1031728 Rur Coop-July/Aug 02 - USDA Rural Development · 2019. 11. 20. · bulk commodity exports,...

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lCOOPERATIVESUSDA / Rural Development July/August 2002USDA / Rural Development July/August 2002

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A d d i n g v a l u e t om e m b e r s ’ c r o p s

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2 July/August 2002 / Rural Cooperatives

On July 1, 2001, a new state statute,the Wyoming Processing CooperativeLaw, became effective. This law autho-rizes a limited liability corporation-likebusiness structure (with a modicum ofcooperative characteristics) to processand market agricultural products. Oth-er states are being asked to considerenacting similar legislation. Promoterssuggest this will permit cooperatives toattract outside equity.

While this may seem attractive inthe abstract, cooperative leaders ineach state need to think throughwhether to embrace entities formedunder a statute such as this for at leasttwo reasons. First, such entities may beincompatible with the traits that distin-guish a cooperative from an investor-owned firm. Second, serious questionsexist as to whether such an entity is eli-gible for the public policy benefitsavailable only to cooperatives.

While there is no single definitionof a cooperative for all purposes, coop-erative scholars, leaders and profes-sional advisers agree that for any orga-nization to be considered acooperative, it must have these threeunique characteristics:

1. It is owned by the people who useits services.

2. It is controlled by the people whouse its services.

3. Earnings are allocated to theusers based on patronage, rather thanto investors based on investment.

A business formed under the newWyoming law can have several traitsthat are at odds with those usually asso-ciated with being a cooperative. Underthis law, a cooperative can have anunlimited number of investor non-patron members who aren’t required to

do business with the association, but areentitled to vote and share in its earningson the basis of their level of investment.Patron members are limited to one voteeach, while non-patron members mayhave an unlimited number of votes.

Only one of an unlimited number ofdirectors must be elected by producerpatron members. Director(s) chosen bythe producer-patron members are enti-tled to 50 percent of the voting power onthe board. But this may fall short of thelevel of producer control that is neces-sary to operate as a farmer cooperative.

No limit is imposed on the rate ofreturn investor-members can realizeon their investment, and up to 85 per-cent of each year’s earnings may bedistributed to investor members basedon investment. One or more outsideinvestors with two-thirds voting con-trol can merge or consolidate theentity into another entity, or liquidateit without any support from the pro-ducer patron-members.

Cooperative leaders need to stop fora moment and ask themselves: “Is a lawthat permits this much deviation fromthe cooperative norms of user-owner-ship and user-control—coupled with aprovision that only 15 percent of earn-ings must be returned to users based onpatronage—really a law authorizing theformation of cooperatives?” If someonecan answer this question “yes,” a sec-ond question needs to be addressed:“Just what, if anything, does the termcooperative mean?”

When an organization calls itself a“cooperative,” it has an obligation tomeet expectations that it will act likeone. Delaware could amend its laws tocreate another statute that lets GeneralMotors or any other large investor-

owned firm call itself a “cooperative.”But if such entities disregard the keycooperative characteristics—user own-ership and control and benefits flowingto the users based on patronage—theintegrity of all cooperatives is calledinto question.

Also, the thousands of successfulagricultural and non-agricultural coop-eratives challenge the notion thatinherent defects in the cooperativemodel make co-ops so inflexible andunresponsive to change that they can’tsurvive in today’s business environ-ment. A true cooperative may not bethe appropriate structure for every rural business. But if the founders of anew business don’t believe they canachieve their objectives with a cooper-ative, then they can organize an LLCor some other form of business, ratherthan use political power to enact a lawthat tarnishes the credibility of othercooperatives.

Congress has bestowed a number ofprivileges on businesses that conformto the generally accepted vision oforganizing and operating as a coopera-tive. An entity structured to take fulladvantage of the Wyoming ProcessingCooperative Law might have troublequalifying under any of the followingstatutes:

Antitrust Immunity—Producerassociations formed under theWyoming law, which choose to givevoting power to non-producer/investors, may well be in conflict withthe requirement for antitrust protectionunder the Capper-Volstead Act that allvoting members must be agriculturalproducers. The same eligibility ques-tions arise concerning access to the pro-

C O M M E N T A R Y

States need to carefully consider new “cooperative” laws

continued on page 36

Rural Cooperatives / July/August 2002 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 $21 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).

To file a complaint of discrimination, write USDA,Director, Office of Civil Rights, Room 326-W, WhittenBuilding, 14th and Independence Avenue, SW,Washington, D.C. 20250-9410, or call (202) 720-5964(voice or TDD). USDA is an equal opportunityprovider and employer.

Ann Veneman, Secretary of Agriculture

Michael E. Neruda, Deputy Under Secretary, USDARural Development

John Rosso, Administrator, Rural Business-Cooperative Service

Randall Torgerson, Deputy Administrator, USDARural Business-Cooperative Service

Dan Campbell, Editor

Vision 2000/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.

United States Department of Agriculture

COOPERATIVESRura

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COOPERATIVESJuly/August 2002 Volume 69 Number 3

O n t h e C o v e r :

Bottles of Welch’s fruit punch whirl past the watchful eyes of an inspector in abottling plant in North East, Pa. CEO Dan Dillon discusses how Welch’s addslong-term value to the crops harvested by members of National GrapeCooperative, beginning on page 22. Photos courtesy Welch’s

F E A T U R E S4 Bulking up

Co-ops continue trade recovery, paced by bulk goodsBy Tracey L. Kennedy

6 Rising to the topSmall Wisconsin specialty dairy co-ops finding new niche marketsBy Pamela J. Karg

11 Heavy debt pulls Farmland into Chapter 11;new CEO Terry leads reorganization effortBy Patrick Duffey

12 Closing the gapUtility co-ops see broadband service as way to preserve ruralcommunitiesBy Steve Thompson

17 Rural survivors Can value-added agriculture save struggling rural communities?Congress hopes USDA grant program will provide needed stimulus By Dan Campbell

20 Storm shelter Utility co-ops, USDA working to spread Weather Radio coverage By Steve Thompson

22 Delivering value to membersWelch’s CEO says National Grape members reap benefits fromefforts to expand markets, develop new products By Dan Dillon

27 Unstable farm markets prompt more growers tolook to bargaining co-opsBy Dan Campbell, editor

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

30 MANAGEMENT TIP33 NEWSLINE


B u l k i n g u pCo-ops continue trade recovery, paced by bulk goods

By Tracey L. KennedyUSDA/RBS Agricultural Economist

Editor’s Note: USDA’s Rural Business-Cooperative Service began an annual surveyof cooperative involvement in internationalmarkets in 1997. Prior to 1997, cooperativeexports and imports had been measured atfive-year intervals. An overview of surveyfindings for 2000, with comparisons to 1997-1999, is presented here.

n 2000, U.S. cooperativeexporters continued theirrecovery from the globalcurrency and financialcrises that plagued world

markets in the late 1990s. Export sales ofmore than $5.95 billion were reported, ajump of almost 25 percent comparedwith a 6.4-percent increase for U.S. agri-cultural exports as a whole (USDA). Fol-lowing record sales in 1997, cooperativeexports had fallen off sharply in 1998 andhad begun to recover only slightly by1999 (figure 1).

While trends in U.S. trade point tothe increased importance of differentiat-ed products relative to bulk commodities,exports by U.S. cooperatives remain con-centrated in bulk products. Of the totalfor 2000, $3.99 billion, or 67 percent ofexports, consisted of bulk commoditiessuch as grains, oilseeds, and cotton, com-pared to 41 percent for U.S. bulk sales.The majority of these shipments origi-nated from a small number of largecooperatives. Consumer-oriented orhigh-value products, such as fresh andprocessed fruits and vegetables, account-ed for $1.62 billion, or 27 percent, of the

I

Figure 1—Agricultural exports by U.S. cooperatives, 1980-2000*$ Billions

1980 1985 1990 1995 1997 1998 1999 2000

8.00—

7.00—

6.00—

5.00—

4.00—

3.00—

2.00—

1.00—

0—

*Prior to 1997, cooperative exports were measured at five-year intervals.

Figure 2—U.S. cooperative exports by product category 1980-2000$ Billions

1980 1985 1990 1995 1997 1998 1999 2000

6.00—

5.00—

4.00—

3.00—

2.00—

1.00—

0—

Bulk

Consumer-oriented

Intermediate

total, compared to 36 percent for all U.S. consumer products.Intermediate products—ingredients and partially processedproducts, such as flours, meals, oils and feed—accounted for$235 million, or almost 4 percent, compared to 21 percentfor comparable U.S. sales. In addition, exports of variousfarm inputs and equipment totaled $108 million, or about 2percent, of the total.

Cooperatives’ overall share of U.S. agricultural exports(excluding fisheries, farm inputs, etc.) for 2000 was approxi-mately 11.3 percent. Co-ops had a 21.5 percent share of U.S.bulk commodity exports, 7.4 percent of consumer-orientedproducts, and 2.1 percent of intermediate products.

Among the 91 cooperatives reporting in 2000, export salescontinued to be concentrated among a few of the largest coop-eratives, with six co-ops—each having sales in excess of $100

million—responsible for 79.6 percent oftotal exports. Those six cooperatives repre-sented a range of agricultural products andgeographic areas. The magnitude of exportsamong individual cooperatives ranged fromless than $10,000 to almost $3 billion.

Co-ops recover across mostcommodities; market shifts continue

Exports by cooperatives showed improve-ment across two of three major product cat-egories in 2000 (figure 2). Bulk commoditysales (primarily grains, oilseeds and cotton)dropped more than 50 percent, from $5.4billion in 1997 to $2.5 billion in 1998 and$2.2 billion in 1999. However, they showeda marked improvement in 2000, increasing46 percent, to nearly $4 billion. Indeed,increased sales of bulk commodities account-

ed for most of the gains in total cooperative exports from 1999.Consumer-oriented products (mainly fresh and processed

fruits and vegetables, tree nuts, meats, dairy products andother processed products), which had declined throughout1998 and 1999 (10.8 percent and 17.5 percent, respectively),increased 15 percent in 2000, to more than $1.6 billion.Only 12 percent of the cooperative export gain in 2000 wasattributable to consumer-oriented products, compared to themuch higher proportion (two-thirds) registered by U.S. salesof the same types of products.

Intermediate products (semi-processed products andingredients or inputs such as feed components, flour, meal,oil, and animal byproducts) fell 24 percent from 1997 to1998, then recovered with a 60-percent increase in 1999. In2000, they fell off more than 52 percent, to $235 million.

Asia continued as the largest regionaldestination for cooperative exports in2000, accounting for $2.46 billion, or41.5 percent, of the total (figure 3). LatinAmerica (primarily Mexico) continued toemerge as an increasingly important cus-tomer, growing $1.41 billion, or 23.6percent. African markets also climbed,with $600.7 million, or 10.2 percent ofthe total, while European destinationscontinued to decline in importance,accounting for $532.4 million, or 8.9 per-cent, of co-op exports.

While 2000 appears to have marked aturning point for cooperative exportersfollowing the global economic woes ofthe late 1990s, continued structuralchange via mergers, alliances and dissolu-tions in a number of commodity subsec-tors signal significant change in futureco-op trading patterns. ■


Asia 41.5%

Oceania 0.4%

Europe 8.9%Latin America 23.6%

Middle East 2.3%

Unidentified 5.8%

Africa 10.2%

Canada 7.3%

Figure 3—Cooperative exports by destination, 2000

Total exports $5,952,588,675

Export sales by U.S. farm cooperatives jumped nearly 25 percent in 2000, with bulk goodsleading the way. USDA Forest Service photo


By Pamela J. Karg

Editor’s note: Karg is an agriculturecommunicator based in Baraboo, Wis.,with extensive experience writing aboutcooperatives.

airy co-ops merging tocreate larger marketingoperations has been amajor news story of thepast decade. But a num-

ber of new, small dairy cooperatives thatservice niche markets are also poppingup in America’s Dairyland. Their mis-sion can be complex, but their messageis simple: gaining a share of a growingdairy market for their members.

In a dairy landscape dominated bysuch large co-ops as Dairy Farmers ofAmerica, Land O’Lakes, ForemostFarms USA, Associated Milk Produc-ers Inc., Swiss Valley and Alto Dairy,the new Scenic Valley Protein Produc-ers Cooperative is barely a blip on theradar screen. But what Scenic Valleylacks in size, it makes up for in the ded-ication of its members.

Started 4 years ago, the membershipnow includes 11 farm families. Theyare primarily “colored breed” produc-ers. That is, they milk dairy cows otherthan the familiar black-and-white Hol-steins. Their president and field repre-sentative is Jersey producer Mike Gal-lagher of Darlington, Wis.

“Our goal is to earn more money forour milk,” Gallagher explains. “Withthe cheese yield formula first proposedby the National All-Jersey Associationand adopted by the U.S. dairy industryseveral years ago, we naturally weregetting the full-value price for our

milk. When we didn’t have that avail-able, we were getting approximatelyfrom $1 to $2 a hundredweight lessthan we’re getting right now.”

The Jersey cowTo understand Scenic Valley Co-op,

one first needs to understand the Jerseycow. Compared to the five other majorbreeds milked in the United States,Jerseys give less milk. However, theirmilk is higher in protein and butter-fat—important ingredients for cheese-

makers. In Wisconsin, 85 percent ofthe 23 billion pounds (or 2.7 billiongallons) of milk produced on its 18,000dairy farms goes into producing 300styles and types of cheese. That makescheese king in America’s Dairyland,and it made the colored breed produc-ers believe they had something of valuethey could capitalize on.

“Jersey milk, on average in a Ched-dar cheese plant, will yield about 100 to125 percent per hundredweight ofwhat Holstein milk will yield. Thus, it

R i s i n g t o t h e t o pSmall Wisconsin specialty dairy co-ops finding new niche markets

D

Pep talk—Mike Gallagher nuzzles up to one of his Jersey cows. The new, Scenic ValleyProtein Producers Cooperative is producing for the specialty cheese market. Photos for USDAby Pamela J. Karg


is of more value to the plantand so, of course, to the own-er,” explains Mike Brown,general manager of NationalAll-Jersey, the breed’s nation-al association, headquarteredin Reynoldsburg, Ohio.

“We would meet at night, atleast once a week, to brain-storm ideas and discuss busi-ness,” Gallagher explains.“Finally, we decided it wastime to try it.”

What the original fivefamilies did was contract witha small, privately operated,family-owned cheese plant.Several times a year, milkfrom the Jersey producers ispicked up and processed sep-arately into cheese. Onceaged, cut and wrapped intoconsumer sizes, the producerssell the cheese under their own label toretail outlets. They also offer the“Scenic Valley Jersey Cheese” productsat holiday time, combining it withlocally produced sausages and otherfoods in gift boxes.

“The most interesting thing lastyear, when orders came in, was to seewhere they came from,” Gallaghersays. “There were orders coming fromall over the United States, and we did itby just telling our co-op story to cus-tomers—and then putting a brochurein every box we shipped.”

Telling its story Gallagher is one of five co-op direc-

tors. The others are Gene Dirksen, vicepresident, from Darlington; Steve Hol-land, secretary, from Gratiot; JohnFoley, Darlington; and Jonathon Prim-ley, Blanchardville. Like their other fourmember-farms, none of these five mem-bers milk more than about 100 cows.The members pride themselves on thenatural farming methods they use, pas-turing or grazing their Jersey cows ongreen pasture about half the year.

That pasturing gives the cheesemade from the milk a “more naturalflavor,” the co-op’s brochure explainsto consumers. Cheesemakers agree that

milk shipped from different regions ofthe state or even raised differently—grazed vs. confinement—puts subtleflavors into the milk. As cheesemakers,their challenge is to then bring out andenhance those subtle differences toproduce something consumers want. Infact, that is the basis for the growthseen during the past decade in thenumber of farmstead cheesemakingoperations across the United States.

In addition, pasturing or grazingruminants has also proven healthy forhumans who eat their meat or dairyproducts. Those products have provento be higher in conjugated linoleic acid(CLA), a cancer-fighting “good” fatdiscovered by researchers (see relatedstory).

The Scenic Valley families havepledged not to use hormones in theirherds. Neither is animal rennet used tomake cheese. Rennet is the enzymethat makes the milk set up so curds canform. It occurs naturally in the stom-achs of calves and some other animals.Therefore, Scenic Valley’s contractedcheesemaker uses synthetic rennet. Co-op members use only enough pharma-ceuticals to keep their herds healthy.

These producers are learning first-hand what large corporations and their

public relations and marketingspecialists already know: it’s allabout image. With help fromsources such as the WisconsinMilk Marketing Board and theUniversity of Wisconsin-Madi-son Center for Cooperatives,the producers pulled togethertheir story in a brochure. Thefour-color piece is printed froma computer owned by thecooperative. In fact, the co-opis beginning to acquire moreassets. The members recentlypurchased the old Darlingtontown hall, which was previouslya rural school building. Thissummer they will be renovatingthe town hall into a cheese dis-tribution center. They’ve alsopurchased a cooler and trailerso they can sell their cheese atlocal farmers’ markets and will

make deliveries to a growing list of retailoutlets.

“We’ll fix it up and offer our cheesesfor sale here, along with other Wiscon-sin products and maybe even someantiques or gifts,” Gallagher explains,leaning against the chalkboard stillhanging in the schoolhouse-turned-town-hall-turned-cooperative. LastChristmas, gift boxes were put togetherand mailed from this building. It beatsdoing it at their kitchen tables like lastyear, Gallagher says.

Tough, but rewardingIt’s a bare-bones operation. The

cooler was purchased the last day of the“going-out-of-business” sale held bythe local variety store. The countersalso came from there. They’ve hiredone person to help pack gift boxes,while most members donate their time.The building’s trim could use a coat ofpaint and some remodeling is neededon the inside.

Between the computer hardware andthe building, developing a logo andworking with a consultant to write abusiness plan, the nine dairy farm fami-lies haven’t seen much return on theirinvestments yet. The co-op’s ability togrow is hampered by the fact that the

Valerie Dantoin-Adamski and her husband have started their owncheese label, Northern Meadows Cheddar, and formed a cooperativewith several other producers.


number of dairy farm families in Wis-consin is dropping, though the numberof cows milked in the state remainsconstant at about 1.3 million head. Still,most Wisconsin dairy producers favorHolsteins over Jerseys. And memberslike Gallagher try to do it all—run theco-op, negotiate prices with the cheese-maker, pay state-required bonding feesto ensure the milk checks are good,make calls on local supermarkets thatoffer the cheese, talk to other suppliersand distributors who are showing someinterest in the Scenic Valley idea—andstill find time to farm.

“Easy? It isn’t easy. Let’s put it thatway. But it’s kind of fun,” Gallaghersays of trying to do it all, includingmarketing the co-op’s seven products:Cheddar, Colby, Creamy Jack and Pep-per Jack natural cheeses, as well as gar-lic, plain and jalapeño cheese spreads.“It does take a lot of time and some-

Nearly half of Wisconsin’s 126 cheese plants nowproduce at least one specialty product for a niche mar-ket. Moreover, the amount of specialty cheese producedby each plant has increased to keep pace with con-sumer demand. That’s good news for producers like theAdamskis and the Gallaghers because their CLA-enhanced dairy product fits right into this trend.

Wisconsin now manufactures and markets over 300styles and types of cheeses. It continues to lead thenation in cheese production, accounting for 27 percentof total output. In fact, 85 percent of the 23 billionpounds of milk produced on the state’s 18,000 dairyfarms goes into cheese, or a total of 21 billion pounds.Last year, 197.4 million pounds of that cheese was aspecialty product.

The state is home to the nation’s largest Brie andGouda/Edam cheese plants. The nation’s only Lim-burger and Gruyere cheese plants are located here,just a few short miles from each other. The UW-Madi-son has one of the nation’s Dairy Research Centers,funded by dairy producers and other portions of theindustry. The state has the nation’s only MasterCheese Maker program. It allows cheesemakers withat least 10 years of experience to complete a rigorous2-year program to become certified in specificcheeses. The cheesemakers and the Wisconsin Milk

Marketing Board then use the certification in market-ing programs to tout the quality of Wisconsin-madecheeses with consumers.

The state may never specifically tally cheeses suchas those marketed by Scenic Valley or the WisconsinDairy Graziers co-ops. Cheeses made from a specificbreed, from cows on pasture, higher in CLA, farmstead(made on the farm) or other variations fold into the tallyby general cheese variety. Nevertheless, it’s thosenuances that fuel growth seen in cheese consumptionand help farmers such as the Adamskis and the Gal-laghers capture greater returns.

However, Wisconsin cheesemakers are hard-pressed to keep pace with growing consumer demand.That’s because the state’s milk production remainsstagnant while the number of dairy farms declines. Thestate remains home to nearly 1.3 million cows thateach produce an average of nearly 17,000 pounds(almost 2,000 gallons) of milk each year. But cows inother states produce, on average, more milk per cow.That increases an operation’s efficiency and improvesreturn on investment.

In October, the Professional Dairy Producers of Wis-consin (PDPW) issued its second “state of the industry”report. The farmer-led educational group encouragedWisconsin producers to grow their businesses so they

Wisconsin dairy industry has marketing options

Lesson #1—Gallagher uses an old blackboard in Scenic Valley’s new offices to underscore amessage near and dear to the hearts of co-op members everywhere. The building was for-merly Darlington’s town hall and before that a rural school.


times it seems like just bits and pieceshere and there. But a lot of time andcontacts and legwork.”

Currently, only about 10 percent oftotal milk production by Scenic Valleymembers is separated out for produc-tion under their own label. This year,the co-op hopes to create enoughdemand that members have 50 percentof their milk made into their product.When they do, they’ll improve theirpossibilities for grabbing a larger shareof a growing national cheese market,Gallagher says. (See sidebar above.)

New co-ops in townScenic Valley might have been the

first dairy co-op in Wisconsin to try tovalue its milk and cheese for its grazingand Jersey characteristics. Yet, it’s notthe only one around. Since Scenic Val-ley formed, at least two other co-opshave started. One is located outside

LaCrosse, while another is located innortheastern Wisconsin, near Seymour.

“Within the last two years, webecame aware of some nutrients(including CLA) that were in the milkfrom cows on pasture that are not pre-sent in milk from cows fed typicalconfinement feed,” notes Rick Adams-ki. He and his wife, Valerie Dantoin-Adamski, operate his family’s 100-year-old Full Circle Farm. “Westarted exploring the possibility ofmarketing those nutrients. We’re alsolearning more about the nutrients;there are more nutrients in the milkfrom these cows, so we have a wholenew area to explore.”

Typically, their milk goes to theemployee-owned Antigo, Wis., CheeseCo. In conducting experiments todetermine the level and value of theCLA in milk and then cheese, theAdamskis contracted with a Green Bay

cheesemaker to process it separatelyinto white Cheddar cheese. Testingproved the cheese retains the higherCLA levels of the milk.

“We’re lucky we live in Wisconsinwith so many smaller cheese plants,”Dantoin-Adamski says. “Rather thanlearning the cheesemaking process andputting in something here on the farm,we contracted with Jim to process ourmilk into cheese—just as we do forhay-making and everything else on thefarm so that we can just concentrate ongrazing our cows.”

The Adamskis began marketing theseasonal cheese under their ownlabel—Northern Meadows Cheddar—directly to consumers and have formeda cooperative with several other pro-ducers. They market it to some naturalfood stores in northeastern Wisconsinand in Madison, and a few upscaledelis carry the product. However,

can get their fair share of the increasing demand fordairy products.

Producers can grow their operations in several ways,said Hank Wagner, an Oconto Falls, Wis., producer andPDPW president. Producers can expand, as his familydid, to milk 400 cows in a new set-up. Alternatively,there’s plenty of room to grow production per cow inWisconsin, which ranks far below other dairy regions,such as California, Idaho and New Mexico.

Producers could benefit from developing and follow-ing a business plan, he said. In fact, a Harvard Universi-ty study showed that the amount of time spent in plan-ning a business directly relates to its success. Ownersspending six months or less planning ended up with an80 percent failure rate. Those who took a year or moreto plan ended up with an 80 percent success rate.

Wagner said there are still other ways Wisconsinproducers can grow their businesses to increase milkproduction. Some producers concentrate solely oncows, hiring other farmers to custom raise heifers.

Other producers have purchased total-mixed-rations(TMR) equipment and worked with nutritionists toensure cows eat well. Some producers routinely cleantanks so cows have access to clean water and drinkmore. Both are small moves, but improve milk produc-tion per cow as well as improve efficiencies while cost-ing producers next to nothing, Wagner said.

Even with major changes—better barn ventilation,

better bedding to improve cow comfort, or installing aflat barn parlor—milk production can increase whileproducers save money doing some of the work them-selves or even getting help from neighbors. That’s whata group of Crawford County, Wis., producers did whenthey worked together to help each other retrofit animalhousing units and work on a simple milking parlor.

To some, these moves may seem like obvious busi-ness decisions to make. Yet, the traditions surroundingWisconsin’s dairy industry have made it difficult forsome producers to consider changing, or even increas-ing their operation size. Instead, the state has for toolong debated size rather than tackle business efficien-cies, market share and capturing farm profits in a grow-ing marketplace. Wagner and the PDPW leaders want tochange that.

“What I want Wisconsin dairy producers to under-stand from this report is that there is cause for hope.There is a future in this industry. People can make mon-ey. Only none of us is doing it the same way our parentsor grandparents or great-grandparents did it. We can’t.No business can,” he added.

Whether it’s changing the operation or developing aniche in the specialty cheese market, PDPW is tellingWisconsin producers it’s time to renovate and innovate.Producers like the members of Scenic Valley and Wis-consin Dairy Graziers are heeding the advice. ■

—By Pamela J. Karg


Dantoin-Adamski wants to make itavailable to everyone, regardless ofincome, because everyone deservesgood, nutritious foods.

Seeking higher premiumsDantoin-Adamski believes the higherCLA level of Northern Meadow cheesecan open the possibility of premiumsbased on the CLA content in milk, ifthe milk and related dairy products canbe marketed for their CLA content.The all-natural Northern Meadowcheddar has a flavor distinct to theregion where it’s made, and that flavorwill vary year-to-year depending onsunshine, rain and plant growth. FullCircle sold its cheese, made at a smallcheese plant in DePere, for $5 perpound. At that price, the cheese couldsupport a milk payment price of about$16 per hundredweight.

“The Adamskis’ efforts may providea model for other dairy grazers inter-ested in adding value to their milk pro-duction,” said Stan Shaw, administratorof Wisconsin DATCP’s marketing divi-

sion. “By focusing on a possible con-sumer benefit found within theircheese, they may have a firm founda-tion to enter the marketplace.”

“We have combined efforts with fourother family farms to form a new coop-erative called the Wisconsin Dairy Gra-ziers Co-op,” Dantoin-Adamskiexplains. “These farms graze cows in vir-tually the same way our farm does. Weare pooling our milk and cheesemakingso that we can make enough volume toreach the economies of scale needed tomarket our cheese efficiently.”

The handcrafted cheese is madeexclusively from the milk of these cowsthat graze on grass and clover mead-ows. The Adamskis note that onlywhen cows graze on fresh plantsdirectly in the field can they obtainhigher levels of CLA. “This superiorWisconsin cheese has a flavor that, likea fine wine, is unique to the region,”Dantoin-Adamski says, pointing outthat the conservation award-winningFull Circle Farm and the other mem-bers of the co-op are located about 25

miles from Lake Michigan and on theedge of the Nicolet National Forest.

Already participants in USDA’s Sus-tainable Agriculture Research and Edu-cation program in the 1990s, theAdamskis received a $20,000 Agricul-tural Development and Diversificationgrant this summer from the WisconsinDepartment of Agriculture. They areusing it to identify the marketing feasi-bility of pasture-based cheese and dairyproducts for the Wisconsin Dairy Gra-zier Cooperative, the newest suchorganization to form. The Adamskisand the Gallaghers have talked aboutsimilar challenges and opportunities.

“We’d like to stay right around 25member farms,” Gallagher explains.“But there are ways that our co-opcould work with other groups, likethe Adamskis, to offer other productsthey might make. And I think all thesmall co-ops need to get togetherthrough an organization, like theCenter for Co-ops, to talk over com-mon business issues so that we’re alllearning and growing.” ■

Increasingly, proponents of grass-fed livestock sys-tems are gaining support and scientific research to sub-stantiate the benefits of the food products they market.In addition, several government-sponsored projects findenvironmental and economic benefits when producersswitch to grazing operations.

According to Jo Robinson in her book “Why Grassfedis Best!,” meat, eggs and dairy products from grass-fedanimals “are lower in total fat and calories but richer in“good” fats, such as omega-3 fatty acids and the can-cer-fighting fat, CLA (conjugated linoleic acid.). Theyalso have higher levels of a number of antioxidant vita-mins.” Robinson, a New York Times best-selling writer, isalso the principal researcher for the “eatwild.com” Website. Her interest in grass-fed products grew out of herprevious book, “The Omega Diet,” co-authored with Dr.Artemis Simopoulos. Her research is based on multiplesources, including work completed by Dr. Tilak Dhiman.

Now a dairy nutritionist at Utah State University, Dhi-man came to the United States from his native India as avisiting student to the USDA’s Dairy Forage Research

Center at the University of Wisconsin-Madison and on afarm outside Prairie du Sac, Wis. Dhiman found that thefatty acid, produced by bacteria in rumen, is found inespecially high levels in milk and meat from animalssuch as cows, sheep and goats. Researchers also foundthat the CLA content of milk is as much as five timeshigher when cows graze green, predominantly ryegrassor on natural pastures, than when they eat diets consist-ing of 50 percent conserved forage (such as alfalfa andcorn silage) and 50 percent grain.

At the same time, researchers found CLA inhibits thegrowth of chemically induced skin and stomach cancersin mice, as well as cancer in the mammary gland of rats.Synthetic CLA similarly changed the body compositionof laboratory animals; they developed more muscle andhad less body fat. Human nutrition research in the foodscience department at the University of Wisconsin-Madison has shown that CLA is part of essential fattyacids people need to fight cancer. While the relationshipbetween diet and cancer is extremely complex, thestudies bolstered specialty dairy marketing efforts. ■

Making a case for grass-fed animals

Patrick DuffeyUSDA Rural Development

asting effects of the agri-cultural recession ofrecent years, which hasleft some farmers reelingand driven others out of

business, finally caught up with NorthAmerica’s largest farmer-owned cooper-ative. Despite $11.8 billion in sales lastyear, the weight of $1.9 billion in liabil-ities from rapid expansion in the 1990sto better compete on world marketsforced Farmland Industries, KansasCity, Mo., to file for Chapter 11 bank-ruptcy protection on May 31. UnderChapter 11, firms seek protection fromcreditors while they reorganize theirbusiness. The bankruptcy process cantake a year or more to complete.

In the wake of the filing, the coop-erative has begun a summer-longreorganization study to explore itsfuture. The investment bank UBSWarburg has been hired to help evalu-ate what might be sold to reduce costsand raise cash.

After less than 2 years at the helm,Robert Honse, Farmland’s chief execu-tive officer, retired at age 58 in earlyMay. Farmland’s 22-member boardunanimously chose Robert B. Terry, 45,to succeed him. Terry has been Farm-land’s executive vice president, generalcounsel and corporate secretary. Terrysaluted Honse for his 30-year careerwith the cooperative and help in reduc-ing debt by $500 million, cutting cor-porate expenses in half and securing anew bank agreement.

Terry madeimmediate changeson his executivestaff. Steve Rhodes,48, is the new exec-utive vice presidentand chief financialofficer, replacingJohn Bernardi, whohas left the cooper-ative. Rhodes hadbeen a vice presi-dent and controller. Bob Schuller, 41,succeeds Terry as vice president, gener-al counsel and corporate secretary. Hehad been associate general counsel.Dennis Alt, another associate generalcounsel, was named vice president forstrategic projects and will lead thereorganization effort. Tim Daughty,48, is the new vice president for admin-istration.

The 73-year-old cooperative waspushed over the brink by an estimated$30 million “run on the bank” in lateMay due to an aggressive early redemp-tion demand from subordinated debtholders who had heard news of poten-tial bankruptcy. The bonds are held byabout 20,000 individuals who provideabout $570 million in debt financing.The bankruptcy court will inform thoseunsecured creditors on how to confirmand address their claims.

The cash-flow crisis was madeworse by a sagging nitrogen fertilizermarket in recent years. The situationintensified as drought has squeezedfarmers in the West and heavy rainssoaked the Midwest, delaying crop-planting. The bankruptcy filing covers

Farmland Industries, Farmland Foods,Farmland Pipe Line Co., FarmlandTransportation (transportation broker-age) and SFA Inc., a Midsouth retailfarm store operation. The filing doesnot affect several Farmland sub-sidiaries, including Agriliance (a fertil-izer marketing venture with CHSCooperatives and Land O’Lakes);ADM-Farmland (a grain marketingventure with Archer Daniels Midland);and Farmland National Beef, a 5-year-old beef processing venture with U.S.Premium Beef (which has the right offirst refusal to buy any available Farm-land stock in the venture).

While maintaining most of itsoperations, the cooperative plans tocut its workforce. In the past 2 years,Farmland had trimmed 4,000 jobs butstill employs about 13,000 people,including 900 in the Kansas City area.Just before filing for bankruptcy,Farmland paid its employees early andasked them to cash their checks within24 hours. Since then, Farmland hasclosed 16 convenience stores in north-east Arkansas that it acquired when it


H e a v y d e b t p u l l s F a r m l a n d i n t oC h a p t e r 1 1 ; n e w C E O T e r r y l e a d sr e o r g a n i z a t i o n e f f o r t

L



By Steve Thompson, USDA Rural Development

t wasn’t so long ago

that telephone service

in rural areas usually

fell short of the standards city

dwellers expected. My grandmoth-

er, who lived in a small Ohio farm

town, had a telephone with no dial

until the 1980s. To make a call, she

picked up the receiver and gave the

number she wanted to the operator.

Some subscribers still had party

lines: phone lines that were shared

between a number of houses, mak-

ing it possible for nosy neighbors to

listen in on phone conversations.

Today the scene has changed

dramatically. Most rural areas

have basic telephone service com-

parable to that available in cities.

While many rural areas are still

struggling to gain access to Internetservices, others are further along thancities in offering cutting-edge, broad-band telecommunications service.That’s appropriate, rural telecommu-nications advocates say, becausebroadband communications give ruralareas access to many of the servicesonce confined to larger populationcenters—services that are becomingmore and more vital to the economichealth of America’s heartlands.

These services include better educa-tional opportunities and access to medicalspecialists for people living in isolatedareas. It is becoming common for ruralstudents to take courses not available attheir local schools through electroniclinkups that create “virtual classrooms,”where they are able to interact withinstructors and other students miles away.

Similarly, telemedicine technologymakes it possible for medical specialiststo examine and treat patients living inremote locations. It’s all made possiblethrough the use of computers andbroadband communications links,which many rural telephone co-ops areaggressively promoting.

What is broadband?The capacity of a line or interface to

carry information is referred to as“bandwidth.” The wider the “band,”the more information. Voice communi-cations over telephone lines take up lit-tle bandwidth compared to that neededto transmit television signals or for fastcomputer links.

Broadband communications, usingmore sophisticated transmissionhookups, make possible distance learn-ing, telemedicine and a vast range of

other computer-based services. Ineffect, this technology makes it possibleto carry on many kinds of businessactivities irrespective of location, offer-ing hope to many rural communitieshit hard by the recent vagaries of agri-cultural markets.

C l o s i n g t h e g a pUtility co-ops see broadband serviceas way to preserve rural communities

I


Data on a beam of lightTelephone signals were first carried

by ordinary copper wire, which couldhandle only a few dozen channels perstrand. Coaxial cable, which has a sin-gle wire in the middle surrounded by awoven wire sheath, came into wide-spread use in the 1950s, and had acapacity about a thousand times that ofsimple wire.

Microwave radio links, using bothsatellites and earth-bound chains oftransmission towers, offered evenmore capacity—although atmosphericconditions can compromise theireffectiveness. However, the advent ofthe computer age, as well as the riseof the mobile phone, resulted in avastly expanded demand for band-

width, a demand that these conven-tional transmission mediums werehard-pressed to fill.

The answer was to transmit datawith light, using fiber optics. Becauselaser light is made up of identical wavesof the same frequency, it can travellong distances without scattering. It canalso be modulated, like a radio wave, tocarry information. A special glass,developed in the 1970s, makes it possi-ble to transmit laser light through thinfilaments for up to 150 miles before it’snecessary to amplify it. A thin bundleof these filaments is capable of carryinghundreds of times more data than acoaxial cable.

By the late 1980s, fiber-optics cableswere being used increasingly for tele-

phone trunk lines, and cable televisioncompanies used them to transmit pro-gramming cross-country.

New Mexico co-opboosts education

By 1990, the concept of distancelearning —in which a teacher interactswith students in other locations viatelevision —was being tested by a fewpioneers. That’s when Dr. Robert Har-ris learned about it. Dr. Harris was thegeneral manager of ENMR Plateautelephone co-op, which serves part ofeastern New Mexico and several coun-ties in west Texas. Dr. Harris learnedabout a distance learning project inArizona, and immediately decided thata similar project could be useful to stu-dents in ENMR Plateau’s service area.

Eastern New Mexico was ideallysuited for such an experiment. It isbeautiful, but very sparsely populated,with a number of small, isolated com-munities. Dr. Harris knew that therewere schools throughout the area thathad so few students it wasn’t possible tobring them specialized educationcourses such as foreign languages, dif-ferential calculus, and other higher-lev-el subjects.

He quickly found a willing partnerin Clovis Community College in east-ern New Mexico. The president of thecollege, Dr. David Caffey, wasintrigued by the idea, and very quicklyan agreement was drawn up for a 5-year pilot program under which thecollege would provide remote class-room instruction through a fiber-opticstwo-way television link.

Drs. Harris and Caffey first dis-cussed the project in the fall of 1990.Only a few short months later, in timefor the spring semester of 1991, thepilot program was up and running with49 small-town students. The collegeobtained funding under the “E-Rate”program, a Federal CommunicationsCommission effort that taxes long-dis-tance telecommunications companiesand makes the funds available to defraythe cost of telecommunications servicesin schools and libraries.

ENMR granted the college an ease-

Tiny strands of glass fiber (left) cancarry far more information using beamsof light, than can older coaxial andcopper cables (below).

ment for the use of the fiber-opticslink, and two-way television systemswere set up in 12 small school districts.The first video set-up was expensiveand clumsy, using direct fiber-opticslinks with the switching equipment inENMR’s main office in Clovis. Thesystem made huge demands on band-width, and links had to be manuallyswitched at the headquarters.

Today, the use of new digital tech-nology is making it possible for the pro-ject to bring distance-learning to nearlya thousand students using less than 1percent of the original bandwidth.Computer software is now taking careof switching, allowing the college totake over all administration of the dis-tance-learning program; the co-op nowmerely provides the infrastructure.

Expanded curriculum As the program has matured, the

curriculum has expanded, and recentstate legislation has made it possible forstudents taking some advanced coursesto earn college credits concurrentlywith their high school credits. The sys-tem is also used after hours by adultstaking college-credit courses and by theNew Mexico Department of Labor foroutreach to unemployed workers.

The carrying capacity freed up bymore efficient technology is used forupgraded telecom service to individualand business subscribers, includinghigh-speed Internet service over DSLlines (see sidebar).

The fiber-optic lines, which wereoriginally meant to serve only schools,are ideally situated for serving the co-

op’s rural subscribers, most of whom livenear the participating schools or close tothe fiber-optics lines. Because the signaldegrades over distance, DSL is imprac-tical more than three miles away fromthe exchange or a fiber optic terminal.

USDA helps Kansas co-opwith distance learning project

Another co-op distance-learningpioneer is Rural Telephone Service Co.Inc., located in northwestern Kansas.Rural Telephone was one of the firstcompanies to bring fiber optics intorural service, laying several routes in1988 with financial help from what wasthen the Rural Electrification Adminis-tration (REA), now USDA Rural Utili-ties Service.

“It was obvious to us in the mid-

Fiber optics offer the most efficient means of carryingtelecommunications over trunk lines. But it isn’t practi-cal to use fiber optics for the connection between yourtelephone or computer and your telecom exchange. Forthat, a copper wire hookup is still used.

Computers that don’t share a local network talk toeach other through telephone lines using modems. Amodem translates the computer’s outgoing data into aform that can be transmitted through the phonehookup. On the other end of the line—usually at one’sInternet service provider (ISP)—another computeruses a modem to retranslate the information into a lan-guage that computer can use. The ISP computer,called a server, routes the signal to its final destination.Receiving information from another computer worksthe same way, but in reverse.

The first modems were hooked up to telephonesthrough little speakers and microphones in a cradle thatheld the telephone handpiece. Today, most home comput-ers still use voice lines, but the modems are part of thecomputer and are hooked directly into the phone circuit.

Today’s phone modems are faster than earlier ver-sions, but their top speed—nominally 56.6 kilobits persecond, but actually somewhat less—is barely adequate for most purposes, including down- and up-loading files and browsing the World Wide Web. Thespeed of such modems is limited by the capacity oftelephone circuits that are designed to carry voices,not digital data. Anyone who has downloaded a largefile using a regular phone modem—a task that can

take an hour or more —knows their limitations. Not to worry. There are other ways to hook into the

Internet that offer much higher speeds. Cable TVproviders offer high-speed services that use their digitalcable systems, but the speed can fluctuate dependingon the number of users on the circuit. Another service,offered through telephone providers, is Integrated Ser-vices Digital Network (ISDN), which sends both tele-phone and computer traffic over a special digital link.Currently, ISDN service is expensive, and computerspeeds are limited to 128 kilobits per second. It is bestsuited to businesses that need the special capabilitiesof an internal digital telephone system.

One of the most popular high-speed services forhome and small business users is Digital SubscriberLink (DSL). DSL uses regular copper telephone lines, butsends compressed data through a special modem overhigh frequencies unused in regular voice hookups.Because it doesn’t use voice frequencies, it can sharethe regular telephone line. The connection is always“on,” and it doesn’t interfere with regular telephone ser-vice, the way a phone modem does.

Best of all, connection speeds are anywhere from 6to 125 times faster than regular dial-up modems—usual-ly about 1.5 megabits per second. DSL is offered to busi-nesses and homes by many rural telephone co-ops. TheNational Exchange Carrier Association, a quasi-govern-mental agency, estimates that 65 percent of rural phonelines are now capable of carrying DSL service. ■

—by Steve Thompson

Tapping into the Internet


1980s that if we wanted to build for thefuture, fiber optics were the way to go,”says Larry Sevier, general manager ofthe co-op.

A distance learning program soon fol-lowed. Today, 13 high schools, ColbyCommunity College and Hays State Uni-versity participate in the program, bring-ing advanced and specialized curricula torural Kansas students. A grant from theRural Utilities Service’s Distance Learn-ing Program is being used to expand thetwo-way interactive television networkand add classrooms to the system.

More recently, Rural Telephone,with the help of RUS, is helping makeit possible for Phillips County Hospi-tal, located in the town of Phillipsburg,Kan., to offer improved medical ser-vices all over the county—an especiallyimportant service for a communitywith a widely scattered population.

The project came about after thenon-profit organization that operatesthe hospital, Great Plains HealthAlliance, embarked on an effort to con-nect member clinics and hospitals on acommon data network. With the help

of the Economic Developmentoffice of Rural Telephone,Great Plains, which is head-quartered in Wichita, Kan.,decided to build its pilot pro-ject in Phillips County.

The healthcare organizationwas able to form a consortiumof health care facilities, includ-ing clinics and a retirementhome, which received an RUStelemedicine grant of $247,000.The money is being used toinstall computers in eachdepartment of the hospital andin participating clinics and

nursing homes. In addition, new fiberoptic lines are being laid between nurs-ing homes and nearby hospitals inPhillipsburg and Logan, another townin Phillips County.

For now, telemedicine cameras andmonitors will be installed only in PhillipsCounty Hospital’s education departmentand one clinic—but data-sharing capa-bilities will mean a boost in efficiency forall the participating facilities. The even-tual goal is a broadband network provid-ing data-sharing and telemedicine capa-bilities to participating healthcareproviders across several states.

Jim Wahlmiere, the administrator ofPhillips County Hospital, is lookingforward to completing the pilot projectby the end of this year. “I want to thankRural Telephone for all their help onthis, especially for their assistance ingetting the USDA/RUS grant,” he says.

Rural Telephone has used its fiber-optics lines to make DSL hookupsavailable to more than 80 percent ofits subscribers. And its willingness tooffer state-of-the-art telecom servicehas helped it compete for subscribersin Norton and Almena, towns servedby giant Southwestern Bell, where


While only 5 percent of American towns with popula-tions under 10,000 have access to broadband telecom-munications—according to a 2000 report by the Com-merce Department—funding is available to address theproblem.

In late March, Agriculture Secretary Ann Venemanannounced the availability of $300 million for distancelearning and telemedicine grant/loan combinations fromUSDA Rural Utilities Service (RUS). The applicationdeadline for these funds is Aug. 31, 2002.

Both the Bush administration and Congress have rec-ognized the importance of rural access to broadband.The Farm Security and Rural Investment Act of 2002,signed into law, amends the Rural Electrification Act of1937 (which authorizes USDA Rural Developmenttelecommunication programs) to insert a new title pro-viding specifically for loans and grants for “the construc-tion, improvement, and acquisition of facilities and equip-ment for broadband service in eligible rural areas.”

The Act makes available $20 million in loans and loanguarantees for each of the fiscal years 2002 through2005, and $10 million each in 2006 and 2007. These loansby themselves could generate a total of $2 billion in pri-vate investment in rural broadband. In addition, another$80 million in loans for the construction of new broad-band facilities is authorized for fiscal year 2002 underthe Broadband Pilot Loan program, originally institutedin 2001. However, RUS will not be taking new applica-tions for the Broadband Pilot Loan program this year,because it has applications on hand for in excess of$350 million.

Besides these special programs, USDA Rural Devel-opment plans to continue using general telecommunica-tions program authority, which includes hardship, “costof money,” rural telephone bank and guaranteed loans,to fund broadband expansion. Since 1995, every newtelephone line funded by RUS has been capable of car-rying DSL service. ■

USDA providing funding for rural broadband service

The Clovis Community College distance learning equip-ment is used after school hours for adult educationand outreach to unemployed workers. Photo courtesyENMR Plateau Cooperative


the co-op serves 95 percent of themarket.

Sevier has one regret about being afiber-optic pioneer. When the co-op’sfirst fiber-optics lines were installed,nobody had any idea how great andhow quickly demand for service wouldgrow. Some of the cables have beenaugmented, and advances in electronicshave made it possible for the existinglines to carry more traffic. But Sevier

says he would lay larger-capacity cablesto begin with if he had it to do again.

Unlimited possibilitiesfor rural America

Both ENMR Plateau in New Mexicoand Rural Telephone in Kansas see theavailability of high-speed Internet accessas crucial to the future economic healthof their service areas. The quality of edu-cation that distance learning makes pos-

sible for small school districts—as well asthe higher standards of medical careoffered by telemedicine—encouragefamilies to remain in rural areas insteadof moving to more urbanized locations.And high-speed Internet, teleconferenc-ing and related services using broad-band communications to make it possi-ble for businesses in rural areas tocompete in the national and worldeconomies in ways formerly not possible.

Broadband makes it possible forcompanies that rely heavily on tele-phone or Internet ordering to offeremployment to under-employed laborpools in rural areas. It also facilitatestelecommuting—working from a loca-tion remote from the office or otherplace of business—making it possiblefor many people to work at jobs any-where in the country, without movingaway from home.

Neither co-op thinks that the possi-bilities of high-speed data transmissionhave even come close to being fullyrealized. In the future, broadband com-munications may offer rural areasacross America the ability to developnew alternatives to reliance on farmincome and erase the economic gapbetween town and country once andfor all. ■

Telemedicine equipment enables this boy in a rural Kansas town to be examined by doctorsin a distant location. Photo by Charlie Riedel

Food business opportunities theme of NICE keynoter New opportunities for cooperatives within the food business will be the subject of the keynote remarks at the 74th Nation-

al Institute on Cooperative Education (NICE) in Chicago Aug. 5-7. David Kohl, Virginia Polytechnic Institute & State University,will discuss “Mega Trends in Agriculture and the Food System: How Cooperatives Can Benefit,” at the first general sessionon Aug. 5.

Cooperative benefits contained in the new farm bill will be examined by J. B. Penn, USDA’s under secretary for farm andforeign agricultural services. Eight symposiums are scheduled during the conference examining: biotechnology, co-op divi-dends from research, the role of cooperative boards in governing of joint ventures and alliances, audit committee responsi-bilities, co-op financial challenges, home-grown fuels, identity-preserved products and cross-border cooperatives.

William Davisson, chief executive officer of GROWMARK Inc. and chairman of the NICE Education Committee, will pre-side at the NCFC education foundation banquet Aug. 7 and will provide concluding remarks for the conference.

NICE is sponsored by the National Council of Farmer Cooperatives, which has named an executive committee to explorethe future needs of cooperative education and the future of the NICE conference. For registration information, contact TomLittle at (202) 626-8700, or visit the NCFC Web site at www.ncfc.org, or write: NCFC Education Dept., 50 F.St. NW, Suite 900,Washington, D.C. 20001


By Dan Campbell, editor

he internal combustion engine improved thequality of life in rural America, but it also mayhave doomed many of America’s rural farmingtowns by expanding trading areas beyond thedistance a horse could travel in a day (the basis

on which many rural trading centers were founded). Many ofthe farming communities that survived the coming of the auto-mobile—particularly in the Great Plains—may not, however,survive continuation of a farm policy that subsidizes produc-tion of commodity crops, leading to ever fewer, larger farmsproducing more and more of the nation’s food and fiber, saysBruce Babcock, an economist at Iowa State University.

Ironically, the success story of the American farmer—hisability to produce huge volumes of high-quality, low-costfood—has been the downfall of thousands of rural communi-ties, Babcock said. Speaking as a panelist on a rural develop-ment session at USDA’s 2002 Agricultural Outlook Confer-ence, he noted that “However much we try to combat ruralstagnation with price supports and commodity production, Ithink it will lead to large portions of physical and social infra-structure leaving vast areas of the Great Plains.”

He cited an article in a recent issue of the “The Econo-mist”magazine showing that rural counties that have receivedthe most farm subsidies during the past 20 years have alsosuffered the greatest population declines. “I’m not sayingsubsidies caused the population to decline,” Babcock said.“But it is clear that encouraging commodity production withprice subsidies has not kept people in rural areas.”

Babcock said that while Congress (in his view) may beunintentionally accelerating outward migration from somerural areas by showering “unprecedented levels of support”on commodity crops, it is simultaneously seeking another,more promising path to fighting rural stagnation: encourag-ing new value-added agricultural endeavors.

In 2001, USDA launched a new program to spark develop-ment of more value-added agricultural enterprises, as autho-rized by the Agricultural Risk Protection Act of 2000.Though the Rural Business-Cooperative Service, it provided$20 million in grants for 62 value-added ag projects, rangingfrom a joint venture of two Illinois cooperatives studying thepossibility of building their own flour tortilla plant, to a new

market development project launched by the California WildRice Growers Association. (The entire list of grants, as well asinformation about upcoming grant rules and deadlines, can beviewed at www.rurdev.usda.gov/rbs/coops/VADG.htm). Manyof the grants were awarded to cooperatives, but all producerscan apply for them.

However, the 62 projects funded represented just a frac-tion of the 509 applicants who sought $136 million in fund-ing, according to panel moderator Randall Torgerson, deputyadministrator for USDA/RBS Cooperative Services.

New Center to promote value-added ag projectsCongress—through the 2002 Farm Bill—is doubling

USDA’s annual value-added grant program to $40 million foreach of the next six years. The money will be used both asgrants for more value-added enterprises and to fund (with $2million per year) an agricultural marketing center. One suchentity, the Agricultural Marketing Resource Center (AgMRC)at Iowa State University (of which Babcock is a member ofthe executive committee), has been formed through a part-nership of Iowa State, Kansas State and Oklahoma State Uni-versities and the University of California, with financial sup-port from USDA. Smaller amounts of the appropriation will

T

R u r a l S u r v i v o r s Can value-added agriculture save struggling rural communities? Congress hopes USDA grant program will provide needed stimulus

The future of many farming-dependent rural communities mayhinge on the ability to develop new, value-added ventures thatcreate jobs and keep wealth at home. Congress has doubled thesize of a USDA grant program intended to promote value-addedagriculture. USDA photo by Ken Hammond


also be used to fund several new value-added innovation centers and for aresearch project on value-added agri-culture.

The AgMRC’s main objective is tocreate an electronic, Web-based librarythat producers and producer groups canaccess for information that will supporttheir value-added endeavors. AgMRCstaff will collect and interpret relevantinformation and conduct research onvalue-added agriculture. The centerwill also compile information on busi-ness principles, legal, financial andlogistical issues that producer groupsshould consider before investing theirmoney in a project, and it will coordi-nate research and extension programswith value-added ag groups. The centeris a joint venture of extension, researchand industry, Babcock said, noting thatthe center will operate with an industryadvisory council.

And what exactly is “value-added”?Babcock said there are two basic defini-tions: 1.) Any activity that increases the

per-unit price received for farm produc-tion; 2.) Any activity that transforms aproduct into another product that fetch-es more revenue on the market.

But will more value-added agricul-ture increase rural vitality? “I don’tknow,” Babcock said. Experience todate, he said, “has shown that large-scale, capital-intensive, value-addedenterprises, such as ethanol, will notslow down migration from ruralareas.” People are more mobiletoday—they will live wherever theythink can have the best life, he noted.“All things being equal, businesseswill locate in areas where workerswant to live.”

Three ways to make moneyBabcock said there are three basic

ways for farmers make money. “Thefirst is to be lucky,” he said. “MostIowa corn/soybean farmers made lotsof money in 1997—both yields andprices were high; But not many willobtain financing based on luck.”

The second way is to offer a differ-entiated product or service that returnsmore from the market than it costs toproduce or deliver. This means success-fully duplicating what someone else isdoing or finding a new kind of market.

The third alternative is to produce acommodity at a lower unit cost thananyone else can. “This is what drivesmarket prices down,” he said, addingthat investments in meat packing andethanol plants are attempts to makemoney by being a low-cost producer ofa commodity. “It moves farmers fromproducing one type of commodity totwo commodities.”

The experiences of the last 20 yearsof farmer-owned enterprises “suggeststhat groups of farmers can be the low-cost provider of a value-added commod-ity if they hire high-quality externalmanagement and relinquish day-to-daycontrol to management,” he said.

“Farmers face a different set of chal-lenges when they want to produce a dif-ferentiated product,” Babcock said. He

Doyle Freeman, a beekeeper/honey producer fromCherry Tree, Pa., and managerof the Penn’s Corner FarmAlliance, provided the value-added panel with a small mar-keting co-op’s perspective. Theco-op was formed with ninemembers in 1999 to help farm-ers in the Pittsburgh areabypass wholesalers and dis-tributors and sell directly toupscale restaurants and gro-cery retailers.

Consider the situation ofone member who grows greenbell peppers. The farmerwould traditionally sell hiscrop to a Pittsburgh whole-saler for about $4.85 perbushel. “The wholesaler would then sell to a distributor,who would then sell to a purveyor in Greensburg, 40miles east, and the purveyor would make final delivery

to restaurants—by which time the value of that bushelof bell peppers had increasedto $11.90,” Freeman said. Thisis a common problem, andUSDA data shows that, onaverage, farmers earn onlyabout 21 cents of the con-sumer’s food dollar, he noted.

“That was the traditionalsystem,” Freeman said, “buttwo people have problemswith it: the grower—whooften earns less than cost ofproduction, and the restau-rant chef,” who loses a greatdeal of freshness due to adelivery system that mayhave taken two weeks fromfarm field to kitchen.

By marketing through the co-op, the bushel of bellpeppers sells for $14 (the chef will pay a premium forimproved freshness), and the farmer nets $11.20.

Pennsylvania co-op targets upscale restaurant trade

When he’s not helping his co-op sell fresh produce, honey,meat and eggs to Pittsburgh’s upscale restaurants, bee-keeper Doyle Freeman (left) sells his wares at farmers’markets. Photo Copyright Andy Starnes/Pittsburgh Post-Gazette,2002. All rights reserved.

noted that a member of his advisorycouncil says “the three biggest chal-lenges farmers face in this arena are:marketing, marketing and marketing—meaning that most good ideas failbecause farmers do not realize how dif-ficult it is to create a market for a newproduct. A mentality of ‘I will produceit, and a market will be created’ just doesnot work,” Babcock said. That’s whylarge food companies spend millions ofdollars on test-marketing and advertis-ing. Even for good new products that domake it to the market, getting shelfspace in retail stores is becomingincreasingly difficult, he noted.

Farmers can instead concentrate onwhat they do best: production, and leavethe marketing to others, Babcock said.“This can work if you are producing aproduct that is difficult to procure else-where, such as the 75 Iowa hog produc-ers who sell pasture-raised hogs toNiman Ranch for a premium over com-modity price for a unique product: nat-ural pork.” If consumers continue to

demand more information about theway food is produced, this type of value-added agriculture may become a majorinfluence, as it has in Europe, he noted.

Soybean co-op seeksnew marketing avenues

Also participating on the same panelwith Babcock were two value-addedpractitioners—one representing a medi-um-sized processing co-op, the other asmall marketing co-op (see sidebar).The medium-size co-op, South DakotaSoybean Processors (SDSP), was found-ed in 1996 as a new-generation co-op inVolga, S.D. That co-op has completed afifth consecutive successful year trans-forming soybeans supplied by 2,100members into soy oil, meal and hulls.

Rodney Christianson, CEO of theco-op since its founding, said thatSDSP’s primary reason for existing isto generate value-added patronagechecks every year for his members.“And they will let me know if theydon’t get it,” he said.

In SDSP’s first five years of opera-tion, it has crushed 112 million bushelsof soybeans, earned $25 million inprofits and members have received$15.5 million in cash patronage. Sharevalues in the co-op have more thandoubled, from $10,000 to $21,000.Farmers’ initial investment in the co-op was $21 million.

“When I first joined the co-op, oneof the first things I tried to assess waswhether they were willing to makeinvestments needed to stay competi-tive,” Christianson said. He hoped toinvest $500,000 to $1 million per yearback into operations. But SDSP hasreinvested $11 million in the first fiveyears, “which certainly exceeds myexpectation.”

Had the co-op stayed with its origi-nal plan to only crush 50,000 bushelseach day into oil, its earnings wouldlikely have been closer to $9 millionthan $25 million, Christianson said.Instead, it expanded capacity to 80,000


Restaurants use the fact that they are cooking withvegetables and fruits grown on local farms as a mar-keting tool. The co-op also custom-grows a numberof items for chefs that are otherwise not readilyavailable.

Penn’s Corner has now about doubled in size, to 17producers located in nine counties in a mountainous,180-square-mile area surrounding Pittsburgh. Their pri-mary market is 21 restaurants, the Greater PittsburghFood Bank, and three grocery stores. The co-op sup-plies a wide variety of fruits, vegetables, herbs, honey,eggs and meats.

After its first season, the co-op returned an additional43 percent gross income over the traditional wholesalemarket, Freeman said. “We have not eliminated the mid-dleman, we have become middleman.”

Every weekend, each member sends the co-op a listof what he or she will have available for sale. The co-opthen compiles the list of all members and distributes it tocustomers, who have until Tuesday night to place theirorders. Tuesday night, members are notified of whatthey need to supply. On Wednesday the growers har-vest, then make delivery to one of a several co-op pick-up points.

The co-op confirms quantities and other order infor-

mation, produces delivery tickets and invoices, anddelivers to customers on Thursday. Customers get theirproducts within 24 hours of being harvested. Growersare paid the middle of the following month. From June toNovember, when production is at its peak, additionaldelivery days are added to the cycle.

At this point, the co-op is seeking “slow, measuredgrowth” in order to keep customers happy with top ser-vice and quality food. “We have a waiting list of growerswho want to join us,” Freeman said.

The co-op has gross sales of $260,000 annually, and itkeeps 20 percent for operations. For most members, theco-op provides supplemental income; all but three mem-bers continue to rely on farm markets for their majorsource of revenue.

Freeman said quality is the key to the co-op’s suc-cess. “We tell our members, if you would not put it out onyour farmers’ market table, don’t send it to the co-op.”

Cornell University did a survey showing that there are28 co-ops performing similar functions from Virginia toMaine. Managers of these co-ops recently gathered toexplore the possibility of building a network and estab-lished the framework for the new Northeast Federationof Family Farm Cooperatives (NeFFFCo). ■

—by Dan Campbell


By Steve ThompsonUSDA Rural Development

he United States has the dubious distinctionof being one of the countries on Earth mostprone to severe weather. Every year, Ameri-cans deal with an average of 10,000 thunder-storms, 2,500 floods and, especially, 1,200

tornadoes, as well as several hurricanes.Many of these weather events, especially tornadoes,

strike quickly, giving people little time get to safety. Andthey can be deadly. Last year, 39 Americans were killed bytornadoes, and an average of 1,500 are injured by themannually. This year may be even more dangerous: torna-does killed 11 people in April and May alone, and meteo-rologists are predicting more tornadoes than usual.

Many of the deaths caused by severe weather could beavoided with enough advance warning. But tornadoes andother destructive events, such as line squalls, can develop andmove at astonishing speed. A few years ago the movie“Twister,” in which a small prairie town is devastated by atornado with no warning, dramatized the problem of effec-tively notifying people in their paths. Conventional warningsystems such as television and radio are inadequate becausenotice of a tornado or line squall often gives only a few min-utes’ time to get to shelter. If you’re not listening or watch-ing, you can wind up out of luck.

The answer to this problem is a radio receiver that acti-vates itself and raises a noisy alarm when a storm warning isissued. The National Oceanographic and AtmosphericAdministration (NOAA) operates National Weather Radio—a network of special transmitters broadcasting on assignedfrequencies that can be picked up by special receivers. Thesereceivers can be set to a “standby” mode in which theyremain quiet until receiving a unique alarm signal. The alarmsignal activates the receiver, which then plays the warning toeveryone in earshot. An agency of NOAA, the NationalWeather Service, issues the notifications, which, it claims,give listeners at least 12 minutes’ warning of tornadoes—ample time to get to shelter.

For the protection they offer, warning receivers arecheap: the least expensive models retail for about $50. How-ever, for them to work, there must be a transmitter nearby. A

look at a map of the operating transmitters reveals a numberof areas—especially in the western United States—that arenot close enough to a transmitter to receive broadcasts.

Montana is one state that still has sparse coverage, a factthat was driven home to people in the area of Circle, Mont.,a town of approximately 400 residents in eastern part of thestate, on July 12 of last year. That’s when it was hit by a pow-erful line squall—a huge downdraft. Residents did not haveweather alarm receivers because there was no NOAA trans-mitter within range. No one was killed, but the storm causeda considerable amount of damage.

Fortunately, help was available in the form of a newprogram administered by USDA Rural Development’sRural Utilities Service (RUS). In April 2001, RUS issueda Notice of Funds Availability for the Weather RadioTransmitter Grant Program. Under the program, $5 mil-lion has been made available to non-profit corporationsor associations, local and state governments and Indiantribes to build NOAA transmitters in rural areas withpoor or no coverage.

Mid-River Telephone Cooperative, which is headquar-tered in Circle, found out about the program after beingcontacted by the National Weather Service office in Glas-gow, Montana. The Co-op worked with the Glasgow officeand another in Billings, as well as three local county gov-ernments to apply for grants for four transmitters in nearbyareas not receiving coverage. “We were thinking not justabout our customers, but about our employees, too,” saysErin Lutz, who coordinated the effort. “We have the largestservice area of any telephone co-op in the United States,and our maintenance people in the field spend a lot of timefar from convenient shelter. They need ample warning ofdangerous weather.”

The applications were for installing transmitters in Fallon,Powder River, and Garfield Counties, as well as in Circle,which is located in McCone County. Three of the applica-tions were submitted by county governments; the fourth wassubmitted by the co-op itself. “Wherever we had a cell-net-work or microwave tower, we donated space on the towerand in the service building, as well as the necessary phonelines,” says Lutz. One transmitter was not located in the co-op’s service area, and so facilities were donated by a fellowtelecom cooperative.


S t o r m S h e l t e r Utility co-ops, USDA working to spread Weather Radio coverage

T

One transmitter, located in Fallon County, is already upand running; the other two are expected to be operational bythe middle of the summer. “We’re running a heavy promo-tional campaign to encourage our customers to use thesetransmitters,” Erin Lutz says. “We’re even considering mak-ing receivers available in our customer service offices in areasthat aren’t convenient to the nearest retail outlet.”

The National Weather Service has recognized Mid River’sefforts with the Mark Trail Award, which it created to honorpeople and organizations that have saved lives or protectedproperty by using or promoting NOAA Weather Radio. Theaward was for filling the largest gap in the network in a non-mountainous area. Lutz says the award was a surprise to theco-op. “We didn’t even know about the award until they toldus we were getting it,” she says.

USDA Rural Development also received the Mark Trail

Award in a ceremony on Capital Hill. Deputy Under Secre-tary for Rural Development Michael Neruda accepted theaward on behalf of RUS on April 17. The Agency was hon-ored for its support for the expansion of the NOAA networkin rural areas, including its administration of the WeatherRadio Transmitter Grant Program. Since the program began,RUS has distributed about $2.5 million in grants for trans-mitters on 43 rural sites—a sizeable contribution to the safetyand well-being of rural Americans.

Grant funds are still available for building weather alerttransmitters. Interested parties are encouraged to check outthe program’s web site at: http://www.usda.gov/rus/telecom/initiatives/noaa/weatherradio.htm, or telephoneprogram coordinators Craig Wulf at 202-720-8427 and Orren E. Cameron, 202-690-4493, for information on how to apply. ■


Famous comic strip character Mark Trail tells readers how to protect themselves from tornadoes. Rural Development’s Rural Utilities Servicewon the Mark Trail Award from the National Weather Service for its efforts to promote the NOAA Weather Radio network. Reprinted with specialpermission by King Features Syndicate, Inc. All worldwide rights reserved.

By Dan Dillon, CEO, Welch’s

Editor’s Note: This article is based on the keynote address Dillondelivered to the Eastern Member Relations Conference in Buffalo,N.Y., in May.

t Welch’s, and as a cooperative, our mis-

sion is different in several very important

respects than if we were a publicly held

company.

Providing a secure market and increasing demand for

our members’ quality grapes and other non-financial

measures are central elements to our mission. Adding

value to our co-op, delivering value to our members, is

quite different from that of a public company because

our mission is different. Our owners have different goals.

What they expect from their ownership is different fromwhat, for example, a General Mills’ stockholder expects. Thequestion then is, what do they want? What addsvalue for them?

In the late 1990s, we surveyed our NationalGrape directors and delegates and asked them torank 15 possible actions we could take to add val-ue to our members’ ownership. What were themost important, most relevant measures of per-formance?

The study results were very instructive. Notsurprising, topping the list were:

• total patron proceeds,• earnings per ton and• growing the enterprise.But what was particularly enlightening in the

survey and in follow-up discussions was the high value NationalGrape members put on other, more subjective measures:

• Providing a secure market when the industry is in surplus.• Growing the demand for their grapes.• Providing an opportunity for them to expand produc-

tion—to plant more grapes.• Having the receiving and containment capacity to han-

dle even large crops in a timely manner.• And, most important, having confidence in the market-

ing capability of the co-op to sell their entire crop—evena bumper harvest.

Based on this research and discussions, we have over timerefined our mission.

Corporate missionThe mission of our company, as a cooperative, is to: • maximize long-term grower value and• provide a reliable market for members’ grapes through:

– excellence in product quality, – customer service, – market responsiveness, – and consumer satisfaction.

Our mission, in addition to the obvious objective of moreproceeds in the present, includes increasing demand and pro-viding a secure market for all our members’ grapes over thelong run.

It is important to understand that there is a price for theseadditional elements of the mission. They add value, but thereis a tradeoff in that they reduce proceeds in the short term.


D e l i v e r i n g v a l u e t o m e m b e r sWelch’s CEO says National Grape members reap benefitsfrom efforts to expand markets, develop new products

A

Financial measures surveyNational Grape directors and delegates ranked these actions for impor-tance in adding value to their crop:Patron Proceeds Debt-to-Equity RatioProceeds per Ton Total DebtSales Growth Acreage GrowthPremium Over the Cash Market Profit Above Cost of ProductionEarnings per Acre Harvest Containment ImprovementReturn on Equity Invested Administrative ExpensesTotal Proceeds Plant Operating Expenses


If our mission were only to maximizeproceeds or maximize proceeds per ton,then the actions we should take would bedifferent. Our investments would befocused differently from what they are cur-rently focused on.

We literally take thousands of actionsevery year that reduce proceeds per ton forthe current year. But these actions areessential to achieving the other dictates ofour mission:

• Maximize long-term grower value.• Provide a secure market.• Increase demand for all the members’

quality grapes.Let’s look at some real examples driven

by this mission.In the early 1980s, Welch’s was receiv-

ing 192,000 tons of grapes per year, butonly selling 168,000 tons—demand was 10percent less than supply. Every year,inventories were building as deliveriescontinued to exceed sales. We were headedfor a disaster.

Welch’s recognized this dilemma andmade the very difficult decision to invest in growing demandeven though it depressed earnings $75 to $100 a ton in thoseinvestment years. We were sacrificing short-term proceedsper ton for other important longer-term objectives.

The alternative, and one we not only considered but oneoften used by other co-ops and companies faced with a simi-lar situation, was to allocate the number of tons our memberscould deliver.

But, we didn’t do that. In 57 years, we have never done

that. We took all the grapes and invested heavily in market-ing, in new products and advertising to increase demand overtime—even though it seriously depressed the proceeds perton we were able to pay in the short term.

But the investment in receiving and marketing all our mem-bers’ grapes not only increased demand to absorb the greatersupply, but it also increased demand so that by the mid 1990s wewere offering our members opportunities to plant more grapes.

In an average year in the 1980s, we sold 192,000 tons and

A technician performs quality-control testing onbottles of Welch’s grape juice. Right, Concordgrapes are ready for harvest. Photos courtesyWelch’s/National Grape Cooperative

paid $197 per ton. But by the 1990s,Welch’s had increased demand to274,000 tons a year. The increaseddemand allowed us to earn an average of$252 per ton—28 percent more per tonon 43 percent more tons sold per year—almost doubling (up 83 percent) totalproceeds per year back to the members.

But creating and maintaining thisdemand also has a price. Today, forexample, Welch’s invests more than $80per ton every year in advertising alone.

There are some who would suggestthat we should sacrifice that advertisinginvestment or other marketing invest-ments in some years in order to increaseshort-term earnings.

In 1999, for example, we hadincreased demand so quickly in the

mid-1990s that the cash market forConcord grapes shot up and was actual-ly higher than the earnings we paid ourmembers. A seemingly simple solutionwould have been for us to reduce oreliminate the advertising or new prod-uct investment or other investments toincrease our earnings $100 per ton.

We could have materially beatenwhat others were paying if we did, andwe could have easily moved all the tonswe were receiving without advertisingin that year. But our mission demandsthat we maintain a consistent invest-ment in growing demand—in order tomaximize long-term owner value.

The logic of that commitment reallymanifests itself in a year of big cropsurpluses (as 2002 appeared to be prior


Editor’s Note: Crop losses in Michigan for both the2001 and 2002 crops will have a devastating impact onmany members of the National Grape CooperativeAssociation, the farmer-owned parent company ofWelch’s that processes and markets their grapes asjuice, jelly and other products. Some, and perhapsmany, will not be able to continue in farming. In areasof New York, Pennsylvania and Ohio, National mem-bers have also suffered extensive frost damage thisspring. National Grape and Welch’s are workingclosely to obtain disaster relief.

After scraping to harvest a 2001 crop up to 75 per-cent smaller than normal, juice-grape growers insouthwestern Michigan figured it couldn’t happen twoyears in a row. It didn’t.

Due to a drastic temperature swing in late April, the2002 pickings are even worse.

“It’s still hard to gauge, but I’d say at this pointwe’ve lost 90 to 95 percent of this year’s crop,” saysJon Hinkelman, who farms 220 acres evenly splitbetween Concord and Niagara grapes near the townof Bainbridge, in the heart of Michigan’s grape-grow-ing country. “Our area consists of a widespread rangein radius and it is very uniform—there are placeswhere 100 percent of the crop is gone.”

The trouble started when temperatures rose ashigh as 92 degrees. “That pushed things along to avery volatile state, then there were the cold tempera-tures a few days later,” says Hinkelman, a member of

the National Grape Cooperative Association.The mercury hit a low of 18 degrees on April 23,

leaving Michigan growers scrambling for ways to sal-vage what they could. Even the secondary buds can’tmake up for much of the loss.

The small amount of fruit that can be harvestedmay not contain a high enough sugar content for useby Welch’s. “It’s difficult with a secondary bud toobtain a really desirable (sugar) level,” Hinkelmansays.

Even programs set up to help Michigan growersmay backfire, due to the consecutive crop catastro-phes. Many have taken advantage of zero-percentloans made available through a state program,spurred by the efforts of National/Welch’s. But thesegrowers now find themselves constricted by theshort terms of the loans—most have a four-year pay-back, with some stretching to five.

“Nobody counted on back-to-back years like that,”Hinkelman says. “With terms like that, that’s a lot ofmoney to pay back over a very short time when cashflow is very, very low.” An additional issue facinggrowers who waited to apply for state assistance:qualifying for the loan now with the diminished repay-ment outlook for the 2002 crop.

Growers in northwestern Pennsylvania initiallythought they had gotten off relatively easy, despitesimilar weather conditions in late April. Bill Beckman,who grows grapes on 325 acres in the townships ofHarbor Creek and North East, Pa., said only 30 or 40

Co-op working to help growers hit by devastating crop losses

Squeeze bottles of Welch’s grape jelly ontheir way to a grocery store near you.


to some devastating freezes in late April and May). Con-cord inventories have been running at record-high levelsbecause of the increased supply and low prices for Califor-nia grapes. Demand for Concord is flat to declining—foreveryone else, but not for Welch’s. And if that were not badenough, other processors are already warning that theremay be a significant reduction in the price they pay forConcords in 2002. But for Welch’s members, the consistentinvestment made in growing demand has not only addedvalue through the opportunity to plant more grapes—wejust concluded the biggest planting program in our 57-yearhistory—but we will also materially increase our earnings infiscal 2002 vs. 2001.

We are adding value by consistently investing in increasingthe demand for Welch’s products—increasing the demand forConcord and Niagara grapes—through advertising, newproducts, marketing programs in new channels of distribu-tion, such as club stores and single-serve channels, throughhealth and nutrition research and public relations programs.

At the same time that we had been investing in increasingdemand by more than 80,000 more tons per year, we recog-nized that tens of millions of dollars in capital investmentwould be required to receive and contain those grapes.

As a co-op, our mission includes providing a secure mar-ket—particularly in times of surplus—another way we addvalue. Welch’s has established a policy for receiving and con-tainment aimed at minimizing the risk that our qualitygrapes will not be harvested, received or contained.

This is an investment well beyond what a public or non-co-op company would make because it reduces profit. It is anadded value that we provide to our members. But it’s notfree. We have calculated that our receiving and containmentstrategy costs our members about $30 a ton every year.

Perhaps this can be viewed as insurance. Our memberssacrifice $30 a ton in proceeds most years in order to ensurethey get all their grapes delivered in exceptional years—as in2002—or 1992—or 1996.

The original 2002 forecast was for a record crop of

acres were hit by frosts in late April and early May.But the worst was yet to come.

“The biggest damage came on May 20,” Beckmansaid. “Our high ground got hit, stuff that hadn’t frozenin 25 or 30 years got hit this time.” Beckman said hecan’t be sure how bad this year’s crop will be untilassessing secondary and tertiary growth in July, butthat it’s certain to be the fifth poor harvest in the pastsix seasons for area growers.

Officials of National/Welch’s say the organization isworking on ways to adapt to this year’s unforeseencrisis. Until the wild temperature swings in Michiganand elsewhere in grape country, a yield 53 percentlarger than the previous year’s had been forecast.

“We went back to Capitol Hill in May, 2002, inresponse to the current crop disaster,” said VivianTseng, vice president and general counsel for Welch’s.“The National/Welch legislative team is workingclosely with our elected representatives in Congressto seek an appropriate legislative vehicle for a directassistance program to address crop losses in both2001 and 2002.”

The crop failures also put growers in a differentkind of crunch, since past crops are averaged toarrive at future estimates for insurance benefits.

“The severe losses we experienced in two consec-utive years will hurt our ability to adequately insureour crops against future losses,” Hinkelman said.“Years ago, there were grant programs, which weredesigned to cover crop disasters. But these werescrutinized by the public so the federal governmentdecided against disaster programs in favor of insur-ance programs.” In this way, growers would have the

ability to protect themselves. The cost is somewhatsubsidized because the premiums are so high, heexplained.

“These two years that will go against our ability toinsure our crop are devastating,” Hinkelman said. “Inthe past, they had grant programs, which were basedon your loss. This has been something that the publicscrutinized, so they expanded on the insurance pro-gram so that you have the ability to protect them-selves. The premiums are subsidized, because the riskis so high.”

Tseng said National/Welch’s is also exploring waysto alleviate that problem. The organization is stillassessing crop losses in other prime growing regions,including western New York and Pennsylvania.

A Senate amendment that would have providedmore than $2.3 billion in disaster relief to growers of avariety of crops nationwide, including grapes, wastrimmed from the Farm Bill earlier this year.

Despite enduring consecutive crop catastrophes,Hinkelman maintains an optimistic view of the indus-try’s future.

“I think you’ve got an industry to be very proud of.Both Michigan and our federal people have an indus-try that’s worth protecting,” he says. “The grapeindustry has been one of proud heritage—we justdon’t ask for help. [Editor’s Note: Grape growers cur-rently receive neither government support nor subsi-dies.] We have a great marketing arm in Welch’s. Ithink the industry will be here in five years, but weneed to look at ways to make things better.” ■

—by David Staba


The Welch’s name has long been associated with thegrape industry. The company traces its origins to Dr.Thomas Bramwell and his son, who, in 1869, gatheredConcord grapes near their home in Vineland, N.J., andpasteurized and bottled the squeezed juice. In 1897, thefounder’s son, Dr. Charles Welch, moved the company toWestfield, N.Y., where it still produces the popular grapejuice, although its headquarts to Concord Mass. in 1982.

Today, Welch’s is the marketing arm of the NationalGrape Cooperative Association, which purchased thefirm in 1956. Grape supplies for the company’s productscome from the 1,400 grower-owners operating morethan 49,000 acres of vineyards in Pennsylvania, NewYork, Ohio, Michigan, Washington state and Ontario,Canada. Welch’s is the world’s leading marketer of Con-cord and Niagara grape-based products which are soldthroughout the United States and 38 countries aroundthe world. Sales for fiscal 2001 reached $650 million andnet proceeds topped $67.4 million.

CEO Daniel Dillon credits the company’s success in

maximizing shareholders profits to its status as a coop-erative. Its aim is to preserve the long-term livelihood ofits member-growers and to provide a reliable market forthe grapes via extensive advertising, customer serviceand consumer satisfaction.

A third of its sales come from new products intro-duced in the past 5 years. Dillon believes new packag-ing has helped the company get more products into dif-ferent sections of supermarkets—from the juice shelf tothe freezer case to the refrigerated foods section.Welch’s has gained a greater presence via vendingmachines, convenience stores and membership whole-sale clubs. Wider exposure has led to higher sales.

The company attributes part of its success to a well-balanced board containing growers, professional man-agers and outside directors. Strong internationalgrowth is developing in the Latin America/Caribbeanregion. On the domestic front, Welch’s became the firstmajor juice company to introduce a plastic, ready-for-school size bottle. ■

Welch’s roots extend to 1869

342,500 tons, or 53 percent (118,000 tons) more than in2001. Welch’s was fully prepared for this, because we hadmade the investments to receive, contain and sell that entirebumper crop. But spring freezes in Michigan and in the tri-states region (New York, Pennsylvania and Ohio) reduced theprojected crop to one that is now expected to be only 6,800tons, or 4 percent, larger than last year.

If our mission were to maximize the proceeds per ton onthe tons we receive—a logical objective if we were a public ornon-co-op company—then we probably would not accept allthe grapes originally forecast or even the current, more mod-est expectations.

The point is, the cost of having a secure market in a yearsuch as 2002 was originally projected to be, is reflected in anearnings-per-ton reduction. The value of maintainingdemand, growing demand, having the resources ready toreceive and contain exceptional crops, the value of having themarketing flexibility to sell 50,000 or 100,000 more tons inan exceptional year, is why National Grape members chooseNational…and Welch’s.

There is also a serious trend to consider—the substituting ofCalifornia grapes and foreign grape juice for Concord. For 133years, Welch’s has defined grape juice with the unique, distinc-tive, special taste of Concord. Only in North America is theConcord taste the taste of grape juice and grape jelly. In the restof the world, when a consumer thinks of grape juice, the tasteexpectation is entirely different from the U.S. consumer.

This expectation is critical to our growers. The substitu-tion of California grape juice for Concord may still produce a

nice-tasting juice, but it is not the unique taste of Concord.Much of our product formulation work, our marketing,

advertising and health and nutrition efforts are focused onthe unique taste and health attributes of the Concord grape.It is imperative that Welch’s continue to drive these efforts.

While other juice manufacturers are substituting Califor-nia and foreign grape juice for Concord, National Grapegrowers can rest assured that they have a secure market at ahigher, more stable price because they own Welch’s.

Our mission is not to maximize earnings per ton or to max-imize profits or return on members’ equity. Rather, our mis-sion is focused on creating long-term value for our members.We believe the success of Welch’s strategies to build value forour members has indeed been fulfilling that mission.

Obviously, the spotlight will always remain focused on theproceeds per ton we pay. But there is recognition of the valueprovided through:

• increasing demand—creating opportunities to expand, • providing a secure market even when the industry is in

surplus, or the quality is compromised,• having the receiving and containment capacity to handle

even exceptionally large harvests in a timely manner,and, most important,

• the confidence in Welch’s marketing capabilities to main-tain the relevance of the unique Concord and Niagarataste and to sell the entire crop—even a bumper crop.

This is value over and above the proceeds per ton we pay.It is real. Is it worth $50 a ton? $100 a ton? In many years, asin 2002, it might be priceless. ■

By Dan Campbell, editor

argaining co-ops and pro-duction contracts havelong played a role in help-ing farmers and rancherssecure a fair price for

their products, but the wilder-than-nor-mal swings in commodity prices inrecent years may prompt even greateruse in the future. Representatives fromthe beef, poultry and processing tomatoindustries, who participated on apanel discussion at USDA’s 2002Agricultural Outlook Conferenceeach described various ways thesetools can help producers meet thechallenges ahead.

Dan Looker, business editor of“Successful Farming” magazineand the moderator of the paneldiscussion, said he began notic-ing a sharp increase in interest inbargaining co-ops about fouryears ago, when a group of “pro-gressive farmers from Iowa, Illi-nois and other Midwestern statesgathered to discuss somethingthat has been around for decades:bargaining co-ops. They began mak-ing trips to California, Maine andother states where these types of co-ops have been operating. Because ofthat, our magazine also rediscoveredbargaining co-ops and began writingabout some of the more successfulco-ops,” Looker said. “SuccessfulFarming” also sponsored a “Market-ing Clout” conference last winter fea-turing presentations by bargainingco-op leaders.

Tomato growers struggleto find market balance

“An old pot still cooks good soup,”John Welty said, quoting an old Frenchproverb. Welty, executive vice presidentfor the California Tomato GrowersAssociation (CTGA), was referring tothe Capper Volstead Act, which allowsproducers to jointly discuss price andtrade information, and has helped tofoster thousands of cooperatives andbargaining associations. Welty is well

practiced in the art of bargaining for acrop price, having long led CTGA in itsefforts to bargain for fair prices for Cali-fornia tomato growers. California farm-ers produce about 95 percent of thenation’s supply (and 40 percent of theworld supply) of processing tomatoes.

The role of bargaining coopera-tives, such as his, is still not wellunderstood, but they play a vital rolein promoting the interests of farm-ers—particularly producers of specialtycrops who rarely qualify for subsidies

or other support programs, Welty said.For the canning tomato industry,

reports given at the start of the confer-ence that the agriculture economy is“reasonably stable” are far from accu-rate, Welty said. The market may havestabilized for producers of subsidizedcrops, but specialty crop producers havesuffered a 20-percent decline in pricesduring the past five years. “That’s ahuge drop in net income,” he said.

Production costs are high for spe-cialty crops—averaging $1,800 peracre—and margins are “razor-thin,” usually 5 percent or less,Welty said.

California, which produces350 crops—including the lion’sshare of many of the nation’s spe-cialty crops—long felt it was insu-lated from the supply-price rollercoaster that farmers in most otherstates live with. Growers in theGolden State have long used cropdiversification as a primary riskmanagement tool. But that hasprofoundly changed in recentyears, with markets for California

specialty crops “one by one succumb-ing to over-planting, over-supply anderoding prices,” Welty said.

CTGA has long argued that com-modity program “flex acres” not beallowed to be switched over to vegeta-bles, because this kind of shift woulddistort vegetable markets that had pre-viously been free from subsidy influ-ence. Welty noted that even smallshifts in program crop land into veg-etable crops could “ruin the marketswith near-instantaneous over-supply.


U n s t a b l e f a r m m a r k e t s p r o m p tm o r e g r o w e r s t o l o o k t ob a r g a i n i n g c o - o p s

B

About 95 percent of the nation’s supply of processingtomatoes are produced in California. USDA photo


“And low and behold, that prophecybecame reality,” Welty said. “While wewere able to keep the wolf away fromthe door for seven years, as programcrops lost their subsidies (and othermajor producing parts of the world didnot remove theirs) world prices plum-meted.” U.S. program crops beganmoving “freed-up acres into high-mar-gin crops,” Welty continued. “Thistrend has completely undermined thecornerstone of the risk-managementstrategy of specialty crop growers.”

Contracts can spread riskfor specialty crop farmers

Almost one-third of U.S. crops andlivestock and 40 percent of U.S. fruitand vegetables were grown under pro-duction contracts in 1997, according toUSDA data he cited. That’s more thandouble the amount grown under con-tract a decade before, Welty said.

With contracts, the handler sharesthe risk with the grower, he noted.Quality incentive contracts reward bet-ter quality crops, which also benefit theprocessor.

“The ability to transfer title of vastquantities of fresh, red-ripe, perishabletomatoes in a manner that shares risk ina rational fashion is a major asset, andshould not be trifled with,” Weltystressed.

Growers used to worry about largefood companies vertically integrating,buying land, buildings and productioncapability, Welty noted. “But why ownfarms if you can own the farmers?”Welty said, quoting ag law expert NeilHamilton, stressing the vulnerability offarmers in the marketplace.

“First we had marketing contracts,where price was set before the crop wasproduced,” he said. Under these con-tracts, farmers retained ownership ofthe crop up until delivery.

“Then we saw production contracts,where processors maintained morecontrol of the product, from beginningto end,” including seed variety, thecrop (once the seed was in ground),harvesting and hauling.

“Now we are seeing risk-sharingcontracts,” which Welty said shift risk

“against the farmers’ side of the equa-tion. Many of these contracts are writ-ten so that farmers have to take them orleave them,” he said, suggesting thatfarmers “should just say no to these con-tracts, in general, until they have thepower to negotiate better agreements.”

The 1967 Ag Fair Practices Act—which does not require good-faith bar-gaining and dispute resolution andenforcement —is “flawed and has fallenout of use,” Welty said. The main flaw,he continued, is that it does not compelgood-faith bargaining by handlers, andimplies that handlers are not requiredto deal with bargaining associations.

“The need for growers to securefair, reasonable prices has never beenmore pressing,” Welty said, adding thatthis should be a critical component ofU.S. farm policy.

Poultry growers stillseeking national voice

Mary Clouse, project director forRural Advancement Foundation Inter-national (RAFI) in North Carolina,said income for chicken producers isalso lagging far behind a fair level, andthat the industry has been strugglingfor many years to forge an effectivenational cooperative or bargainingassociation that can help growers gainbetter margins.

In the early days of the industry,farmers owned their chickens, boughttheir feed and built their own poultryhouses. “They sold their birds whenthey were ready.

“But efficiency dictated that it wasbetter for the processor to own the

birds, own their own feed mills andhatcheries and to contract with farmersto raise birds. In the process, farmerslost much control over their opera-tion,” she said.

Virtually all broilers in the UnitedStates are currently raised under con-tract to an ever-declining number oflarge processors. She estimated thatthere are 24,000 contract poultry grow-ers in the United States providing morethan 7 billion broilers to 42 major poul-try companies. “When I started in thepoultry business there were 160 majorcompanies, so there has been tremen-dous consolidation in 25 years.”

Tyson Foods is by far the largestprocessor, with 42 plants in 17 states,65,000 employees and 7,000 contractfarmers, she said. Gold Kist, a coopera-tive, is a distant second, with 12 plantsin five states.

Clouse said the current economicstructure keeps producers at the mercyof the poultry companies. It costs about$125,000 to build and equip a modernpoultry house, which will provide anaverage income level of just $4,000 peryear. About 76 percent of poultry grow-ers earn less than $29,000 per year, and45 percent earn less than $14,000 annu-ally. She said more than half of poultrygrowers fall under the federal povertylevel—based on a family of four thatdepends on poultry alone for income(and she said many do).

Ranking of growers for pay byprocessors is done by a process theycall a “tournament.” But Clouse saidgrowers believe these pay tournamentsforce growers “to play in a gamewhere everyone gets different equip-ment and with no referee. The poultryprocessors control all the inputs, tellthem how to grow birds, decide whento take birds, and when to bring feed.The company decides whether to con-tinue to use your facility and any dis-pute resolution method.”

With the switch in most contracts tobinding arbitration between the compa-ny and individual growers, farmers havelost their access to the courts. Somecases are still going to court anyway,with producers claiming the contracts

Contract poultry growers are still tryingto forge an effective national bargainingassociation. USDA photo


were signed under duress, Clouse not-ed. “We hope state and federal laws willset higher standards for contracts,” shesaid, noting that it “may take a combi-nation of forces to bring this about.”

Clouse was a founding member of theNational Contract Poultry GrowersAssociation (NCPGA) in 1990, andworked as a field organizer in the South.She started a newsletter that at first wentto 250 farmers, but within two yearswent to 10,000 farmers. Fear was so greatamong producers who attended earlyorganizational meetings that someattended wearing disguises and underaliases, she recalled. The co-op was char-tered in Arkansas in 1990, and was in 16states by 1992. Its early efforts includedoffering group insurance and equipmentbuying programs to members.

Early NCPGA successescrushed by new contracts

After success in those early years,the industry decided to “lower theboom” in 1994, Clouse said. Processorscalled in all contracts in Alabama(where the association had its largestnumber of growers) and then issuednew contracts with binding arbitration.“The 40 members who refused to signit got no more birds,” she said, notingthat 11 of those growers are stillinvolved in litigation against the com-panies. Thirty of its leaders wereforced out of business or “intimidatedinto leaving the organization. This hada chilling effect on the rest of the orga-nization. Growers were frightenedback into the woods,” she said.

“Fear still rules the roost,” Clousecontinued, noting that many producersare afraid to promote a stronger bar-gaining cooperative for fear of reprisalsby processors. She painted a grim pic-ture punctuated by cases of poultryfarmers who have committed suicideover economic desperation—and evenone murder where a producer shot andkilled a company production managerand then killed himself.

As it stands today, producers shouldbe treated as company employees, notindependent suppliers, because the real-ity is that they are piece-wage producers

under near-total control of the proces-sors, Clouse said. “Our course of actionnow is to get protections first—we’renot trying to organize a big, bulky orga-nization.” She said efforts are concen-trating on regaining access to courts andconnecting with other producer groups.

“Our farmers like what they do—they feed the country; they don’t wantto ruin the industry or drive it offshore,”she said. Clouse noted that “chicken canbe grown anywhere,”and said China isbuilding “huge feed mills” to expand itspoultry industry. Country-of-originlabeling will help the domestic industry,she said, stressing that consumers preferU.S.-raised meat. “But if companiesleave the U.S., what’s to stop farmersfrom starting their own plants?”

Clouse said producers are finding new,non-traditional allies in some consumer,environmental and church groups.

U.S. cattle industryregaining lost markets

Paul Hitch, a Guymon, Okl., feedlotoperator who helped launch the Con-solidated Beef Producers bargainingcooperative, said to regain lost markets,the cattle industry needs to look to thepoultry industry and the way it marketsconsumer-driven products.

Cattlemen look back at the 1970s asthe good old days for their industry,Hitch said. In those days, John Waynewas still the nation’s idea of a moviestar, big belts, buckles and western hatswere all the rage and, he continued,“beef was king of the meat case whilechicken was just a commodity that cat-tle producers paid little attention to.”Flash forward to 2002, and beef haslost its crown to chicken, which isincreasingly sold under brand names“while beef is just a commodity.”

“We forgot about the people who atebeef and didn’t want to spend six hoursmaking a pot roast. The poultry peopledid not forget the consumer, and sothey started selling breaded, boneless,skinless, microwavable chicken in everycut imaginable.” By about 1970, thebeef industry had begun experiencing atwo-decade-long erosion of marketshare. “We were marching down the

road—if not to oblivion— at least to aposition of less significance.”

Cattle producers, he said, shouldhave been thinking of themselves asbeef producers first, not cattlemen.“The person who eats beef is our kingand queen. They want consistent-qual-ity products that are easy to prepare ina short period of time. And if you don’tgive it to them, somebody else will.”

The pork industry has been quickerthan the beef industry to emulate themarketing success of the poultryindustry, Hitch said. But the beefindustry is finally heading in the rightdirection. In addition to offeringleaner, more consistent beef in agreater variety of easy-to-cook cuts,Hitch said branded beef products arebecoming more common.

As a result, beef has increased itsmarket share by 5 percent in the lastcouple of years.

So, with the beef industry heading inthe right direction, the challenge forranchers and feeders is to make sure theycan supply the type of beef needed tosustain and expand these market gainsand to earn a fair return for their efforts.

Hitch said that means moving awayfrom cash markets, which “workedwell as long as there were lots of sell-ers and buyers dealing in a non-dif-ferentiated product.” But with thenumbers of feeders, packers, ranchersand retailers contracting more andmore, he said the situation haschanged dramatically.

Beef packing concentrationsparks need for co-ops

The top four beef companies in theUnited States now control 80 percentof beef packing in the nation. The topseven retailers control 45 percent of allbeef sales to the public, and that isexpected to climb rapidly to 75 per-cent, Hitch said.

He noted that some say this concen-tration is the result of a “conspiracy” totake control away from farmers andranchers, but Hitch said this process isreally just the result of basic marketforces at work.



By James BaardaUSDA/RBS Ag Economist [email protected]

Editor’s Note: This is the first of athree-part series about cooperative boards ofdirectors. This article identifies the sourcesof authority for boards and describes sevenbasic responsibilities imposed on every coop-erative board of directors. The next articlediscusses the legal standards directors mustmeet and outlines practical ways directorscan protect themselves as well as the cooper-ative. The last article describes the numer-ous special difficulties faced by cooperativedirectors and shows why a cooperativedirector’s task is more difficult than fordirectors of other organizations.

eing a director of a coop-erative isn’t easy. In fact,it is harder to be a goodcooperative director thana director of almost any

other organization, including the largestcorporations in the country. Coopera-tive directors make decisions that aren’trequired in a non-cooperative corpora-tion, and bad decisions can hurt thecooperative and all of its members.

Frequently, directors just have toolittle information about what they needto do as directors. Information that isavailable to help them become excel-lent directors is often not appropriatefor cooperative directors. Often, adviceis so general it isn’t applicable andsome is so specific that it cannot beapplied easily. Advice and informationmay not focus on the real issues andsometimes the advice is conflicting.

The three articles in this series cer-

tainly don’t give all the answers. How-ever, existing information related tocooperative directors, as well as thedirectors of other kinds of organiza-tions, can be distilled and focused forcooperative director use. Conciseguidelines are given that can be tailoredto the needs of individual directors onthe boards of a specific cooperative.

This article identifies authority thatgives directors the rights and responsi-bilities to carry out their work as direc-tors on behalf of the cooperative and itsmembers. Then it describes the sevenbasic responsibilities imposed on alldirectors of all cooperatives: the “circleof responsibilities.”

Board authorityWhat gives a board of directors its

authority? The basic authority, and theultimate statement of responsibility, isimposed by law. Statutes under whichcooperatives are incorporated identifythe board of directors as the key insti-tution responsible for the direction andmanagement of the cooperative. A typ-ical cooperative statute says: “Theaffairs of the association shall be man-aged by a board of not less than fivedirectors, elected by the members orstockholders from among their ownnumber.” Variations exist, of course,among statutes and states, but thetheme is always the same: the lawplaces a cooperative’s management andguidance in the hands of its board ofdirectors.

The statutory mandate is broad butisn’t described in further detail by moststatutes. This is one reason that furtherexplanation is needed to make the direc-

tive meaningful. An added source ofguidance is a cooperative’s own bylaws.The bylaws are not the place to givedetailed descriptions of what the boardis supposed to do, and bylaws typicallydo not. However, in describing certainprocesses and actions of the cooperative,bylaws often identify decisions theboard must make on specific issues.Some of these will be described whenboard function and personal responsibil-ities are noted in the next article in thisseries and—even more so—when specialissues are described for directors in thefinal article. The problem faced bydirectors (who represent members)when members want something thatwill be detrimental to their cooperative(to whom directors also owe a duty) isalso noted in the final article.

Finally, the board will establish itsown internal structure, rules and opera-tions to supplement the broader state-ments in the statutes and the bylaws.These cannot remove or diminish theresponsibilities imposed by statute, butcan create a framework in which theoverall responsibilities and authority areuseful in the everyday work of the board.

These are the technical sources ofauthority. The ultimate authority,though, comes from the cooperative’smembers. The cooperative is theirs, andwithout members’ desire to create andperpetuate the cooperative, the boardwould not exist. Members place theirtrust, their needs, and authority in aboard of directors of their own choosing.

Circle of seven responsibilitiesDespite significant differences

among cooperatives in the United

C o - o p b o a r d s ’ c i r c l e o fr e s p o n s i b i l i t i e s

B

M A N A G E M E N T T I P


States in size, function, complexity,organizational form, financing methodsand membership makeup, it is possibleto summarize a “circle” of sevenresponsibilities applicable to all coop-

erative boards of directors. Of course,each of the responsibilities will be car-ried out differently depending on thecooperative, but fundamentally the cir-cle of seven responsibilities describesall cooperative boards of directors.

1. Board represents cooperativemembers

Cooperatives are created and oper-ated to serve members’ needs. Mem-bers invest in the cooperative, theypatronize it and they exercise ultimatecontrol of the cooperative. The boardof directors is the means by which theneeds and desires of individual cooper-ative members are incorporated intothe cooperative. In some circum-stances, of course, members votedirectly on a cooperative issue. But forthe most part, members are represent-ed by the board of directors.

Directors are elected by membersand directors’ role is to represent thosemembers. To represent members effec-tively, directors must know what mem-bers need. They also assess the cooper-ative’s capabilities to meet those needs.Directors must understand thestrengths and weaknesses of the coop-erative and make judgments based on a

thorough understanding of the cooper-ative’s resources and its employees sothey can be used to the members’ bestadvantage in a successful cooperative.

2. Board establishes cooperativepolicies

Directors put theirmember representationrole into effect by makingpolicy. Indeed, many dis-cussions about coopera-tive directors summarizethe board’s job as estab-lishing cooperative policy.Policies may be broadand long-range or theymay be specific andimmediate. Both are nec-essary. If the board fails toestablish cooperative pol-icy, either someone elsewill establish the policyor the cooperative willoperate without directionand control. In either

case, the cooperative cannot be success-ful and disaster is likely to follow.

3. Board hires and supervises man-agement

Directors do not run the cooperativethemselves. Employees are used to dothe work necessary, given policies theboard has established about the purpos-

es of the cooperative and specific poli-cies guiding cooperative operations.The board hires and supervises manage-ment. Normally, direct involvement byboard members is limited to only topmanagement, but the board’s responsi-bility does not end with the employ-ment of a chief executive officer. Super-visory responsibilities vary according tostructure and circumstances.

4. Board is responsible for acquisi-tion and preservation of cooperativeassets

Cooperatives acquire and use assets

to serve patrons in one way or another.An overall responsibility of the board isto establish policies with respect toacquisition and preservation of thecooperative’s assets. Cooperatives areentrusted with other people’s moneyand must account for it at all times. Theassets of a cooperative were purchasedwith member money, and the coopera-tive is obligated to those members.

This board responsibility is shownin two specific obligations. First, theboard is responsible for guaranteeingthat the cooperative establish and useaccounting systems that keep track of all aspects of the cooperative’sfinances and resources. The account-ing system must also accuratelyreflect the true financial condition ofthe cooperative.

The second obligation is that theboard monitor the cooperative’s finan-cial performance and establish policiesthat protect the cooperative fromfinancial shocks and risky situationsthat undermine its financial health.Proper audits and careful boardresponse to audit reports is the firststep towards meeting this responsibili-ty, but a range of board decisions canspell financial success or failure.Whether financially related policies areshort-term or long-term, the board of

directors has the ulti-mate responsibility forthe cooperative’s finan-cial affairs.

It is clear that theseresponsibilities requirea great deal of care,attention, and skill by

each member of the board. Boardmembers must understand what afinancial reporting system is, what itmust do, and what financial informa-tion can and cannot tell directorsabout the performance of the coopera-tive and its management.

5. Board preserves the cooperativecharacter of the organization

The board, as the policy-makingbody and representative of the cooper-ative’s members, is responsible formaintaining the special character of thecooperative. If the cooperative is

General definitions:Responsibilities: What boards of directors must do tomeet their obligations to the cooperative under lawsand other guiding sources.

Standards of conduct: Sometimes called duties, stan-dards specify how the responsibilities must be carriedout. They impose standards of conduct on the boardand individual director board members.

Liabilities: These are consequences when directorsfail to carry out required responsibilities with therequired standards of conduct. Liability may beimposed on the cooperative or individual membersof the board.

Boards of directors and management often strugglewith the division of duties, supervision, and opera-tional detail between the board and management.This issue can be detrimental to the cooperative ifconflicts are not resolved satisfactorily.


allowed to deviate from principles tothe extent that it is no longer a cooper-ative, the directors have failed in thisresponsibility. This can be a breach ofthe trust that members have placed inthe board, and in some cases it can be aviolation of law.

At the same time, the board appre-

ciates that a wide rangeof operating methodsand structures is avail-able to cooperatives.Preserving cooperativeprinciples doesn’t meanthat the cooperative iseither small or simple.It only means that thefundamental characterof the organization isthat of a cooperativeregardless of size orcomplexity.

The responsibility imposed on theboard to preserve the cooperativecharacter of the organization meansthat the directors must know what thatcharacter is, how it operates in thestructure of their organization, andwhat kinds of events and actions mayundermine cooperative fundamentals.

6. Board assesses the cooperative’sperformance

Every organization evaluates its per-formance to assess the policies andactions taken during the year and to planeffectively for the future. For coopera-tives, performance rules are not identicalto those that generally apply to othertypes of businesses, although they aredeceptively similar. A cooperative isindeed concerned with the “bottom line”and its success as measured by financialcriteria, but it is not organized to simplybenefit itself. The cooperative’s perfor-mance is ultimately measured by thebenefit it confers on those who use it.Performance is judged by the coopera-tive’s fundamental objectives.

This may be accomplished in differ-ing ways, as no single standard of mea-sure is available to the board. The boardis faced with multiple criteria, and somemay be conflicting. Some criteria maybe measured in numbers, and some can-not be measured by any financial docu-ments. Despite the variations, the boardmust keep its eye on the cooperative’sultimate goals, make careful assessmentsof performance and strategies, establishappropriate policies, and make harddecisions on behalf of the members.

7. Board informs membersCooperative boards of directors

inform members about the cooperativeorganization—the members’ own busi-ness. This duty is rather unique amongbusinesses in its importance and impli-cations for member control.

Without accurate information,members cannot make decisions abouttheir cooperative and will not be pre-pared to make decisions imposed onthem as cooperative members. Mem-bers will not be able to understandwhether their cooperative is successful,or whether basic changes must be madeto correct problems identified by theboard. And without accurate and com-plete information, members will not beable to make judgments about coopera-tive management or about the board’sown performance.

Member information completes thedirectors’ “circle of responsibility”leading to member representation. ■

This may be one of the most misunderstood andneglected of directors’ responsibilities. In most situa-tions, it does not require specific action on the part ofthe board, but only if the proper safeguards have beenestablished and are in place for all to see. A periodicreview of the cooperative along with established poli-cies and rules requiring operation on a cooperativebasis are essential. But nothing gives the cooperativeas much protection as an articulated dedication tocooperative principles understood by the board, themembers, and management.

Implementing exerciseAt your next board meeting, consider conducting a complete assessment of

sources of the board’s authority, including statutory requirements, bylaw provi-sions, policies, board structures or another source of board authority.

• What is the source of the authority?• What does it mean for the everyday operation of the board?• Does the board fully appreciate its authority—and its limits?• How can the board respond better to the authority it is assigned?

At each of the subsequent seven board meetings, thoroughly consider oneof the responsibilities listed.

• What specifically does the board currently do to meet the responsibility?• What are the weaknesses in the board regarding its responsibility?• Does each director have the skill, interest, and time to consider and respond to the

responsibility?• Does the board have the knowledge and information necessary to meet each

responsibility?• What specific steps can be taken to make the board meet every responsibility?• Is there a consensus on the board’s performance?• Would members agree with the board’s self-assessment?

The most effective way to make the responsibilities “up close and personal”is to have each director individually address the issue and propose his or her ownsolution to problems perceived about the responsibility under discussion. Boardmeetings or ancillary sessions to board meetings can then provide the forum fordiscussion within the board. These sessions may be more effective if manage-ment is not present.


Western Sugar Co-op pays $85 million for six plants

Sugar beet growers in four westernstates have seized control over a majorsegment of the U.S. sugar industrywith the launch of Western SugarCooperative. The cooperative was bornat the end of April after 2 years of diffi-cult negotiations by its predecessor,Rocky Mountain Sugar Cooperative.The talks finally culminated in a deal topay $85 million for six sugar beet pro-cessing plants, storage facilities and ahost of other support facilities andequipment belonging to Tate & LyleNorth America. The new cooperativewill also assume payment of the $100million inventory debt to the Com-modity Credit Corporation.

Not even a deep freeze in early Maythat impacted 20 percent of its mem-bers’ acreage could deter the start ofthe new co-op. With seed suppliesample, growers moved quickly toreplant the 30,000 lost acres. Cropplanting had already been delayed bydrought conditions in much of its terri-tory: Nebraska, Wyoming, Coloradoand Montana.

The drawn-out negotiations wentthrough three agreements and five pre-vious closing dates before a final settle-ment was reached. To maintain marketidentity, the cooperative adapted thename of the old company.

Tate & Lyle had owned the plantssince 1985, when it purchased themfrom the bankrupt Great Western Sug-ar Co. Efforts to complete the sale hadbeen stymied in recent months, partlybecause capital markets had been affect-ed by the Sept. 11 terrorist attacks andthe national economic recession.

Two USDA Rural Business-Cooper-ative Service programs played a keyrole in financing the sale. ThroughUSDA’s Cooperative Stock PurchaseProgram, more than 480 growersfinanced their purchase of $200-per-acre equity stock in the co-op. Thatguaranteed $10 million in Wells Fargobank loans to cover the producers’equity. The bank will share the invest-ment with a dozen banks in the partici-pating states after closing loans for thegrowers. USDA also provided the co-op with $14 million in Business andIndustry Program loan guarantees.

Initially, 143,500 acres were com-mitted to the cooperative and more areexpected, now that the purchase hasbeen completed. Growers earlier hadbeen assured of a contract for the 2002season regardless of who would ownthe firm. So, despite the extendednegotiations, sugar beet plantingmoved ahead as quickly as weatherconditions in the region permitted.

Meanwhile, Inder Mathur, a formerchief financial officer for Western Sug-ar Co., has been named chief executiveofficer of the new cooperative, accord-ing to Rick Dorn, board president anda sugar beet grower from Hardin,Mont. He said Mathur would be agood match for the cooperativebecause “he knows the system and hasthe respect of other employees.” Dorn said he was “delighted that the growersnow own Western.” He said the newfarm bill will “bring stability to ourindustry and contribute to our successas owners.” He invited all area growersto “join with us in building a strongcooperative for our own benefit.”

Frank Bush will continue as market-

ing director for the new Western Sugar.Key management staff are beingretained at all six plants. The Denver-based cooperative will operate all theplants this season. They are located in:Scottsbluff and Bayard, Neb.; Billings,Mont.; Lovell, Wyo.; and Fort Morganand Greeley, Colo. After this season theco-op will assess the future of each plant.

Simultaneously, grower- and com-munity-based groups have been nego-tiating the purchase of Holly Sugarplants at Torrington and Worland,Wyo. The growers would operate aslimited-liability companies. Torring-ton is on the Wyoming-Nebraska lineand near the new Western SugarCooperative’s refinery at Scottsbluff,Neb. Holly’s parent, Imperial Sugar,has reorganized after earlier declaringbankruptcy and earlier this year soldsugar plants in Michigan to a newcooperative.

Dakota Pasta co-opconverts to corporation

Members of Dakota Pasta Grow-ers Co., widely looked to as a suc-cessful model of a new-generationcooperative, have voted 693-146 toconvert from a cooperative to a regu-lar corporation. Some observers saythe vote reflected the reality that themember-farmers who own the busi-ness were no longer supplying themajority of durum to the plant, rais-ing legal and tax questions aboutwhether it could continue to operateas a cooperative. As a corporation, itneed not get the majority of itsdurum from members, and it will beable to sell stock to the public.

Board Chairman Jack Dalrymple,

N E W S L I N E

also North Dakota’s lieutenant gover-nor, said that with the change the busi-ness will seek new stockholders to raiseadditional funds. “This (conversion) isabout this business and is in no way areferendum on the cooperative struc-ture,” Dalrymple told the AssociatedPress. Critics of the move say they willbe watching to see if farmers can main-tain long-term control of the businessnow that it has converted.

With processing plants in Carring-ton, N.D., and New Hope, Minn.,Dakota Pasta has 115 employees and isthe third largest pasta maker in theUnited States, processing about 1.5million pounds daily. Farmer-memberswill no longer be required to supplydurum to the company, although theywill still hold a special class of stockthat gives them preference in selling totheir former co-op.

Raymond Crouch, DFA editor,killed in Texas airplane crash

Raymond Crouch, director of mem-ber publications and media relationsfor DFA, was killed May 20 in thecrash of a light aircraft nearStephenville, Texas. Also killed in theaccident was the pilot, Kelly Wilson,43, a Tarleton State University profes-sor. Crouch, 54, was taking aerial pho-

tos for an arti-cle for anupcoming issueof the DFA“Leader” news-paper, of whichhe was editor,when the BeechBonanza 35 air-craft wentdown.

“This is aprofound loss

for the dairy industry, his family andhis friends,” said Agnes Schafer, DFA’sexecutive director of corporate andpublic relations. “Raymond was pas-sionate about farmers workingtogether in the marketplace for a bet-ter future, and used his love of theprinted word and the photographicimage to communicate the stories of

the American dairy farm family.”Crouch’s roots were in the dairy

industry, and he spent most of his lifeworking for it. He was born into adairy family and grew up in Denton,Texas, where he began his career as aphotographer and writer for the Den-ton Record Chronicle. He later workedin the banking industry before becom-ing communications director for theSouthern Region of Associated MilkProducers Inc., where he remained fornine years. When AMPI merged intoDFA, Crouch moved to Kansas Cityand took the position with DFA. Hewon numerous professional honors forboth his writing and photography, anda number of his photos have appearedin this magazine.

Canadian dairy co-op buysIndiana cheese plant

Agropur cooperative, the mostimportant Canadian cheddar cheeseproducer and a leading manufacturerand distributor of cheese, is making itsdebut in the U.S. market with the pur-chase of the Deutsch Käse Haus Inc.(DKH) cheese plant in Middlebury,Ind. DKH mainly markets colby, col-by-jack and pepper-jack cheese. Theplant operates in the heart of an Amishcommunity which provides the milksupply and labor force. Agropur isowned by 4,700 dairy farmers andemploys more than 3,100 people.

Resource library for co-opsdedicated at DC University

A resource library for cooperativeson the campus of the University of theDistrict of Columbia (UDC) in Wash-ington, D.C., has been dedicated toC.H. Kirkman, Jr. Kirkman served as asenior cooperative education specialistfor 31 years and worked on manycooperative programs while withUSDA’s Agricultural Cooperative Ser-vice (now part of USDA/RBS). Heretired in the 1980s. Last year, heestablished an endowment to supportthe center.

The library was established in 1996by Kirkman and UDC officials tosupport cooperative education and

research efforts of the university byproviding a repository for researchand reference materials related to thehistory and aims of agricultural andconsumer cooperatives and their asso-ciations. He and family membersdonated funds to establish the library.Both he and USDA contributedbooks and other cooperative informa-tion materials. This is the first suchlibrary on the East Coast and third inthe nation.

Australian Farley to lead Calcot

The board of Calcot Ltd., one of theworld’s oldest and largest cotton mar-keting cooperatives, has chosen DavidD. Farley, 45, an Australian farm exec-utive, as CEO and president. Farley,only the fifth CEO in the history of theco-op, succeeds Tom Smith, who hadbeen president since 1977. Farley willwork with Smith through the end ofSeptember and then assume full duty

on Oct. 1. Smithwill continue asa consultant fora year.

Board Chair-man Bruce Hei-den said Farleywould bring “anoutside per-spective andenergy thatshould be ofgreat benefit to

the continuation of successful mar-keting of members’ cotton.” Farley isthe former chief executive officer ofColly Farms in Australia, the largestvertically integrated cotton buyer,ginner and marketer in the country.He brings a wealth of experience tothe cooperative. Farley said heexpects to spend his first four monthsmeeting growers, gin managers andbuyers of the cooperative’s cotton.He said he would look for ways toreturn growers to profitability, whichwill benefit both the cooperative andthe cotton industry. Calcot, Bakers-field, Calif., has annual sales of 1.4million bales of cotton.


Raymond Crouch

David Farley


Bio-based, renewable energy products featured at USDA Earth Day event

USDA celebrated Earth Day with a product show-case of bio-based and renewable energy products. Theshow, held in the courtyard of the Department of Agri-culture headquarters in Washington, D.C., featuredmore than a dozen manufacturers of a wide variety ofbio-based and renewable products. The event not onlydemonstrated the adaptability of U.S. crops for Earth-friendly products, but also provided an opportunity forfederal purchasers to learn more about the products.

“American farmers—unmatched in the world fortheir productivity of food and fiber—are now producingbio-based products that will do everything from fuel ourcars to provide Earth- safe solvents to clean our homesand factories,” said Michael Kossey, the show coordi-nator and special projects manager for USDA’s RuralUtilities Service.

One of thefeaturedexhibitorswas NaturalPlant Prod-ucts ofSalem, Ore.,a coopera-tive of 85 turfgrass grow-ers. Manyturf growersin the North-west alsogrow meadowfoam, a herbaceous annual wildflowerthat yields an oil with a unique, fatty-acid compositionthat has been used since the mid-1980s by the cosmet-ics and personal-care products industry. The co-op,formed in 1982, expanded rapidly in the mid-1990s,recruiting new members to help meet demand that wasgrowing at 15 percent per year. As a result, acreageshot up from 2,000 to 8,500 acres.

But—in a process that many growers know all toowell—the industry is now in an over-supply situation,which has the co-op and others looking for new usesfor meadowfoam. One of the most promising uses—ondisplay at the USDA Earth Day event—is meadowfoammeal, a pelletized product which has been used suc-cessfully in the nursery industry as a fertilizer and as aprotectant against weeds. Other uses being studied formeadowfoam oil, which is highly stable, include as an

additive in hydraulic and motor oils.Other exhibitors at the event included:• United Soybean Board—provided information

on a widevariety ofproductsmade fromsoybeans,grown by600,000 U.S.farmers.These newproductsinclude soy-based lubri-cants, woodadhesives,printing inks,

solvents, building composite materials and paints,among many others.

• Urethane Soy Systems Co.—This Illinois firm isdeveloping uses for soybean oil- based polyurethane,which is used in the manufacture of carpeting, furnitureupholstery, auto body parts and many other products.The South Dakota Soybean Processors cooperative inVolga, S.D., is its exclusive supplier of crude soy oil (seearticle, page 19).

• Gemtek Products—This Arizona company isproducing bio-renewable cleaning products—includingdegreasers, solvents, lubricants and odor neutraliz-ers—sold under the motto “safely cleaning planetEarth.” The company’s products are used for everythingfrom removing graffiti on buildings to metal cleaning inthe aircraft industry and as an odor neutralizer in meatprocessing plants and paper pulp mills.

• EarthShell Corp.—Disposable plates and bowlsmade from natural ingredients, such as limestone andpotatoes, are the specialty of this Maryland-based com-pany. All products are 100 percent biodegradable, yetrugged in use and microwavable. EarthShell also makecups and sandwich boxes. Its products are alreadybeing used in 90 Walmart stores on the West Coast, inseveral national parks and universities, says JohnNevling, director of product management.

• Eco Film—the Cortec Corporation of St. Paul,Minn., produces degradable film used in the manufac-ture of garbage and mulch bags, grocery bags, toy andparts packaging, export packaging, etc. ■

The United Soybean Board showed off awide array of soy-based products atUSDA’s Earth Day product show. USDA pho-tos by Dan Campbell

Taylor Oldroyd (right), USDA RuralDevelopment public affairs director, checksout some bio-renewable cleaning products.

tection for sharing market informationprovided by Section 5 of the Coopera-tive Marketing Act of 1926.

Subchapter T Tax Treatment—The Wyoming law is written so anentity it authorizes can receive single-tax treatment without having to meetthe qualifications for “operating on acooperative basis” under Subchapter Tof the Internal Revenue Code. Propo-nents of the law applied for andreceived a letter ruling from IRS that acompany formed under the law quali-fies for single tax treatment as a part-nership under Subchapter K, ratherthan as a cooperative under SubchapterT. This process was completed beforethe law even took effect.

Security Exemption —The Securi-ties Act of 1933 exempts farmer cooper-atives qualifying for 521 tax status fromits registration and prospectus require-ments. Only farmers’ associations quali-fy for 521 tax status. If a Wyoming Pro-cessing Cooperative has non-producerinvestors, it is questionable whether itcan qualify for 521 tax status, a neces-sary prerequisite to be eligible for theexemption in the ‘33 Securities Act.

Borrowing from CoBank—TheFarm Credit Act and Farm CreditAdministration regulations bar CoBankfrom making loans to marketing coop-eratives that have more than 20 percentof their voting power in the hands ofnon-producers or are authorized to pay

dividends on member capital thatexceed 10 per cent per year. Thus, it isquestionable whether an associationorganized under the Wyoming law thatgives more than 20 percent of the vot-ing control to investor “non-producer”members or permits returns on mem-ber equity of more than 10 percent iseligible to borrow from CoBank.

The Agricultural Marketing Actof 1929—This Act is the only federalstatute of relevance that purports todefine the term “cooperative.” The def-inition is patterned on the tests set outin Capper-Volstead. To qualify, an asso-ciation must, among other things, becomposed of “farmers” and must eithernot permit a member to have multiplevotes based on equity, or limit returnson equity to 8 percent. While the defin-ition is no longer used for its originalpurpose, to describe an entity eligible toborrow from the Farm Credit System,it has been incorporated by referenceinto several other laws that benefitcooperatives. It is the test to qualify for:

1. The protections against handlercoercion and discrimination in theAgricultural Fair Practices Act,

2. The cooperative exemption fromthe registration requirements of theSecurities Act of 1934,

3. The cooperative exemption fromthe trust provisions of the PerishableAgricultural Commodities Act,

4. The cooperative exemption from

trucking regulation under the Inter-state Transportation Act.

Taken together, all of these statutesreflect a consistent pattern of Congres-sional recognition that a cooperativeoperates within certain prescribed limi-tations. Cooperative leaders need toconsider the implications of a statestatute authorizing the formation ofcooperatives that may not qualifyunder any of these federal laws.

Unfortunately, simply suggesting theWyoming Processing Cooperative Lawgoes too far in discarding cooperativetenets doesn’t solve the bigger problemthat it was intended to address: Whatmust be done to ensure that entitiesowned and controlled by their member-users, and operated for the benefit ofthose member-users, cannot only sur-vive, but thrive in the years ahead?

Some serious thought and discus-sion are needed as to how to build flex-ibility into the cooperative model with-out destroying the unique features thatjustify favorable public policy treat-ment. Let these comments serve as achallenge to all cooperative leaders tobegin thinking about how the coopera-tive of the future must to be organizedand operated to meet the needs oftomorrow’s member-users.

Randall E. Torgerson, Deputy Admin-istrator, USDA Rural Business-Coopera-tive Service


Davisson heads CF Industries The new chairman of the board of

CF Industries Inc., the Chicago-areabased fertilizer manufacturing and dis-tributing cooperative, is Bill Davisson,chief executive officer of GROW-MARK Inc., Bloomington, Ill. Hesucceeds John Gherty, president andchief executive officer of LandO’Lakes, Inc., whose term expired.Both regional cooperatives are amongnine U.S. and Canadian farm supplycooperatives that own CF and securefertilizers from it. Through thousandsof member-owned sales outlets of

these cooperatives, CF’s nitrogen andphosphate fertilizers reach more than1 million farmers and ranchers in 48states and the Canadian provinces ofOntario and Quebec.

Moser joins LOL board Bobby Moser, vice president of agri-

cultural administration and universityoutreach executive dean of the collegeof food, agricultural and environmentalsciences at the Ohio State University,has been named as an advisory memberto the Land O’Lakes board of direc-tors. LOL Chairman Jim Fife said it

was a tribute to the $6 billion dairycooperative to gain an advisory mem-ber of Moser’s stature.

SV buys Rochester CheeseRochester (Minn.) Cheese Co., with

plants at Spring Valley and Delbo,Minn., has been purchased and willbecome a wholly owned subsidiary ofSwiss Valley Farms, Davenport, Iowa.The Rochester headquarters facilityincludes a cold storage warehouse. Thecompany ages, grates and custom-blends cheese for food companiesnationwide and packages parmesan and

Commentary continued from page 2


romano cheese for retail and ingredientmarkets. The firm’s annual sales areabout $100 million. Gene Quast, SwissValley CEO, said the expansion effec-tively broadens the cooperative’s lineand enables it to offer a complete line ofquality dairy products to its customers.

Montana elevator, long trainsboost farmer wheat prices

Mountain View Co-op’s new $6 mil-lion grain elevator and the 110-cartrains it accommodates are bringingfarmer-members another 8 to 10 centsper bushel for the wheat they sell to thecooperative at Collins, Mont. Thefacility’s 800,000-bushel capacity isenough to nearly fill a couple of thelong trains. Better still, the train can beloaded by a crew of only three, insteadof the 12 workers the job would take ata standard elevator. The first loadingtook only 13 hours vs. the standard twodays. Manager Bruce Clark said hehopes to cut the time to just ninehours. The lure is a $400-per-carfreight discount, prompting a number

of these super elevators to appearacross Montana.

Similarly, in North Dakota, KindredGrain and Oil has merged with Cenex

Harvest States at West Fargo, leadingthe way for construction of a multi-million dollar elevator at Kindred toaccommodate 100-car trains. Else-

Rural Survivors continued from page 19

bushels per day and has made invest-ments to move further up the value-added chain.

“Vision is important, but it is the exe-cution of that vision which is most cru-cial,” Christianson said. “My farmerschose to be in businesses that was a com-modity—to be a low-cost producer in anindustry where the top four companiescrush 75 percent of the crop. It’s a veryconsolidated industry. So it would befoolish to come back three or four yearslater and cry about how hard it is to com-pete with big companies.” But Christian-son said he has heard other new-genera-tion co-op leaders say they are upset thatthe large companies “are coming after us.If you don’t want to play with them,don’t put your business plan there.”

The SDSP board passed a resolu-tion that the co-op have no more thana 104 percent ratio of debt to equity. Atthat time, the ratio was 114 percent,but it has since been lowered to 35 per-cent. Another target was to pay 70 per-

cent of value-added patronage in cash.None was paid in the first year, but inthe next four years the payment was 80percent in cash, dropping to 70 percentlast year—a record profit year.

Christianson said SDSP has studiedits industry carefully to determine thebest course for the future. The five-year vision included boosting capacityto 100,000 bushels per day, to generate60 percent of revenue from value-added activity, to vertically integratetoward end customers and to createpartnerships and strategic alliances that“forge win-win relationships with otherproducer groups.”

A major result of the direction is anew strategic alliance with Urethane SoySystems of Dover, Ill.—which Christian-son described as a small, private compa-ny, trying to substitute soy oil for petro-leum-based oils in the manufacture ofpolyurethane. The goal will be to makeSDSP a major supplier of soy-derivedpolyurethane for carpet padding, furni-

ture upholstery, car bumpers, etc. It’s a 4.6-billion-pound market, he

said, and by 2007 SDSP hopes to havean 850-million pound share of it. Soyoil saves 5 to 30 percent of the cost ofpetroleum-based polyurethane, he said.The co-op has filed for a patent on aprocess it will use to process crude soy-bean oil into poly-oil.

SDSP is also working with Minneso-ta Soybean Processors—a 2,330-mem-ber co-op—to build a new soybean pro-cessing plant in Brewster, Minn., whichthey hope to have operating in 2003.SDSP will provide management andmarketing for that operation.

SDSP is considering converting to alimited liability corporation, but willcontinue to operate “with the sameoperating principles as a co-op,” he said.

Christianson, quoting business con-sultant Danny Cox, summarized theprocess of launching successful value-added enterprises: “dream, study, plan,take action.” ■

In recognition of GROWMARK’s 75th anniversary of service to local coopera-tives and their farmer-members, Future Farmers of America members from Nor-mal, Ill., plant trees on the farm of Dan Kelley, chairman of the regional cooper-ative’s board. The tree planting symbolizes faith in the future of America andwas conducted in conjunction with the cooperative’s participation in the IllinoisBuffer Partnership program, part of the Trees Forever organization. Photo cour-tesy GROWMARK. ■


where, an elevator and two miles ofsidetrack are under construction atHighmore, N.D., and should be readyfor the fall harvest season. The unit-train facility will be served by theDakota, Minnesota and Eastern Rail-road. CHS Cooperatives and the localFarmers Union Co-op elevators atKennebec, Reliance and Chamberlainare participating in the project.

Fla. timber co-op formed;poplars focus of Minn. co-op

A handful of small timberland own-ers in Florida have formed a coopera-tive to help cope with a depressed tim-ber market. Similarly, a small farmercooperative in west-central Minnesotais looking to make hybrid poplar treespart of its members’ cash crop mix.

In Florida, trees on co-op members’land were dying, rotting and beinginfested by the southern pine beetle.Five members signed a contract withHarrington Logging Inc., of Brewton,Ala., and sold timber from 142 acres inOskaloosa and Walton Counties. Exten-sion agents in the two counties evenpitched in to help form the cooperative.Almost immediately, landowners got 50percent more money per ton than if eachhad dealt separately with the industry.

A contractual clause specifies whattype of harvesting equipment will beused to ensure that the land wouldremain in good condition and stumpscut at specified levels. Some landown-ers have expressed interest in forminganother cooperative. Even the timbercompanies are excited about thearrangement because it saves themtime and travel between tracts andmakes scheduling crews easier.

President Dennis Gibson of theMinnesota Agro-Forestry Co-op, Ben-son, Minn., is encouraging members towork on developing a market for farm-raised, hybrid poplar trees and is hop-ing to attract the interest of venturecapitalists. That would require plantingenough acres of the trees to ensure asteady supply for a prospective market.The 40-grower cooperative was formedin 1996. Members are encouraged toplant hybrid poplars as windbreaks andother conservation uses, with an eyetoward eventually harvesting a prof-itable tree crop. On his farm, Gibsonuses as mix of hybrid poplars and cot-tonwoods as windbreaks to reduce ero-sion and improve water quality. Theyalso boost corn and soybean yields byreducing wind stress on them.

NCB income hits $12.5 million;Snyder to head NCBA board

Net income for fiscal 2001 reached$12.5 million for the National Cooper-ative Bank (NCB) in Washington,D.C., a credit source for many of thenation’s non-agricultural cooperatives,President Charles Snyder reported atthe bank’s most recent annual meeting.The bank’s total capital hit $344.7 mil-

lion and netassets reached$1.1 billion. Thebank is owned by1,841 borrower-cooperativesthroughout thenation.

The bankbestowed itsStanley W. Drey-er Spirit ofCooperation

award to the National CooperativeBusiness Association’s (NCBA) dot-Coop team for its efforts to propose,develop and launch the new .coop top-level Internet domain. Only coopera-tives and cooperative support organiza-tions are eligible to register namesunder .coop. “Dot Coop will identifyand unify us as cooperatives on the

Heavy dept pulls Farmland into Chapter 11 continued from page 11

purchased SF Services in 1998.An 11th-hour buyout bid for Farm-

land’s meat business by SmithfieldFoods Inc., the world’s largest hogproducer and pork processor, wasdeclined by the cooperative’s board.Farmland rejected the offer afterreceiving $306 million of debtor-in-possession financing from its lendingsyndicate headed by Deutsche BankAG and including CoBank, BankersTrust Co. and Rabobank. Sen. CharlesGrassley of Iowa has since said heopposed any deal between the firmsout of concern for too much concen-tration in the meatpacking industry.

Farmland’s refrigerated foods unit,which includes its beef and pork busi-ness, generated sales of almost $4.75billion in 2001. Its fresh meat opera-

tions are the fifth largest in thenation. Rather than focusing on own-ing livestock, Farmland has beendeveloping branded meat productsincluding case-ready offerings forsupermarkets.

Farmland is also attempting to sellits petroleum refinery at Coffeyville,Kan. After a 5-week shutdown forrepairs and improvements, the refinerycame back on stream for the springseason. The regional cooperative’sbankruptcy petition is expected to havelittle effect on operations of its localcooperative owners. If Farmland’sstock is devalued, the locals couldwrite them off for tax benefit in thecurrent fiscal year.

Harry Fehrenbacher, Illinois farmerand Farmland chairman, earlier this

year told a Farmland Systems Confer-ence in Scottsdale, Ariz., that thecooperative was changing from acommodity-based farm supply busi-ness with huge cycles and small mar-gins to a more stable, high-marginfoods business, although “the transi-tion is not complete as evidenced byfinancial results of the past few years.”He said,“We must position it (Farm-land) to generate a return on yourequity investment...including thefoods business.”

Terry indicated the cooperative’sstrong brand equity, leadership in themeat business, $2 billion asset base andsupport of its 1,700 local cooperativesand their 600,000 farmer-ownerswould help the cooperative emerge as astronger company. ■

Charles Snyder

Internet and around the globe,” Snydersaid. “It weaves together cooperationand the communities we serve.”

Snyder’s bank was one of thefounding members of dotCoop. Hewas subsequently elected chairman ofthe NCBA board, succeeding PeteCrear. The bank has registered morethan 200 dotCoop addresses by 82affiliated cooperatives and recentlyrevamped NCB’s Web site andlaunched it under the new address:www.ncb.coop. “For NCBA members,cooperatives and communities nation-wide, we have a special opportunity tocombine our forces to reach NCBA’sbold goal of creating a strong, distinctcooperative sector.”

Kansas fetes Gwin, WilliamsTwo inductees, Francis “Fritz” Gwin

and James Williams, have joined theKansas Cooperative Hall of Fame.Gwin was manager of Farmway Co-opin Beloit and also served as chairman ofthe board of Farmland Industries.Williams, retired president of the

Wichita Bank for Cooperatives, devot-ed 27 years to providing credit servicesto agricultural cooperatives while serv-ing on the board of directors of numer-ous regional and national cooperativeorganizations.

Extended courting pays offIt took 18 months of courting to ice

the deal, but New Vision Co-op atWorthington in southwest Minnesotarecently shipped 75 railcars of soy-beans—about 270,000 bushels—to anoilseed crushing company in Jalisco(near Guadalajara), Mexico. An agricul-tural merchandising firm that repre-sents about 200 cooperatives in theUpper Midwest helped arrange thesale. The shipment marked the firstdirect sale by Minnesota farmers to aforeign customer under a state pro-gram promoting exports.

Talks are underway for the sale ofmore soybeans and possibly corn.While the $1 million sale was big forthe cooperative, it was a small part ofthe state’s annual total exports of $681

million in soybeans and soybeanproducts. Almost 2 years ago, Gov.Jesse Ventura headed a trade missionto Mexico and mutual visits followedby Minnesota farmers and state agri-cultural officials from Mexico. ativesector,“ Snyder said.

Illinois sheep co-op launchedSheep producers in Illinois have

decided to pool their resources in aneffort to make more money throughIllinois Value-Added Wool ProducersInc. The state’s 2,400 producers oper-ate small flocks and the grade of woolis not the best. So the cooperative isexploring value-added products, suchas stadium blankets with the colorsand logos of Illinois colleges and uni-versities and bio-filters for hog con-finement facilities. Currently, theprice of wool in that area does noteven cover the cost of shearing. Thecooperative is designed to link sheepproducers with each other and finalalternative markets for the state’swool supply.


Unstable farm markets continued from page 29

The Texas Cattle Feeders Associa-tion (which covers Texas, Oklahomaand New Mexico) first floated the ideaof forming a cattle marketing co-op inabout 1986, but it died for lack ofenthusiasm. “It came up again in 1992,and failed by a smaller margin,” Hitchsaid. “Then it came up again in 1997,but still didn’t have quite have the criti-cal mass to go forward.”

In 2000, Hitch—whose familyfeeds about 300,000 cattle in Okla-homa and Kansas—was chairing theTexas Cattle Feeders Associationwhen his board told him the time wasright to form a marketing co-op to tryto earn more for their members. Theidea was that instead of independentfeedlots each selling separately topackers, and being worked againsteach other, they would commit cattleto a co-op that would sell to packerson their behalf.

Formed in April 2000, the co-oprecruited its first members in May

2000, enrolled 2.1 million cattle and“closed the books” on membership byOctober of 2000. “That is a signifi-cant number of cattle—twice the sizeof the largest independent cattle feed-er in the nation,” Hitch said. InMarch 2001, Consolidated sold itsfirst cattle.

Since then it has sold 60 percent ofthe cattle submitted by its members.Cash sales have accounted for 39 per-cent of sales, premium-grid sales 39percent and in-the-beef (or carcassweight) sales the other 22 percent. “Iwish we had more negotiated gridsales—I think we need to get awayfrom the cash market,” he said. Con-solidated members have netted $8 perhead more than on the cash market.

“So yes, Consolidated Beef hasachieved some success, but it is not assuccessful as it needs to be,” he said.Hitch noted that the co-op had a smallloss of $160,000 the first year (againstcash reserves of $2 million).

“It’s been a tough, tough time forcattle sellers,” Hitch said. “There’s toolittle packing plant capacity and toomany cattle to sell. That does not giveyou much traction as a seller.”

Again, about that pot roast. Now theindustry is offering consumers a good-tasting roast that is mircowavable inseven minutes and has potatoes andcarrots with it, Hitch said.

“When you brand your product,there is huge incentive to line up a con-sistent supply of the right kind of prod-uct to make your brand successful. Andthat’s where I want Consolidated Beefto fit in. I want the packer to makemore money,” he said, but he alsowants his members to make more mon-ey “by making Consolidated Beef thesupplier of choice for a packer/retail-er/branded program that provides theright kind of cattle at the right plant atthe right time to make the programwork. We are not there yet, but that’swhere we are headed.” ■


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1031728 Rur Coop-July/Aug 02 - USDA Rural Development · 2019. 11. 20. · bulk commodity exports,...

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