the co-opto ADM, and that he agreed at thesemeetings to try to convince farmers toaccept a lower price than most thoughtthe co-op was worth, while focusing onhow much he would receive fromADM. “The case has fed long-standingresentments among independent-minded farmers against the consolida-tion of agriculture into the hands of afew global titans, such as ADM,” thearticle says. [Editor’s note: this was anoutright acquisition, not a co-op con-version, but many of the same issuesarise in each type of transaction.]

Nadeau likes new co-op laws passedin Minnesota and similar laws beingdeveloped in other states that allow fornon-member investors but preservemajority member control. These laws

apply to the formation of new cooper-atives and do not affect existing co-ops.They require that patrons retain atleast 50 percent of decision-makingpower.

“These laws retain the importantco-op provision of democratic membercontrol,” Nadeau says. “Attempts toform co-op-like entities, such as C-corporations or LLCs, don’t share thisbasic statutory protection and thus canmore easily be converted to investor-controlled businesses.”

Not a black & white issueTerry Barr, an agricultural econo-

mist with the National Council ofFarmer Cooperatives (NCFC) inWashington, D.C., thinks criticsshould avoid viewing co-op conver-sions as a black or white issue, consid-ering the complex challenges facingfarmer co-ops.

“NCFC supports all farmer-ownedorganizations that seek to enhancefarmer returns,” says Barr. “We shouldworry less about what we call the form,and more about whether membersunderstand the implications of thechange and whether it truly serves theinterest of the farmers in both theshort and the long term.”

Other business forms continue tochange as well, he says. “The corpo-rate business form arose in the early1800s because of the lack of venturecapital,” he says. “Today, there is noshortage [of venture capital], andthere’s an active equity market. At thesame time, the cost of regulatory bur-dens, spurred by corporate scandalssuch as Enron, have increased dramati-cally. In this environment, many cor-porations are evaluating conversion.”

Barr adds that most traditional agco-ops already modified their struc-tures or capital plans to deal with achanging global marketplace. “Manyfarmer-owned co-ops are building rela-tionships with companies throughoutthe food chain,” he says. “Most areinvolved in joint ventures. Most havesubsidiary LLCs. None are the same.”

Barr agrees with co-op attorneyHanson that the changing structure offood and agriculture presents a transi-tional challenge for most co-ops.“When co-ops were formed, the ideawas that current patrons would replacethe capital of prior patrons,” Hansonsays. “But co-ops have fewer patronstoday. Without outside capital, thatpoints to a train wreck in the future.”

■


economic opportunity and improve thequality of life in rural America.

One grant was awarded to theHavasupai Tribal Council to providewireless broadband internet service tothe community of Supai, HavasupaiReservation in Arizona. Located inthe southwest corner of Grand CanyonNational Park, the Supai communitywill connect all critical facilities,including public safety and health ser-vice, public schools and homes in thecommunity that has a population of503. Other grants range from theNorth Slope Borough of Nuiqsut, Ala.,to Benoit, Miss.

Communities selectedfor the BroadbandCommunity Connectprogram (the completelist is available atwww.rurdev.usda.gov) donot have access to broad-band connectivity for theessential services ofpolice and fire protection, hospitals,local government, libraries andschools. The program is in its thirdyear and, including today’sannouncement, has invested $30.1million in grant funds.

Ninety rural communities have now been connected to high-speedtelecommunications through thisprogram. In return, the communi-ties will make at least 10 computersavailable to the public with sethours and instruction available foruse on the Internet. The grant pro-gram supplements USDA RuralDevelopment’s standard high-speedtelecommunications loan program.

AMPI butter plant hit by fireCleanup was underway in early

January at the scene of a fire that dam-aged the Associated Milk ProducersInc. (AMPI) butter manufacturing andpackaging plant in New Ulm, Minn.Workers began clearing rubble fromthe exterior of the manufacturing plantas fire and insurance investigators con-tinued their assessment. While the fullextent of the damage caused by the firewas still being determined, the cooper-

ative was working to provide uninter-rupted service to its butter customers.“Other butter makers from throughoutthe country are generously helpingAMPI fill its orders,” said AMPIGeneral Manager Mark Furth.

Alert employees reported the fireshortly after 6 p.m. on Dec. 1.Following safety protocol, all 30employees on duty in the plant wereimmediately evacuated and no injurieswere reported. Fire officials commend-ed AMPI employees for their quickaction and assistance in controlling theblaze. “AMPI did an excellent job with

its evacuationplan,” saidNew UlmFire Chief

Curt Curry. “Their participation in theprocess was outstanding. There wereemployees on the ground helping withthe plant layout and location of haz-ardous materials.”

Service to the dairy producers whoship their milk to the plant was notinterrupted. The butter plant’s milkreceiving facility, which is housed in aseparate building, did not sustain anydamage. Milk delivered to the facilityis routinely processed at one of AMPI’s12 other manufacturing plants that arelocated throughout the upper Midwest.

The butter plant primarily churnscream and packages butter.

CHS 2004 earnings a record $221 million

CHS Inc. reported record netincome of $221.3 million for its fiscalyear ending Aug. 31, 2004. The recordnet earnings represent the highest everrecorded by a U.S. regional agricultur-al cooperative. The 2004 results com-pared with net income of $123.8 mil-lion for the period Sept. 1, 2002 - Aug.31, 2003. Net income for 2004 exceed-ed a previous company record of$178.6 million set in fiscal 2001. Netsales for fiscal 2004 also set a record at$10.9 billion, compared with $9.3 bil-lion for fiscal 2003, largely attributed

to increased prices forenergy products andgrain.

Strong refining mar-gins, combined withimproved performanceby CHS lubricants andpropane, contributed tothe highest energy earn-ings in the co-op’s histo-ry. Agronomy opera-tions, represented byCHS 50 percent owner-ship in Agriliance, LLC,reported earnings doublethose of fiscal 2003.

CHS “outputs” busi-nesses, consisting oflocal operations, businessservices, grain market-ing, processing andfoods, reported

improved performance across theboard. Country Operations andServices, which includes CHS localoperations, animal nutrition and sun-flower businesses, turned in its fourthconsecutive year of strong perfor-mance. Grain marketing operationsovercame challenges in Chinese soy-bean markets to complete fiscal 2004with its best earnings in five years.

Earnings for 2004 were up signifi-cantly over the previous year withinthe processed grains and foods seg-ment, which consists of oilseed pro-

Debris is cleared following a fire at AMPI’s butter plant in NewUlm, Minn. Above, Minnesota Governor Tim Pawlenty (left) and AMPIGeneral Manager Mark Furth survey the damaged plant, which will berebuilt in New Ulm this spring. Photos courtesy AMPI


cessing, Mexican foods, CHS owner-ship in Horizon Milling LLC (a flour-milling venture), and Ventura FoodsLLC (a vegetable oil-based food man-ufacturer and packager).

CHS has realigned its businessorganization and leadership responsi-bilities to position the company forgrowth in current and future business-es. Under the realignment, CHS willconsist of four operating divisions:Processing, Ag Business, Energy andBusiness Solutions. There will also betwo supporting divisions: Finance andShared Services. Each of the six divi-sions will be led by an executive vicepresident. The changes took effect Jan.1. “As CHS focuses on continuing toadd value for all of its stakeholders, it’sessential that our structure reflects ourstrategic direction and efforts to growin our core business areas,” said JohnJohnson, president and chief executiveofficer.

CHS also recently announced thatit is entering the wholesale propanebusiness in the Indiana, Ohio andMichigan marketplace previouslyserved by Countrymark Co-op.

Bison co-op optimistic aboutemerging from Chapter 11

The North American BisonCooperative of New Rockford, N.D.,filed for Chapter 11 (reorganization)bankruptcy in Fargo, N.D., inNovember, but says it is in bettershape than a year ago and expects toemerge from bankruptcy within a year.Meanwhile, the 330-member co-op isfighting back with a new retail brandname, TenderBison, and will be improv-ing the efficiency of its processingplant by doing custom bison slaughter-ing. The co-op currently handles 250to 600 head a month at its plant, buthas the capacity to process more than1,000 bison or cattle each month.

Co-op CEO Dieter Pape said$600,000 will be spent on capitalimprovements this year, according toAgWeek. “I think the changes we haveimplemented will allow us to emergefairly quickly from Chapter 11 andcontinue to be a profitable and ongoing

concern that has capacity to startrepaying members from profits to helpliquidate their deferred accounts, whichwill be turned into equity,” Pape said.

UW co-op reference book newly revised

Cooperatives: Principles and Practicesin the Twenty-First Century, a coopera-tive reference book last published in1980, has undergone an extensive revi-sion by Kimberly Zeuli, assistant pro-fessor, and Bob Cropp, professoremeritus, at the University of Wis-consin Department of Agricultural andApplied Economics. The book’s chap-ters on organization, structure, financ-ing and management of cooperativesare as relevant today as ever. Books canbe ordered (there is a charge) at:http://cecommerce.uwex.edu/showcat.asp?id=107. A PDF versioncan be downloaded for free at:http://cecommerce.uwex.edu/pdfs/A1457.PDF.

Specialty grain industry education network expands

The Midwest Shippers’ Association(MSA) co-op will be able to strengthenits Midwest Specialty Grain Industryand Education Network through agrant from The Cooperative Found-ation. “The Network provides valuableeducation to producers on existing andemerging opportunities in the identi-ty-preserved specialty grains industry,”says William J. Nelson, CooperativeFoundation president. “It also pro-vides producers with a network ofprocessors, traders, as well as domesticand international buyers and end usersin the specialty grains industry.”

As a networking project, the contri-bution will help support a promotionalDVD for the 2005 Midwest SpecialtyGrains Conference and Trade Show.The Network also includes weeklynews and information releases relatingto foreign trade leads and market intel-ligence.

MSA is a nonprofit, agriculturalcooperative that helps producers, pro-ducer groups and small agribusinessesin Minnesota, North Dakota, South

Dakota, Iowa and Wisconsin efficientlyproduce and export specialty grains.More information is available at:www.mnshippers.org. As a privatefoundation, The Cooperative Found-ation has supported cooperative busi-ness development, education andresearch projects in the UpperMidwest for more than 50 years. For more information, visit:www.coopfoundation.org.

Cropp interim directorof UW Center for Co-ops

Bob Cropp, professor emeritus ofagricultural economics, will serve asinterim director of the Center forCooperatives at University ofWisconsin-Madison. Cropp wasdirector of the center from 1990 to2003. Anne Reynolds, who had beenserving as interim director, willremain at the center as assistant direc-tor. The change relieves her ofadministrative responsibilities so shecan focus on developing and deliver-ing extension and outreach programsand applied research.

“The center has increasing demandsfor work to address critical extensionand outreach needs,” said Dean EltonAberle. “I commend Anne Reynolds forher leadership as interim director whilealso carrying major responsibilities forextension, outreach and grant projects.”Founded in 1962 as the InternationalCooperative Training Center, theUWCC provides programs for interna-tional and domestic cooperatives.

DotCoop launches directory;Paul Hazen to head OCDC

A directory of all active .coop Websites is now available from DotCo-operation LLC, the sponsor of thecooperative-only .coop domain.Launched in November, the directoryallows searches for co-ops by name,location and domain name. The direc-tory of nearly 4,300 addresses can befound at www.directory.coop orthrough a link from the dotCoop site atwww.coop. The directory displays eachdomain name; clicking on the domainname takes you directly to the site.


“When you find co-ops on ourdirectory,” says NCBA CEO PaulHazen, “you know they are co-ops thattruly identify themselves as co-ops andpromote the co-operative principlesthrough their Internet identity.” The.coop domain, approved by ICANN in2000 and launched in early 2002, nowhas more than 8,000 domain namesregistered.

In other NCBA-related news,Hazen, who has served on theOverseas Cooperative DevelopmentCouncil (OCDC) board for six years,has been elected chair by the board.OCDC is an association of eight inter-national cooperative developmentorganizations. As board chair, Hazensaid his top priorities will be to guideOCDC through the transition expect-ed with the retirement of long-timeExecutive Director Ted Weihe and torefocus on expanding funding forOCDC members’ international devel-opment work.

“We need to reverse the trendtoward a declining federal commit-ment to overseas cooperative develop-ment and renew policy makers’ sup-port for cooperatives as a tool to buildwealth and opportunity in some of theworld’s poorest countries,” Hazen said.“I’ll be working to ensure that OCDCresources are focused on that coregoal.”

New funding source for rural economic development

The U.S. Department ofAgriculture has announced the cre-ation of a new rural development pro-gram that will provide a long-termfunding mechanism for loans andgrants to rural America. This newsource of capital for rural economicdevelopment will bring new jobs tosome of the most isolated and ruralareas of the country.

USDA Rural Development’s RuralEconomic Development Loan andGrant Program (REDLG) managesthese projects. New regulations enableUSDA to guarantee up to $3 billion inbonds or notes of nonprofit lenders,for up to 20 years, if the proceeds are

used for electric and telecommunica-tions loans. The lender, whose notesthe government will guarantee, will berequired to pay an annual fee of 30basis points over the term of theunpaid debt. Most of the 30 basispoints will be deposited into theREDLG program.

The program was authorized bySection 6101 of the 2002 Farm Bill.Like other USDA Rural Developmentprograms, local leaders will make thedecisions on what projects are neededin their communities. The REDLGprogram provides zero-interest loansand grants for all types of communityand economic development projects.Past projects have included fire trucks,libraries, health facilities and industrialparks.

From the beginning of this programin 1989, USDA Rural Developmenthas invested approximately $250 mil-lion in more than 1,000 projects acrossthe country, leveraging an additional$1.4 billion in private sector funds andcreating an estimated 28,000 jobs.During the Bush administration,approximately $90 million has beeninvested, creating or saving almost15,000 jobs.

Hanson gets co-opleadership honor

Mark J. Hanson, chairman ofLindquist & Vennum PLLP’sAgribusiness and Cooperative PracticeGroup, received the MinnesotaCooperative Leadership Award duringthe joint annual meeting of theMinnesota and Wisconsin state co-opassociations. Hanson is the youngestrecipient of the award and the onlyattorney to be so honored.

He is responsible for developing anew form of business organization: acooperative taxed on a partnershipbasis. His efforts in analyzing trendsrelated to the future viability of coop-eratives led to Minnesota Chapter308B, a 2003 law intended to helpspur significant Minnesota coopera-tive development. He is working withsimilar legislation in Wisconsin andIowa as well as working with federal

officials to change federal law andmake the cooperative legal structuremore attractive. Hanson also orga-nized some of the first ethanol, eggand beef-processing cooperativesusing marketing agreement pledges

and stock invest-ment for capitaliz-ing these sophisti-cated businesses.

The LeadershipAward is sponsoredand administeredby the MinnesotaAssociation ofCooperatives to

honor distinguished individuals fortheir contributions to cooperativebusiness. Nominees are selected fortheir leadership, vision, personal com-mitment, innovation and statesman-ship.

Dakota local co-ops mergeThe Farmers Union Co-op

Association of Redfield-Doland hasmerged with the 4 Seasons Cooperativeof Britton, both in South Dakota, ef-fective Feb. 1, 2005. The merger wasapproved Dec. 6 at the 4 Seasons Co-op’s annual meeting. Patrons ofRedfield-Doland voted unanimously onNov. 22 to merge with 4 Seasons, whilethere were only two dissenting votes atthe later co-op, for a 98 percent favor-able vote. The merged co-op will beoperated initially by a 16-memberboard. Plans call for three directors togo off the board each year at the firsttwo annual meetings, reducing theboard to nine directors.

4 Seasons Co-op’s year ending Aug.31 was the second most profitable yearfor the co-op since 1986. It had a mar-gin before taxes of $837,695. Thegrain division showed a profit of$102,000.

Lamb Checkoff faces voteSheep producers, feeders and first-

handlers are voting to decide whetherto continue the American LambCheckoff program, which promotesyear-round consumption of Americanlamb and works to minimize the

Mark J. Hanson


volatility of seasonal lamb sales. Thefour-week voting period begins Jan 31and ends Feb. 28. The referendum isbeing conducted at local county USDAFarm Service Agency (FSA) offices. Tofind your closest office, visit FSA’s Website: www.fsa.usda.gov/pas/default.asp.

Collections under the LambCheckoff program began in July 2002,and raise a budget for the AmericanLamb Board of about $2.3 millionannually. Administrative expenses arelimited to 10 percent of budget. The13-member board is appointed by theSecretary of Agriculture, and the boardoffice is in Denver.

Record beet payments for Minn-Dak members

Minn-Dak FarmersCooperative harvested netrevenues of $198.9 million forthe excellent 2003 crop,resulting in the highest grossbeet payment in co-op historyfor member-shareholders.Addressing members at theco-op's annual meeting inFargo, N.D., in earlyDecember, Minn-DakExecutive Vice-PresidentSteve Caspers said sugar con-tent of the 2003 crop was “anexcellent 18.7 percent -- wellabove the five-year average,”and beet purity was also good.The co-op sliced 2.1 million tons ofbeets, the second largest volume everprocessed by Minn-Dak. About 2.26million tons of beets were harvestedfrom 112,800 acres in 2003, with anaverage yield of 20 tons per acre.

The high-quality crop also resultedin a good year for Minn-Dak’s market-ing subsidiaries. John Doxie, presidentof United Sugars Corporation, a jointventure which markets sugar forMinn-Dak and two other sugarbeetco-ops, said sales volume was up 23percent in 2004. Midwest Agri-Commodities Co. of San Rafael, Calif.,marketer of Minn-Dak’s molasses andbeet pulp, also had record sales volumeand made record returns to members.Minn-Dak Yeast Co., owned by Minn-

Dak and Sensient Technologies ofMilwaukee, Wis., recorded sales of$7.3 million.

Minn-Dak President and CEODavid Roche said he foresees chal-lenges looming large on the horizonfor the co-op, including falling sugarprices, the need for more industry pro-motion, higher production costs andtrade agreements which could result inmore sugar imports. Stagnant, if notdeclining, prices have been the normat Minn-Dak the past several years,and the co-op has continually takensteps to increase productivity and effi-ciency to counteract the price declinesin order to cushion the impact on

shareholders, he noted. In addition,the entire sugar industry has had tocome to terms with lower consumptionby consumers, which has promptedsugar producers to consider new waysto promote sugar.

Despite these hurdles, Roche said hesees a bright future for the co-op. “Theintensity of our owners has created a‘can do’ culture at Minn-Dak,” he said.

Victor Krabbenhoft, delivering hislast speech before retiring as Minn-Dak board chairman, compared thehistory of the co-op to a marathon.“It’s a long run, complete with obsta-cles, and those with a strong will con-tinue on. It’s important that we don’tback down from these challenges, butrather meet them head on.”

The 2004 crop sugar content isdown to 16.7 percent, due to largeamounts of rain in the fall.

USDA Ag Outlook Forum providesinsight on “front-burner” ag issues

USDA’s annual Ag Outlook Forumwill be held Feb. 24-25 in theWashington, D.C. suburb ofArlington, Va. Leading commodityanalysts will be on hand to discussplanting, trade and price prospects forfarm commodities for the year ahead.The program will focus on the impactof science on farming, farm policy andagricultural markets. Speakers willalso discuss issues such as Mad Cow

disease (BSE) and beef trade,prospects for energy pricesand ethanol, internationaltrade talks, market integra-tion in North America, earlydebate on the next Farm Billand new dietary guidelines.

There will be ample timefor networking at this popu-lar event, which attracted1,400 people last year.Attendees will receive a set ofnew USDA long-term com-modity projections to 2014.The conference will be heldat Crystal Gateway MarriottHotel. For program details,registration and hotel infor-mation, visit the conference

Web site:http://www.usda.gov/oce/forum, or call (877) 744-3083.

Crop-based biofuels could add$5 billion to farm profits by 2025

A new report provides furtherweight to the potential benefit ofethanol and other biofuels in reducingAmerica’s dependence on importedoil, while adding $5 billion annuallyto farm profits by 2025 if productioncommitments are made now. “Thesefuels are derived from cellulosic bio-mass such as corn stover, grain straw,straw and sugarcane waste rather thanjust from grains, thus providing a fur-ther benefit of harvesting two cropsfrom every field,” says BrentErickson, a vice president of the

Sugar samples are tested in Minn-Dak’s lab. Members receivedthe highest gross beet payments in the co-op’s history for the 2003crop. Photo courtesy Minn-Dak


Biotechnology Industry Organization(www.bio.org).

At $40 per dry ton, the $5 billionadded profit is based on 200 milliontons of biomass, which is less thanone-sixth the total amount of biomassfarmers could produce by 2050,according to the report “GrowingEnergy: How Biofuels Can Help EndAmerica’s Oil Dependence,” issued bythe nonprofit National ResourcesDefense Council (NRDC). The resultof a two-year study by agricultural,engineering and environmentalexperts, it is the first to focus on whatbioenergy technologies can dowhen commercially matureand operating on a large scale.In addition to adding to farmprofits, biofuels have thepotential of being cheaperthan gasoline and diesel, sav-ing about $20 billion per yearon fuel costs by 2050, accord-ing to the report. Moreover,biofuels could reduce green-house gas emissions by 1.7 bil-lion tons per year.

“This report also addressessome of the concerns raisedwhen using biomass for energyindependence,” Erickson said.“For example, biofuels can becompetitive with gasoline anddiesel, with a price of between59 cents and 91 cents per gal-lon for the former and 86 cents per gal-lon for diesel. This is the equivalent ofsaving $20 billion per year in fuel costsby 2050. Enough land is available forbiofuels to make a big contribution,and emission concerns over low-per-centage blends of ethanol in the exist-ing fleet can be addressed.”

For a copy of the 96-page reportand executive summary GrowingEnergy: How Biofuels Can Help EndAmerica’s Oil Dependence, log onto:http://www.bio.org/ind/GrowingEnergy.pdf

USDA-EPA partnershippromotes renewable energy

USDA Rural Development and theEnvironmental Protection Agency

(EPA) recently announced a new inter-agency partnership to support agricul-tural and business based renewableenergy systems. This agreement is partof the Bush administration’s effort toincrease teamwork in delivering ser-vices to rural America.

“This agreement is a triple play,”said Agriculture Acting UnderSecretary for Rural DevelopmentGilbert Gonzalez. “It’s good for theenvironment. It helps exploit a newenergy source — one with high growthpotential — of clean, renewable fuel toreduce our oil imports. And it’s good

for the bottom-line of farmers, ranch-ers and small businesses.”

The agreement provides for EPAtechnical support of USDA in review-ing systems for methane gas recoveryvia anaerobic digestion of animalwaste. EPA will also consult on techni-cal guidelines for USDA RuralDevelopment initiatives encouragingmore state-of-the-art digester tech-nologies. USDA and EPA are alsoinvestigating expanding support toother areas. The partnership will pro-mote use of anaerobic digestion tech-nology in a way that enhances ruralagricultural development, providesenvironmental benefits and increasesfarm revenues through the generationof renewable energy.

“Energy production is an excitinggrowth sector for U.S. agriculture,”said Gonzalez, “and a strong ruraleconomy, more jobs in rural areas,renewable energy production and acleaner environment are all key ele-ments of President Bush’s agenda.USDA Rural Development is commit-ted to aggressive leadership on theseinitiatives.

The 2002 Farm Bill directs USDAto encourage the development ofrenewable energy. In 2003-04, USDARural Development invested $16.9 mil-lion in 67 anaerobic digester projects.

With leveraging, the totalinvestment exceeds $80 mil-lion. These projects serve11,300 rural households,generate 127 GWh, and cre-ate 120 jobs.

Another $3 million goingback to Walton EMCmembers

For the second year in arow, most Walton ElectricMembership Corporationcustomer-owners will betaking part in a $3 millionrefund. That means $22million has been returned toco-op members over thepast 17 years. Most of therefunds will appear as acredit on electric bills, with

the average being $27. This saves morethan $30,000 in check production andmailing costs. Refunds are based onthe amount of the customer’s annualpower bills.

Some margins are held for reservefunds so that Walton EMC is preparedfor emergencies. Margins are also usedto help pay down debt and to makemajor purchases. “But when thosemargin reserves grow to more thanwhat’s needed for a safe financial cush-ion, Walton EMC returns the extra,”explains CEO Ronnie Lee. More than92,000 customers will get money back.Walton EMC is a customer-ownedelectric company and serves 107,000electric accounts in ten NortheastGeorgia counties. ■

USDA’s Gilbert Gonzalez (right) and the Environmental ProtectionAgency’s Jeff Holmstead sign an agreement setting up a new part-nership to support agricultural- and business-based renewableenergy systems.



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