Rur Coop July05 V4 · made small loans to help farmers get through tough times, built and managed migrant worker camps, con-structed rural water projects, purchased land for con-servation

Rura

lCOOPERATIVESCOOPERATIVESUSDA / Rural Development July/August 2005

Greener PasturesFarmer/consumer alliance boosts beef sales page 8

Small dairy co-ops looking to branded cheese page 12

Greener PasturesFarmer/consumer alliance boosts beef sales page 8

Small dairy co-ops looking to branded cheese page 12

2 July/August 2005 / Rural Cooperatives

Editor’s note: Guest commentary for thisissue was written by Jean-Mari Peltier,president and CEO of the NationalCouncil of Farmer Cooperatives (NCFC).It is based on a statement she submittedin July to the Antitrust ModernizationCommission (AMC). The opinionsexpressed are her own, and do not neces-sarily reflect those of USDA or its employ-ees. The AMC, created by Congress toreview U.S. antitrust laws, announced thisspring that it would review the limitedantitrust immunity offered by the Capper-Volstead Act, among other agriculture-related statutes.

The Capper-Volstead Act is the cor-nerstone of farmer cooperative law andenables farmers to join together tocooperatively process and market theirproducts. Without Capper-Volstead,America’s farmers and ranchers wouldlack any real bargaining power in aneconomy increasingly dominated by afew large buyers.

Farmer cooperatives enable agricul-tural producers to:

• Derive more of their income fromthe marketplace;

• Take advantage of value-addedopportunities;

• Better manage the risk inherent inproduction agriculture and

• Compete more effectively in theglobal marketplace.

Congress has a long history of rec-ognizing the need of farmers to be ableto form cooperatives, and hasexpressed its desire to promote theseassociations of producers through theClayton Act, the Capper-Volstead Act,the Agricultural Marketing Act and theAgricultural Marketing Agreement

Act. Such statutes are also vitallyimportant for the benefit of producersas well as consumers.

There is no need to repeal or sunsetthe limited antitrust immunity in theCapper-Volstead Act because effectivelimits on its application already exist.For instance, the Act already gives thesecretary of agriculture authority toreview and protect the interests of allparties, including consumers.

Farmer cooperatives and theirmembers form a cornerstone of U.S.agriculture and rural America. Theyimprove the economic well-being oftheir members, provide jobs and lead-ership in their local communities andhelp meet the food and fiber needs ofconsumers both in the United Statesand around the world.

NCFC strongly urges that the AMCrecommend that the limited antitrustimmunities and the historical protec-tions for farmers found in the Capper-Volstead Act be maintained. We are farfrom alone in taking this stand. Otherfarm organizations that have offeredtestimony in support of Capper-Volstead include: the American FarmBureau Federation, National MilkProducers Federation, Farm CreditCouncil, National Farmers Union,National Grange and 16 state andregional farmer cooperative councils.

Additionally, the co-chairs of theCongressional Farmer Cooperative

Caucus —Senator Larry Craig (R-ID),Senator Blanche Lincoln (D-AR),Representative Sam Graves (R-MO),Representative Earl Pomeroy (D-ND)— have sent a letter to the Commis-sion voicing strong support of main-taining the historical protections pro-vided by the Capper-Volstead Act.

NCFC has also joined the JointExport Trade Alliance in support ofthe Export Trading Company Act andthe Webb-Pomerene Act, two otherprovisions singled out by the Commis-sion for study.

The AMC has scheduled a hearingon exemptions and immunities, whichinclude both Capper-Volstead and theAg Marketing Act, for Thursday,November 3. Exact time and locationhas yet to be announced at the time ofthis writing. Additional informationcan be found on the AMC Web site at:http://www.amc.gov. Comments can besent to either [email protected] orby mail to Antitrust ModernizationCommission, 1120 G St., NW, Suite810, Washington, D.C. 20005.

Capper-Volstead has played a criti-cal role in making the United Statesthe world’s leading agricultural nation,and will continue to pay dividends forall Americans in the years ahead.

— Jean-Mari Peltier, President & CEONational Council of Farmer Cooperatives

NCFC is a national association represent-ing America’s farmer cooperatives. Thereare nearly 3,000 farmer cooperativesacross the United Sates whose membersinclude a majority of our nation’s morethan 2 million farmers, ranchers andgrowers.

C O M M E N T A R Y

Defending the cornerstone of cooperation

Capper-Volstead givesfarmers and ranchersreal bargaining power.

Rural Cooperatives / July/August 2005 3

Rural COOPERATIVES (1088-8845) is publishedbimonthly by Rural Business–Cooperative Service,U.S. Department of Agriculture, 1400 IndependenceAve. SW, Stop 0705, Washington, DC. 20250-0705.The Secretary of Agriculture has determined thatpublication of this periodical is necessary in thetransaction of public business required by law of the Department. Periodicals postage paid atWashington, DC. and additional mailing offices.Copies may be obtained from the Superintendent ofDocuments, Government Printing Office, Washington,DC, 20402, at $23 per year. Postmaster: send addresschange to: Rural Cooperatives, USDA/RBS, Stop3255, Wash., DC 20250-3255.

Mention in Rural COOPERATIVES of company andbrand names does not signify endorsement overother companies’ products and services.

Unless otherwise stated, contents of this publicationare not copyrighted and may be reprinted freely. Fornoncopyrighted articles, mention of source will beappreciated but is not required.

The United States Department of Agriculture (USDA)prohibits discrimination in all its programs and activities on the basis of race, color, national origin,sex, religion, age, disability, political beliefs, sexualorientation, and marital or family status. (Not all prohibited bases apply to all programs). Persons with disabilities who require alternative means forcommunication of program information (braille, largeprint, audiotape, etc.) should contact USDA’s TARGETCenter at (202) 720-2600 (voice and TDD).

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Mike Johanns, Secretary of Agriculture

Thomas C. Dorr, 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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COOPERATIVESCOOPERATIVESJuly/August 2005 Volume 72 Number 4

p. 4

p. 8

p. 18

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

4 USDA marks 70th anniversary of landmark rural legislation

8 Atlantic Tender BeefCanadian co-ops expand market for home-grown meatBy Tom Webb

12 Bucking the TrendSmall dairy co-ops targeting niche markets By Carolyn Liebrand

18 New Technology: Opportunity and ChallengeTechnology changes could turn milk plants into ‘dairy refineries’By Charles Ling

22 No Shell GameOyster co-op hopes to revive Mystic’s faded shellfish industryBy Stephen Thompson

26 The Inside Scoop on Outside HelpOutside co-op development specialists play crucial roleBy Gerald Ely

29 Consolidation, expansion spark growth in co-op feed salesBy Eldon Eversul

D E P A R T M E N T S2 COMMENTARY21 LEGAL CORNER33 NEWSLINE39 INSIDE RURAL DEVELOPMENT

O n t h e C o v e r :

The verdant pastures of Prince Edward Island provide abundant foragefor the province’s beef and dairy cattle. The Atlantic Producers BeefCooperative and Co-op Atlantic are working together to create a biggermarket for home-grown beef. Photo by Christian Ruel, courtesy MirrorlockPhotography, www.mirrorlock.com.


eventy years ago, much of rural Americaexisted in a world of candle and lanternlight after the sun went down. Long aftermost urban citizens had electric lightsand power, the nation’s rural quality of

life and productivity were severely hampered by thelack of widely available electricity. Only about 10 per-cent of America’s farms had electricity in the early1930s and progress at expanding service was very slow.

The country was also in the midst of a terrible eco-nomic depression that caused millions to lose theirjobs. Large swathes of the nation were also sufferingfrom a severe drought and wind storms that combinedto create the “dust bowl” conditions that drove tens ofthousands of farmers from their land.

In 1935, Congress responded with two crucialpieces of legislation that forever changed the face ofrural America, creating the Rural ElectrificationAdministration (REA) and ResettlementAdministration. Both were among the predecessoragencies of today’s USDA Rural Development.

The REA, working in partnership with thousands oflocal utility cooperatives, brought electric power toalmost every corner of the nation. Rural electrificationhappened much quicker than many dreamed possibleat the time. Indeed, many historians say that the effortwas one of the federal government’s greatest successstories of the 20th century. In 1949, REA added a ruraltelephone program that had a similar impact on bring-ing telephone service to rural areas.

Like the REA, the Resettlement Administration hada dramatic impact on the quality of rural life. Focusedinitially on emergency relief during the crisis of theGreat Depression, the Resettlement Administrationmade small loans to help farmers get through toughtimes, built and managed migrant worker camps, con-structed rural water projects, purchased land for con-servation purposes, resettled displaced farmers on newland and even built entire model communities fromthe ground up. Out of this eclectic mix of programsgrew the Farm Security Administration and then theFarmers Home Administration (FmHA).

S

USDA marks 70th ann iversary o f landmark ru ra l leg is la t ion


REA and FmHA merged with severalother USDA programs — including theAgricultural Cooperative Service — tocreate USDA Rural Development in 1994.

Sec. Johanns notes hugeimpact on quality of life

The 70th anniversary of the creationof REA and the ResettlementAdministration — which launchedAmerica’s quest for rural electrification,homeownership and economic security— was marked during a special ceremonyat USDA headquarters in Washington,D.C., in May.

“The rural electrification effort of the20th century serves as a benchmark ofexcellence,” Agriculture Secretary MikeJohanns said. “In 70 years, the quality oflife in rural America has dramaticallyimproved, due in large part to the mas-sive effort by USDA to bring economicopportunity, affordable housing and elec-tric, telephone, water and wastewaterinfrastructure to rural communitiesacross the nation. President Bush hasnow challenged us to bring telecommu-nications technologies, such as broad-band, with the same dedication to ruralcommunities by 2007.”

The arrival of electricity on farms and ruraltowns had a dramatic impact on the qualityof life and productivity of the nation. Above,satisfied customers outside the office ofVernon Electric Co-op in Westby, Wis.Photo courtesy Vernon Electric Co-op. Photos atleft and below, courtesy National Rural ElectricCooperative Association (NRECA).


Having grown up on a dairy farm inIowa, Johanns said he feels a personalconnection to the mission of RuralDevelopment.

“When I was growing up, I askedmy mother, ‘can you remember a timewhen you did not have electricity?’”Johanns recalled. “She said, ‘Yes, ofcourse. When your dad and I startedfarming and milking cows, it was byhand.’ My mother was a very plainspo-ken woman, and added, ‘As a matter offact, half the heck I caught in my lifewas from not holding the lantern rightwhile your dad was milking the cows.’”

As the former governor ofNebraska, Johanns said he takes pridein knowing that the “father of theRural Electrification Program” wasSenator George Norris of Nebraska.Johanns said he keeps a bust of Norrison his desk. Johanns quoted Norrisfrom a letter he wrote in 1935 toMorris Cook, the first REA adminis-trator, saying, “If you can launch thisgreat work in the right direction anddemonstrate that it will bring com-forts, enjoyment and prosperity to ourfarmers and that it can be done with-out financial loss, you will have madeone of the greatest contributionstowards the improvement of farm lifethat could possibly be imagined.

“George Norris was right aboutthat,” Johanns added. “His vision hasbeen a foundation of economic devel-opment in rural America for the 70years since then.”

Johanns said the ResettlementAdministration helped ease the eco-nomic crisis faced by millions ofAmericans in the1930s, and noted thatthe Water Facilities Act of 1937 pro-vided loans for farm water systems in17 western states where drought andwater shortage were familiar hardships.

Enduring commitment to rural America

“The Rural Development programstoday fit like the strands of a thickrope. Together, they are stronger andmore able to do the job than just goingit alone. The Rural Development mis-sion also fits well into the wider uni-

verse of so many USDA programs,”Johanns said, noting that PresidentBush has proposed $12.8 billion forUSDA Rural Development programsin 2006.

Competition in agriculture isstronger than it’s ever been, Johannssaid, but he stressed that Americanfarmers and ranchers can, and do,compete successfully in a worldwidemarketplace. “With the tools thatUSDA Rural Development provides torural residents and communities, theyalso can compete.” USDA is helpingrural communities and producersinvest in new technologies, helpingthem develop value-added productsand open additional markets.

“The rural communities I know are

holding on to their values, but they’realso embracing the future,” Johannssaid. “They are creating what I call thenew rural America, a rural Americathat combines all of the benefits of tra-ditional rural life…with all of theadvantages of the 21st century. It’s avery remarkable thing to see.”

Johanns thanked Rural Develop-ment employees for “making a differ-

ence in the lives of millions of realAmericans: shop owners, teachers, fac-tory workers, mothers, fathers and thenext generation. You may never meetthem, but you are very, very much apart of their lives. And they and ourentire country are better off for yourservice.”

Gilbert Gonzalez, then USDA act-ing under secretary for rural develop-ment, said rural America must respondto new global markets and competi-tion, and that economic diversificationoffers new and emerging opportunitiesfor the rural economy. He too offeredhis thanks “to the many thousands ofdedicated employees over the pastseven decades” who have made USDA’s

The electrification of rural America was accomplished through a partnership of user-ownedco-ops and the federal government, says Glenn English (top photo), CEO of NRECA (top).Agriculture Secretary Mike Johanns (above) calls Senator George Norris — a driving forcebehind rural electrification in the 1930s — a personal hero and he keeps a bust of Norris onhis desk. Above right, USDA staffers Sam Morgan (fiddle) and Ray Sheehan provided someunplugged music for the 70th anniversary celebration. Color USDA photos by Pete Manzelli. Blackand white photo courtesy NRECA.


rural development programs work. “There is no doubt in my mind that

— as I travel across the United Statesand see the millions of people you’veassisted — that you have made a differ-ence,” Gonzalez said. Rural Develop-ment today has a loan portfolio ofmore than $87 billion invested in ruralAmerica, including $40 billion in utili-ty loans, $40 billion in housing loansand more than $6 billion in businessand farmer cooperative loans.

Electric co-ops key torural advancement

Business Week magazine in 1937 saidthe REA program — still in its infancyat that point — was doomed to failure,noted Glenn English, CEO of theNational Rural Electric CooperativeAssociation. “The magazine said it’scrazy to think that you can have abunch of farmers out there that thefederal government is going to loanmoney to, and they’re going to be ableto take care of their own needs. Buthere we are, 70 years later, and we sureproved Business Week wrong,” Englishcontinued.

About 37 million people in 47 states

today get their electricity throughcooperatives, English continued. “Noone else wanted to provide power tothose farmers and people living inthose rural areas. This (REA) executiveorder made it possible for private citi-zens to partner with their government— made it possible for people to cometogether to take care of their ownneeds,” English continued, calling theeffort “the ultimate in self-reliance.”

The electric co-ops that formed allacross rural America in the 1930soften had only 200 or 300 members,English noted. These co-ops allowedrural people to “actually own thebusiness and determine their own fateand their own future through theirown elected officials.” Today, henoted, about 43 percent of the nation-

al electrical distribution system isowned and maintained by about 10percent of the population, throughtheir co-ops. Electric co-ops generateabout $1 billion annually for state andlocal government coffers through thetaxes they pay.

John Rose, CEO of the NationalTelephone Co-op Association, whichrepresents more than 500 telephoneco-ops and companies, said the REAprogram had a bigger impact thaneven the co-op numbers indicate,because it motivated private utilities toalso extend service to rural customersthey otherwise would likely haveignored. Rose, a former employee ofUSDA’s rural electric program, saidRural Development’s efforts to expandbroadband Internet service to ruralAmerica may have a similar impact.

Rob Johnson, CEO of the NationalRural Water Association, which repre-sents almost 25,000 water and waste-water service providers, said thatthanks to cooperatives that serve therural community where he farms —Loco, Okla. — he gets better water,phone and Internet service than whenhe lived in a much larger city. Hethanked all the USDA staff at themeeting for “the wonderful past thatyou’ve created for rural residents,” andfor their “commitment to a betterfuture for making rural developmentwork. You see our goal — our jobs —are not done,” Johnson said, notingthat many rural people still don‘t havethe kind of water service, telecommu-nications and electrical service thatthey need. ■

“The rural commu-nities I know areholding on to theirvalues, but they’realso embracing thefuture.”

— Ag Secretary Mike Johanns


By Tom Webb

Editor’s note: Webb is a former advisor toCanadian Prime Minister P. E. Trudeau.He is a cooperative business consultant andprogram manager of the InternationalMaster of Management - Cooperativesand Credit Unions Program, delivered bydistance education from Saint Mary’sUniversity in Halifax, Nova Scotia. Moreinformation about the program may befound at: www.smu.ca/mmccu and aboutWebb at www.global-co-operation.com.

eef producers in theAtlantic Canada region –comprised of NovaScotia, New Brunswick,

Prince Edward Island, Newfoundlandand Labrador— have long struggled toovercome the perception that theirproduct was inferior to beef from west-ern Canada and other regions. But thispicture is being turned around througha comprehensive production andbranding program.

This effort includes the opening ofa co-op beef-processing plant in PrinceEdward Island, the establishment ofstrict beef-production quality and safe-ty standards, and the launching of thewell-received Atlantic Tender Beefbrand. The branded beef program is ajoint effort of the Atlantic BeefProducers Cooperative, headquarteredin Borden, Price Edward Island, with

the consumer co-ops that share mem-bership under the umbrella of Co-opAtlantic, a federated co-op headquar-tered in Moncton, New Brunswick.

The beef farmers’ new-found mar-keting clout has helped to somewhatsoften the severe blow the Canadianbeef industry absorbed when the U.S.-Canadian border was closed to cattleexports following the discovery of acase of BSE that originated in westernCanada.

Family farms in the region remainunder enormous pressure and face anuncertain future due to various chal-lenges, but their new marketing strate-gy has given them a better chance towithstand negative forces. The co-op’s

At lant ic Tender BeefCanadian beef producer & consumer co-ops expanding market for home-grown meats

Darlene Sanford, president of the Prince Edward Island Cattleman’s Association and a member of the Atlantic Beef Producers Cooperative,on her farm near Mt. Carmel, Prince Edward Island. Photo courtesy Cooperative Atlantic

B


effort is benefiting not just producers,but all of the region’s nearly 2.5 mil-lion people by helping to strengthenthe economy of Atlantic Canada.

Reinvigorating dormant industry For at least 25 years, Atlantic

Canada’s beef was poorly marketed andthe region’s cattle industry was gener-ally underdeveloped. Stores in theregion — even cooperative retail out-lets — mostly carried western beef,which had a reputation for high quali-ty, while the region’s own beef wasconsidered “unreliable.”

Consumer demand forced retailgrocery co-ops and other food retailersto buy the majority of their beef prod-ucts from western Canada or abroadbecause they lacked local suppliers whocould offer a consistent supply of top-quality beef products.

While farming, forestry and fish-ing historically have been dominantindustries in this region and remainkey industries, their share of theregional economy has declined duringthe past 25 years. Still, the beef indus-try alone in Atlantic Canada generates$100 million in annual farmgatereceipts, so its well-being is veryimportant to the region’s economy.

Beef producers saw an opportunityto improve their market positionthrough their membership in Co-opAtlantic, a regional cooperative whole-saler. Co-op Atlantic actually beganlife in 1927 as the Maritime LivestockBoard, which evolved over time into amulti-faceted, federated co-op. Itserves not only farmer cooperatives,

but also retail consumer co-ops, hous-ing co-ops and a variety of other small-er co-op sectors.

Co-op Atlantic is today an integrated,agri-food business serving 135 memberco-ops throughout Atlantic Canada. Ithad 2003 sales of more than $508 mil-lion (Canadian). Retail sales of its mem-ber co-ops are close to $1 billion.

The cooperative is a significantplayer in consumer products, agricul-ture and petroleum products, as well asreal estate and housing development.Collectively, Co-op Atlantic and itsmember co-ops employ more than

5,000 people and serve more than226,000 member-families.

Agri-foods strategyThere has long been tension within

Co-op Atlantic resulting from thedominance of the retail co-ops, whichfor many years have been more pros-perous than farmer co-ops. The farmerco-ops sometimes feared that theywere the “tail being wagged by theconsumer dog.”

At the same time, there has alsobeen a deep well of good will amongthe co-op sectors, creating opportunityfor innovative thinking about farmer/consumer cooperation and mutual self-help.

With both farm and retail coopera-tive members, Co-op Atlantic was in astrong position to respond to thegrowing crisis facing beef and otherfarmers. Indeed, many of the keys tocreating a solution to the beef farmers’problems were already in place.

Co-op Atlantic provides farm sup-

plies for both grain and beef farmersand operates several feed mills acrossthe region. It also acts as a meatwholesaler to the last significantregionally owned retail supermarketchain. So it made sense for farmers toteam with Co-op Atlantic to create acomprehensive beef production andbranding program.

The Atlantic Tender Beef (ATB)branding program sets the followingguidelines to ensure highest qualitymeats:• All cattle are fed a high-grain diet with

feeds produced by Co-op Atlantic;

• Beef must grade AA or AAA;• Feed is hormone- and antibiotic-free

and contains no animal byproductsor renderings;

• Cattle are dressed at smaller carcassweights, subject to a minimum agingperiod and handled following strictsafety guidelines of HACCP (HazardAnalysis Critical Control Point);

• Beef is traceable.All cattle in the program are raised

on the scenic rolling hills and the freshair of Atlantic Canada. Consumer co-ops in the program guarantee to buyall the beef that is produced, and thebrand has benefited from strong pro-motional efforts that helped it gainrapid market acceptance.

To make all this happen requiredthe creation of complex partnershipsinvolving: marketing boards, govern-ment agricultural agencies in fourprovinces, the retail and ag coopera-tives that comprise Co-op Atlantic, thenewly formed beef cooperative createdin 2002, secondary processors which

Prince Edward Island, above, is home to the Atlantic Beef Producers Cooperative. Photo by Christian Ruel, courtesy Mirrorlock Photography,www.mirrorlock.com.


manufacture “Market Town” and pri-vate label products, plus independentfarmers and their associations.

Pulling all the pieces together was achallenge, but Atlantic Tender Beefwas launched in 1998. In 2002, afteronly a few years on the market, Co-opAtlantic’s then-CEO Eric Claus said“Although we consider it our brand,we are expecting more and moreAtlantic Canadians will continue tomake it their brand. The numbers tellthe story... the tonnage in beef sold instores has risen nearly 19 percent sinceATB was introduced in our memberco-ops. We expect that trend to con-tinue because we’ve worked very hardto ensure that the quality of the beef isconsistent from week to week.”

Co-op Atlantic purchases more than$15 million worth of beef annuallyunder the program, and the trend isupward.

In 2002, Atlantic Tender Beefgrilling steak won a Canadian GrandPrix Award, presented by the CanadianCouncil of Grocery Distributors. Thecompetition evaluates product innova-tion, packaging design, labeling, pric-ing, taste, nutrition, value, quality andoverall benefits to the consumer.

While some people feared that sup-porting local producers might meanthat they would have to sacrifice quali-ty or price, Co-op Atlantic and thebeef producers deliver goods that meetthe standards of national and interna-tional competitors — and often exceedthem.

Packer closing, BSEpose major challenges

Atlantic Tender Beef was stillin its infancy when Hub Meat

Packers – the only majorpacker in the region — wasbought by the giant Maple

Leaf Foods in February 2000. Apress release said: “Hub Meat

Packers currently has annual sales ofapproximately $270 million. Nochanges are currently planned for thebusinesses or their operations.”

Some hailed the move as promisingstability for the beef industry throughintegration with a national meat com-pany. Others feared that the plant waspurchased to achieve market controland would be closed. After a brief lifeunder the new owners, the plant wasshut down.

The implications for AtlanticTender Beef were disastrous. Beef pro-ducers in the region were left with theprospect of shipping cattleto Ontario for slaughterand then shipping the meatback — over 750 mileseach way.

Lightning struck twicewhen the U.S. border wasclosed to Canadian beefdue to a case of BSE, creat-ing a “perfect storm” ofhardship for farmers.

The response of thecooperatives was quick anddecisive. Co-op Atlantic —together with its co-oppartners — subsidized theshipping of beef to andfrom Ontario and beganplanning for a regional, cooperativelyowned beef processing plant.

An integral part of the plan was thecreation of the new Atlantic BeefProducers Cooperative. The co-opcame into being in November 2002. ByApril 2003, it had 160 members and byearly 2005 membership stood at 200.

Co-op packing plantovercomes challenges

Moving from plan to reality was, ofcourse, not without challenges. Stiff

competition from multi-national retail-ers have made it difficult for Co-opAtlantic to invest its planned 50 per-cent share to make the beef-processingplant a reality. Aggressive price compe-tition between the major competitorsdrove down retail markets and mar-gins, forcing retail co-ops to focusdiminished profits on defensive retailstrategies. Its planned $1.5 millioninvestment had to be reduced to$500,000. Finding money became aproblem and progress faltered.

The Prince Edward Island (P.E.I.)government stepped in to provide sup-port that put the project back on theroad. P.E.I. offered the co-op a pieceof land in a “food park” at a favorableprice and also helped finance a waste-treatment plant.

The beef farmers, in spite of thebattering their industry has taken overthe past two years, did not falter inraising their share of the investment.

To raise their $1.56 million share,Atlantic Beef Producers Cooperativesold shares, often referred to as‘hooks,’ that carried the right and theresponsibility to deliver cattle to thenew plant.

Every producer share cost $60.With planned processing of 500 cattlea week, there were 26,000 shares avail-able. Farmers investing in those hooksraised the $1.56 million needed tomake the plant a reality.

The cooperative is in the process of

Co-op Atlantic purchases more the $15 mil-lion of co-op beef annually for Atlantic TenderBeef. Photos courtesy Cooperative Atlantic


increasing its ownership of the plantfrom 50 to 80 percent. Co-op Atlanticwill hold the remaining 20 percent.

Stock sale exceeds expectationsThe co-op initially expected a mini-

mum sale of 18,000 shares. That num-ber was seen as a measure that therewas enough interest in the industry tomove forward. That figure was easilysurpassed.

In testimony before a CanadianSenate Committee in April 2004,Atlantic Beef Producers CooperativePresident Dean Baglole said, “Wesuspended sales after the initialrun to give us an opportunity tosit back and see exactly howmany cattle we could putthrough. With Co-opAtlantic as our prime cus-tomer, certainly in theearly going we did notwant to have more cattlecoming into the plant

than we could sell. We want to be verycareful and businesslike.”

A waiting list was established forwould-be share buyers. The $60 shareprice is a one-time investment by pro-ducers.

“For someone who has 100 cattle,[the cost] is $6,000 and they are in forlife, which is very appealing,” Baglolesaid.

“Right now, we pay in excess of $80 ananimal to have them shipped toOntario; so, to pay $60 to actually ownpart of a plant was a no-brainer formany producers. They felt it was theright thing to do.”

One of the strengths of the newplant is that it operates on the basis ofreal commitments from farmers to

deliver cattle, ensuring asteady supply to the plant.

Because it buys onlyfrom members, it isable to schedule deliv-

Cattle on pasture in NewBrunswick, where theco-op also has members.Photo by (and courtesy of)William Clarke,[email protected].

Canadian beef farmers have a history of using coopera-tive solutions to overcome challenges. Since the early 20thcentury, farmers have been instrumental in the develop-ment of producer and consumer cooperatives, includingcredit unions, that evolved, thrived and grew all across theAtlantic region.

As elsewhere, local cooperative development was fol-lowed by the creation of second-tier “cooperative cen-trals,” like Co-op Atlantic, which were created and ownedby local co-ops to meet shared needs.

But even this strong co-op tradition has not stemmed theout-flow of businesses during the past century fromAtlantic Canada to the powerful economic centers of Cen-tral Canada and the United States. Often, these businessestake the provinces’ best jobs and educated young peoplewith them.

Most of the region’s people, even those living in urbancommunities, have strong ties to rural communities and thevalues they represent. This has led to strong support for theeconomic base of rural communities. Surveys show thatAtlantic Canadians want to support their farmers.

About 96 percent of Atlantic Canadians would prefer tobuy and support a local product, while 95 percent prefer

local products if the price and quality are equal. Some 92percent want to know where and how their food is pro-duced and 80 percent say knowing this kind of informationinfluences purchases.

Another 81 percent trust locally produced food morethan imported food. A solid 85 percent support the Co-opAtlantic Agri-Food Strategy. Food safety and ethical pro-duction have become real issues with consumers.

Among the issues of growing interest to consumers areanimal treatment, additives, pesticides, fertilizers, GMOs(genetically modified organisms), e-coli and labor prac-tices. The recent move by the U.S. government to pass ananti-bioterrorism act to protect food from chemical andbiological tampering has heightened awareness amongNorth American consumers of a wide range of foodissues.

Consumers increasingly want to know, for both primaryand secondary products, who grows their food, what hap-pens to it chemically and mechanically, and where itcomes from. They want to know what an animal was fedand its health record. Increasingly, consumers want“traceability.” ■

— By Tom Webb

Consumers prefer locally produced foods

continued on page 37


By Carolyn Liebrand, ag economist

USDA Rural Development

he 1990s was a period ofcontinued adaptation bythe dairy industry todynamic, rapidly chang-ing market conditions.

These changes included advances inproduction technology (both on thefarm and in the milk plant), consolida-

tion and growth of retail food chains,vertical and horizontal integration inmilk manufacturing/processing sectors,new trade rules and practices, andchanges in government programs.

These factors contributed to thetrend of consolidation and mergersamong dairy cooperatives, which accel-erated during the waning years of thecentury. As a result, just four coopera-tives marketed 49 percent of all the

milk marketed by cooperatives, or 41percent of all milk sold to plants anddealers in the United States in 2002(Ling).

Furthermore, the four largest dairycooperatives marketed 74 percent ofthe natural cheese, 76 percent of thenonfat-dry milk and 80 percent of thebutter produced by cooperatives. (Themake-up of the top four cooperativesvaries, depending on dairy product).

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Buck ing the TrendSmall dairy co-ops adding value for members by targeting niche markets

Many operators of small, traditional dairy farms, such as this, have banded together in niche-marketing co-ops that are producing brandedcheeses and other dairy products. “The Home Place” painting by (and courtesy of) Jerry Raedeke, http://ftinet.com/raedeke/

Photo courtesy Graze Magazine


However, in spite of these trends(or perhaps because of them) there wasanother marketing development in the1990s. While many dairy cooperativeswere growing larger in size and scope,there was corresponding growth ininterest by milk producers in “nichemarketing.”

Niche marketing means that mem-bers’ milk is manufactured into special-ty or branded dairy products for specif-ic market segments. These activities aretypically conducted on a small scale.

The idea of niche marketing is toadd value to member milk by produc-ing a unique product, capitalizing onits specific attributes and selling it to arelatively narrow target market. Theincreasing interest of consumers inwhere their food comes from and how

it is produced has created a growingmarket for products with attributessuch as “organic,” “artificial hormone-free,” “pasture-based” (grazing), locallyproduced and “freshness.”

Co-ops and niche marketsWhile some producers have delved

into these activities individually, othershave banded together with like-mindeddairy farmers to form small coopera-tives to market milk into these nichemarkets. These efforts have beenspurred on by several factors: the needto preserve a market outlet, milk pro-duction style, and/or producers’ desireto generate added returns on theirmilk above what their traditional outletoffers.

In at least two cases, niche-market

co-ops were formed when milk buyerswould no longer accept producer milkvia their established delivery method.Thus, to preserve an outlet for theirmilk, they decided to own the outletthemselves. The option of adoptingnew technology on the farm to meetmarket demands was not available tothem due to religious considerations.

Similarly, another group of produc-ers found that the payment plan theyhad enjoyed from their milk buyer wasbeing terminated. They bandedtogether to seek markets that wouldcontinue to pay them premiums basedon the quality and composition of theirmilk.

Other producers that formed niche-market co-ops shared the belief thatconsumers desire, and will pay for, cer-

Niche-marketing co-ops face several challenges. Mostarise because of the small volume of milk they have to mar-ket. These hurdles include:

• Higher per-unit costs — The small volume inherentlyincreases a co-op’s per-unit processing costs. The costs ofshipping partial loads of milk, manufacturing small batchesof cheese and butter and bottling small runs of milk are at apremium. And, as noted elsewhere, the long-establishedcheese-manufacturing cooperatives required $5 per cwt ofmilk of member equity in 2002.

• Ability to attract qualified personnel — Due to theirsmall scale, it may be difficult to offer salaries competitiveenough to attract management and personnel of sufficientquality to operate a plant profitably. Poor management andstaff can derail the success of even a high-quality, highlydesired product. Skilled management is critical to avoidingor minimizing the effect of any “hidden-bummer factors”that can be costly to address, says Gerry Ely, cooperativespecialist for USDA Rural Development in Pennsylvania.

These troubles can include the unforeseen cost of get-ting the cooperative’s products into retail stores (slottingfees), unanticipated packaging costs (customers notreturning the novel glass milk bottles when the depositcharge did not cover the bottles’ actual cost), or perhapsunanticipated costs of complying with labeling require-ments (waste and/or fines from mislabeling or ineffectivelabeling).

Producing a quality product is just the first step. Thecooperative must next efficiently get its product to marketin good and attractive condition. Distribution channels must

be efficient so as not to eat up the added value derivedfrom processing and packaging. Moreover, they must havea plan for handling “returns” and unsold product. Finally,they must be savvy about marketing — be able to get theword out about the uniqueness of their product and con-vincing consumers to seek it out and to pay more for it.

• Contract processing — To avoid the high costs associ-ated with owning and operating a small plant, some ofthese groups contract with a plant to have their specialtyproducts produced for them. This means they give up somecontrol over the production process. These groups are thenat the mercy of that processor — be it for the ratescharged, quality, reliability or continuity of service. Many ofthe newer niche-marketing cooperatives are operated onthis basis, presumably to avoid the significant financialcommitment and management demands that come withowning a plant.

Some of these that have their products made for themrely on members to carry out the marketing and distributiontasks. This way, the members capture some of the laborcharge that would otherwise go to middlemen.

However, the opportunity cost of the farmers’ timeshould not be overlooked. Labor, even if “unpaid,” is nevercost-free. Furthermore, while members may excel at pro-ducing milk, they may not have the necessary expertise tocarry out the marketing and distribution functions. Only ifthey are able to perform the middleman functions in an effi-cient and cost-effective way will they be able to captureprofits. ■

— By Carolyn Liebrand

Hurdles to niche-markets


tain special attributes of their milk.These select characteristics arise fromproduction techniques that theybelieve affect the quality of their milk(and resulting dairy products). Theseinclude no use of artificial hormones,pasture-based production, organic pro-duction, the breed of dairy cow, thelocation of the farms and the size andownership of the dairy farms.

Furthermore, some of the memberswere small-scale producers, hard pressedto make a living in an environment ofincreasing costs and volatile milk prices.They sought continued viability fortheir farms by capturing a higher returnthrough these specialized cooperatives.

These producers may look for addi-tional revenue from niche marketsrather than attempt to gain efficienciesthrough traditional means (such asincreased size of farm operation). Inaddition, part of their motivation maybe philosophical — a belief in a certainscale of agriculture or production prac-tices (for instance, family farms and/ororganic production).

A number of articles in this maga-zine in recent years have profiled vari-ous producer-group efforts to addvalue to their milk in this manner (seethe January/February 2005, September/October 2003, and July/August 2002

issues for examples). This articleattempts to summarize the niche-mar-keting efforts by U.S. dairy coopera-tives.

Traditional niche dairy co-opsTraditionally, a niche-marketing

dairy cooperative was one thatprocessed all of its members’ milk inits own plant to manufacture and mar-ket specialty or branded dairy products(typically cheese) for particular mar-kets. In 1992, USDA documented 25of these cooperatives, labeling them“branded cheese” cooperatives (table1). A couple of these co-ops also pro-duced minor quantities of other prod-

ucts, such as butter, nonfat dry milk orwhey products in addition to cheese.

These branded-cheese cooperativescaptured some marketing margins, inaddition to processor margins, by mov-ing operations closer to the consumerand by marketing distinctive productsthat commanded premium prices.They are predominantly located in theEast North-Central region, especiallyWisconsin.

Following the overall trend ofdeclining cooperative numbers, thenumber of branded-cheese coopera-tives fell by 7 cooperatives (28 percent)between 1992 and 2002. However, the

net decline masks the dynamics ofwhat occurred.

Seventeen cooperatives left the cate-gory during that period. Of that total,12 branded-cheese cooperatives (48percent of the 1992 total) went out ofbusiness, nine of which ceased opera-tions altogether under stressed finan-cial conditions, while three mergedwith other, larger cooperatives or wereacquired by an investor-owned firm.

At the same time, four niche dairyco-ops grew to the extent that theirexpanded product lines moved theminto a new category, which USDA calls“diversified dairy cooperatives.” Thesedairy co-ops have multiple productlines, including commodity dairy prod-ucts such as bulk cheese and butter,and also sell a large amount of milk inbulk. One co-op took the oppositetrack and ceased manufacturing cheese,but continued marketing members’milk.

In contrast, 10 cooperatives wereadded to the branded-cheese categorybetween 1992 and 2002. Five wereexisting cooperatives that began (orresumed) manufacturing cheese andthe other five were newly formedcooperatives. Therefore, there were 18niche marketing cooperatives operat-ing in 2002, representing 9 percent ofall dairy cooperatives. Because thesecooperatives tend to be rather small,they handled less than 1 percent of allmilk handled by dairy cooperatives.

Long-established branded-cheese co-ops

In 2002, 13 niche-marketing coop-eratives were long-established busi-nesses, having been in operation formany decades. This indicates thatmanufacturing non-commodity cheesehas long been a viable alternative forsome groups of dairy producers.

However, as was noted earlier, morethan one-third of the branded-cheesecooperatives went out of businessbetween 1992 and 2002 due to poorfinancial performance. These smaller,specialty-cheese makers must offersuperior and unique products and ser-vice in order to survive in an environ-

The Duprey family, members of Our Family Farms Cooperative in western Massachusetts,sample some of their product. Photo courtesy Our Family Farms


ment where large cheese manufactur-ers have considerable market clout dueto the latest technology in their high-volume, low-cost plants.

These long-established, branded-cheese cooperatives are almost alllocated in Wisconsin (with one each inOhio and Pennsylvania). They use allof their member milk in their ownplants, and typically are small opera-tions (10 of the 13 cooperatives han-dled less than 50 million pounds ofmilk annually) and all have grade-Bmilk producer-members.

These long-established cheese-mar-keting cooperatives averaged $10.03 inassets per-cwt of member-milk in 2002(Liebrand), while $5.80 (58 percent ofthe total assets) was provided by mem-bers.

This level of asset use was far high-er than for other operating types ofdairy cooperatives. However, thesecooperatives also generated higheraverage net margins per-cwt of milkhandled than did the other types ofcooperatives: 32 cents vs. 21 cents forall dairy cooperatives in 2002.

New niche-marketing co-opsUSDA identified seven cooperatives

that were formed after 1992 that mar-ket distinctive, niche-dairy products.Moreover, most of these (5 coopera-tives) were formed between 1992 and2002. These are all small cooperativesmarketing milk or milk products thathave unique attributes attractive tocertain consumers.

Two of these newer cooperatives

marketed bottled milk under their ownlabel while the other five made a widevariety of cheeses and flavored cheeses;and at least one of these co-ops madebutter in addition to its specialtycheese. Several were located in Wis-consin with others in Massachusetts,Minnesota, Ohio and Pennsylvania.

All of these new niche-marketingcooperatives attempt to capitalize onthe “natural” production practices oftheir members. They want consumersto know that their products come fromfamily farms and that no artificial hor-mones are used to enhance milk pro-duction. Several emphasize their prac-tice of keeping cows on pasture (whichsome view as more humane) and saythis affects the composition of theirmilk in a health-promoting way.

Some farmers have been stirred into cooperative actionwhen they noted the gap between the price of their milk asit leaves the farm and the prices of dairy products in thestores. In 2000, for example, the average retail price forone-half gallon of milk and of cheddar cheese was aroundthree times the farm value of the milk used in making theretail products.

Thus, many a farm group has been exhorted to add-value to members’ raw agricultural products to capturehigher revenue. However, the gap between the price ofmilk at the farm and the price of end-products from milkrepresents the total marketing bill: the cost of getting theraw product off the farm and into consumers’ hands.“These costs are likely to be incurred regardless of whoconducts the middleman operations.”

The bulk of what may be thought of as “middleman prof-its” actually represents the expenses associated with get-ting farm products into consumers’ hands: labor, packag-ing, rent, transportation, advertising, depreciation, taxes,fuels and energy, interest and repairs. Of course, there isopportunity for profit in these activities, otherwise therewould be no incentive to perform them.

Yet, in order to capture any profits, the middleman func-tions must be conducted efficiently. Any higher-than-aver-age costs due to inefficiencies related to small scale orinexperience would erode profit margins quickly.

According to USDA’s Economic Research Service(ERS), pretax corporate profits made up just 6 percent of

the marketing bill for all food in 2000 (Elitzak). Labor wasthe largest marketing expense, which accounted for 47percent of the difference between the farm value of foodand what consumers spent on food in 2000. Packaging wasthe next largest expense, accounting for 10 percent of themarketing bill, followed by profits.

This suggests that if farmers take on some, or all, of themiddleman functions, they may be able to retain a portion ofthe profits generated by middleman activities. In addition,since labor costs are a major contributor to the value addedbetween the farm gate and dinner plate, farmers may beable to benefit by providing their own “sweat equity.”

Any of the middleman steps the members carry outthemselves may allow them to retain a portion of the laborcharge.

Alternatively, producers could try to raise the value oftheir milk as it comes off the farm. This is what the organicmilk producers have been able to do. For example, the farmvalue of organically produced milk received a premium of$4.16 per cwt in 2004, according to Organic Valley (CheeseMarket News). By stressing the benefits of their particularmilk to consumers, niche-marketing cooperatives maycommand a higher price for their milk and dairy products.

If these premium prices more than compensate for therelatively higher production and marketing costs that arelikely to accompany organic and specialty milk production,these producers may indeed capture greater returns. ■

— By Carolyn Liebrand

How big are “middleman” profits?


The two co-ops that sell bottledmilk emphasize the milk’s local pro-duction and therefore its freshness.They maintain they can deliver themilk from cow to consumer in far lesstime than it takes the large, regionalmilk bottlers.

A couple of the new niche coopera-tives were formed by Amish producerswho were seeking a market outlet fortheir milk because the milk plants theytraditionally dealt with would nolonger accept milk in cans. These twocooperatives operate much like the tra-ditional branded cheese cooperatives— all their milk goes through theirown plant to make cheese.

For the Amish in particular, thoughthey own the plants, they do not oper-ate them because it would violate theirreligious tenets. A hired cheesemakercarries out the manufacturing, oftenfor a portion of the gross income.(Note: some traditional, branded-cheese cooperatives also operate underthis type of arrangement with acheesemaker who furnishes the equip-ment, labor and tools to make thecheese out of members’ milk in plants

owned by the cooperative. Inexchange, the cheesemaker gets ashare of the gross income or profits.)

Plant ownership rare Only one other new niche dairy-

marketing cooperative owns a plant.However, this cooperative onlyprocesses a small portion of its mem-bers’ milk in its plant. It sells all of itsmember milk to a larger, more estab-lished cooperative, then “buys back”the milk it needs for its own opera-tions. The other cooperative bottlingspecialty milk has a similar relationshipwith a larger cooperative and is search-ing for its own plant, but does not ownone at this time.

Thus, five of the seven new niche-marketing cooperatives deviate fromthe model used by the long-establishedcheese-marketing cooperatives. Withone exception, they do not own oroperate any plants. Rather, they con-tract with established manufacturers tomake their products on a batch, or co-pack, basis.

Because the markets for their spe-cialty products are still limited, only a

small portion of their members’ milk isneeded to manufacture their specialtyproducts. So, the bulk of their milkcontinues to be sold through estab-lished outlets. This also contrasts withthe long-established cheese-marketingcooperatives, which use all of theirmembers’ milk in their own plants.

It is apparent that for most of thesecooperatives, the fledgling niche-mar-keting effort is an attempt to garnersupplemental income for members,rather than a market outlet for all oftheir milk production. The volume ofmilk moving through these new niche-marketing cooperatives is quite small— a majority (four out of the sevenniche dairy co-ops) handled less than 5million pounds of member milk peryear. In 2002, these new niche-market-ing cooperatives produced just 16 per-cent of all the cheese manufactured byniche-marketing cooperatives; the restwas produced by long-establishedcheese cooperatives.

Continued interest in niche co-opsThe idea of niche marketing contin-

ues to attract the interest of dairy pro-

PastureLand in southeastern Minnesota is an exampleof a new, branded-cheese and butter micro co-op that hashad considerable success penetrating local and regionalmarkets. Marketing efforts emphasize that freshness isenhanced by local production and that it comesfrom small family farms that help pre-serve a rural way of life and thathave a low impact on the envi-ronment.

PastureLand’s memberfarms have all recently beencertified organic. Its members’cows are all kept on pasture.

“Our job is to manage solar energy,” saysboard President Dan French. “We harvest it in the form ofgrass, using animals. The healthier the system is, thehealthier our product is going to be.”

PastureLand’s artisan cheeses are produced in smallbatches for the co-op by Eichten’s in Center City, Minn.,using only fresh milk from members’ pastured dairy herds.The co-op produces a wide range of Gouda cheeses,

including aged, mild, herb, jalapeno and dill flavors. It alsomakes baby Swiss and cheddar cheese, as well as cheddarcurds.

The co-op’s Summer Gold salted and unsalted butter isalso made in small batches at an old-fashioned,

local creamery in Hope, Minn., usingonly sweet cream from the co-

op’s grass-fed cows. Businesshas been increasing at a ratethat recently justified hiring

its first fulltime manager, JeanAndreasen.

PastureLand, formed in 1999, wasawarded honors in three divisions by the

American Cheese Society in its 2004 competition, including:first place salted butter, first place unsalted butter and thirdplace herb Gouda cheese.

“It is important to us to be an organization that is smallenough that the members have say in future membership,farm certification and other business matters,” saysFrench. ■

Micro co-op finding success in local markets


ducers. Since 2002, at least seven moreproducer groups have formed coopera-tives to pursue specialty markets. Allship to established milk handlers(cooperatives for the most part) andlook to use a portion of their members’milk for their specialty product(s).

Several co-ops in the Northeastemphasize that they are “local produc-ers” and encourage consumers to buytheir products as a way to preserve thefamily farms and rural landscapes intheir state. Most look to bottle andlabel milk as being produced locally,

in-state, but a majority (four coopera-tives) has not settled upon a specificdairy product.

Except for one Amish group, noneown or operate processing facilities.Most of these efforts (five of theemerging cooperatives) are in theNorth Atlantic region, where there isinterest among residents, consumersand state officials in preserving theirstate’s agricultural her-itage and openspace.

Market potentialThe very nature of niche marketing

implies a limited market. However, thatis not to say these niche-marketingcooperatives are precluded from grow-ing into large, successful ventures. Forinstance, the Coulee Region OrganicProducer Pool (CROPP) started out asa small cooperative with seven mem-bers marketing to the organic nichemarket (see Rural CooperativesJanuary/February 2000 and May/June2005 issues). It is now a large, nation-wide cooperative marketing a variety oforganic dairy products under the“Organic Valley” brand name.

Large cooperatives such asTillamook and Cabot Cooperative (nowpart of Agri-Mark, Inc., a dairy market-ing cooperative — see the May/June2000 issue of Rural Cooperatives) havegrown broad regional, if not national,markets for their premium, brandedcheeses. (These three cooperatives areclassified as diversified cooperatives byUSDA due to their wide scope of activi-ties and are not counted in the numberof niche-marketing cooperatives. Infact, many of the large, diversified dairycooperatives offer a variety of brandeddairy products.)

A number of long-establishedcheese-manufacturing cooperativescontinue to thrive by focusing on qual-ity and supplying specific markets with

specialty cheeses. These successfulcooperatives provide evidence that


Table 1—Dynamics of branded-cheese marketing cooperatives between 1992 and 2002

NumberBranded-cheese cooperatives, 1992 25Exits of branded-cheese cooperatives

Branded-cheese cooperatives that:…went out of business 9…merged with another cooperative 2…acquired by an IOF 1…ceased manufacturing operations 1…grew into expanded and/or more diversified operations 4Total exits 17

Entries of branded-cheese cooperativesCooperatives that:

…began/resumed manufacturing branded or specialty cheeses 5…formed to manufacture branded/specialty cheese 5Total entrants 10

Branded-cheese cooperatives, 2002 18Location:

East North-Central 1 16North Atlantic 2 1

West North-Central 3 11 Illinois, Ohio, Wisconsin 2 New York, Pennsylvania3 North Dakota, Minnesota

Valerie Dantoin-Adamski is a member of a small co-op that produces Northern MeadowsCheddar Cheese. Photo by Pamela J. Karg


By Charles Ling, Ag Economist


Editor’s note: This article is based on DairyCo-op Growth Challenges, ResearchReport 206. For a hard copy of the completereport, e-mail your request (include reportnumber) to: [email protected], or call(202) 720-8381. The complete report isalso available on the Internet at: www.rur-dev.usda.gov/rbs/pub/newpub.htm.

ecent technology devel-opments and evolvingtechnology now on thehorizon will create newuses for milk, and new

dairy ingredients and products. Newmanufacturing processes will createopportunities for further growth of thedairy industry. But along with thesenew opportunities come challenges.

In a future that is driven by technolo-gy, dairy cooperatives will face chal-lenges in four primary areas: (1) researchand development; (2) product develop-ment and marketing; (3) acquiring man-ufacturing and processing technology;and (4) equity financing.

Technology could create “milk refineries”

Two aspects of modern technologyare becoming vitally important for thefuture of the dairy industry: (a) filtra-tion technology for fractionizing milkcomponents, and (b) processing tech-nology for making dairy productsusing dairy-based ingredients with onlylimited amounts of fresh milk. Wideradoption of these technologies willlikely cause further restructuring of themilk industry, presenting dairy cooper-atives with many challenges and poten-tially rewarding opportunities.

Filtration is the use of semi-perme-able membranes to separate and “har-vest” milk components for uses asingredients in various foods, beveragesand nutritional or pharmaceuticalproducts. Milk protein concentrate(MPC) is one such ingredient.

Technological advances in thefuture may transform milk plants intomilk “refineries” that can fractionatemilk components into all kinds ofdesired dairy ingredients.

In addition, advances in processingtechnology may allow the use of dairy

ingredients combined with only a smallamount of fresh milk to manufacturedairy products. An example of this is apatented “wheyless process” for pro-duction of mozzarella cheese. Thisprocess allows cheese to be manufac-tured from non-perishable or dried,shelf-stable dairy ingredients.

Developments in filtration and pro-cessing technology combine to allowgreater flexibility in the location ofcheese manufacturing facilities becausehandling and/or transporting largequantities of fresh milk is not required.Also, the need for refrigerated storageof fresh milk is minimal. Several otherwheyless-process patents also havebeen recently granted for making vari-ous other dairy products from dryingredients.

The proliferation of this type ofmanufacturing process technologyusing dry ingredients is going to alterthe dairy landscape in a profound way.A plant making cheese (or other dairyproducts) from mostly dry ingredientscan then be located almost anywhere,with no need to be close to dairyfarms. The plant would no longer need

New Technology:Oppor tun i ty & Cha l lenge Technology changes could turn milk plants into ‘dairy refineries’

R


The evolution of the milk industry has some strikingresemblances to the developments in the tomato industry.In essence, the tomato industry has developed into twoseparate sectors — fresh market and processing sectors— each with specific varieties of tomatoes and distinctivecharacteristics.

Tomatoes for the fresh market are produced in everystate, while production of tomatoes for processing is highlyconcentrated, with 95 percent grown in California.

In the 1950s, 33 states grew processing tomatoes andCalifornia’s share was only 55 percent of the market. Devel-opment of mechanical harvesting equipment and tomatovarieties able to withstand mechanical harvesting led to

concentration of the industry in California. The long grow-ing season, advanced irrigation systems and dry harvestingweather combined with other natural advantages to helpthe Golden State come to dominate the U.S. market.

Development of bulk storage technology and transporta-tion allowed processed tomato products to be manufac-tured year round and processors in the Midwest and Eastserve as final fabricators of processing tomatoes grownand partially processed in California.

While the milk industry is unlikely to be differentiated tosuch extremes, the evolution of the tomato industry providesfood for thought as milk producers ponder the future. ■

— Charles Ling

Dairy & tomato industries show some parallel trends

to deal with producer payrolls, milkhauling, weather-induced intake vari-ability, seasonality of milk productionand composition, seasonal inventoriesof cheese, etc. This development willhave great implications for milk pro-ducers and their cooperatives, espe-cially in regard to cooperatives’roles in the supply chain.

Domestic MPC has non-price advantages

Among dairy ingredients that arecurrently of particular interest todairy producers are MPC,MPC/casein, casein and caseinates.These are used in the maufacture ofcheese products, nutritional supple-ments and other dairy and non-dairy foods.

Until recently, there was nodomestic production of MPC, caseinor caseinates in the United States.Milk prices in the United States arehigh enough that domestic produc-tion of these products cannot competewith imports based on price. Otherprotein products, however, such aswhey protein concentrate (WPC) andother whey products, can compete verywell with foreign production becausewhey price is not regulated.

However, domestic milk-proteinproduction may have some advantages

over imports, despite its higher price.These advantages include fresher pro-tein products at a lower transportationcost to customers, better customer ser-vices due to proximity to end-users,and the ability to supply protein prod-

ucts in wet form or caseinates madefrom fresh milk.

Based on the profitability of milkproduction, the western United Statesis the region that is most certain to seecontinued growth in milk productionand could support new plant capacity.This is the region where new milk-protein plants will likely be located.

Indeed, the first plants in the UnitedStates for MPC production are locatedin Tempe, Ariz., and Portales, N.M.

One of the important functions ofdairy cooperatives is supply-balancingand last-resort processing of surplus

milk. Making milk protein ingredi-ents would be an alternative outletfor such milk. Dairy cooperativesare certainly going to play a promi-nent role in a milk-protein ingredi-ent sector if it becomes economical-ly feasible to produce such productsdomestically.

Cooperatives also are end-users ofdairy ingredients. Some have beenmaking non-traditional dairy or relat-ed products either to satisfy con-sumers’ shifting demand or to offer acomplete line of products to cus-tomers. In most cases, the non-tradi-tional products are dairy-based, anddairy ingredients constitute the majorshare of the manufacturing inputs.

R&D key to market nichesResearch and development is the

foundation of manufacturing and pro-cessing technology, product develop-ment and marketing. Through theirdairy check-off dollars (an assessmenton milk production that funds dairyresearch and promotion), dairy farmers

Loading time at Car-Min-Vu Farms in Webberville,Mich. Photo by Laura Moser, courtesy Michigan MilkProducers Association



Machinery and equipment are the embodiment of newmanufacturing technology. Cooperatives usually acquirenew manufacturing technology by purchasing equipment.There are considerable economies of scale associated withthe new equipment technology. However, as the scale ofdairy plants grows larger, the cost of building a new plantwith new machinery becomes more substantial. The plantalso requires a large milk volume to sustain the operations.

Financing is the ultimate challenge that will enable pro-ducers and their co-ops to meet these challenges.

A dairy cooperative’s debt financing may work much thesame as for any business. Its equity financing, however, isunique and may have one or more of these features:

• common stock held by cooperative members (usually ofnominal value);

• retained patronage as net savings allocated to membersbased on patronage but retained for operations;

• capital retains that are milk payments but are withheld ata certain rate per hundredweight of milk;

• retained earnings that are earned on non-member busi-ness. Members must treat retained patronage and capi-tal retains as income for tax purposes. These retains arerevolved back to members after a certain period of time.

• In lieu of retained patronage and capital retains, a coop-erative may have a base capital plan. Under the plan, atarget base capital level is established at a rate per hun-dredweight of milk marketed during a representativeperiod.

Managing a cooperative’s equity financing is a uniquebusiness challenge because of three often-competing forces:

1. Members want minimal retains held back from theirpatronage checks and as short a revolving period aspossible;

2. The cooperative needs an adequate amount of capitalfor operations;

3. Lending institutions require the cooperative to maintaina certain level of equity.

The base capital plan may be viewed as a compromiseamong the three conflicting interests. Under the plan, oncethe prescribed base capital level is attained, a member canexpect to receive all allocated patronage earnings in cash.The cooperative would have an adequate level of capital tooperate with, and the base capital would have a certaindegree of permanency that helps relieve lending institutions’concern about risk.

Debt financing increases From 1997 to 2002, average cooperative equity increased

by 3 cents per hundredweight, while assets increased by 97

cents and liabilities increased by 95 cents per hundredweight.Contributions by cooperative member-producers to theincreased capital needs were minimal, so cooperative growthwas mostly financed by debts.

Various alternative equity financing methods have beenused to reduce cooperative members’ fiscal burden andinvestment risks, including: public stock corporations, limitedliability companies (LLC), joint ventures and new-generationcooperatives.

It is difficult to operate a public stock corporation or LLC ona cooperative basis because of one or more of the following:

• Investor interests may conflict with the one-person, one-vote democratic control of cooperatives;

• Producers support the cooperative’s business by patron-izing it, investors do not;

• With investor capital, the cooperative is likely to loseCapper-Volstead status;

• In a dairy cooperative, the distinction between milk payprices and premiums vs. profits is not clear-cut, and con-flicts between producers and investors may be very diffi-cult to reconcile;

• Investors’ focus on returns on investment may createfundamental conflicts with a co-op’s mission to providebenefits for member-producers.

The new-generation cooperative model has strengths,including a strong market orientation, and the ability to raiseinvestment capital from members for specific projects and toprovide members with greater flexibility in marketing theirequity if they leave the co-op. But these co-ops have also hadtheir share of problems (see pages 15-19 in the Jan–Feb. 2001issue of Rural Cooperatives, archived at:www.rurdev.usda.gov/rbs/pub/openmag.htm ).

The joint-venture model has worked well for many co-ops,some of which are organized as LLCs.

On the marketing side, a joint-venture LLC may be used bya cooperative and its partner to develop and market certaindairy products. The cooperative supplies milk to the LLC whilethe partner supplies technical and marketing know-how. Thejoint-venture partners share the financing and the risk of thebusiness activities of the LLC. This organizational modelreduces the financing burden and risk exposure of coopera-tive members, while a market outlet for milk is secured.

The promising rewards of adapting to new technology canbe exciting, but the necessary industry adjustment can bechallenging for dairy farmers and their cooperatives. Suc-cess will depend on adequate member equity capital, wellthought-out strategic plans and research and development.■

— By Charles Ling

The ultimate R&D challenge: financing new technology


By Donald Frederick

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

he American JobsCreation Act of 2004 con-tains several provisionsfavorable to rural cooper-atives and their member-

users. One that will directly benefitmany cooperatives and other businessesis the new Qualified ProductionActivities Income deduction.

The Qualified Production ActivitiesIncome deduction is first available fortax years beginning in 2005. Thisreport is a summary of the terms usedand general rules for claiming this newdeduction. As this is somewhat compli-cated, readers are encouraged to discusshow this new deduction may benefitthem with their professional tax adviser.

Three steps to successClaiming the new deduction involves

three computations. Congress has cre-ated some new tax jargon to describethese computations, so taxpayers willwant to become familiar with theseterms as they begin planning to maxi-mize the benefit of the new deduction.

Step 1 — Compute “DomesticProduction Gross Receipts,” whichare the total gross receipts from anylease, rental, license, sale, exchange orother disposition of:

a) Tangible personal property man-ufactured, produced, grown orextracted in whole or significant

part in the United States, b) Electricity, natural gas or

potable water produced in theUnited States, and

c) Construction performed in theUnited States.

Step 2 — Compute “QualifiedProduction Activities Income,” whichis your Domestic Production GrossReceipts determined in Step 1 minus:

a) Cost of goods sold allocable tothose receipts,

b) Other deductions, expenses andlosses directly allocable to thosereceipts, and

c) A pro-ratable portion of otherdeductions, expenses and lossesnot directly allocable to suchreceipts or other income.

Step 3 — Compute your“Qualified Production ActivitiesIncome (QPAI) deduction,” which isyour Qualified Production ActivitiesIncome multiplied by the applicablepercentage for the tax year. The applic-able percentage for each tax year, as setout in the law, are:

a) 3 percent for tax years beginningin 2005 and 2006,

b) 6 percent for tax years beginningin 2007 through 2009, and

c) 9 percent for tax years beginningin 2010 and later.

While this may look simple, it mayrequire some careful analysis to deter-mine, for example, which receipts quali-fy as domestic production gross receiptsor how to allocate costs between activi-ties that generate domestic productiongross receipts and those that produceother types of income.

Limitations on the QPAI deductionCongress has included two upper

limits on a taxpayer’s QPAI deduction:a) QPAI may not exceed taxable

income for the year. If a taxpayer’sQPAI is more than its taxable income,the deduction is limited to taxableincome times the applicable percentagefor that year. If the taxpayer has no tax-able income or a loss for tax purposes,the QPAI deduction is lost for that year.

b) The QPAI deduction may notexceed 50 percent of W-2 wagespaid by the taxpayer as an employ-er during the tax year. This isconsistent with the general aim ofthe new law: to reward companiesthat create jobs in this country; itshould not be a burden on coop-eratives.

Special rules favor manufacturing over service

The new law clearly favors businessesthat produce things over those that per-form services. This is illustrated by sev-eral special rules that apply to the com-putation of domestic production grossreceipts (step 1 above) and distinguishbetween these two types of economicactivity, including:

a) Income from food processing(but not retail operations) isincluded.

b) Income from processing, storingand handling (but not transport-ing) agricultural products usedin manufacturing, producing orgrowing other goods is included,

L E G A L C O R N E R

Get ready to c la im your “QPAI deduct ion”

T


By Stephen Thompson,

Assistant Editor

n a little village near Connecticut’s famousMystic Seaport Museum, a small cooperative isworking to develop Mystic Harbor into athriving source of high-quality oysters. TheNoank Aquaculture Cooperative, in operation

for five years, is still working towards full profitability for itsmembers, but they are optimistic about its prospects.

Noank is an archetypal New England hamlet, with gra-cious old wooden houses and narrow shaded streets, domi-nated by a beautiful traditional white church on a hilltop. It’sonly a few miles away from Mystic, a popular tourist destina-tion known for its charming 19th-century atmosphere.

Both Mystic and Noank are part of the town of Groton,and have gone from being sleepy, working- and middle-classneighborhoods 40 years ago to fashionable haunts of therich. At the same time, the traditional industries of fishing,oystering and lobstering declined drastically as marinewildlife disappeared from the harbor. Now, among the luxu-rious homes and sleek yachts, some people are trying toredevelop one of those industries.

Co-op breeds new oyster strainThe Noank co-op is headquartered in a building at the foot

of Noank’s three-block-long Main Street, on the waterfront atthe mouth of historic Mystic Harbor. Most of the building isdedicated to a hatchery for oysters and other shellfish,presided over by the co-op’s only full-time employee.Through trial and error, the hatchery has developed a strainof oysters that thrives in the harbor and has developed a repu-tation for quality among restaurateurs and other customers.

Rural Cooperatives met Jim Markow, president of the co-op, on a foggy June morning. He was standing at a tablemounted on his boat tied up at the co-op dock, getting afresh catch of oysters ready for market.

“Ya had breakfast yet?” he asks, as he deftly shucks threeoysters for his visitor. Despite a recent breakfast, the chanceto have oysters fresh out of the water is too good to pass up.They are plump, juicy and very tasty.

“I eat them all the time,” Markow says. “They’re the bestoysters you can get!”

Markow is president of the small cooperative, which has12 members, most of whom work part-time as oystermen,and some who work only weekends. Some members operatein Mystic Harbor; others from across Long Island sound onLong Island.


No Shel l GameOyster co-op hopes to reviveMystic’s faded shellfish industry

I

Jim Markow, presidentof the Noank Aqua-culture Cooperative,with a day’s harvest ofoysters. USDA photosby Stephen Thompson

Rural Cooperatives / July/Augustt 2005 23

The Noank co-op is developing areputation for a high-quality product,and its oysters even have a distinctiveappearance, with radial ridges on theirshells. The co-op sells as many oystersas it can grow. The only thing holdingit back from greater sales is productionlimitations.

More production neededIncreasing production is a compli-

cated problem, and members are work-ing hard in anticipation of greaterreturns in the future. Oysters are diffi-cult to breed and raise to the size atwhich they can be set out in the beds(see sidebar). They take three or fouryears to grow to marketable size,lengthening the time it takes to get adecent return on investments of timeand money. And there are countlessvariables that must be dealt with —not only from year to year, but, mostimportantly, from one part of the har-bor to another.

Steve Plant, another member of thecooperative, says that the learningcurve is steep. “You’ve got to start slow

and go easy,” he says. “If I had knownwhat was in front of me …well, I guessI would have gone ahead. Because youhave to go through the pain. If it wereeasy, a lot of people would be doing it.”

“Every day I learn something new,”says Plant. “Stuff you thought wouldwork like a charm fails completely, andaccidents sometimes work better thananything. But once you’ve got every-thing set, then you’ve got a cookbook.”

“You have to learn your area inti-mately,” he says. That’s partly becauseconditions are different from one partof the estuary bottom to another.Plant’s oyster beds are exposed to morecurrent than some of the other mem-bers’, requiring him to grow his babyoysters to a larger size before puttingthem out. But he thinks the trade-off isworth it, because with the currentcomes more exposure to nutrients andbetter flushing action to carry awayoyster waste.

Helping each other outThe cooperative is run informally

for the most part. “We get along with

each other and help each other out,”says Plant. “I hope it stays that way.”

If one member is short on productfor a customer, other members willloan him some of theirs, and membersoften assist each other with repairs andother activities. For the present, thespirit of cooperation seems to makethings work, and the co-op officers andbylaws can settle any disputes.

The co-op is set up as a fee-basedoperation. Members are obliged to buyoyster “seed” — baby oysters — fromthe co-op, and to sell through theorganization.

Markow has been a waterman all hislife, and was a driving force behind thefounding of the co-op. He works fulltime at his oyster business, along withhis business partner, Karen Rivara.Together, he says, they have been ableto develop the business to the pointwhere it is profitable.

Plant’s background is not on thewater, but on Wall Street, where heused to work as an analyst for a hedgefund. Tiring of his routine, he lookedfor a new career that would get him

The Noank co-op grows algae under highly controlled conditions to feed baby and breeding oysters.

out of the office. When his boss sent the fund staff outto look for investment opportunities in commoditiesproduction, he looked into aquaculture, and was attract-ed by its possibilities. To start learning the business, hegot a job with a fish farm.

What he learned was not entirely encouraging. “Ifound that not a lot of people make much money ataquaculture. A lot of these ventures aren’t serious aboutturning a real profit.”

While Plant was looking for a way to get an aquacul-ture operation going, he ran into a friend who intro-duced him to Markow, who was looking for recruits fora new shellfish cooperative.

The cooperative got its start after Markow wasapproached by Roger Sherman, a retired engineer fromthe nearby submarine shipyard at New London.Sherman, a volunteer with the Groton ShellfishCommission, was interested in reviving commercialshellfishing in the Mystic.

Vacated building offers home Sherman learned that an old building in Noank, then

used by the University of Connecticut as a marineresearch laboratory, was being vacated. Originally builtat the turn of the century as a lobster hatchery, thebuilding had two stories (a third story was blown off by ahurricane in the 1920s). It had 6,000 square feet of spaceand a 120-foot-long dock.

Sherman saw the old hatchery building as a terrificopportunity. The Shellfish Commission not only leasesMystic Harbor shellfish beds to commercial watermen,but also maintains recreational shellfish beds in a nearbycove, selling 2,000 recreational shellfishing permits ayear. Sherman figured that if the town could gain own-


Breeding oysters is a delicate task, says Stuart Mattison,manager of the Noank Aquaculture Cooperative and head ofthe co-op’s Noank hatchery. The conditions must be rightand, even then, success isn’t assured.

To ready adult oysters for breeding, they are put into flatconditioning tanks, where they are kept for weeks at opti-mum temperatures, bathed in clean water from the harborand fed algae. The algae — four different varieties — isgrown on the premises under controlled conditions.

Adults are then moved to another tank and the water tem-perature is raised to about 80 degrees to encourage spawn-ing. Once one oyster begins spawning, the others, stimulatedby the hormones released, also spawn.

When spawning begins, the oysters are put into individualplastic buckets, and the eggs and sperm they produce areprecisely mixed, with the goal of maximizing the number offertilized eggs. One female oyster can produce up to 30 mil-lion eggs.

The oyster larvae are incubated, hatched and nurtured invertical tanks with conical bottoms, with a steady stream ofair bubbles and feedings of algae.

After a few weeks, the larvae are transferred to horizontaltrays to “set” — that is, to attach themselves to a bit of shellor sand, and become sedentary. The trays have fine screenbottoms covered with a thin layer of the sand, down throughwhich filtered harbor water is pumped.

After the tiny oysters have grown to a certain size, they areready to be removed from the hatchery. However, before theycan be introduced to open water, they first must be nurturedin floating nursery tanks moored in protected waters.

The open-topped tanks contain modified plastic barrelswith screen bottoms in which the tiny oysters are confinedwhile being bathed in a constant upwelling flow of harborwater, pumped through by an electric motor. The “upweller”tanks are large fiberglass boxes originally used for holdinglobsters. PVC pipes are used to suspend the barrels in thetank and carry the exhaust water out.

After the oysters have reached the correct size — aboutthe size of the tip of a man’s thumb — they are put out on thebeds, which have been prepared by cleaning away any silt orother contaminants. Alternatively, some co-op members sus-pend their oysters in the water in cages. They are allowed togrow for about three years, until they reach market size.

An oyster dredge — basically a flat, steel basket aboutone yard wide — is dragged along the bottom to harvest theoysters. Before going to market, they are put in cages sus-pended in deeper water to depurate, or clean themselvesout, for a few weeks. Only after this final step are the oystersready to be processed for market. ■

Breeding and growing oysters— easy does it

Boats used by Connecticut members of the Noank coopera-tive tie up at the hatchery’s dock. Other members work out ofharbors on Long Island, across the Long Island Sound fromMystic Harbor.


ership of the building, it could lease itfor use as a hatchery to a shellfish busi-ness, in return for oysters and clams tostock the recreational beds. He con-tacted Jim Markow, who expressedimmediate interest.

Markow believed that other water-men in the area would be attracted tothe idea of a shellfish cooperative, andthe idea took off from there. Markowbegan recruiting potential membersand Sherman went about obtaining therights to use the building.

The Commission put together aproposal to turn the buildingback into a hatchery and took itto the chancellor of the universi-ty. However, while the marinescientists who had used the build-ing were enthusiastic about itstransformation into a shellfishhatchery, the administration ofUConn was not. The universitywanted a financial return on thebuilding, which is located onprime waterfront real estate. Halfa million dollars was the lowestfigure the university chancellorwas willing to entertain. It wasmoney the town just didn’t have.

The solution was a specialappropriation from the state leg-islature, obtained by the town’sstate representative, and a statutereserving the building for aqua-culture purposes. The universitywas paid, ownership of the prop-erty transferred to the state agri-culture department, and thefledgling cooperative signed alease agreement. The upkeep andmaintenance of the building is over-seen by the Shellfish Commission,which keeps office space on the secondfloor.

In August 2002, then-Secretary ofAgriculture Ann Veneman presentedthe state of Connecticut with a RuralBusiness Enterprise Grant from USDARural Development for $63,000 toreplace the roof and upgrade the inte-rior. The state is currently transferringownership of the building to the townof Groton.

The co-op has another hatchery, as

well: on Long Island, run by Markow’spartner, Rivara. Having two hatcheriesoffers a fail-safe alternative if oneshould be affected by disease or otherfactors.

Sport fishermen feared impact Some of the biggest hurdles for the

co-op were getting the necessary per-mits, complicated by the fact that dif-ferent government entities have juris-diction over various aspects of the co-op’s operation. But one obstacle camefrom an unexpected quarter.

“Our biggest opponents,” saysPlant, “Were the anglers.” Perhapsinfluenced by unfavorable publicityabout salmon farming, local sport fish-ermen were afraid that an oyster-grow-ing operation would somehow hurttheir fishing.

They needn’t have worried, saysPlant. “Oysters belong here,” he says.“They used to grow wild here. We’rejust trying to restore old habitat forthem.” And in restoring oysters to theharbor, co-op members believe theyare working for the return of other

estuarine wildlife that disappearedyears ago. A bumper sticker on Plant’scar proclaims, “Oysters are HabitatForming.”

“People don’t want to change any-thing,” says Plant, “But they don’t real-ize it’s already changed. We’re chang-ing it back.”

Much of the reason oysters disap-peared from the Mystic River estuary,according to Jim Markow, is that adevelopment boom along the shoredestroyed vegetation that filtered siltfrom runoff water. Silt chokes oysters,

which need clean sand or gravel bot-toms to thrive.

But other conditions in the har-bor offered great potential, includinga healthy level of algae, which is thefood of oysters. “Look at that,” hesays, pointing to the water’s greenishtinge. “See all that algae? That’s justabout perfect for raising oysters.”

Preparing the co-op’s oyster bedshas meant tediously dredging theharbor bottom to clean off sediment.With the return of oysters, Markowsays, conditions improve for otherestuarine wildlife that also left. Hepoints out that in other areas fisher-men seek out oyster beds becausethey attract fish.

Plant says he’s seen evidence ofthe beneficial effect of oysters forfish around his nursery tank. “Youcan see the little baby menhaden (acommercial fish) hanging aroundwhere the water comes out. Theywouldn’t be doing that if the oystersdidn’t put something they like intothe water.”Markow says that there is a certain

amount of tension between the water-men and the well-heeled outsiders whohave bought up most of the waterfrontproperty. He shakes his head. “Theseguys are out here with their million-dollar yachts, and they don’t like see-ing us because our boats are ugly.”

Good neighborsBut co-op members and others say

that most of the immediate neighborsof the co-op are happy with it. “The

Co-op manager Stuart Mattison checks the water froman oyster breeding tank for signs of spawning. Co-opmembers fear that a proposal by the National MarineFisheries Service to declare oysters endangered on theAtlantic Coast would put oyster hatching and growingoperations such as this one out of business.


By Gerald Ely,

Co-op Development Specialist


(Pennsylvania)

Editor’s note: this article is based on a pre-sentation the author made at the NationalValue-Added Conference in Indianapolis,June 16–17, 2005.

n paper, the concept ofwhat a cooperative is andhow a co-op operates isfairly basic. But success-fully developing and

launching a co-op — while not rocketscience — can be complex and daunt-ing for those who have never beenthrough the process. Any number ofobstacles can derail a promising co-opin its formative stages.

A skilled, outside advisor (or agent)can play a critical role in the develop-ment process. Advisors need to wear anumber of hats, but there is no univer-sally accepted qualification skill set.We in USDA Rural Development whoprovide technical assistance to co-opstry to regularly update the skills of ourdevelopment specialists to keep pacewith the evolving economy and tech-nology.

Co-op development agents mustalso be reliable conduits to findingmore outside expertise, which mayinclude an attorney, accountant, econ-omist, marketing specialist, environ-mental specialist, engineer or techni-cal-process specialist. “People” andcommunications skills are also neededby development advisors.

The purpose of this article is toprovide an overview of the variousroles that an outside co-op develop-

ment specialist needs to fill,and some cautions regardingconflicts of interest.

Roles of an outside co-opdevelopment specialist

• Educator — For manyproducers, their knowledgeof cooperatives is centeredon the co-op failures theyhave read about or, per-haps, experienced. Butthere is so much more toknow. Cooperatives comein all sizes, organizational and gover-nance packages, and capitalizationstructures. They perform widely dif-ferent functions and provide a widearray of products and services. Theysuffer or prosper under widely differ-ent leadership capabilities. The roleof the outside agent as educator canbe critical to understanding opportu-nities and making good decisions.They can also play a key role inidentifying prospective leaders fromwithin the ranks of the producers’group.

• Technical Advisor — Closely relat-ed to the role of educator is that oftechnical advisor. Much work can bedone with a steering committee todevelop knowledge of cooperativesand provide guidance in cooperativestructure and governance to preparea committee to work effectively withother important “outside agents,”the attorney and accountant.

Cooperative development, like anyother business development process,goes through several stages.Informing and advising members

about development stages andprocess can be important in co-opsuccess. Failure to adequatelyaddress one phase can easily lead todecisions that simply compound theproblem being addressed.

• Advocate for co-op structure —For many, the cooperative businessstructure is a new concept. It is nottaught in our schools or in most uni-versities. An outside agent can pro-vide objective information about therelative advantages and disadvantagesof cooperatives compared to otherbusiness structures. Likewise, notevery situation is suited for a cooper-ative business structure. Use of acooperative structure that is inappro-priate will likely be detrimental tothe project and its members and cus-tomers.

• Champion/cheerleader for theproject — Cooperative developmentspecialists and publications often dis-cuss the importance of a projectchampion. This is a person whoserves the co-op on a regular — and


The ins ide scoop on outs ide helpOutside co-op development specialistsplay crucial role for business launch

ODan Schofer, co-op development specialist with USDARural Development, works with a co-op of producefarmers which is supplying school cafeterias in northFlorida. USDA photo


often prolonged — basis to encour-age, lead, promote, push and pull tobring together (in a timely manner)the various elements necessary forsuccess. The role of project champi-on is not a role of the outside advisor,but rather the role of a local leader(or two) who will ultimately becomepart of the cooperative. However,every successful cooperative develop-ment start involves a fair amount ofinternal and external encouragement.An outside agent can be effective indeveloping confidence among projectparticipants that they have the abilityto effectively carry out a developmentproject.

An outside agent or advisor canplay an important role in gaining thesupport of potential resource agen-cies, project partners or other sup-porters. In the case of cooperativedevelopment, these agencies or indi-viduals may not be familiar with thecooperative business structure.Objective information and educationabout the cooperative form of busi-ness, cooperative governance, financeand responsibilities of members andthe board of directors can be usefulin gaining their participation.

• Objective observer (devil’s advo-cate) — This trait should be com-

bined with all of those listed above.The outside agent must be morethan an observer. The ability toobjectivity step back, observe, evalu-ate, process and use the vast array ofinformation one gathers in the co-opdevelopment process is an importantpart of successful development.

Cooperative development initia-tives are frequently born of despera-tion. When loss of a farm, a busi-ness or even a rural communityseems eminent, every idea is thoughtof as a solution. The sense of

urgency cries out for shortcuts andemotions run high. I have, on manyoccasions, been called a “wet blan-ket.” But, experience has provenover and over the need to be objec-tive when evaluating needs, opportu-nities, business structure options,potential benefits for participantsand the time required to implementa plan.

Loss of objectivity results in unre-alistic expectations and plans. Thegoal of an advisor is to help a groupmake sound decisions based on thebest information and analysis possi-ble. A decision to not form a cooper-ative that has little opportunity forsuccess is still a success. We shouldcount successes, not cooperatives.

Evaluating qualificationsA big issue for members trying to

develop co-ops is how to evaluate thecapabilities of an outside agent. BrianHenehan of Cornell University says,“The level of professionalism andcompetence can vary greatly amongthose involved in advising a new start-up business, including new coopera-tives.”

In many cases, these advisors mayprovide free service. They may be onthe staff of USDA Rural Development,a university or cooperative extensionoffice, Small Business Development

USDA offers co-op development helpUSDA Rural Development offers a wide range of technical assis-

tance to developing cooperatives. This help can range from an initial fea-sibility study to the creation and implementation of a business plan andbylaws. The goal is to provide a realistic view of what it will take to makea new cooperative succeed.

Assistance is offered through USDA Rural Development’s nationaloffice in Washington, D.C., (202) 720-3350, and most USDA Rural Develop-ment state offices. To be connected to your state office, call (202) 720-4323, then enter “1” and follow the voice prompts. Or visitwww.rurdev.usda.gov and click on the “office locator” button.

USDA also has a number of publications that should be read bythose forming a new cooperative. Most are in the Cooperative Informa-tion Report series, which are on-line at:http://www.rurdev.usda.gov/rbs/pub/cooprpts.htm. For hard copies, e-mail: [email protected], or call (202) 720-8381. ■

Co-op development specialists need to be objective observers. Here, a USDA develop-ment specialist works with board members of a women’s crab processing co-op onSmith Island, Va. USDA Photo by Bob Nichols

Center, Cooperative DevelopmentCenter, Ag Innovation Center, statedepartment of agriculture or a localeconomic development corporation.

But, “free service,” can become veryexpensive if that advisor or agent deliv-

ers the wrong advice, has a bias towardsomeone else’s priorities or puts some-one else’s goals higher than the co-op’s.

Weigh agent’s motivation Be cautious of “self-appointed” out-

side agents. What is their motivationfor wanting a cooperative businessstarted? How will they benefit? Doestheir interest come with the potentialfor personal benefit or gain?


Cooperative development practitioners associ-ated with the Cooperative Development Centers, fund-ed by USDA Rural Development, organized as a net-work called Cooperation Works in 1995. Theydeveloped a set of professional standards called TheMadison Principles, so named because they weredrafted in Madison, Wis. These principles should bestudied by members of developing co-ops, and serveas a reminder for co-op development specialists.

The Madison PrinciplesProfessional Standards for Cooperative Develop-

ment Practitioners1. Individuals providing technical assistance subscribe

to the highest level of ethics and shall declare anyconflict of interest, real or perceived, so that theycan be a credible source of objective feedback andan articulate advocate of the project as needed.

2. Cooperatives are tools for development and shouldpromote both social empowerment and economicgoals.

3. Applied appropriately, cooperatives have value to allpopulation groups and for all businesses and ser-vices in the public and private sectors.

4. Each cooperative responds to its unique economic,social and cultural context; as a consequence, eachcooperative is different.

5. There are essential steps that must be taken in acritical path to succeed.

6. An enthusiastic group of local, trustworthy leaders isa prerequisite for providing technical assistance.The effective cooperative development practitionernurtures that leadership by helping them shape avision that will unite members and provide ongoingtraining.

7. Cooperatives only work when they are market dri-ven; the development practitioner seeks to ensurethat accurate market projections precede otherdevelopment steps.

8. Member control through a democratic process isessential for success.

9. Success also depends on the commitment of themember’s time and financial resources.

10. There must be tangible economic benefits formembers.

11. The cooperative’s products and services must gen-erate sufficient revenue so that the effort can befinancially self-sustaining. Provisions must bemade to share any surplus revenue.

12. Market opportunities exist throughout the world.Cooperatives and market development should tran-scend national boundaries.

13. Successful, established cooperatives should assistemerging cooperatives to develop. New andemerging cooperatives should be encouraged tocommunicate with and learn from successful coop-eratives. ■

Co-op development trainingslated for Madison in NovemberCooperation Works is sponsoring the second of two,

five-day training workshops for co-op development spe-cialists, Nov. 14-18 in Madison, Wis. The first session ofThe Art & Science of Starting a Cooperative Business washeld last May. The program is the most comprehensivetraining program on the development of cooperative busi-nesses available in the United States, bringing togetherproven experts and co-op leaders from across the countryto deliver the best of what has been learned in coopera-tive business development to new practitioners in thefield. Best practices case studies using various types ofcooperatives will be incorporated into the classes.

Participants who missed the first part can still enrollin the November session, but should call the CooperationWorks office first. The training program was launched in 1999, and was re-tooled and updated last year in col-laboration with the University of Wisconsin Center forCooperatives. For more information, visit: www.cooperationworks.coop, or call (307) 655-9162, or e-mail [email protected].

Cooperation Works was found in 1997 by eight co-opdevelopment centers, and has since grown to 21 centersserving 43 states. It promotes business development inall co-op sectors by sharing best practices and lessonslearned. ■

Cooperation Works



By Eldon Eversull, ag economist


Editor’s note: Information for this article isfrom a soon to be published ResearchReport 207.

gricultural cooperativessold about $7 billion infeed in 2004, more thandouble the sales valuereported in USDA’s last

study, conducted in 1984. Manychanges have, of course, occurred dur-ing the past 20 years for cooperativefeed manufacturers. Six of the majorcooperative feed manufacturers nolonger exist. However, their manufac-turing facilities have not been lost.Prior to ceasing operations, allianceswere developed with other coopera-tives to incorporate most of the feedmills into existing cooperatives.

This consolidation and expansiontrend continued until one cooperativebecame the leading cooperative feedmanufacturer. This same cooperativepurchased a major investor-owned feedmanufacturer and has become thelargest U.S. feed manufacturer. Also,one large cooperative feed manufactur-er converted to an investor-ownedfirm.

The more than doubling in the dol-lar amount of feed sales for coopera-tives over the past 20 years is thus theresult of a combination of businessexpansion, purchase of an investor-owned feed manufacturing firm andincreased ingredient costs, minus theloss of the cooperative that convertedto an investor-owned firm, amongother such changes.

USDA surveyUSDA Rural Development sent a

survey to 646 cooperatives that had atleast $500,000 in feed sales in any ofthe prior five years. There are manymore cooperatives that sell feed, butfew of these with less than $500,000 insales had feed mills. About 33 percent,or 220, usable surveys were returned.

Among the major changes since the1984 survey is that hog productioncontinues to be concentrated in largerfarms and vertical integration contin-ues among feed production, hog pro-

duction and meat packers. Hog pro-duction has also seen movement fromtraditional production areas of theCorn Belt, Lake States and NorthernPlains to Appalachian, Southeast andMountain states, much of the migra-tion being driven by pollution andodor issues.

Global markets have also openedU.S. borders to meats produced over-seas. Bovine spongiform encephalopa-thy (BSE), or mad cow disease, hasclosed the U.S./Canadian border sev-eral times to importation of live ani-mals and has impacted export markets.Avian flu has had a large impact onforeign poultry production and couldbecome a major domestic concern.The large increase in ethanol produc-tion has made distiller’s grain (anethanol byproduct) a competitivechoice to traditional feed production.

Survey highlightsThe survey found that:• The Corn Belt and Lake States

account for 80 percent of cooper-ative feed production;

• Types of feed and percent of totalproduction by co-ops are: com-plete feed — 83 percent; supple-ment feed — 12 percent; premixfeeds — 5 percent;

• Feed sold in bulk accounts for 90percent of feed sales, while 10percent is still sold in bags.

• Meal was the most common formof feed produced by co-ops (72percent of the total); pellets weresecond (14 percent), followed bycoarse-textured (11 percent), liq-uid (2 percent), cubes (1 percent)and blocks (0.4 percent).

Conso l idat ion , expans ion spark g rowth in cooperat ive feed sa les

A

Co-op feed sales have more than doubledin the past 20 years, according to a newUSDA survey. USDA Photo by KenHammond

• Hog feed was by far the biggestshare of the market, accountingfor 53 percent of co-op feed pro-duction, followed by dairy feed at17 percent and beef feed at 14percent.

• Over half of the feed producedwas sold at the retail level, while17 percent was sold wholesale; 15percent was custom grind andmix; 9 percent was custom fed toothers’ animals; and 6 percent wasfed to animals owned by the coop-erative.

Complete, supplement or premix feeds

Formula feed is produced accordingto exacting specifications to satisfy dif-ferent animal groups’ physiological andenvironmental needs. Feed productionis usually classified further into specificfeed types, such as complete, supple-ment and premix. Comparing 2004 to1984, we can see that complete feedproduction rose about the sameamount as supplement feed declined(chart 1). By region, complete feedproduction increased greatly over the1984 average of 74 percent in all butthe Northeast, Lake States andSoutheast.

By feed mill size: mills producingfrom less than 999 tons to 74,999 tonsannually produced complete feedsabout 70 to 79 percent of the time.

Feed mills producing from 75,000 to99,999 tons produced more supple-ment feed (30 percent) and less com-plete feed (65 percent). Production atfeed mills with a volume of more than100,000 tons also differed from theaverage, with more than 90 percentcomplete feed and only 6 percent sup-plement feed.

Feed typeIn 1984, the use of pellet feed had

increased greatly from prior studies,accounting for about half of total feedproduction. By 2004, pellet feeddropped to 14 percent of total produc-

tion while meal climbed to 72 percentand coarse-textured 11 percent (chart2). This compares to 49 percent mealin 1984 and 47 percent pellets. Mealproduction increased in the Corn Belt,while pellets increased in the South-east. Much of this apparent drop inpellet feed may be due to several largercooperative feed manufacturers notresponding to the survey.

Feed mills with less than 999 tonsof production made about equalamounts of meal and coarse-texturedfeed. They also made the most liquidfeed. Feed mills with 10,000 tons to74,999 tons of production made aboutthe average amount of meal feed, 70percent. Feed mills with 75,000 to99,999 tons of production made themost pellet feed (32 percent).

Animal typeHog feed accounted for 53 percent of

the feed produced by respondents, whiledairy feed was the most-produced feedin the 1984 survey (chart 3). Hog feedwas the most-produced feed in the LakeStates, Corn Belt, Northern Plains andMountain regions while beef feed wasthe most-produced feed in the SouthernPlains and Pacific regions. Dairy feedwas the most-often-produced feed in theNortheast, Appalachian, Southeast andDelta regions.

Hog feed was the most-often-pro-


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duced feed for feed mills with annualproduction from 25,000 tons per yearto over 100,000 tons. Feed mills witha volume of less than 999 tons per yearto 9,999 tons focused on beef feed.Feed mills producing between 10,000tons per year and 24,999 were aboutevenly split between hog and dairyfeeds.

Feed distributionBy a large margin, respondent

cooperatives distributed the feed theyproduced through retail sales (chart 4).This is very different from the distrib-ution pattern found in 1984, in whichwholesale sales and retail sales wereabout equal. Again, several largecooperatives that did not respond tothis survey have feed sales that areknown to be heavily weighted towardwholesale sales and thus may haveskewed survey results.

Retail sales increased by about 20points over 1984 while wholesale salesdropped about the same amount.Custom-grind and mix feeds droppedsix points, as did feeding to coopera-tive-owned animals. Feeding to others’animals (custom fed in feed lots orconfinement facilities) grew by almostnine points. Retail sales accounted forat least 90 percent sales in the

Northeast, Appalachian, Delta,Southern Plains and Pacific regions.

Feed mills with production of lessthan 999 tons per year almost exclu-sively relied on retail sales. Feed millsproducing from 75,000 to more than100,000 tons per year relied on whole-sale sales about 24 percent of the time.These same feed mills also custom-fedtheir feed to others’ animals for morethan 10 percent of their feed sales. ■

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The farm-productionregions referenced inthis article are as follows:

Northeast: Maine, N.H., Vt., N.Y.,Mass., R.I., Conn., Pa., N.J., Del., Md.and D.C.;

Lake States: Mich., Wis. and Minn;

Corn Belt: Ohio, Ind., Ill., Iowa and Mo.;

Northern Plains: N.D., S.D., Neb. and Kan.

Appalachian: Va., W.V., Ky., TN and N.C.;

Southeast: S.C., Ga., Ala. and Fla.

Delta States: Miss., La. and Ark.;

Southern Plains: Okla. and Texas;

Mountain: Mont., Idaho, Wyo., Colo.,Utah, Nev., Ariz. and N.M.;

Pacific: Wash., Ore., Calif., Hawaiiand Alaska.


or her “drive, wisdomand relentless pursuit ofexcellence,” Janet H.Schoniger, vice presidentof corporate communica-

tions for CoBank in Denver, Colo., hasbeen named the 2005 winner of theH.E. Klinefelter Award, the highesthonor bestowed on a coop-erative communicator.Terri Faulkner, communi-cations coordinator forDixie Electric Cooperative,received the MichaelGraznak Award, which rec-ognizes the outstandingyoung co-op communica-tor (under 36) of the year.The awards were presentedat the annual institute ofthe Cooperative Com-municators Association(CCA) in Denver, Colo., in June.

Schoniger is the 47threcipient of the Klinefelteraward, which recognizes contributionsin furthering the cooperative systemand for raising the standards of coop-erative communications. She was rec-ognized for the key role she plays inensuring CoBank’s communicationsadvance the bank’s mission and vision.

Schoniger focuses on communica-tion efforts that support CoBank’sstrategic plan, and even coined thebank’s tagline, Rural America’sCooperative Bank. She is active in CCA,where she is past committee chair ofthe CEO Communicator of the Yearaward, and the National Council ofFarmer Cooperatives.

Faulkner is responsible for all

aspects of her 18,000-member cooper-ative’s communications, including pub-lications, media relations and Websites. She also handles cooperativeadvertising and is responsible for allschool programs, community and pub-lic relations and special projects.

Faulkner was saluted for “demon-strating the sevencooperative princi-ples in her workethic and attitudeon a daily basis,and for bringingcreativity and ahigh level of pro-fessionalism into

all the communi-cations efforts.”

CCA’s annualcooperative com-municationscompetitionattracted nearly800 entries infour classes:writing, publications, photography andprograms & special projects (the latterof which includes everything fromadvertising to web sites). The grandaward winners in each class were: • Writer of the Year – (tie) Allison

Morgan and Mark E. Johnson, bothof Tennessee Farmers Cooperative;

• Photographer of the Year – RobinConover of the TennesseeAssociation of Electric Cooperatives;

• Publication of the Year – BonnieJones of Jackson ElectricMembership Corporation for its2004 annual report.

• Special Projects, Best of Class –Joseph W. Richardson, SouthwesternElectric Cooperative, for a “small-shop portfolio” of communicationswork.

USDA’s Rural Cooperatives magazinewon the first place feature articleaward from a field of nearly 50 entriesfor “Flying the Coop,” by Catherine

Merlo, which addressesstrategies for retaining co-opmembers. It also won thirdplace for best overall mem-ber magazine or newspaper,while Stephen Thompson,the magazine’s assistant edi-tor, won the third placeaward for digitally manipu-lated photos for an illustra-tion/photo showing a farminside a bank vault. For thecomplete list of award win-ners, visit: www.communica-tors.coop.

CCA is a national organi-zation of more than 350 pro-fessional communicators who

work for cooperative businesses andorganizations throughout the UnitedStates and a number of other nations.For more information, visit the Website above or call Executive DirectorSusie Bullock in Lubbock, Texas, at(806) 795-2783. ■

CoBank’s Schoniger named top co-op communicator

F

Janet Schoniger of CoBank.

Terri Faulkner of Dixie ElectricCooperative.


Pennsylvania food-marketing co-op completes trade mission to China

The Food Marketing Cooperativeof Pennsylvania (FMCP) — a jointeffort of small to medium-sized foodprocessors — recently completed theirfirst trade mission to China. The trademission, coordinated by thePennsylvania Department ofAgriculture (PDA), represented 13food manufacturers who have foundthat leveraging their resources helps allof them reach markets that almostnone of them could access individually.

“This trip was a real team effort bythe members of the co-op, the stateand the U.S. Department of

Agriculture (USDA),”Pennsylvania AgricultureSecretary Dennis Wolff said, not-ing that many of the trip’s costswere offset by a grant fromUSDA. The co-op had an exhibitat the HOFEX Food Show inHong Kong and participated inretail tours.

“Pennsylvania cannot ignoreChina’s market potential formany of the same foods our owncitizens have come to enjoy,”Wolff said. “This trade missionwas extremely important in pro-

viding exposure for the common-wealth’s food products while develop-ing relationships with qualityimporters and distributors in China.”

Ron Davis of Bell Export FoodsGroup, representing members ofFMCP, joined John Jantos, PDA’s inter-national business development divisionchief, during the week-long trip toHong Kong and southern China.During the mission, the pair participat-ed in market briefings by the U.S.Embassy and Consulate. They alsogained insight and perspective into theAsian market through a trade show inHong Kong and meetings with buyers,importers and distributors there and inthe southern Chinese city of Shenzhen.

“With a population of more than 1billion people, there is tremendousmarket opportunity for Pennsylvania’sdiverse array of quality agriculturalproducts in China,” Wolff said. “Thistrip was a great step forward in creat-ing relationships that will soon addChina to the growing list of countriespurchasing Pennsylvania’s agriculturalproducts.”

The co-op’s expenses for the trademission were partially offset through

use of the Market Access Program(MAP) of USDA’s Foreign AgriculturalService. MAP funds are availablethrough four State Regional TradeGroups (SRTGs), which consist ofstate departments of agriculture. TheSRTGs work closely with USDA topromote international trade. This pro-gram can reimburse businesses for upto 50 percent of their internationalpromotion expenses.

In this case, Food Export USA-Northeast, the SRTG which representsten northeast state departments ofagriculture and the Mid-AmericaInternational Agri-Trade Council(MIATCO), which represents 12grain-producing states, collaborated onthe China mission to benefit the co-opand several other agribusinesses fromother states.

Alto forms whey-marketingpartnership

Alto Dairy Cooperative, Waupun,Wis., has formed a marketing alliancewith Main Street Ingredients,LaCrosse, Wis., to sell its dried wheyand permeate to the nutritional andfood-processing industries. Thearrangement will not affect Alto’s feeddivisions. “By marketing our driedwhey and permeate through this part-

nership, Alto will be able to capitalizeon Main Street’s sales and marketingexpertise — adding value to our mem-bers’ milk,” said Rich Scheuerman,President and CEO of Alto DairyCooperative.

N E W S L I N ECompiled by Dan Campbell

Send items to: [email protected]

CorrectionIn the May–June issue of Rural

Cooperatives, an article aboutCooperative Agricultural Services’ newsoybean extruder incorrectly stated thatthe operation is located in SouthDakota. It is actually located in Kansas.The state agency that worked closelywith the co-op to develop the facility isthe Kansas Department of Commerce.

Fred Detrick displays a co-op poster that gracedNew York City buses in the 1960s. Tru-Blu Blue-berry Co-op, founded in 1928, recently closed itsdoors. Photo by Larry Hajna, courtesy Camden Courier-Post


The partnership is one of severalinitiatives Alto is working on to bringhigher margins and add value to thecooperative and members’ milk,Scheuerman said. In April, Altoannounced its partnership with

Winona Foods to brand and market itsaged cheddar cheese nationally.

In other news, Alto recently hostedthe national Food Network televisionshow “Unwrapped,” at its Waupun,Wis., plant, where it was featured in a

special segment onfood toppings. Theshow focused on Alto’sshredded cheesemak-ing process and its110-year history as aproducer-owned coop-erative. Hosted byMarc Summers,“Unwrapped” uncov-ers behind-the-scenesdetails on classicAmerican food byexploring test kitchensand the secrets behindfood companies andtheir products. Alto Dairy manufac-

tures more than550,000 pounds ofAmerican and Italian-

style cheese per day at its Waupun andBlack Creek facilities from a dailyintake of more than 5 million poundsof milk. Cheese and whey produced byAlto Dairy are marketed nationwideunder a variety of brand names andprivate labels.

Aurora Co-op buyingCargill’s Grand Island mill

Aurora Cooperative is buyingCargill’s Grand Island, Neb., feedmill.“This acquisition is a wonderfulopportunity as it allows AuroraCooperative to upgrade its feed ser-vices to current and future livestockproducers,” says Aurora CooperativePresident and CEO GeorgeHohwieler.

The purchase comes on the heels ofthe co-op’s 2005 board retreat, wherethe directors “committed to be activelyinvolved in the feed business for thelong term,” Hohwieler said. Theacquisition also favorably positionsAurora in response to USDA’s and theU.S. Food and Drug Administration’s

niche marketing is a viable alternativefor interested farmers.

Synergy with establishedcooperatives

Most of the newer niche-marketingcooperatives continue to sell the bulkof their milk to other handlers. Theydirect just a portion of their milk to aplant to have their specialty productsmade.

For some, these shipments for theirniche products are only done occasion-ally. Others ship all their milk to theirhandler (typically a cooperative) and“buy back” the amount of milk neededto make their specialty product. In thiscase, the handler diverts shipments ofthe niche marketing cooperative mem-bers’ milk to the selected plant.

These arrangements give the mem-bers market security (a market outletfor all of their farms’ milk). At the sametime, it allows them to seek added

returns on a portion of their milk.The relationship between these new

niche-marketing cooperatives andestablished cooperatives appears mutu-ally beneficial. The niche-marketingcooperative can focus its efforts on itsniche products, leaving the tasks ofmanaging milk routes, producer pay-roll and balancing milk supplies to thelarger cooperative.

The established cooperative benefitsby having members who, due to theadded revenue they gain from theirniche products, are thriving and happymembers. Moreover, the establishedcooperative gains another outlet formember milk, however small.

ReferencesCheese Market News, MidwestEducation Program Raises Awarenessof Organic Farming, Seeks InterestedParties, pg. 10, Vol. 25, No. 12,April 22, 2005.

Elitzak, Howard. Food MarketingCosts at a Glance. Food Review,Economic Research Service, USDA,Vol. 24, Issue 3, September-December 2001.

Liebrand, Carolyn. Financial Profileof Dairy Cooperatives, 2002, ResearchReport 203, Rural Business-Cooperative Service/USDA,September 2004.

Liebrand, Carolyn. StructuralChange in the Dairy CooperativeSector, 1992-2000. Research Report187, Rural Business-CooperativeService/USDA, October 2001.

Ling, K. Charles. MarketingOperations of Dairy Cooperatives,2002. Research Report 201, RuralBusiness-CooperativeService/USDA, February 2004.■

Bucking the trend continued from page 17

Alto Dairy’s shredded cheesemaking process was recently fea-tured on the Food Network’s “Unwrapped” program. Photo cour-tesy Alto Dairy


stance on species-segregated feed man-ufacturing operations, he noted. Inconjunction with the asset sale atGrand Island, Cargill AnimalNutrition announced that it will dou-ble production at its Duncan, Neb.,location.

Bin collapse causesco-op to halt storage

Central Valley Ag Co-op is closingits grain storage facility in Fremont,Neb., but will continue to offeragronomy and petroleum services,according to the Fremont Tribune. InNovember, one of the co-op’s grainbins collapsed, and the Nebraska

State Fire Marshal’s office and theco-op’s insurance firm said the stor-age bins and the feed mill were asafety hazard.

At one time the local co-op provid-ed storage for some 500,000 bushels ofgrain. But last November, a 50-year-old storage bin housing some 70,000bushels of corn collapsed, spewinggrain into the loading area. Metalfatigue is the suspected cause.Rebuilding the storage facility andupgrading the feed mill would be cost-prohibitive, so the board chose to closethem. The co-op will offer membersthe option of shipping grain to termi-nal elevators under the co-op’s name,

or it will pick grain up on members’farms.

Calif. dairy co-opbuying Frito plant

California Dairies Inc., Artesia,Calif., is in the process of buying the280,000 square-foot Frito-Lay plant inVisalia that was closed last fall. Thefinal proposal is subject to the approvalof the cooperative’s membership. Thepurchase is also contingent on thecity’s permission to build towers tallerthan 100 feet, as well as on receipt of aconditional-use permit.

The facility may start producingtoward the end of 2007. In the first

have supported many research projectsthat advance processing technologyand product development. However,only through a cooperative’s own pro-prietary research and developmentefforts can it identify and fully graspmarket niches and bring new productsto the market.

New products may be developed bymodifying the flavors, taste, colors,forms, packaging or shelf-life of exist-ing products, or by fortifying them fordesired functionality. Product develop-ment also refers to using dairy ingredi-

ents (or dairy products as ingredients)to develop or improve existing foodsand beverages.

Marketing new consumer productsrequires market research, test market-ing, advertising and promotion, con-sumer education, shelf-space acquisi-tion, merchandising and servicing theproducts. Substantial costs are associat-ed with each of these activities. In mar-keting new dairy ingredients, the chal-lenge is to provide end-users (proces-sors) with information on the attribut-es, the functionality and the applica-

tion of the ingredients.To differentiate value-added prod-

ucts and gain competitive advantages,cooperatives also must devote ade-quate resources to develop or acquireprocessing technology and adopt newways to manufacture or package prod-ucts, or to enhance the particularattributes of their products. Theother aspect of processing technologydevelopment is finding new ways tomake existing products, such as thewheyless process for making mozzarel-la cheese. ■

New technology: are co-ops ready? continued from page 19

old-timers around here are all for theoperation,” says Roger Sherman.“They understand that oysters help thewater quality.”

Co-op member Artie Valdezbelieves in keeping the neighborshappy. So, he recently took a day off toclean up weeds and brush around thebuilding. “The local people have beenreally helpful,” he told me. “We werestrangers at first, but we’ve gotten toknow and trust each other.”

Valdez grew up in the Groton area,and says he has had a passion for theoutdoors and the water all his life.After a term in the military, he

returned to the area in 1990 to settledown. For a while he worked as a civil-ian at the local naval base, but after theunit in which he worked shut down in1993, he tried commercial fishing,starting a firm he named “Sweet PeaEnterprises,” after his oldest niece’snickname. “I made ends meet, but notmuch more,” he says.

In 1999, Valdez was talking to JimMarkow and brought up the difficultyof working on the water alone. Thetwo started working together, andwhen the idea of a co-op came up, hesays, “I thought it was a great idea.”

Valdez especially likes the way co-

op members support each other. “Weall offer to do stuff for each other,” hesays. “That’s the whole idea of a coop-erative. It’s a great feeling, workingtogether.”

Valdez says his operation is finallystarting to pay off. “It’s been a longroad,” he says, echoing Steve Plant’ssentiments: “You never stop learning.”

He also hopes to be able to hiremore people and provide them with away to earn income. While he’s notable to do that yet, he’s confident that,with continued hard work, Sweet PeaEnterprises and his fellow members’businesses will continue to grow. ■

No shell game continued from page 25


phase, 5 million pounds of milk perday would be processed, and 100workers would be employed at fullproduction. In the second phase, theplant capacity could increase to 10million pounds of milk per day andemploy as many as 180 workers.

California Dairies’ 680 membersannually produce more than 14 billionpounds of milk that accounts for 40percent of the state’s production. Thecooperative is buying the plant to keepup with its members’ milk productiongrowth of 3 to 4 percent per year.Visalia is in Tulare County, which had$1.4 billion in milk sales in 2004, mak-ing it the No. 1 milk-producing countyin the country.

CF Industries plans stock saleCF Industries Inc., a Long Grove,

Ill.-based manufacturer and distributorof nitrogen and phosphate fertilizerproducts, plans to raise $700 million inan initial public stock offering. CFIndustries is owned by eight farmer co-ops: CHS Inc., MFA Inc., GrowmarkInc., Southern States Cooperative,Land O’Lakes, Tennessee FarmersCooperative, Intermountain FarmersAssociation and Cooperative Federéede Quebec.

The owners of CF Industries wouldreceive shares of common stock in thenew company and cash in exchange fortheir outstanding equity interests inCF Industries. CF had an operating

loss of $311.3 million in 2004. If approved by the U.S. Securities

and Exchange Commission, CFIndustries Holdings Inc. would beformed to serve as the holding compa-ny for the operations of CF IndustriesInc. Morgan Stanley & Co. Inc. andJ.P. Morgan Securities Inc. will serve asjoint lead managers in connection withthe offering. Credit Suisse FirstBoston LLC and Harris Nesbitt Corp.are serving as senior co-managers.

CHS sells Mexican foods operationsCHS Inc. recently sold its tortilla

and chip operations to GrumaCorporation. The sale consists of threeplants, located in New Brighton,Minn., Fort Worth, Texas, andPhoenix, Ariz. The plants employabout 250 employees. Gruma is a sub-sidiary of Gruma SA de C.V., ofMonterrey, Mexico, which marketsproducts under the Mission andGuerrero names.

“As we looked at the future direc-tion of our operations and our invest-ment in the value-added food sector,we concluded that it is in the bestinterest of all of our stakeholders thatwe divest of our Mexican foods opera-tions and focus on other areas of ourfood and grain processing business,”said John Johnson, CHS president andchief executive officer. “CHS remainscommitted to its vision of linking pro-ducers to consumers through its other

grain-based food processing and man-ufacturing businesses.”

Co-op conference slated in Minnesota

“Cooperative Opportunities in aGlobal Economy” is the theme for the8th annual Farmer CooperativesConference, to be held Nov. 7-8 atthe Hyatt Regency in Minneapolis,Minn. The conference has been spon-sored since 1998 by the University ofWisconsin Center for Cooperatives toprovide co-op directors, managers,government officials and academicswith information on major trends andissues impacting agricultural coopera-tives. Presenters and topics are select-ed to stimulate critical thinking andthe exchange of ideas. The conferenceincludes ample opportunities forinteraction and discussion. For moreinformation, visit:www.wisc.edu/uwcc/fc/fc.html, or call (608) 262-3981.

$10,000 land stewardshipprize offered by AFT Nominations are being acceptedthrough Nov. 1 for American Farm-land Trust’s 2006 Steward of the LandAward. The $10,000 prize is presentedannually to a farmer or rancher whobest exemplifies AFT’s mission ofstopping the loss of productivefarmland and promoting farmingpractices that lead to a healthy

and c) Income from the production

(but not the transmission or dis-tribution) of electricity, naturalgas and potable water is includ-ed.

Special rules for cooperativesCongress wrote special rules into

the new law to make sure cooperativesaren’t disadvantaged in their treat-ment compared to other types ofbusinesses:

a) When computing their QualifiedProduction Activities Income(step 2 above), cooperatives donot need to take into accounttheir deduction for qualifiedpatronage refunds and per-unitretains.

b) Agricultural and horticulturalcooperatives may pass throughsome or all of their QPAIdeduction to their patrons. Thecooperative must provide a writ-ten notice to its patrons explain-

ing the pass-through within theapplicable payment period.

This deduction is not simple, but itdoes offer a significant tax savings tocooperatives and other businesses thatmanufacture, produce, grow or extracthard products within the UnitedStates. Managers, directors and advi-sors are urged to study this new taxprovision and incorporate it in theirfuture business and tax planningefforts. ■

Legal Corner continued from page 21


environment. Nomination kits can berequested by calling (800) 886-5170,extension 3011, or can easily bedownloaded on AFT’s Web site:http://www.farmland.org/steward/nomination_instructions.pdf .

The 2005 Steward of the LandAward was recently presented toSteve Sinton, a wine grape growerand fourth-generation cattle rancherfrom Shandon, Calif. Throughout his18,000 acres of ranchland and 125acres of vineyards, Sinton uses a vari-ety of innovative practices to promotesustainability and protect the envi-ronment. His efforts have evenresulted in the reintroduction of theCalifornia condor, which nest onparts of his property. He was alsoinstrumental at the state level in thecreation of the California RangelandTrust, California’s statewide agricul-tural land trust.

“The Steward of the Land Awardshowcases the diversity of Americanagriculture and illustrates the manybenefits farmers and ranchers provideto the general public, like habitat forwildlife, a filter for clean air and waterand scenic vistas,” said Sinton.

“I’m a rancher, but I know that pastwinners of this award have also beengrain growers, dairy farmers and fruitgrowers. There are people in everyaspect of agriculture that are engagedin good stewardship practices.”

Dairy conference eyesnational marketing agency

Farmers should take advantage ofthe Capper-Volstead Act and form anationwide marketing agency-in-com-mon to manage milk shipments and toallocate milk to end users in the mostefficient manner possible, some speak-ers said during a recent dairy confer-

eries more accurately than can aprocessor buying cattle on the openmarket. Still, farmers who have spenttheir lives thinking of the processingplant “as the enemy” have had somedifficulty thinking of the plant theyown as “us.”

The co-op hopes its strategy oftransparency in its dealings with mem-bers and not “painting rosier picturesthan reality” will pay off with mem-bers. Honesty and openness are, afterall, a basic foundation of the coopera-tive movement.

The new plant has a supply agree-ment with Co-op Atlantic, whichmakes the Atlantic Tender Beef brandexclusive to co-op stores. That will notprevent it, however, from providingother house brands to other retailers,selling to the food service industry orseeking specialty or niche markets.

Expanding beef traceability There are other challenges and

opportunities facing the industry.While ATB is traceable to its point oforigin, traceability ends when it arrives

at the plant door. Baglole says the co-op is in negotiation with the Canadianfederal government to find funds toadd traceability technology to theplant, which would be a big advantagein promoting their products.

“It’s not just food safety that thiswould help,” Baglole says. “We wouldbe able to look at which type of animalsells better, which cuts sell faster andshare the information back with the pro-ducer. It would make us more respon-sive to what the consumer wants.”

This initiative will not solve all theproblems facing beef farmers. BSE andother problems could continue to createhavoc for the foreseeable future. But itdoes point to a long-term way out.

This marketing effort is not limitedto beef. The co-op also marketsAtlantic Tender Pork and Chicken.There is a range of Market Townhouse label products that are locallysourced. These products are all part ofthe co-op’s agri-food strategy that sup-ports Co-op Atlantic’s goals of: integrating agriculture production intoits retail merchandising strategies;

generating and retaining wealth in thecommunities of Atlantic Canada;differentiating the co-op from thecompetition.

The programs are variouslydescribed as “farm-to-fork,” “gate-to-plate,” “stable-to-table” or “from thefarm family to your family.” The pro-grams are intended to offer both farm-ers and consumers — everyone inAtlantic Canada — a local alternativefor goods and services needed if theyare to live in viable, healthy communi-ties. The aim is to seek win-win solu-tions to challenges, such as AtlanticTender Beef, where both consumersand farmers support each other.

Given the push towards marketglobalization, some assume that it isinevitable that huge multinationalcorporations will control every facetof the economy. But when there is acommitment to find innovative meth-ods for solving the challenges facedby locally owned enterprises, every-one benefits: local producers, con-sumers, communities and the entireco-op system. ■

Atlantic tender beef continued from page 11

Cattle rancher and grape grower SteveSinton of Shandon, Calif., won the 2005Steward of the Land award. Photo courtesyAmerican Farmland Trust


ence in Syracuse, N.Y. “Growing theNortheast Dairy Industry” was thetheme of the conference, held June 1.

New opportunities in the cheeseand fluid markets were discussed, andyoung producers saw promising futuresin dairy farming, especially in WesternNew York.

However, dairy farming challengeswere also discussed, including: envi-ronment (air, water, odors, flies,pathogens, etc.), animal welfare con-cerns, food safety, milk quality, effi-ciency and production costs, decreasedgovernment involvement, internationalcompetition, and financing.

Diamond Walnut to convert After functioning as a grower-

owned co-op for nearly a century,Diamond Walnut members have votedto convert the business into aninvestor-owned corporation. About 80percent of the co-op’s 1,735-membersvoted for the conversion of the compa-ny, which will become Diamond FoodsInc.

“We are gratified by the high levelof grower support,” said MichaelMendes, president and chief executiveof Diamond.

The initial public offering may sell5.3 million shares at $15 each, possibly

raising $70.9 million. Money will beused to create new products and mar-kets to address increasing walnut pro-duction and more competition.

Production for Diamond’s membershas grown about 65 percent over thepast seven years, according toDiamond’s prospectus, due to factorssuch as higher yields per acre and bet-ter varieties.

The company, citing a more com-petitive environment, also wants towork better with large customers suchas McDonald’s, which uses Diamond’swalnuts in its fruit and walnut salad,The Fresno Bee reported. ■

Many failed businesses can recallthe equipment sales person whothought it would be great to build aprocessing plant on the edge of town.They had the feasibility study todemonstrate that it could work, butwas that study tilted by someone whohad a vested interest to see a plantbuilt?

There are also project championswho may see themselves fitting nicelyin the position of general manager of anew co-op, which can clearly consti-tute a conflict of interest. This is simi-lar to the issue we see arising in someco-op sales or conversions when man-agement has a vested, financial interestin convincing the board and membersto sell or convert their co-op.

The potential for such conflicts ofinterest should be revealed by anyoutside advisor involved in a project.Some behavior, especially amongattorneys, bankers and others, isaddressed by legal or regulatoryguidelines. However, behavior of anyco-op development advisor mustadhere to the highest ethical stan-dards.

Timing issues• When is an advisor’s assistance

needed? Timing of assistance to

developing cooperatives is impor-tant. The appropriate advice at theappropriate time is the goal.Understanding the developmentprocess, recognizing the skills thatexist and the needs for assistance andarranging a team of advisors shouldbe planned at the beginning of thedevelopment process.

• When does an advisor exit thescene? The answer, of course,depends on the assistance being pro-vided. Sometimes the assistance isvery short term. Issue-specific helpcan often be completed in a relative-ly short period of time. Generaldevelopment assistance may continuethroughout the project, even intooperation.

• When does the co-op develop-ment effort end? USDA RuralDevelopment policy is that it makeslittle sense to help form a co-op, andthen abandon it. Business develop-ment issues that arise after a co-oplaunch are, to some extent, pre-dictable. If the expertise exists toassist the co-op further with theseissues, it should be offered. Forexample: management turnoveroften occurs in the first 12-18

months of business operation; theboard will face the need for a finan-cial audit within a year of start-up;board turnover will likely make aboard training program advisablesoon after the first annual meeting.All of these challenges can be sur-mounted with the help of an advisorwho has experienced them in otherbusiness start-ups.

SummaryEffective technical assistance in the

development of a new cooperativerequires:1. Understanding the cooperative

form of business;2. Understanding development

processes and procedures;3. Understanding business operations;4. Knowledge of the industry in which

the cooperative will operate; 5. Understanding one’s capabilities

and limitations.

An outside agent must have theknowledge, skills, experience and con-fidence to provide valuable guidance.Arrogance to think that he or sheknows everything needed to completethe co-op business formation will bethe downfall of an agent.■

The inside scoop on outside help continued from page 28


By Peter J.Thomas, Administrator

Business and Cooperative Programs


ith record-high energyprices this summer, it’sno wonder that interestin USDA’s RenewableEnergy and Energy

Efficiency grants and loan program issoaring. Under this program, USDARural Development has been allocated$22.8 million to help farmers, ranchersand small rural businesses promoteinnovative renewable energy develop-ment and energy efficiency projects.

Enhancing our energy diversity andefficiency is a key goal of the BushAdministration, and will provide anopportunity to strengthen both ournational security and the rural econo-my. USDA Rural Development is play-ing a major role in helping to reachthis goal by funding a wide range oftechnologies allowed under this pro-gram. They include: bioenergy andbiomass (including anaerobicdigesters), geothermal, hydrogen, solarand wind energy, as well as energy effi-ciency improvements.

Agriculture Secretary Mike Johannscalls renewable energy “an excitinggrowth frontier for American agricul-ture” as the nation strives forward inimplementing an innovative energypolicy, and I heartily agree.

The program, now in its third year,was created by Section 9006 of the2002 Farm Bill. About $11.5 million,half the funds available, will soon beawarded as competitive grants. By the

time the grant applicationdeadline ended earlier thissummer, we had received over 360applications requesting more than $60million – about double the number ofrequests received the previous year.

These grant requests are being care-fully evaluated by teams of expertsfrom the Department of Energy andour own Rural Development StateOffices who will eventually select themost promising projects.

Renewable energy grant applica-tions may be made for a minimum of$2,500 and a maximum of $500,000.Energy efficiency grant applicationsmay range from $2,500 to $250,000.The grant request may not exceed 25percent of the eligible project cost.

If your grant request isn’t fundedthis year, or if you are now contem-plating a new project, keep in mindthat applications for 2006 funds will beaccepted beginning October 1.

The process is highly competitive,so the more time you spend developinga solid project plan that shows a stronglikelihood of success and which willbenefit the rural economy in your area,the better your chances of funding.

The second $11.5 million availablein FY 2005 for this program has beenreserved by USDA to support guaran-teed loans until August 31, 2005.These funds can generate about $200million in loan guarantees. As withUSDA Rural Development’s otherguaranteed loan programs, projectdevelopers will work with a locallender, who in turn can apply toUSDA Rural Development for a loan

guarantee. Any of the second $11.5million not obligated to support loanguarantees will be awarded as grants.

Loans may be for up to 50 per-cent of the project’s cost, with a maxi-mum of $10 million per project.Deadline for the agency to obligatefunds for a loan guarantee is Aug. 31,2005. Rural Development can acceptFY 2006 applications beginning Oct. 1,2005 for both loan guarantees andgrants. However, FY 2006 budgets andfunding are not yet available.

For more information on therenewable energy and energy efficien-cy program, please visit our Web site:http://www.rurdev.usda.gov/rbs/farmbill/index.html. Or, you can be con-nected to your USDA RuralDevelopment state office by calling(202) 720-4323 or via links from ourInternet home page: www.rurdev.gov.

To date, the Bush administrationhas invested nearly $45 million in 32states through this program.

It is very encouraging to see howinnovative our nation’s farmers, ranch-ers and small business owners are inadapting new technology in so manyways to meet the nation’s energyneeds. The old saying, “where there’sa will, there’s a way” certainly seems tohold true on the new frontier of agri-energy. Working with this program forthe past two years has strengthened mybelief that it’s not a matter of if, but amatter of when and how our nation willbecome energy self-sufficient onceagain. ■

Renewable energy:the new f ront ie r

I N S I D E R U R A L D E V E L O P M E N T

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Ethanol production is booming in the United States.


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