Rur Coop Sept05 V4 copy - USDA Rural Development2 September/October 2005 / Rural Cooperatives A fishing boat tossed a quarter mile inland and deposited on the roof of a collapsed home

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lCOOPERATIVESCOOPERATIVESUSDA / Rural Development September/October 2005

Taking StockKeys to success for rural grocery co-ops page 19

Taking StockKeys to success for rural grocery co-ops page 19

USDA / Rural Development September/October 2005

2 September/October 2005 / Rural Cooperatives

A fishing boat tossed aquarter mile inland anddeposited on the roof of acollapsed home. Mileafter mile, block upon block, of housesand commercial buildings transformedinto splinters and rubble. Beautifulcoastal cities like Biloxi and rural townslooking like they’ve been the targets ofwartime saturation bombing. The greatcity of New Orleans turned into a fish-bowl. Scenes so terrible that they seemalmost surreal.

At press deadline for this publica-tion (Sept. 8), the nation is only begin-ning to gauge the terrible toll ofHurricane Katrina. The death toll isalready several hundred and could gomuch higher as the flood waters dropand rescue workers begin the grim taskof sifting through the wreckage. Andwith property damage expected toexceed $100 billion, this will easily godown as the worst natural disaster inthe nation’s history.

The storm created a tidal wave ofhomeless evacuees unlike anything ournation has ever before experienced –hundreds of thousands of people need-ing shelter, food and the other necessi-ties of life as they await determinationof when, and if, they will ever be ableto return to their homes.

USDA Rural Development is playinga major role in finding living quartersfor storm victims. Some 30,000 unoccu-pied apartments in USDA-financedmulti-family housing developments (andnearly 200 single-family homes) acrossthe nation were identified within days ofthe storm, and are being made availableto shelter the victims.

Rural Development has waived secu-rity deposits and offered rent abate-

ments for up to 90 days to help victimsand has fronted security deposits forutilities. In the most heavily storm-impacted areas, USDA Rural Develop-ment instituted a 180-day halt on mort-gage payments for more than 14,000housing customers.

Rural Development is also takingthe lead in coordinating availablehousing from other federal agencies,including Housing and Urban Dev-elopment (HUD) and the Veteran’sAdministration.

In disaster relief centers across theimpacted area, volunteers from USDARural Development field offices arestaffing the desks to handle assistancerequests. Likewise, our rural utilitiesprograms staff is going all out to pro-vide supplemental financing and tech-nical help for repairs of electric,telecommunications and water systems.

Other USDA agencies are likewiseinvolved in more ways than can beaddressed in this column. To cite justone, the USDA Forest Service has 11management/logistics teams and 37labor crews of 20 people each under-taking 30 assignments at a cost of $28million in storm-hit communitiesalong the Gulf Coast.

America’s cooperatives are alsosending aid in many forms. As theyhave in so many other hurricanes inrecent years, rural electric co-ops aresending repair crews to help get thelights back on. Five electric crewsfrom Walton Electric MembershipCorporation (EMC) in Georgia weredispatched to southwest Mississippi

just a day after the hurricane hit. Afew days later, it sent more crews toan even harder-hit co-op, the PearlRiver Valley Electric PowerAssociation in Columbia, Miss. Whennot working, crew members weresleeping in a church there — the onlyshelter available.

The Cooperative DevelopmentFoundation quickly launched theKatrina Cooperative Recovery Fund,which will direct contributions specifi-cally to individuals and cooperativebusinesses in the rural areas of the threehurricane-ravaged states. See Newsline(page 35) for more on this effort.

One good bit of news for farmer co-ops at press deadline is that Port ofNew Orleans authorities believe ship-ping operations may be restored to asemblance of normality much soonerthan had initially been anticipated.One can almost hear an audible sigh ofrelief throughout the nation’s heartlandfrom farmers and co-ops who dependon the Mississippi River network andthe Port of New Orleans for shippingtheir crops.

This recovery effort will last foryears to come. Whatever it takes, thereshould be no doubt that USDA RuralDevelopment and the nation’s cooper-atives will do their part to help mend aland, and lives, broken by nature’s fury.

— Dan Campbell, Editor

C O M M E N T A R Y

Shelter from the Storm

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Rural Cooperatives / September/October 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.

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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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COOPERATIVESCOOPERATIVESSeptember/October 2005 Volume 72 Number 5

p. 4

p. 8

p. 19

p. 27

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

4 Running on Empty?‘Great ethanol debate’ waged at NCGA forumBy Stephen Thompson

8 Farmer-owned ethanol and the role of information technologyBy Anthony Crooks & John Dunn

17 Diversified rural economy goal of Under Secretary Dorr

19 Taking StockRural food co-op case studies reveal success factorsBy Greg Lawless & Anne Reynolds

25 Antitrust review reveals strong co-op support for Capper-VolsteadBy Alan Borst

27 When the sky fallsAdvance planning key to crisis communicationsBy Amber DuMont & Donna Abernathy

D E P A R T M E N T S2 COMMENTARY14 LEGAL CORNER15 VALUE-ADDED CORNER29 NEWSLINE37 NEW CO-OP PUBLICATIONS39 INSIDE RURAL DEVELOPMENT

O n t h e C o v e r :

Viroqua Food Co-op General Manager Jan Rasikas, right, in the oldstore with an employee and her daughter. The co-op recently moved toa much larger store. Story on page 19. Photo by Greg Lawless, courtesyUniversity of Wisconsin


By Stephen ThompsonAssistant Editor

oes makingethanol con-sume moreenergy than itproduces? Will

ethanol be a key componentin helping the nation reduceits voracious appetite for for-eign oil, or just be a bit playeron the energy front?

That’s been the subject ofan intense debate for years,and two panels of expertssquared off recently to try tosettle the question. Theexperts presented starkly dif-fering views during “EthanolEnergy Balance,” an openforum held Aug. 23 at theNational Press Club inWashington, D.C., sponsoredby the National CornGrowers Association(NCGA).

Dr. David Pimentel, a pro-fessor emeritus of entomology atCornell University, and Dr. Tad W.Patzek, an associate professor of chem-ical engineering at the University ofCalifornia-Berkeley, argued thatethanol production from corn is a netenergy loser and contributes to globalwarming. They also say it could neverprovide more than a tiny portion ofthe nation’s fuel needs.

Dr. Bruce Dale of Michigan StateUniversity and Dr. John Sheehan ofthe National Renewable Energy Labcountered that Pimentel and Patzekare running on empty, and that their

conclusions are based on faulty data.Patzek and Pimentel’s conclusions

have received some notoriety in themedia, leading some ethanol advocatesto accuse them of “duping” the public.The resulting controversy encouragedthe NCGA to hold the forum and,later the same day, a follow-up semi-nar: “Renewable Energy: DynamicPossibilities,” during which theemphasis was more on the potential ofethanol and biodiesel.

Energy consumed vs. yield The disagreement centers on the

amount of total energy inputs required

to produce ethanol. These inputsinclude: the fuel to power machineryneeded to grow and harvest the feed-stock, such as corn; the petroleum usedin manufacturing the required fertiliz-ers, pesticides and herbicides for thefeedstock; the energy expended totransport the feedstock to the proces-sor, and the energy used by the ethanolprocessing plant.

Pimentel has argued for many yearsthat the total energy inputs, whenadded up, make ethanol a “net energyloser,” and that relying on ethanol as afuel source would cause significantenvironmental impacts.

Running on Empty? ‘Great ethanol debate’ waged at NCGA forum

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Illustration by Stephen Thompson

In a paper he published in 1998,Energy and Dollar Costs of EthanolProduction with Corn, he says:

“Assuming a net production of 50gallons of fuel per acre of corn, andassuming that all cars in the UnitedStates were fueled with ethanol, atotal of approximately 2 billion acresof cropland would be required toprovide the corn feedstock. Thisamount of acreage is more than fivetimes all the cropland that is actuallyand potentially available for all cropsin the future in the United States.”

Pimentel spoke to a largely pro-ethanol crowd of corn producers andtheir representatives. Ethanol, he said,is not a true renewable energy source,because it requires more energy in itsproduction than is extracted from thefinished product. According to his cal-culations, ethanol takes about 1.15BTUs (British Thermal Units) ofinput for every 1 BTU of output.

Other reasons ethanol production isundesirable, said Pimentel, include theenvironmental impact of corn produc-tion. “Corn production causes moresoil erosion than any other crop.” Headded that growing corn also requiresmore insecticide, herbicide, and nitro-gen fertilizer than most other crops,

with the result that corn production inthe United States causes $45 billion inenvironmental and other damage eachyear. He said it requires 1,725 gallonsof water to produce 1 gallon ofethanol.

Pimentel also claimed that, withmore than 3 billion malnourished peo-ple in the world, burning corn forenergy poses serious ethical questions.

Pimentel advocated using other fos-sil fuels to replace petroleum. “We canuse coal to make diesel and gasoline,”he said, at an energy cost of 2 BTUsto produce 1 BTU of fuel.

Patzek told the audience that simplykeeping U.S. car tires properly inflatedwould save more petroleum thanethanol production. “Each year theU.S. uses more energy than our vege-tation can sequester as biomass,”Patzek argued. He said that in 2003,the United States used 105 times moreenergy than was required to feed thepopulation, and biomass as a source ofenergy in the United States is heavilysubsidized by petroleum.

According to Patzek, the amount ofethanol energy that can be extractedfrom 1 square meter of land is “tiny”— about one-tenth of 1 watt — com-pared with energy available from othersources. “A wind turbine generates 1

watt per square meter, which can beconverted to mechanical work almostperfectly,” he said. “A photovoltaic cellgenerates between 10 and 20 watts persquare meter. Thus, wind turbines andphotovoltaic cells are 20 to 100 timesmore efficient in delivering mechanicalwork than corn ethanol.”

Patzek showed a graph comparingprojected petroleum consumption andethanol production in 2012. “Anhyd-rous ethanol replaces 1.5 percent ofpetroleum in 2004,” he said, “and willreplace another 1 percent in 2012” —far too little to make an impact onU.S. petroleum consumption.

Ethanol advocates’ responseJohn Sheehan countered that

ethanol’s return on fossil energyinvestment is positive. Peer-reviewedDepartment of Energy and USDAresearch, he said, shows that producing1 unit of ethanol energy from cornrequires only 0.75 of an equivalent unitof petroleum energy, for a net gain of25 percent. Using switchgrass forethanol production results in evenhigher energy gains: up to 72 percent.

“Pimentel’s methodology assumesinputs that are too high,” Sheehan said.

“No one is saying that biofuels willreplace petroleum,” said Sheehan, but

Critics say ethanol diverts too much cornfrom human consumption; but proponentsnote that the nation is running up recordcorn surpluses . USDA/ARS Photo



he added that the value of biofuels inreducing the U.S. dependence on for-eign oil is “critical.”

Bruce Dale not only disputed thePimentel data, he also attacked thevery premise of Pimentel’s argument:that the net energy balance of a fuel isa valid yardstick of its usefulness. “Icome to bury ‘net energy,’ not topraise it,” he said, referring to thePimental’s cost/benefit formula.

Dale called net energy a “conve-nient fiction, an academic toy” that“doesn’t relate to the real world.” Thereason, he said, is that it doesn’taddress the quality of various forms ofenergy — treating solar, natural gas,coal, petroleum, etc., as equal. “But allenergy is not created equal,” hedeclared, arguing that the quality ofenergy — that is, its readiness to beconverted into the required work orservice — is a vital factor in determin-ing its value.

“We do not need energy per se,”said Dale. “We need the services ener-gy provides,” including electrically-powered equipment and appliances,heat and transportation. The U.S. haslots of coal and natural gas,” he said,

“But they don’t work in the gas tank.They have the wrong energy quality.”Solutions, he said, “will require mak-ing comparisons and choices betweenreal alternatives.”

Dale gave an example: Using thecriterion of Pimentel and Patzek, hesaid, the “net energy” of electricityproduced from coal is minus 235 per-cent, because it takes three calories ofcoal to produce one calorie of electrici-ty. But, “Electricity is higher qualityenergy than coal.” Refining crude oilinto jet fuel, diesel or gasoline resultsin a net energy balance of minus 39percent, as opposed to minus 29 per-cent for making ethanol from corn,according to Pimentel’s figures.

If ‘net energy’ was a good yardstick,“we should shut down all coal-electric-ity generation and all oil refineries,”Dale said.

During the question-and-answerperiod, Pimentel was asked aboutethanol production’s relation to animalfeed. He replied that using corn forethanol had resulted in higher beefprices. Dale challenged that assertion,asking Pimentel how he could recon-cile his statement with the fact that the

United States currently has the higheststocks of corn in history — more than2 billion bushels of surplus corn lastyear.

Other questions centered on thedata used by the anti-ethanol faction inmaking its calculations. Both Pimenteland Patzek were accused of using out-dated data from the 1980s, butPimentel asserted that, except for fig-ures regarding the energy costs of theconcrete used in building ethanolplants, his figures were up-to-date.

Biofuels touted as efficientThe “Dynamic Possibilities” forum

was devoted to supporters of ethanoland other biofuels, many of whomcontinued to criticize Pimentel andPatzek’s findings.

Roger Conway, a USDA researcher,called the concept of net energy a falsestandard, and claimed that Pimenteland Patzek “picked and chose” data toget a desired result, treating as consis-tent information from surveys gatheredwith differing methods and criteria.

David Morris, of the Institute forLocal Self Reliance, said that biofuelsare not a silver bullet for the energyindustry, but could replace 70 percentof the petroleum used for fuel andother purposes. He pointed out thatthe co-products of ethanol andbiodiesel were “significantly valuable,”and said that Pimentel and Patzek didnot include the true value of suchproducts as distillers grains and soymeal, both excellent animal feeds, intheir calculations.

“We’re not dying from a shortage ofstarch,” Morris said, referring to theingredient of corn that is used in thefermentation of ethanol, leavingbehind high-protein distillers grains.Even with biofuels, Morris said, theUnited States must reduce its overallenergy consumption.

Morris has just published a newpaper: Carbohydrate Economy, Biofuelsand the Net Energy Debate (on-line at:www.newrules.org) which looks at thecomparative data that underlies theethanol debate. In it, he saysPimentel’s “aversion to including an

Net energy ratios of ethanol and biodiesel, as determined by different researchers. A ratio of1 means that the same amount of energy is used to produce the fuel as is extracted from thefinal product. A ratio higher than 1 means a surplus of energy. In both cases, DavidPimentel’s findings are substantially lower than those of other researchers. Data: David Morris/Institute for Local Self Reliance; Graphic by Stephen Thompson.


energy credit for [ethanol] coproductsis puzzling. If we use the energy usedto grow and process a crop on theinput side of the equation, we shouldinclude all the energy value of all theend-products on the output side.”

Morris also said biofuels representa tremendous opportunity for farmersto add value to their crops, sayingthere could be 1 million farmers own-ing shares in a biorefinery by 2050.

Michael Wang, of the ArgonneNational Laboratory’s Center forTransportation Research, said thatmany studies contradicted the claimsof Pimentel and Patzek. He said thatArgonne’s study of the same subjectconcluded that producing cornethanol requires 26 percent less ener-gy than it contains, and that cellulosicethanol, made from switchgrass andother inexpensive plant sources,requires a whopping 90 percent less,partly because its byproducts can beburned for energy to power the pro-cessing plant.

“A review of Pimentel/Patzek,” saidWang, “reveals that they made pes-

simistic assumptions, and double-counted certain energy costs withoutdetailed elaboration.” Wang accusedPimentel and Patzek of consistentlyoverestimating energy requirementsfor both farming and processing ofcorn for ethanol, including calculatingethanol plant energy use at 30 percentabove actual figures.

Other speakers attacked Pimentelfor using extraneous data in their cal-

culations, such as the food eaten byfarmers and workers engaged inethanol production and the energy costof building farm machinery, andclaimed that their results were notpeer-reviewed before publication.

For more detailed reading: A copy of Dr. Patzek’s presentation

to the forum is available on theInternet at:http://www.berkeley.edu/news/media/releases/2005/08/NPC_briefing_Patzek.pdf. Other presentations can be foundat the NCGA Web site at:http://www.ncga.com/ethanol/debunk-ing/ForumPresentation.htm.

David Pimentel’s 1998 report,Energy and Dollar Costs of EthanolProduction With Corn is available at:http://hubbert.mines.edu/news/Pimentel_98-2.pdf. Pimentel and Patzek’sarticle, Ethanol Production Using Corn,Switchgrass and Wood; BiodieselProduction Using Soybean and Sunflower,was published in in the March, 2005edition of Natural Resources Researchmagazine. ■

This field of soybeans could be harvested forbiodiesel, which produces a higher yield ofenergy than does ethanol. USDA/ARS Photo

“There could be 1 million farmersowning shares in a biorefinery by2050.”

— David Morris


Anthony Crooks and John Dunn,Agricultural EconomistsUSDA Rural Development

Editor’s note: This is the first of a two-partarticle looking at the impact evolvinginformation technology is having on thenation’s rapidly expanding ethanol indus-try. In part two, we will take a closer lookat the various factors that have convergedto spark the industry’s growth, as well asthe impact of information technology onproduction and commercialization ofethanol products.

dvanced informationtechnology (IT) and anincreasingly transparentfinancial sector havebecome key driving busi-

ness forces in recent years, havingmajor impacts on operations, strategies,structures, ownership and performance.These forces cut across many industriesto force changes which, in turn, havehad significant economic and socialimpacts in rural communities.

Recent writings underscore thedepth and extent of the impact of IT onbusiness and industry. Consider just afew:• Are the impacts of IT adoption any

more profound or far reaching thanthat of other technologies? In hisbook, Does IT Matter? InformationTechnology and the Corrosion of Com-petitive Advantage, Nicholas Carrseems to think not. Carr asserts thatIT, as with earlier technologies —railroads, electric power and tele-phones — is steadily evolving from aprofit-boosting, proprietary resourceinto a simple utility/commodity andanother cost of doing business. Carrcontends that the strategic impor-tance of IT has actually eroded as itscore functions have become widelyavailable and affordable. Carr’s viewswere roundly contested.

• In IT Doesn’t Matter, Business ProcessesDo; A Critical Analysis of NicholasCarr’s IT article, published in theHarvard Business Review, HowardSmith and Peter Fingar suggest that

Carr was only half right. They sayCarr’s article is about technology as abusiness (the IT industry), not thebusiness use of technology for com-petitive advantage. In other words,Carr has intermixed informationtechnology as a business with the actof using information technology toconduct business. Carr’s article exam-ines the first 50 years of IT and busi-ness automation, when the focus wason data function, storage, processing,and transport. In the next 50 years,the core functions of IT are businessprocesses and their functions of stor-age, processing, and transport.

• In The World is Flat: a Brief History ofthe 21st Century, Thomas Friedmantakes off at a gallop, offering exampleafter example of just how correctSmith and Fingar were. Friedmanasserts that it is precisely because ofIT and business process-processingthat the era of mainframe computing— with its command-and-controlorientation and companiesand/departments organized vertically

Farmer-owned ethanol and the ro le o f in fo rmat ion technology

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— has given way to the era of PC-Internet-fiber optics computing andnew business practices which are lessabout command and control, andmore about connecting and collabo-rating horizontally.

• In The Only Sustainable Edge: WhyBusiness Strategy Depends on ProductiveFriction and DynamicSpecialization, John Hagel andJohn Seely Brown assert thatbusinesses thrive when they takefull advantage of IT opportunitiesto negotiate the “productive fric-tion” of their economic environ-ment and begin to coordinate theactivities of enterprises, compa-nies and specialties across dimen-sions of time, space and form tobuild and accelerate their capabil-ities. Friedman and Hagel/Brownemphasize the critical importanceof digitizing and decomposingwork so that it can be movedaround in time and space — to beoutsourced (or off-shored) forcompetitive advantage.

IT leveling the playing fieldfor smaller-size businesses

It is precisely because of evolv-ing IT and business process-pro-cessing that mid-sized firms fromall over the world compete now ona more level playing field.Suddenly, mid-sized and even smallbusinesses have access to the sameadvantages that were once heldexclusively by the larger, vertically

integrated firms. As the fuel ethanol industry ramps outof its developmental stage into a moreestablished role within the U.S. fuelsindustry, a substantial portion of invest-ments are being made in single plantswith annual capacities that range from50-100 million gallons. Not all ethanol

ventures have succeeded. However, asubstantial flow of capital investmentinto ethanol plants continues, unabated.

This emerging industry structure isin sharp contrast with what is typicallyobserved in sectors that process bulkagricultural commodities. Typically, acommodity sector is composed of a few,large multi-plant firms which achieverelative prominence after attaining sig-nificant economies of scale, size andscope. These plants then work to cap-ture additional value through theirtrading and financial operations. Thesetraditional industries are also character-ized by a high degree of vertical inte-gration and/or coordination.

The ability of traditional firms toachieve competitive advantage is predi-cated, in part, on their capacity todevelop efficient internal informationsystems to provide market coordina-tion and links between their operationsand global commodity and financialmarkets. However, the rapid andwidespread change in informationtechnologies has arguably eroded thepower provided to these global pro-cessing concerns.

ObjectivesOur hypothesis is that the knowl-

edge-based economy may be funda-mentally changing cost structures andthe competitive landscape faced byfirms in rural America. This became thejumping-off point for this USDA-spon-sored study on the future ownershipand control of the ethanol industry.

Several factors have contributed to loweringethanol plant operating costs, including greatercorn-to-ethanol conversion rates, which are nowcommonly 2.8 bushels per gallon. Photo by DavidLundquist. Background photo USDA/ARS


The objective of out study was to dis-cover answers to four basic questions:

(1) Does the present ethanol indus-try represent a stable structureor a transitional step toward aninevitable concentration ofownership into the hands of afew large processing firms?

(2) Have contemporary informationtechnologies fundamentallychanged the information flows,scale of operations, access tomarkets, conditions of verticaland horizontal coordination,sources of finance and the com-petitive landscape for medium-sized, independent processingfirms?

(3) To what degree have cost sav-ings associated with betteraccess to information andfinancing offset the cost savingstraditionally associated withhorizontal and vertical integra-tion in processing industries?

(4) What steps do medium-sizedethanol production entities needto take to continue to survive in

this new information-basedmarket environment?

The fuel ethanol industry may verywell be in transition toward aninevitable concentration of ownershipinto the hands of a few large process-ing firms. At present, however, thereseems to be a structural equilibriumamong the mid-sized and largestfirms. This equilibrium is supportedby an industry-wide adoption of con-temporary information technologiesthat serves to enhance medium-sizedfirms’ access to markets and inputs,while simultaneously diminishing therelative importance of vertical coordi-nation.

The rise of the ethanolplant “franchise”

In the early 1980s, a number ofpeople were exploring the idea ofsmall, portable on-farm stills and 1-million-gallon-per-year plants. Theydiscovered that besides being expensiveto build, these plants have to be staffed24 hours a day and that the job ismuch more sophisticated than throw-

ing some corn in a vat, and then open-ing up a spigot the next day to fill up atractor with ethanol.

Broin, Fagen/ICM and other engi-neering firms designed “cookie-cutter”ethanol plants with standard designsthat can be easily built in most loca-tions. They also provide the financing,conduct feasibility studies and will“hand-hold” producer-investorsthrough the entire process. They canoffer an entire package — from feasi-bility to turnkey and beyond.

This prospect didn't exist in theearly ‘90s, when there were manyquestions about the right way to builda plant. Builders of a 30-million-gal-lon-per-year plant had to follow amore traditional construction route.This involved hiring a process firm, anengineering firm for the design and aconstruction management firm, all orsome of which may have had no priorexperience building an ethanol plant.Uncertainty added significantly tostart-up costs and, subsequently, toeach step in the process.

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Ethanol plants typically forward-contract the sale oftheir fuel twice each year. There is also a spot market,but no real-time pricing exists. Daily prices fromBloomberg, OPIS and Platt are published, but these arereported too late to be of use to traders. Mandatoryreporting would be useful to plant managers andboards of directors. Having accurately reported priceswould provide a basis of comparison for boards to usein evaluating how good a job their marketing firm isdoing. Traders and ethanol plants get price quotes, butno quantity information is available.

Plants want to lock in their corn price and sell theirethanol on a six-month contract in an effort to set a“crush margin.” Longer periods are unavailablebecause their buyers (refiners and blenders) won’tcommit beyond six months. This is an interesting devel-opment, given that energy traders are accustomed tolocking prices for up to 10 years in advance.

The marketing of dried distillers grains (DDG) — amajor co-product created in ethanol production — isalso done primarily by a few firms with a few buyers.The traders on both sides are well informed, but theprice reporting is of limited use because the producttraditionally is highly variable in quality and there areno specified trading standards. DDG quality variesbecause of corn quality, the heating/drying processand an inconsistent blending of DDG with solubles.Each of these factors results in a highly variable analy-sis of DDG. The market discounts the price of DDG forthis variability.

Universities provide excellent information on thefeeding of DDG to beef cattle, swine and poultry. Someresearch indicates that DDG has a nutritional valueequivalent of 120 to 130 percent of corn, but it sells at amuch lower price.

However, while the potential to feed DDG is large,the feed industry will not incorporate any ingredientinto its rations until there is ready supply in the amountneeded to serve their markets. A case in point is ConA-gra considering the use of DDG products in its poultry

division. It tested numerous products and was report-edly pleased with the nutritional attributes and cost ofDDG and wanted to incorporate it into their rations.Eventually, however, reliability was the restricting fac-tor. The whole exercise stopped dead when ConAgraasked the simple question, “Can you provide us 3 mil-lion tons of it?” Such a supply was not then available.

Distributed Control Systems (DCS) benchmarkingenables plants to standardize their distillers grain prod-ucts to the quality and consistency required by theircustomers. DCS also gives opportunity for consolidat-ed marketing efforts among partnering plants to have apresence in regional and (soon) national marketsbecause they now have a consistently reliable product,available in sufficient volume and offered at an attrac-tive price relative to corn.

Corn procurement is not as concentrated as cornmarketing. Many plants have procurement allianceswith their ethanol marketing partners. These are sup-ply agreements and risk-management contracts thatwork in concert with the marketing contract to pro-vide a reasonable assurance to the plant of a work-ing ‘grind margin.’ However, corn trading/procure-ment is more fragmented because it is not necessaryfor a plant to align itself with a major grain-tradingcompany.

One reason for this is that the farmer-owned plantshave delivery agreements with their producer mem-bers to source a significant portion of the requiredfeedstock locally. A more important reason is thatthere is a trading history in corn and market trans-parency because of the Chicago Board of Trade andthe futures markets. There’s a local corn “basis,” and ahistorically well known set of transportation differen-tials. So, it’s not necessary to align one’s self with amajor company to procure feedstock efficiently. How-ever, lenders offer incentives to new plants to contractfor risk management services as a way of mitigatingtheir own risk in the project. ■

By Anthony Crooks & John Dunn

Ethanol marketing/contracting


However, enough plants have beenbuilt to develop a large body of knowl-edge and experience which has reducedthe degree of uncertainty about suchprojects. Time and expense have beenreduced for everything — from thefirst planning meeting to pouring thefirst gallon of ethanol.

The standardized designs and busi-ness models were pioneered mainly byBroin, Fagen/ICM and a few othercompanies. These firms began with therecognition that producer groups weredeveloping an investment interest inthese plants. They also understood theoperating point at which these plantscould be profitable — at that time, itwas around 40 million gallons per year.

Compared with 10 or 15 years ago,standard design technology has cut inhalf the costs of construction and thenon-energy portion of operations. Andwhile it’s unfortunate that higher natur-al gas costs have wiped out much of thatsavings, today’s plants are being builtfor half the money and operate twice asefficiently as those of the 1990s.

Several factors have contributed sig-nificantly to lowering operating costs,including greater corn-to-ethanol con-version rates, which are now commonly2.85 bushels per gallon, up to threegallons (on a denatured basis) given theright variety of corn. Reduced cost andincreased efficiency of enzymes meanthat enzymes cost only half of whatthey did 10 years ago.

Distributed control systems Prior to the mid-1980s, process

automation was comprised of analogloop controls and complex pneumaticcontrols with individual, large circuitboards dedicated to each control loop.These systems were normally locatedin control rooms, so the sensors andcontroller outputs had to be physicallyconnected to the control room.

This resulted in large cable runs fullof wires and tubing. Because the sys-tems were bulky and required directinterconnections with the process,there were often several satellite con-

trol rooms for each part (or subpart) ofthe process. These systems requiredsophisticated maintenance by skilledinstrument technicians, and data-log-ging was done on strip chart recorders.Despite the awkward implementation,these systems replaced hardwired relaysand manual controls for critical sys-tems, allowing plants to reduce laborand improve consistency of operation.

But an even more significant con-

tributor to plant efficiency has beenthe development of information tech-nology systems, the so-calledDistributed Control Systems (DCS),and the electronic automation that'sevolved in the plant. DCS were intro-duced in the late 1980s, enabling cen-tralized process monitoring and con-trol. DCS systems placed integratedcircuit board controllers close to theprocesses that they controlled. Inputsfrom field instruments and outputs tovalves and pumps were converted to 4-20 milliamp signals to minimize signalloss and noise.

They generally run short distancesto cabinets in the process area whichcontained a manageable number ofcontrol loops. Each DCS cabinet isconnected to a main control computer.Process instruments, output to pumpsand valves, and controller settings aredriven from a computer console (dash-board) located in a central controlroom. This design also enables moni-toring and control from multiple (andredundant) locations, such as local

control rooms, engineering offices oreven remote locations.

Expanding system capabilitiesDuring the 1990s, these systems

grew in capabilities in step with thegeometric growth of information tech-nology applications and abilities. Thisevolution reduced labor requirementsby more than 50 percent during thepast 15 years. As computer control,process monitoring and laboratorycapabilities further improved, sophisti-cated data warehousing and analysissystems were adopted to convert theever-increasing volume of data intouseful information. These systems cannow monitor process conditions andcontrol settings, as well as laboratorymeasurements when integrated with aLIMS (Laboratory InformationManagement System).

Whereas early systems could onlyretrieve historical information, today’ssystems perform complex mathemati-cal manipulations, display graphicalresults and project future outcomes allin ‘real-time.’ Data manipulation andextraction capabilities enable muchnarrower process tolerances to furtherreduce costs and simultaneouslyincrease yields and productivity.

The advantages of DCS systems,data warehousing and analysis include:A reduction in manpower by allowingone operator to monitor and controlseveral processes at once; the ability tosee small changes in production vari-ables and correlate them to changes inconditions, raw materials or ingredi-ents; and an increase in overall plantefficiency, because operators can fine-tune process parameters using real-time data and sophisticated analysis.

Early on, plants scheduled severalmaintenance shutdowns during theyear to prevent equipment failures.With the data collection capabilitiesof the DCS systems, preventive main-tenance programs came into a worldof their own, reducing downtime forpreventive maintenance. Theseprocesses and technologies continue

Farmer-owned ethanol and the role of information technology continued from page 11

Today’s plants arebeing built for halfthe money and oper-ate twice as efficientlyas those of the 1990s.


to evolve and become even more sig-nificant.

Business/bio processmetrics & benchmarking

DCS plants all have the same pro-duction and business processes andshare a data collection and analysisprotocol called "benchmarking.”Benchmarking is an array of perfor-mance measures that are monitoreddaily, gathered weekly and summarizedmonthly to be reported to manage-ment and the board. If, for example, agroup of 10 plants of common designare all linked together, the businessand biological process benchmarks forthis group are very well understood.

The manager of any one plant,therefore, can adjust and refine theprocess to improve his performanceand thereby raise the standard of thewhole group, in a stair-step fashion.This business process is possible onlywith today’s information technology,and even now it’s time-intensive toperform. But this would have been vir-tually impossible 10 years ago.

Firms like Broin and Fagen/ICMwere able to expand to their presentcapacity level because of the informa-tion technology employed by the newplants. Broin and Fagen/ICM eachdirect the operations of some 20 plants.

The talent pool to manage andoperate these plants has grown withthe process. Both firms employ a cadreof well-seasoned managers wholearned during the difficult years howto run a plant efficiently. Both compa-nies provide management services,marketing and procurement contracts

to mid-sized plants. This is a far cryfrom the old days when managers werestill putting contracts out and doingeverything by hand.

Now — by using information tech-nology and business process technolo-gy — a group has the ability to manageabout 20 plants as one plant. Fifteenyears ago, it would have been nearlyimpossible to market the product forthat many plants and do a good job.Now, an entire array of managementservices is provided.

There is no way those plants couldbe managed in this way withoutimproved information technology. Theplants themselves are physically too farapart. It would be impossible to overseeso many variables in different parts ofthe country. The necessary staffingwouldn’t be available because of theexpertise required at the control points.

Consolidated marketing partnershipsThe rise of marketing firms was

instrumental in this trend. Ethanol isnot marketed at the processing plant.Buyers (the refiners and blenders ofgasoline) don’t want to deal with allthese small plants. They demand bulkpurchasing — millions of gallons at atime. Buyers want to sign contracts for50-180 million gallons and want totrade with someone marketing 500million gallons per year.

The first impact of modern IT onthe ethanol industry was as a horizon-tal coordinator. Many mid-sized firmsconsolidated their marketing activitiesout of necessity to bargain with thehandful of fuel ethanol buyers whotraded in quantities of hundreds of

millions of gallons at a time. Successful consolidated marketing

efforts led to innovative applications ofthese powerful new IT technologies tocoordinate other activities horizontally— such as procurement and logistics,risk analysis and eventually plant man-agement — among several plantssimultaneously. This horizontal coor-dination/consolidation role acrossenterprises, companies and time/spaceis now performed by five or six firms.Their services are contracted to a sub-stantial majority of the mid-sized,farmer-owned plants.

Over the past few years, the marketshare of the industry’s major producer(ADM) has dropped from 60 percentto around 30 percent. The balance hasbeen taken by marketing firms —United Bio Energy, Ethanol Productsand a few others.

Because fuel ethanol is sold by adozen marketers and most of it is pur-chased by a half dozen buyers, informa-tion on prices and quantities may bevery good within that trading circle, butit is unavailable to outsiders. There is nomandatory reporting of ethanol prices.

Consolidation of process management

It appears that a virtual consolida-tion of ethanol processing is takingplace. Instead of consolidation throughownership, management is becomingmore centralized and concentrated. Anumber of companies — such as LandO'Lakes and Purina, CFC, United BioEnergy and even integrators such asCargill — are offering managementservices to facilities other than their

own. IT has altered the ethanolindustry structure by shifting theownership and control emphasisfrom the acquisition of physicalproduction assets to the aggrega-tion of information technologyassets. Economic power in theindustry no longer arises fromownership of production capital(plants and equipment) but fromthe control and manipulation ofintellectual capital and propertyrights. ■

This study is based on two focuspanels of leading ethanol producersand industry experts, held in March2005, to examine the state and futureof the ethanol industry. Industryexperts on the panels included repre-sentatives from: the commoditiesexchanges (NYMEX, CBOT), financial

firms, producer associations andlegal firms that serve the industry,information technology, plant man-agement and an agricultural biotech-nology firm. Follow-up interviewsamong 12 plant managers were alsoconducted to clarify the informationobtained in the focus panels. ■

Study methods


By Marlis CarsonGeneral Counsel and Vice President, Legal, Tax & Accounting;National Council of Farmer [email protected]

Donald A. FrederickProgram Leader for Law, Policy & Governance;USDA Rural Development/Cooperative [email protected]

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

n Aug. 8, 2005, PresidentGeorge W. Bush signedinto law the Energy TaxIncentives Act (EnergyAct) of 2005. The new

law provides $14.5 billion in tax reduc-tions over a 10-year period to boostconservation efforts, increase domesticenergy production and expand the useof alternative energy sources, such asethanol, biodiesel, solar, wind,hydropower and clean coal technology.Several provisions will benefit farmers,other rural residents and their coopera-tives. These new tax incentives are inaddition to several favorable sections inthe American Jobs Creation Act of2004 (Jobs Act) (see Legal Corner,Rural Cooperatives, Jan/Feb 2005, p. 20).

These rules are often somewhatcomplex. But, if understood and usedeffectively, they can provide significanttax savings to producer owners andtheir cooperatives involved in energyproduction.

Small ethanol producer credit extended

For several years, the tax code hasprovided small ethanol producers a taxcredit of 10 cents per gallon on thefirst 15 million gallons of ethanol pro-duced each year. A small ethanol pro-ducer had been defined as a person orentity whose ethanol productioncapacity did not exceed 30 million gal-lons per year. The Energy Act extendsthe credit to ethanol producers with aproduction capacity of 60 million gal-lons of ethanol per year.

The Jobs Act gave cooperatives thatqualified for this credit the option topass the credit through to theirpatrons, on a patronage basis. TheEnergy Act requires cooperatives thatdo pass the credit through to notifytheir patrons in writing of the pass-through within the 8.5-month pay-ment period described in tax code sec-tion 1382(d).

Small agri-biodiesel producercredit and pass-through

The Energy Act creates a new smallagri-biodiesel producer credit that mir-rors the small ethanol producer credit.The credit is 10 cents per gallon on upto 15 million gallons of bio-diesel pro-duced each year and a “small” produc-er is defined as one whose biodiesel

production capacity does not exceed 60million gallons per year. Cooperativesmay pass the credit through to theirpatrons on a patronage basis, provideda written notice of the pass-through ismailed to the patrons within the 8.5-month payment period.

This credit is in addition to creditscreated in the Jobs Act for biodieselused as fuel either in a mixture withdiesel fuel or on its own. That credit is$1 per gallon for any biodiesel that isagri-biodiesel and 50 cents per gallonfor other biodiesel. Agri-biodiesel isbiodiesel derived solely from virgin oilsfrom crops such as corn, soybeans andsunflower seeds, and from animal fats.

Renewable energy credit, pass-through

In 1992, Congress created a taxcredit for the production of electricityfrom wind, organic material of plantsgrown exclusively for use in producingelectricity and poultry waste. The JobsAct and the Energy Act have expandedthe list of qualified renewable fuels toinclude all livestock waste, forest prod-ucts, other crop by-products andresidues, geothermal energy, solarenergy, small irrigation power, munici-pal solid waste, refined coal and Indiancoal.

Eligible cooperatives may pass thecredit through to their patrons, on apatronage basis, provided a writtennotice of the pass-through is mailed tothe patrons within the 8.5-month pay-ment period. An “eligible cooperative”means a cooperative that is more than

L E G A L C O R N E R

Energy Tax Incent ives Actinc ludes cooperat ive p rov is ions


O


Type of business: Farmers PrideCooperative is a 100 percent, produc-er-owned soybean meal productionand marketing cooperative. On Sept. 1, Farmers Co-op Oil Co. in NewmanGrove merged with Farmers Pride,Battle Creek Co-op.

Business objective: To operate as aproducer-owned, value-added enter-prise that processes locally grown soy-beans into soybean meal for local live-stock producers and soybean oil forfeed or fuel.

Annual sales: Farmers Co-op Oil had$18.8 million in total co-op sales for2004, up 29.6 percent from $14.5 mil-lion in 2003. NewMaSoy™ soybeanmeal and oil sales were $1.4 million for2004, up 353 percent from 2003. TotalNewMaSoy™ sales for 2003 were$415,000, which was the start-up year,with meal being processed for less thansix months. Sales have increased expo-nentially since then, and will surpass$2 million this year for processed soy-bean meal and oil.

Number of members & employees:Membership comprised of 310Newman Grove-area farmers; theNewman Grove co-op location has 18full-time employees overall, and sever-al more in the soybean-processingdivision.

Description of business activity:The conversion of soybeans into mealand oil begins by mechanically extrud-ing the soybeans to release the oil from

the meal. These products are thenseparated; the meal is ground to a uni-form consistency for additional proteinand energy in livestock feed for swine,poultry and dairy operations. The oil issold as feed or fuel-grade oil to proces-sors. While these processes have been

in existence for years, many farmers inrural areas have been unable to reapthe benefits because the value-addedactivity takes place after the commodi-ties are sold at low market prices.

How co-op was developed/financed:Farmers Co-op Oil Co. was first orga-nized in 1924 as a fuel purchasing and

distributing co-op. In succeeding years,grain merchandising, agronomy/fertil-izer, feed sales and ready-mix concretedepartments were added. In early2002, an informal feasibility study onadding a soybean processing facilitywas done through the local board ofdirectors with advisory assistance fromCoBank. There was no stock sale tofinance the soybean processing plant.The plant costs (in excess of $400,000)were amortized over seven years at 5percent interest.

How USDA helped: In addition totechnical assistance, USDA RuralDevelopment provided Farmers Co-opOil Co. with a $22,300 Value-AddedProducer Grant (VAPG) for product

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

Farmers Pr ide Cooperat iveNewman Grove Branch, Nebraska

“This soybean-pro-cessing facility allowsmembers to activelyparticipate in, andown, a value-addedenterprise, whichdiversifies theirincomes andimproves the long-term sustainability.”

market development in 2003.The money was used to com-plete a feasibility study thatwould verify the existence of anemerging market for naturalprocessed soybean meal and oilproducts. The project receivedthe green light and later thatyear the co-op received a sec-ond VAPG of $120,000 fromUSDA Rural Development toassist in the first full year ofoperations. Farmers Co-op Oilprovided matching funds of$142,300.

Leader’s comment: “This soy-bean-processing facility allowsrural Nebraskans who aremembers of Farmers Co-opOil Co. to actively participatein, and own, a value-addedenterprise, which diversifiestheir incomes and ultimatelyimproves the long-term sus-tainability of their farmingoperations.” — Randy Benson,General Manager, FarmersCo-op Oil Co.

The results: Today,NewMaSoy™* Extruded/ExpelledSoybean Meal, Extruded Full FatSoybean Meal and Natural ProcessSoybean Oil are being produced fromthe 1,200-1,500 bushels of soybeansprocessed daily. (NewMaSoy is a stateof Nebraska registered trademark.)Three full-time positions and severalpart time positions have been addedto the plant’s workforce. Through thehiring of a full-time marketing repre-sentative, made possible by the VAPGfrom USDA, sales increased dramati-cally in 2004. The soybean value-added activity is anticipated to pro-vide a 20-cents-per-bushel increaseabove the raw product value.

Market outlook: The demand forsoybean oil is excellent, with theproduct being sold as quickly as it is processed. Soybeanmeal requires more marketing effort, but sales continue toclimb each month and the trend is strong for repeat-cus-tomer business. More than 480 tons of meal were sold in

October and approximately 1,000tons were contracted for in late2004 and the first half of 2005.Protein is being provided to dairyand swine farms, and several feedmills. The sales area has expand-ed to cover 13 counties inNebraska with contracts inKansas, Colorado, South Dakota,New Mexico and Idaho. Soybeanmeal has not been sold out ofstate yet, but this is the next mar-keting step for the co-op, withsales in both Kansas and SouthDakota on the horizon.

Major challenge/opportunityfacing co-op: Margin percent-age, production efficiency andequipment maintenance continue

as our greatest profit challenge.

Contacts: Phone: (402) 447-6292: e-mail: [email protected]. ■


Randy Benson, Newman Grove branch manager (left),and Gene Wissenburg, NewMaSoy manager, outsidetheir co-op’s new soybean extruding plant. Above, alarge bin was added in 2004 to the NewMaSoy Soy-bean Meal loading facility to handle increased pro-duction, which tripled in the second year of operation.Photos courtesy Farmers Pride Cooperative


homas C. Dorr — afarmer from Marcus,Iowa — was appointedby President George W.Bush to be the under

secretary for rural development andwas sworn into office by AgricultureSecretary Mike Johanns on July 27.Dorr served in the same positionunder a recess appointment fromAugust 2002 to December2003. After his recessappointment ended, hewas named senior advisorto the secretary of agricul-ture for rural developmentissues.

“Tom has demonstrat-ed his insight into theissues facing rural Americaand commitment toaddressing those issuesthroughout his 4 years atUSDA,” Secretary Johannssaid. “He is a tireless advo-cate for rural America andI’m very pleased that theSenate recognized his hardwork and dedication, asreflected in his confirma-tion.

Johanns said Dorr’sleadership has been“instrumental in many ofUSDA’s efforts to carry out thePresident’s vision of a vibrant ruralAmerica. I’m confident that Tomreturns to the under secretary positionwith even greater passion and arenewed sense of commitment to thatvision.”

Dorr will oversee USDA RuralDevelopment policies and programs.

Rural Development consists of threeprogram areas: rural business & coop-eratives, utilities and housing. Theseprogram areas provide $14 billion inannual funding authority for loans,grants and technical assistance to ruralresidents, communities and businesses.Dorr also oversees an $87 billion port-folio of existing business/co-op, hous-ing and infrastructure loans to rural

America. Rural Development alsoincludes USDA’s cooperative program,which includes research, technicalassistance, education (including thispublication) and statistics designed tostrengthen the nation’s rural coopera-tives.

Rural Development has over 7,000employees located across the United

States and in Puerto Rico, the VirginIslands and the Western Pacific Trustterritories.

“I look forward to advancing thePresident’s rural initiatives and posi-tioning rural America to benefit fromthe changes that are barreling downthe pike at us,” Dorr said. “There arechallenges due to ever-tougher inter-national competition and unrelenting

cost pressures on individual producers.But there is also enormous upsidepotential from diversification of therural economy. Emerging growth sec-tors based on broadband, bio-agricul-ture, value-added production, ethanoland biodiesel are there to be leveraged.They create significant opportunity forall rural Americans.”

Divers i f ied , s t rong ru ra l economygoal o f Under Secretary Dor r

T

Thomas Dorr, left, of Marcus, Iowa, is congratulated by Agriculture Secretary Mike Johanns after being swornin as the new under secretary for rural development. With Dorr is his wife, Ann. USDA Photo by Alice Welch


As senior advisor to the secretary ofagriculture for rural developmentissues, Dorr coordinated several majorinitiatives on behalf of the secretary.He played critical roles in USDA dis-aster relief efforts in response to thehurricanes in Florida; he worked close-ly with the assistant secretary for civilrights to reach out to minority farmersand provided key leadership on variousactivities to improve program manage-

ment and business practices through-out USDA.

Dorr has broad agricultural, finan-cial and business experience. He hasserved as a member of the board ofdirectors of the 7th District FederalReserve Bank of Chicago, the IowaBoard of Regents from 1991–1997,and as a member and officer of theIowa and National Corn GrowersAssociations.

Prior to his current service atUSDA, Dorr was the president of afamily agribusiness company consistingof a corn and soybean farm, a state-licensed commercial grain elevator andwarehouse and two limited liabilitycompanies.

Dorr graduated from MorningsideCollege with a B.S. degree in businessadministration. He is married to AnnDorr and has two children. ■

USDA Rural Development moved quickly and deci-sively to offer many types of assistance to those affect-ed by Hurricane Katrina.

“In Mississippi, for example, Rural Development vol-unteers are driving FEMA staff to the places wherethey’re needed, and working closely with FEMA,” Agri-culture Under Secretary for Rural DevelopmentThomas Dorr said on Sept. 5, during a trip to Missouri,where he met hurricane victims evacuated fromLouisiana and Mississippi.

“Our state offices are identifying vacant housingunits for the newly homeless. In Oklahoma, our staff isassisting anyone from the hurricane zone who needshelp finding shelter,” he continued. “We’re working toget generators to the affected area. As far away asSouth Dakota, our agency is finding shelter for hun-dreds of people who are without homes.

“The 7,000 members of our team are doing every-thing they can to help those in need,” said Dorr. Anassessment of Rural Development housing identifiednearly 800 vacant housing units near the hurricane-affected area, and more than 30,000 units nationwide.

Assistance is also being offered to homeownersfinanced through Rural Development loans. Homeown-ers in the affected area are getting a 6-month moratori-um on their mortgage payments.

Rural Development has also designated a toll-freenumber to provide assistance to homeowners, rentersand others in need of housing assistance: 1-800-414-1226. Information is also available on the USDA website: http://www.usda.gov.

Renters, individuals or families made homeless bythe disaster may apply for occupancy at any otherapartment complex as a “displaced tenant.” Appli-cants will be placed on a special list to be offered anyvacant unit, or the next one available if no vacanciescurrently exist.

For residents receiving rental assistance (RA) in

units made uninhabitable by Hurricane Katrina, RuralDevelopment can allow the transfer of the RA to anoth-er eligible apartment complex. The transfer must beagreed to by all parties and be designed for the returnof the residents — if they so choose — and the RA tothe original complex and unit after the property hasbeen restored.

Dorr noted that assistance is also being offered tothose communities in the affected areas that haveCommunity Facilities loans, and if asked, the Businessand Industry Program will place a moratorium on Inter-mediary Re-lending Program payments.

Additionally, Dorr said an estimated 50 Rural Devel-opment “circuit riders,” who maintain and repair smallsewer and water systems across the country, were dis-patched to the disaster area to provide technical assis-tance to operators of sewer and water systems. ■

USDA Rural Development offers hurricane-relief

Under Secretary for Rural Development Thomas Dorraddresses a press conference at a Red Cross center inCape Girardeau, Mo., where many hurricane victims wereevacuated following the storm. Dorr is leading USDA effortsto find housing for evacuees. Photo by Fred Lynch, courtesySoutheast Missourian


By Greg Lawless & Anne Reynolds,University of Wisconsin

Editor’s note: This article is excerpted from the authors’ newreport: Keys to Successful Start-Ups for Rural Food Co-ops: Four Case Studies, CIR 63, produced by the Universityof Wisconsin Center for Cooperatives. Hard copies of the reportcan be ordered by e-mail: [email protected], or bycalling: (202) 720-8381. It can also be downloaded from theInternet at: www.rurdev.usda.gov/rbs/pub/newpub.htm. The report was prepared for the North Country CooperativeDevelopment Fund, with funding from USDA RuralDevelopment.

hat factors contribute to the success or fail-ure of a rural grocery cooperative? To findsome answers, four case studies were con-ducted of Upper Midwest co-ops: Iron RiverCooperatives, Iron River, Wis.; Root River

Market Cooperative, Houston, Minn.; Viroqua FoodCooperative, Viroqua, Wis., and Tower Foods MarketCooperative, Oneida Nation, Wis.

This article begins with brief overviews of the four co-ops, followed by analysis of key factors that influenced thesuccess or — in one case — failure of these co-ops.

Root River Market Cooperative — Houston, Minn. The Root River Co-op is a full-service retail grocery store

that provides a conventional inventory of foods and othergrocery items in a city of 1,020, located in the southeasterncorner of Minnesota. The community suffered the loss of itsonly grocery store in 1998.

After failing to attract a private company to run a store, acore of people in the community in early 1999 decided to trya cooperative. A study showed it would cost $400,000 tolaunch a co-op store. Some 310 members joined, who con-tributed $170,000 in member equity and loans. NorthCountry Cooperative Development Fund (NCDF) thenoriginated a loan for $225,000. About $12,500 in grants werealso raised.

The store generated $1.06 million in the first year, about12 percent below the projection. Operational costs had alsobeen underestimated. To reduce costs, one of three depart-ment managers was reluctantly laid off.

Sales have been evenly split among members and non-members. Summer has been the heaviest sales period, drivenby tourism to the area. In recent years, the co-op’s grosssales have held steady at just over $1 million. A pharmacy(which rents space from the co-op) has drawn customers,particularly elderly residents. The gross margin held steadyat about 25 percent during the first 5 years of operation, andit earned a 5.9 percent net profit, annualized over the past 3years

At the end of November 2004, membership had risen to419. Based on an average of 2.58 people per household, co-op membership is estimated to be 1,081 individuals.

W

Taking StockRural food cooperative case studies reveal critical retail success factors

An original 1914 share of stock in Iron River Cooperatives, formedby Finnish immigrants in Wisconsin.

Root River Cooperative General Manager Tony Densted empha-sizes friendly customer service. The co-op averages just over $1million in annual sales. Photo by Greg Lawless, courtesy University ofWisconsin


Viroqua Food Cooperative— Viroqua, Wis.

Located in a town of4,335 which has become ahub of the “alternative,back-to-the-land communi-ty.” As a natural food store,it faces different circum-stances than most conventional gro-cery stores. It serves as an excellentexample of the “start small and grow”approach to food co-op development.

It started as a food-buying club in1991. Members decided to open aretail outlet in Viroqua, incorporatingas a Chapter 185 Wisconsin coopera-tive. While the new board did not havewritten a business plan or use profes-sional consultants, it had 5 years’ expe-

rience operating a buy-ing club of 40 corefamilies. The co-op’sincorporation papersestablished two classesof stock. When the doorsopened in September1995, the store had 600square feet of retailspace and the co-ophad 95 members. In1996, the co-op had$174,330 in gross sales.By 2003, the co-op’sgross sales had risen to$1.07 million.

The co-op did nottake out any commer-cial or institutionalloans to capitalizestart-up. About a yearor two after opening, itapproached NCDF for

the first of three small loans to financeequipment and other needs.

The co-op currently has 1,000members representing 635 households,with 82.5 percent of sales going tomembers. Extremely limited retailspace means employees must be con-stantly stocking shelves.

In 2002, a feasibility study looked atmoving to a new, larger location andrenovating an existing building.

Members invested $159,000 for theproject. However, the co-op boardultimately decided to build a new storeat a cost of $1.6 million. It authorizedthe sale of $900,000 of new, Class Cstock, which, unlike its voting stock orClass A shares, would pay dividends.However, unlike loans with a fixedmaturity date, the co-op won’t have toreturn the new equity until peoplerequest it.

By the end of 2004, the co-op wasnegotiating a substantial loan with alocal commercial lender, using aUSDA Rural Development loan guar-antee, combined with a subordinateloan from NCDF. The co-op opened anew store in June 2005. The newbuilding is 7,200 square feet, with4,400 square feet of retail space. In thefirst two months of operation, saleswere running ahead of projections.

Tower Foods Market Cooperative —Oneida Nation, Wis.

This co-op had themisfortune of repre-senting the only “fail-ure” among the fourcase studies. The storewas located about 5miles from Green Bay,Wis., a metropolitanarea of 226,778 people.Motivation to start aco-op goes back toApril 1995, when anon-Native familyclosed its private gro-cery in the area.

The idea for a newgrocery in the OneidaNation became a vehi-cle for achieving a

number of greater tribal goals: eco-nomic development and job creation,tribal self-sufficiency, improved dietsand better health, food security forelders and young children, and evenenvironmental stewardship (the storeused solar power).

In January 1996, the tribe commis-sioned a study — the first of two mar-ket analyses conducted by majorwholesale suppliers. Based on a

Inside the old Viroqua FoodCooperative (above) and thenew store (right), whichopened in June. This co-opserves as an example of the“start small and grow”approach. Photo by GregLawless, courtesyUniversity of Wisconsin


10,000-square-foot facility, the firststudy projected a 19-percent marketshare and gross sales of almost $3.3million in the first year of operation. A second market analysis later reducedsales projections to $1.7 million. Bothproved wildly optimistic.

The Oneida Nationagreed to provide $250,000to the grocery store, and anapplication was also submit-ted to USDA requesting a$500,000 grant. The co-opultimately got a $460,000USDA revolving loan,issued through the tribe.Some projections wereapparently erroneouslybased on that money being

a grant — a misinterpretation thatseverely affected the co-op’s financialprojections. No commercial bank loanswere taken out to finance the openingof the store.

Project leaders spent 2001 develop-ing a business plan, recruiting boardmembers, incorporating the co-op,developing bylaws and holding com-munity meetings. By April 2002,

extensive renovations were finallyunderway to convert an empty ware-house in a business park into a mod-ern, full-service grocery.

Tower Foods Market opened forbusiness in July 2002. The store occu-

pied 8,000 square feet and had 266members when the doors opened.Around the time of opening, a wholenew slate of directors took over theboard. Money set aside for boardtraining was not spent.

In its first year of operation in2002/2003, the grocery achieved only$452,589 in gross sales, one-third ofthe projection. Another sign of trouble

was the turnover in management; theco-op went through four managers in2 years. Poor location, outside compe-tition and non-competitive prices wereamong other factors cited in the failureto generate more sales.

In June 2004, unableto attract further supportfrom grants, the tribe orlocal banks, Tower FoodsMarket shut down.

Iron River CooperativesInc. — Iron River, Wis.

As they struggled toclear ground and growcrops in the hard claysoil north of Iron Riverin the early 1900s,Finnish immigrants

would trade their farm produce withlocal merchants for farm supplies andhousehold goods. Unsatisfied with theavailable retail service, in 1914 theyorganized the Oulu Co-op grocery andset out to raise $2,500 to open it. Thesale of $10,000 of co-op stock wasauthorized, at $5 per share.

Merchants responded by cutting offall credit to the farmers and stoppedtrading groceries for their butter andeggs. After six months, the co-op hadraised only $640, but neverthelessdecided to open for business in nearbyIron River. In 1916, they opened a sec-ond branch in Oulu.

Other Finns in northern Minnesota,Wisconsin and Michigan’s UpperPeninsula — many of them living andworking in company-owned miningtowns and remote farming communi-ties — were also forced to deal withstores that held a virtual monopolyover trade and charged excessiveprices. This led to the formation ofabout 65 Finnish-sponsored co-ops inthe three states, very few of whichfailed during this period.

Success was credited primarily tothe solidarity of the members and thekey role played by a federated co-opwholesaler, the Central Co-opExchange (CCE), formed by Finns in1917. CCE not only made bulk pur-chases for member stores, it also

An undated photo of a neighboring Finnish co-op in Maple, Wisc., 16 miles west of IronRiver. Photo courtesy Wisconsin Historical Society Top: The Red Star Chorus youth group, from a 1929 issue of the Central Co-op Exchange’s(CCE) publication Cooperative Pyramid Builder. In the 1930s, CCE and affiliated co-ops severed relations with the Socialist party.


helped with co-op education and tech-nical assistance for such crucial func-tions as bookkeeping.

Many of the Finnish immigrantswere socialists, due in part to thetyranny they had faced under theRussian Czarist regime. Their co-opstores were even called ‘Red Stores’ bynon-Finns. But a struggle in the 1930sresulted in a break with the Socialistparty. CCE changed its name toCentral Co-op Wholesale (CCW), andreplaced its red-star trade label withthe twin pines logo of the Rochdaleconsumer co-ops.

Big economic and social changesafter World War II led to the rise ofsupermarkets and greater auto travel.About 30 of the Finnish co-op storesfailed between 1945-1963. CCWmerged with Midland Co-op Inc. in1963. By the mid-1970s, only aboutone-third of the 175 Finnish co-opstores still existed.

Midland merged with Land O’Lakes in 1982. By 2004, Iron RiverCo-op was one of the few Finnish-ori-gin co-op groceries still operating inWisconsin. Today, it operates a 7,000-square-foot grocery and a 6,400-square-foot hardware store.

In fiscal 2003, the grocery and hard-ware stores had gross sales of $3.88million and gross margins (after cost-of-goods-sold) of 26 percent and 39percent, respectively. About 86 percentof grocery sales were made to mem-bers in 2003. The net margin (or prof-it) for the combined business was$88,082 in 2003. Current membershipstands at roughly 4,000 households,about 3,500 of which are active.

The co-op has been negotiatingwith a local commercial bank to obtainfinancing to build a new, 15,000-square-foot building — a $2.5 millionproject. Thus far, the co-op has notpursued selling equity shares to mem-bers, nor does it intend to ask mem-bers to make unsecured loans — twostrategies that other co-ops have usedsuccessfully to finance expansions.

By early September 2005, thefinancing for the new store was inplace (with help from Bayfield Electric

Co-op to cover a “gap”), and the boardwas slated to meet later that month tomake a final decision on the move. “It’sgut check time: when you put all thefinal numbers together, does it stillwork?” General Manager PatrickDooley said. Despite fully owning anempty parcel of land on the edge oftown, the new plan calls for buildingthe new store closer to downtown.

Critical success factors • Common variables that impact the

success or failure of these food co-opswere identified in this study:community and industry support;member support; quality of thebusiness plan; business growthpatterns; market niche; board andmanagement leadership, and finance.

CompetitionThree of the four cooperatives faced

direct competition from grocery storesin nearby, larger communities. In eachcase, many members of the local com-munity commute to work in thesecities and often buy groceries on theway home. Root River Cooperative isthe only grocery store in Houston, butthere are two full-service grocerystores in nearby small communities,plus a Wal-Mart Superstore in LaCrosse and other large groceries inboth La Crosse and Winona.

Iron River Cooperatives is the onlyfull-service grocery store within a 30-mile radius, but the co-op is concernedabout a planned WalMart Superstore

in Ashland. Tower Foods Market Co-op faced the closest competition, withfour dominant grocery stores in nearbyGreen Bay and a new, 68,000-square-foot store in DePere, Wis. (five milesaway).

Viroqua Food Cooperative differsbecause it is a natural foods grocerystore, with the closest competitionmore than 30 miles away. Viroqua isfour times larger than Iron River orHouston, and it is more isolated fromlarge population centers.

Support from otherco-ops & community

All of the cooperatives received sup-port from their cooperative communi-ty in the form of advisors or consul-tants. Two of the co-ops, Root River

and Viroqua, benefited directly fromthe presence of strong cooperatives intheir community. The two largestemployers in Houston are cooperativesand each of them provided loans toRoot River during its start-up phase.An attorney from the local electric co-op helped the steering committee filethe articles of incorporation.

In Viroqua, a local resident who hadhelped start CROPP, a successfulorganic marketing cooperative, servedas an active advisor to the food cooper-ative. A long-time CROPP employeeserves on the board of directors andprovides valuable experience with mar-keting and operating. The Viroqua co-op also benefited tremendously from

The new Viroqua Food Co-op includes 4,200 square feet of retail space in a 7,200-square-foot building. Photo by Greg Lawless, courtesy University of Wisconsin



Based on these four case studies, we can identify fourkey characteristics that contributed to the success of RootRiver, Iron River and Viroqua.

• Strong operational management — Each of the suc-cessful cooperatives employed managers who werewilling to innovate, make necessary changes, investand grow. The manager of Root River eliminated themeat department manager’s position to improve thebottom line. In Viroqua, the manager invested in tech-nology that helped the co-op benchmark perfor-mance, improve profitability and gather the data nec-essary to plan an expansion. Iron River Cooperativeshired a new manager who had runa major business in another serviceindustry, so he came with financial,personnel and marketing experi-ence. He is leading the relocationeffort.

• Member, community and industrysupport — Viroqua, Iron River andRoot River all received substantialleadership and financial supportfrom their members at start-up.They also benefited from strongcooperatives in their communitiesthat provided financial supportand/or shared expertise. Root River also got supportfrom local public officials, who were very interested inattracting a grocery store to Houston. Local supportwas a major factor in convincing the local bank tomake a start-up loan. Root River was the only cooper-ative in the group that received a commercial loan onstart-up, but Iron River is currently negotiating for amajor loan from a local lending institution.

Cooperative industry support also helped some.Iron River Co-op, along with dozens of other co-opsstarted by Finnish immigrants, received significantsupport from the Central Co-op Exchange. Part of thechallenge today is the co-op’s isolation as it workstoward a major expansion without a CCE to provideadvice, unbiased benchmark data and other support.

Viroqua Food Co-op has tapped into a national net-work of food co-ops. This has clearly strengthened itsmanagement’s hand.

While Root River, as a “conventional grocery,” didnot enjoy similar industry support, the help it receivedfrom long-standing local co-ops and from a coopera-tive lender (NCDF) was critical. By comparison, Tow-

er Foods was relatively isolated and independent.

• “Reasonable” competition — Although travel forshopping is a fact of life in rural communities, thesuccessful cooperatives all benefited from a locationas the sole grocery store (or natural foods store) intheir immediate area. All three of the successful co-ops are located about 20-30 miles from their competi-tion.

• Dedicated organizers — The three successful coop-eratives all drew on substantial leadership skills froma dedicated group of volunteers. In Viroqua and Root

River, the volunteers had trackrecords to draw on from previousbusinesses experience. They alsotook advantage of advisors fromlocal cooperatives, from the localcommunity and within the groceryindustry. In Iron River, the cooper-ative was instrumental in forminga wholesale cooperative, whichbecame an integral part of manysuccessful retail co-ops acrossthe northern tier of Wisconsin,Minnesota and Michigan.

Potential pitfallsThe case study of Tower Foods Market Cooperative

provides a detailed examination of many potential pit-falls in starting a co-op grocery. Although it might beviewed as a unique case because of its relationshipwith the Oneida Nation, it is probably safe to make thefollowing generalizations as contributing to its failure: • High turnover of leadership and management; • Too many “collateral” goals (which included improv-

ing the diets of the Native American population itserved, creating economic development on the reservation, etc.);

• Lack of rigorous financial analysis; • Poor location;• Failure to change direction quickly.

The story of Tower Foods Market also points outthe importance of the “cooperative advantage.” A co-op that lacks member support, especially during thecritical start-up phase, will lose out on the very tangi-ble factors (financial, leadership and expertise) thathave made Viroqua, Iron River and Root River suc-cessful rural grocery stores. ■

Keys to success…and pitfalls

Tower Foods Market Cooperative was hurtby rapid turnover in management and co-op leadership, and by having too many col-lateral goals. USDA photo by Margaret Bau


support of the regional and nationalnatural food co-op network.

Iron River was part of a movementin the early 20th century to developcooperatives across northernMinnesota, Wisconsin and Michigan.The board and management wereinstrumental in starting and supportinga cooperative wholesaler (CCE) inSuperior and benefited from its ser-vices for years. They occasionallyattend training sessions provided byCHS Inc., but don’t seem connectedstrongly to the co-op community. Thecurrent situation is similar to that ofTower Foods Market, which receivedsporadic assistance from cooperativeadvisors and other food co-ops in theregion. But it had no consistent rela-

tionship with another local, supportivecooperative.

Both Root River and Tower FoodsMarket had significant support fromlocal officials. The City of Houstoncommissioned the initial feasibilitystudy for a downtown grocery store,after the previous store closed. Theyalso contracted with a grocery whole-saler for a design and to identify oper-ational needs. The co-op steeringcommittee benefited from these stud-ies and got the support of a locallender.

Tower Foods Market was supportedby the Oneida Nation from its incep-tion and received grant/loan supportbased on its relationship with thetribe. The cooperative was located on

tribal land,next to severalservice offices.The co-opdidn’t seekconventionalfunding fromlocal banks,and there isno evidencethat itreceived sup-port fromGreen Bay orother nearbycommunities.The 2004

business plan recommended a strongmarketing plan to the larger tradearea, but the store closed before theplan was implemented.

Member supportIron River and Viroqua both make

more than 80 percent of their sales tomembers. Viroqua opened with 95members in 1995 and had 1,000 mem-bers by 2004. Members’ supportallowed Viroqua to open debt-free in1995, and members continue to showtheir support with equity investmentsand loans.

Iron River has 3,500 active mem-bers, 200 of whom attended the lastannual meeting. Members are notbeing asked to invest in the relocationproject through loans or equity.

Root River makes 50 percent of salesto non-members — many of themtourists, who are an important compo-nent of the co-op’s profitability. The co-op had 310 members when it opened in2000, and members provided over 40percent of the funds needed to open thestore. Membership has increased by 35percent in 4 years, to 419.

The organizers of Tower FoodsMarket held a number of communitymeetings to gather support and feed-back from potential members and cus-tomers. It seems clear that the co-opIron River Cooperatives General Manager Patrick Dooley and Board

President Lee Ruska. The current store (below) was built in 1929, but theco-op is planning to build a new store. Photo by Greg Lawless, courtesyUniversity of Wisconsin


Taking Stock continued from page 22


By Alan Borst, Ag EconomistUSDA Rural Development

gricultural producers inthe United States havelong enjoyed the right tocollectively market theirproducts through coop-

erative marketing associations. Thisright has been established and main-tained over the last century through aseries of laws, rules and regulationswhich have provided limited antitrustprotection to such producer coopera-tion.

This is critical, because withoutsuch protection, farmers seeking tocollaboratively market their productswould face a serious risk of antitrustlitigation. Beyond this enabling legalframework, the U.S. government hasactively promoted agricultural cooper-ation through various policies and pro-grams which have provided favorabletax treatment and access to certainprogram benefits.

Public officials have periodicallybrought some elements of this institu-tional infrastructure under scrutiny.The logical response of the coopera-tive community to such examinationhas been to justify the public benefitsof producer cooperation and the poli-cies and programs which enable it.

A federal commission is currentlyreviewing all of the laws that provideproducers with some limited antitrustprotections. The following article is areview of the arguments made in sup-port of the most important federal

antitrust exemption for cooperativeassociations — the Capper-VolsteadAct of 1922 (CVA).

AMC assessing needIn 2002, Congress created the

Antitrust Modernization Commission

(AMC) to determine the need forreform of various antitrust laws. TheAMC findings will be submitted toCongress and the President. The AMCis a 12-member, bipartisan commissioncomposed of mostly antitrust lawyers.

There are a series of workinggroups under the Commission examin-ing various aspects of U.S. antitrustlaws, including one for Immunities andExemptions. The Commission hasagreed to study all antitrust immunitiesand exemptions to determine whether

they should be repealed (if not justifiedby their benefits), or if they shouldotherwise be time-limited.

The AMC has received several sub-missions in response to its request forpublic comment in support of coopera-

A

Ant i t rus t rev iew reveals s t rong co-op communi ty suppor t fo r Capper-Vols tead

President Warren Harding signs the Capper-Volstead Act in 1922, which provided limitedanti-trust exemptions for farmer cooperatives. The law is currently being reviewed by theAntitrust Modernization Commission (AMC).


tive antitrust protections. Parties sub-mitting comments in defense ofCapper-Volstead include: the U.S.Department of Agriculture, theCongressional Farmer CooperativeCaucus, the National Council ofFarmer Cooperatives, the AmericanFarm Bureau Federation, the NationalFarmers Union, the National MilkProducers Federation, the OregonDepartment of Agriculture and somedistinguished professors with decadesof experience in research on coopera-tives and their enabling laws. Therewere no submissions that were directlycritical of the CVA. The arguments insupport of Capper-Volstead in thesepublic comments follow.

CVA worldwide modelThe Capper-Volstead Act is a model

that has been emulated around the countryand the world. CVA has been a modelof cooperative legislation which manyforeign countries have been using as ablueprint for their own co-op laws.U.S. government agencies are support-ing the organization of agriculturalcooperatives in countries around theworld. All 50 states have enacted lawsfor agricultural cooperative incorpora-tion and many states have antitrustexemptions for producer cooperation.

The weakening or repeal of the Capper-Volstead Act would be disruptive and costlyto U.S. farmers. U.S. farmers and theircooperative marketing associationshave relied upon CVA protection forthe last 83 years. Any uncertainty overthe future of CVA would create uncer-tainty over the future of cooperativeenterprises that are dependent upon itsprotection. Such uncertainty couldtranslate into higher interest rates andcosts for co-ops. This would createincreased economic un