Rur Coop March 05 temp$2-per-hundredweight mark — $2.50 below the price producers say they need to...

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lCOOPERATIVESCOOPERATIVESUSDA / Rural Development March/April 2005

Potato growerslooking to a new daypage 4

2 March/April 2005 / Rural Cooperatives

Editor’s note: Guest commentary forthis issue is by Lynn Jensen, statedirector for USDA Rural Devel-opment in South Dakota. Jensen,past president of the National CornGrowers Assoc., continues to farm atLake Preston, S.D., population 600,and is an investor in several farmer-owned, value-added enterprises.

USDA Rural Developmentisn’t crop subsidies. It isn’t con-servation programs. It doesn’tdeal with mad cow disease.

Rural Development is invest-ment banking. It’s the investmentarm of USDA with a focus on eco-nomic opportunity and quality oflife.

In the first four years of theBush administration, RuralDevelopment has invested over$50 billion in rural communitiesfor everything from new value-added, producer-owned businessesto broadband technology. RuralDevelopment brings you electrici-ty and water and it helps buildyour schools, hospitals and firestations.

It’s the lead federal agency onvalue-added agriculture and one ofthe key players on biofuels. It alsoprovides technical assistance,research and education (includingthis publication) to help buildstronger rural cooperatives.

As we continue to transitionbeyond traditional commodityagriculture, Rural Developmentwill be an increasingly importantpartner across the board in ruralcommunities.

Business development is a big

part of what Rural Developmentdoes. The fastest growth rate inrural areas has been in farmer-owned, value-added businesses.

In rural communities, successfulproducers and co-op members arenatural leaders. They have theenergy, the business experience,the resources and the respect tolead. If rural communities aregoing to work, producers have toget involved. This is about qualityof life. This is about your sons ordaughters coming back home.

We also know there’s a cashvalue to your farms and ranches inhaving good schools, a grocerystore, hospital, implement dealeror fire station within a reasonabledistance. None of those things willbe there if producers don’t getinvolved. Our communities needyou on the school board, the hos-pital board, etc., but mostly on thelocal economic developmentboard.

While we work to buildstronger rural communities, wealso need to continue to transitionto more value-added agriculturalbusinesses. The National Corn

Growers Association just issued anew report, “Taking Ownership ofCorn Belt Agriculture,” whichproducers need to read.

The report says: “As the busi-ness leaders and economic enginesof their communities, U.S. farmersand ranchers play a vital role inrevitalizing America. They possessthe capital reserves needed toinvest in new value-added ven-tures, and the willingness to diver-sify outside of raw commodityproduction.”

Bio-agriculture is one of a num-ber of emerging technologies withextraordinary potential. It is in itsinfancy. I can’t tell you where itwill be in 20 years, but I dobelieve in 20 years we will belooking back in astonishment athow far we’ve come.

Producers have some decisionsto make. Not everyone will makethe same choice. There are realopportunities for producers toparticipate in the ownership struc-ture.

Ethanol, for example, took offwhen producers got involved in abig way. Ethanol is becoming adecentralized industry with stronglocal ownership. We know that hashad tremendous benefits for ruralcommunities.

Producers need to be alert tothe opportunities that will arisealong the way to participate inownership. That’s where thegreatest gains will be realized. — Lynn Jensen, State DirectorUSDA Rural Development, South Dakota ■

C O M M E N T A R Y

Producers are natural leaders for rural communities

If rural communitiesare going to work,producers have to getinvolved. This isabout quality of life.

Rural Cooperatives / March/April 2005 3

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

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Mike Johanns, Secretary of Agriculture

Gilbert Gonzalez, Acting Under Secretary,USDA Rural Development

Peter Thomas, Administrator, Rural Business-Cooperative Service

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

Dan Campbell, Editor

Vision Integrated Marketing/KOTA, Design

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

This publication was printed with vegetable oil-based ink.

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COOPERATIVESCOOPERATIVESMarch/April 2005 Volume 72 Number 2

p. 4

p. 8

p. 14

p. 18

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

4 Price crisis prompts potato growers to form national co-op

8 Low-carb, High Hopes Co-op’s tubers may beef-up Florida's potato industry

11 Farmer co-op business volume nears $117 billion

14 Unflappable Plant closure forces co-op launch onto fast-track

18 A Perfect Storm Farmland trustee sues ex-officers, directors

23 Court of Preference Minn. co-op helps manufactured home residents

25 Upswing Continues Despite loss of Farmland, Agway, revenue & income climb for top 100 co-ops

30 Perils & Pleasures of Partnerships Key issue of co-ops in business partnerships: Who do you trust?

D E P A R T M E N T S2 COMMENTARY 12 VALUE-ADDED CORNER 24 LEGAL CORNER 33 NEWSLINE 43 INSIDE RURAL DEVELOPMENT

O n t h e C o v e r :

Potato growers in Idaho and other states are hoping they can establisha fair price for their crop through a new co-op that will work to betterbalance supply and demand. In Florida, another new co-op hopes to findsuccess with a low-carb potato variety. Articles on pages 4 & 8. Photocourtesy United Fresh Potato Growers of America


By Stephen A.Thompson

Assistant Editor

otatoes have been a staple of the American dietfor more than a century, and U.S. and Can-adian growers together produce about 18.5million tons of them a year. For many Amer-icans, a meal just isn’t complete without pota-

toes, whether mashed, fried, boiled, or baked. However,recent trends in consumption and increases in growers’ pro-ductivity are keeping potato prices down, putting farmers ina bind. In response, a nation-wide cooperative is beingformed with the purpose of better managing supplies to helpgrowers earn a fair price.

United Fresh Potato Growers of America was organizedMarch 3, in Washington D.C., during the annual meeting ofthe National Potato Council. United of America hopes tobecome an umbrella organization for a network of state co-ops that will monitor the potato market and encourage farm-ers to take voluntary action to limit potato production whenrequired to keep prices at, or above, a break-even level.

Until recently, the amount of potatoes people eat eachyear was rising: the total weight of potatoes eaten in theUnited States per person is about 30 percent higher nowthan it was in 1980. But the popularity of the “low-carbohy-drate” diet and other trends have put the squeeze on freshpotato consumption: in 2002, annual U.S. per capita con-sumption dropped more than 10 percent from its peak in

Pr ice c r is is p rompts potato g rowers to fo rm nat iona l cooperat ive

P


1993, according to USDA’s EconomicResearch Service.

Part of the problem is the growingproportion of people who live in one-or two-person households. People wholive in families with children are thegreatest consumers of potatoes.Reduced demand for French fries infast-food restaurants is another factor.But the most conspicuous cause is therise of the “Atkins Diet” and its imita-tors. Such diets require people to con-sume drastically reduced amounts ofcarbohydrates.

In its first phase, the Atkins Dietrequires consumption of only 20 gramsof “carbs” per day. Normal carbohydrateintake in the United States, according tothe Institute of Medicine, is about 200to 330 grams per day for men, and 180to 230 grams for women. The averagepotato contains about 26 grams.

Whatever the causes of the slump inpotato demand, the impact on priceshas been dramatic. Bulk prices forfresh potatoes now hover around the$2-per-hundredweight mark — $2.50below the price producers say theyneed to stay in business.

Responding to a crisisIn response to the low-price crisis,

Florida farmers have come up with alow-carb potato they hope will find itsown market (see related article, page8). But northern potato producers willbe unable to grow the low-carb variety.They need a different strategy, andthey need it soon.

Idaho is the largest potato-growingstate, producing a third of the coun-try’s crop, and Albert Wada is thelargest potato farmer in the state. Hegrows more than a billion spuds annu-ally on 12,000 acres near Blackfoot,the self-styled “Potato Capital of theWorld.” Wada’s father began the oper-ation after he moved to Idaho fromCalifornia to avoid the federal govern-ment’s internment of Japanese-Americans during World War II.

Wada says that potato farmers arelosing money steadily, watching theequity they have built up in their busi-nesses over many years go down the

drain. He believes the problem isn’tjust lowered demand. “We’ve beenover-producing fairly consistently,” hesays. “If this keeps up, all the growersare going to go broke.” Other Idaho

farmers point out that, while Idahopotatoes used to be a recognized“brand,” and commanded higher pricesthan others, that advantage has nowlapsed, exacerbating the price problemfor Idaho farmers.

“We’ve operated on the assumptionthat with free enterprise, hard work,and good weather we’ll do okay,” saysWada. “But the other side of that coinis globalization of the market.”

The advent of the North AmericanFree Trade Agreement (NAFTA),which opened U.S. borders to theimport of farm products from Canadaand other countries, has put a heavydownward pressure on the pricesAmerican farmers can get for theirpotatoes. “Historically, we would gettwo years out of five that we madedecent money,” Doug Hanks, presi-dent of the Potato Growers of Idaho,says. The two good years would getthe farmers comfortably through thethree bad years. But in the lastdecade, under NAFTA, he says, “It’smore like two out of ten.”

The problem of foreign competi-tion hit home for Idaho farmers in

2003, when a large French-fry process-ing plant in Canada began production– replacing one in Idaho – and theUnited States became a net importerof French fries. The announcement ofthe Idaho plant’s closing had comeafter the 2002 crop was already plant-ed, resulting in a large surplus of pota-toes in the state.

In 2003, despite voluntary acreagereductions, farmers realized an evenlarger surplus. The resulting low priceshave affected potato prices across thecountry.

Co-op role in supply managementWada thinks the answer lies in

managing the supply of fresh pota-toes. He founded United FreshPotato Growers of Idaho in late2003, hoping it would form thenucleus for a nationwide federatedcooperative with member co-ops ineach potato-producing state. Theidea, he says, is to unite potato grow-ers and “rationalize the industry,” bytailoring production to the market,much the same way milk producershave managed to do with dairy pro-duction. The plan is called UnitedWe Stand (see sidebar).

Attorney Randon Wilson, legalcounsel for the co-op, stresses the needfor the effort to conform to theCapper-Volstead Act so as not to besubject to anti-trust laws. That meansthat packers and other ineligible busi-nesses can’t participate. “We’ve got tobe a pure farmer’s cooperative,” hesays.

With the formal organization of thenational federated cooperative thisMarch, the effort is underway.Representatives of state and regionalpotato-grower associations and coop-eratives voted Albert Wada the interimchairman, and pledged to help set upthe state and regional co-ops that willform the foundation for United FreshPotato Growers of America.

The effort will face a number ofchallenges. The first is the necessity ofgetting enough producers on board tobe effective. Not only must a high pro-portion of growers join, but the co-op

“We’ve been over-producing fairly consistently. If thiskeeps up, all thegrowers are going to go broke.”

—Albert Wada


must represent all the major potato-growing states. “We need to get partic-ipation from all the significant growingareas,” says Wilson. “If we don’t, it’scurtains for this deal.”

Potato farmers tend to prize inde-pendence, and don’t have the samekind of strong cooperative traditionthat helped the organizers of theCWT program in the dairy industry(See Newsline, page 33). But Wadaand David Beesley, the secretary ofUnited of Idaho, say that the beauty oftheir program is that it preservesfarmer autonomy.

Producers will still sell their crop towhomever they wish, for terms agreedbetween buyer and seller. And as longas prices remain above the trigger point,the program will take no action. Should

supply reduction be necessary, partici-pation in buyouts of acreage or cropswould be entirely voluntary. A farmerwith formal or informal obligations tosell his full output to buyers would stillbe able to do so; others with compara-tively more incentive to reduce produc-tion would bid to reduce their own.

“One thing we want to be carefulabout is how we treat our customers,”said one farmer at the organizationalmeeting. “And this program will allowus to treat them with respect and pre-serve our good relationships withthem.”

Two approaches toSupply management

“There are two basic approaches todealing as an industry with oversup-

ply,” says attorney Wilson. “One is toseek a government program, such asmarketing orders or subsidies. Theother is for the industry to take theinitiative to unite and pursue programsof mutual benefit.” Many farmers arevery reluctant to seek a governmentmarketing program or other assistance,for fear it will compromise their inde-pendence, he says. “Often, federal pro-grams mandate participation. But thebeauty of an industry program like thisis that it leaves growers free to maketheir own decisions.”

Some experts wonder if large buyerssuch as Wal-Mart and the large super-market chains will balk at attempts toraise prices, and seek alternativesources. But Beesley says that, for themost part, the large customers would

Representatives of potato-growers associations vote to establish United Fresh Potato Growers of America during a March meeting inWashington, D.C. Albert Wada, appointed interim chairman, is at center left in the white shirt. USDA photo by Steve Thompson


like to see a stable price situation.“They can’t plan ahead with pricesgoing up and down the way they donow,” he says.

One possible stumbling block is thecost of participation. Member farmers,many already strapped for cash, will berequired to help fund cooperativeadministrative programs. In addition,co-op funds may be used to offerincentives for switching acreage toother crops, and, if necessary, to buyout portions of a crop after harvest.Under the dairy farmers’ CWT pro-gram, farmers pay into an indemnityfund, through an assessment on pro-jected output, for this purpose.However, no decision had been madeat press time about implementation ofsuch a program.

The cost of such an indemnityfund should be seen as a highly

attractive investment, says CarlTaylor, chairman of United of Idaho’sFuture Crop Committee, who ham-mered out the basic United We Standplan. “If you pay in 40 cents a hun-dredweight, but in return you get aprice for your crop of $4.50 insteadof $2, you’ve just made a profit ofover 1,100 percent.”

This strategy assumes that buyingout acreage and harvested potatoes willbe cost-effective. The co-op citesresearch by the University of Idahoindicating that a 1-percent decrease infresh potato supply can be leveragedinto a 7-percent rise in prices. The ulti-mate return will depend on the pricesfarmers are willing to take for reducingtheir crops and other market factors –most especially how many farmersdecide to participate in the co-op.

Will enough potato farmers sign up

to make the plan work? “We’ve triedto get something like this goingbefore,” says Doug Hanks, “But wecouldn’t reach critical mass.” However,he says, “Now the willingness to dosomething is at ‘must’ level for growersin Idaho and across the country,because of continued low returnsthey’re getting for fresh potatoes.”

Potato farmers at the NationalPotato Council conference expressedvarying degrees of hope and skepti-cism. “I don’t know if it’ll work, but weneed to do something,” said one. Most,however, seemed cautiously hopeful.

Wilson is enthusiastic about the co-op’s chances. “I have high hopes thefarmers will deal with this problem asan industry, that they will work togeth-er to bring the supply of potatoes intoline with the demand. That’s the nameof the game.” ■

United Fresh Potato Growers of America envisionsa two-pronged approach to influencing the market,similar to the successful Cooperatives WorkingTogether (CWT) program that has helped shore up milkprices by removing some excess milk capacity (seepage 33).

The first prong is the withdrawal of a calculatedamount of productive acreage. If acreage restrictionsfail to result in sufficient upward pressure on prices,the second prong calls for restricting the number ofpotatoes harvested .

To limited planted acreage, a base acreage will bedefined using historical information verified by USDA’sFarm Service Agency (FSA). Planting commitments byfarmers will be gathered every year by Feb. 28, and theco-op will perform a comprehensive demand/supplyanalysis, considering such factors as potential yields,projected market demand, etc.

If the market analysis indicates that the projectedcrop will be too large, the cooperative will offer to payfarmers for retiring potato-producing acreage. Farmerswill bid to plant alternative crops for a chosen priceper acre. Factors to be taken into consideration forbids will be the location of the farm, its potential pro-ductivity, the varieties of potatoes grown and, ofcourse, the price the farmer agrees to accept. Co-op

officials pledge that all information provided by pro-ducers will be held in strictest confidence.

Farmers or their agents would take part in frequentconference calls throughout the year discussing pricesand expected output in their respective areas.

The June 1 potato planting report, issued by USDA’sNational Agricultural Statistics Service, will serve as apossible warning bell for a potential surplus. Using thelatest information, the co-op will perform anotherdemand/supply analysis, and determine if growersshould be encouraged to voluntarily limit production byminimizing inputs on selected acreage.

Another analysis will be done Aug. 15. If projectedyields are not compatible with favorable prices in theprojected market, the co-op may ask farmers todestroy a portion of the crop in the field. If low priceconditions arose after the harvest, measures would betaken to limit shipments of potatoes until prices rise toa reasonable level. Other potential supply-manage-ment tools include a “B market” strategy that woulddivert potatoes to export and to non-conventional usessuch as animal feed.

To head off potentially disastrous prices in the com-ing year, the cooperative is also attempting to institutea crash crop-acreage buydown for the 2005 potatoplanting. ■

The United We Stand program


Low-carb , H igh HopesCo-op’s slimmed-down, SunLite tubersmay beef-up Florida’s potato industry

Checking on the first crop of low-carbpotatoes (from left) are: Edsel Reddon,University of Florida extension agent; USDARural Development State Director CharlesW. Clemons; and Wayne Smith, president ofSun Fresh of Florida growers’ cooperative.USDA photos by Ellen Boukari

By Ellen Boukari

USDA Rural Development/ FloridaPublic Affairs Office

ursting with calcium,niacin, iron andVitamin C, potatoes are one of the world’sgreat foods. Even pota-

to skins are a good source of fiber.And they can be served in a seeming-ly inifinite number of ways. It’s notsurprising, then, that potatoes havelong been America’s most popularvegetable, according to USDA’sEconomic Research Service, whichreports that the typical Americanconsumes more than 140 pounds of spuds each year.

But for weight-conscious con-sumers, there is trouble lurkingbeneath the skin: carbohydrates, and

plenty of them. If you subscribe to thenotion that fat is the dieter’s friend,carbohydrates — as are found in breadand potatoes — are viewed as dietaryoffenders. As the low-carb diet trendhas taken root, millions of Americanshave adopted a low-carbohydrate regi-men. That’s resulted in the sale of a lotof meat, but fewer potatoes.

Potato sales have been decliningprecipitously in the Tri-County agri-cultural area (St. Johns, Putnam andFlagler counties) of northeast Florida,once known as the Potato Capital ofFlorida. The number of potato grow-ers here has dwindled from nearly 400farmers in the early 1970s to fewerthan 40 today.

Fighting to regain crown Five Florida potato growers are

seeking to regain lost market share by

forming SunFresh of Florida Market-ing Cooperative Inc. The members, allsixth-generation Florida potato grow-ers, think that a new variety of low-carb potatoes they are growing caneven help the Tri-County area regainits potato crown. The co-op has beenbolstered by technical assistance and a$95,000 Rural Business EnterpriseGrant (RBEG) from USDA RuralDevelopment. Also playing a vital roleis Chad Hutchinson, an assistant pro-fessor of horticulture at the Universityof Florida’s (UF) Institute of Food andAgricultural Sciences.

Hutchinson has been growing andtesting the new potato variety for fiveyears at UF’s Plant Science ResearchUnit in Hastings, Fla. In 2000, potatofarmers and UF scientists began work-ing with Dutch seed company HZPCto develop a better potato — better

B


tasting, better looking and with anincreased shelf life. It has 30 percentfewer carbs and higher protein thanrusset potatoes (the biggest selling vari-ety in the United States). This tuberinnovation is already impressing health-conscious consumers and is bringingthe potato back to the dinner tables ofmore people on low-carb diets.

“Growers love this potato,” saysHutchinson. “It is disease resistant, hasa shorter growing cycle and is betterable to deal with Florida’s extremeweather.”

Co-op growers are hopeful that thenew SunLite potato will revive thepotato market and turn a profit forthem. Joe Mueller, business and coop-erative programs director for USDARural Development in Florida, provid-ed the co-op with critical help indeveloping their marketing organiza-tion. The RBEG funds from USDAassisted with the initial marketing roll-out for the new potato.

The SunFresh co-op has exclusiverights to the potato. As an added bene-fit, SunLite low-carb potatoes aregrown in compliance with a pilotUSDA program that provides identitypreservation of the crop from the farm

to the consumer. Shoppers are thusassured they are getting authenticSunLite™ low-carb potatoes.

Trouble in potato countryWhile growers are optimistic about

the new potato, they also are awarethat competition from northern grow-ers will remain tough. The Tri-Countypotato-growing region consists ofabout 21,000 acres of unique farmland.The moderate climate allows growersto harvest potatoes early in the year,usually in March and April, sometimeseven earlier. Over the years, MotherNature’s benevolence was a boon toFlorida growers, giving them the com-petitive advantage over cold-weatherspud growers.

However, due to new potato storagetechnology and excess potato produc-tion in northern states, growers herecan no longer compete by relying sole-ly on the early-to-market growingcycle and the freshness of their prod-uct. The number of buyers has dwin-dled, also contributing to the declineof the Florida potato industry. Withlittle member commitment, anotherlocal co-op was not having much luckincreasing prices or finding new mar-

kets for its members, Mueller notes. By 2003, Florida’s potato industry

was ripe for a positive change. Theground-breaking, low-carb potato wasthe impetus needed to rally the farmersinto a unified group seeking a biggermarket presence.

Prior to the formation of SunFresh,there has been little crop differentia-tion in Florida potatoes had none hada brand identity. Potato marketing hashistorically been focused on bulk pro-duction, with most sales made to man-ufacturers of the potato chips orFrench fries. Farmers knew that inorder for the low-carb potato to be asuccess, they would need more than abetter potato.

The task was formidable. Instead of focusing solely on growing

and harvesting potatoes, the farmersnow were tasked with product manage-ment, from planting to harvesting, pack-ing, shipping and marketing on anational scale. Seeking advice about howbest to bring to fruition the many piecesof the challenging puzzle, farmers andscientists consulted with local agricul-ture extension agent Edsel Reddon, whoin turn called on Mueller at USDARural Development for advice.

SunLite low-carb potatoes are sortedat the co-op’s packing house.


Co-op: perfect marketing vechicleWhile Florida’s potatoes represent

only 5 percent of the nation’s crop,they are important to the state, gener-ating more than $120 million in salesannually.

Mueller was convinced that if farm-ers worked together and had a strate-gic plan for the future, they could cap-ture more profits with the low-carbpotato. The co-op seemed to be theperfect vehicle to take this new potatoto the market place.

But given the lackluster perfor-mance history of some other coopera-tives in the area, it was no easy task toconvince growers that a new co-opwas the best bet toward making thelow-carb potato profitable. Organizingand operating a new co-op would bethe true test of commitment and dedi-cation.

Less than 12 months after it waslaunched, Mueller says SunFresh ofFlorida Marketing Cooperative “hasdemonstrated a winning combinationof know-how, determination and man-agement skills to handle the myriad ofdetails required, both internally as wellas externally.

Marketing campaignThe cooperative is pushing full-

steam ahead with marketing strategiesthat emphasize the potato’s health bene-fits. Sunfresh is promoting the SunLitebrand as a unique, gourmet potato sureto please the palate and the waistline.The growers also want to market thepotato as a fresh vegetable with a brandname and logo, so that shoppers will askfor it in their grocery store.

Given that the potato is smoothskinned, has small eyes and slightlyyellow flesh, it offers eye appeal andtempts the tastebuds with its freshcreamy texture. And butter and sourcream are optional, due in part to thepotato’s high-moisture content, saysHutchinson.

USDA Rural Development’s RBEGfunding was provided to the FloridanResource Conservation and Develop-ment Council, which in turn used thefunds to assist the co-op in marshalling

marketing activities for the potato. Amarketing campaign targeting wholeal-ers, retailers, the food service trade andconsumers is in full swing to marketSunLite as a premium table potato.

The potatoes hit supermarketshelves in February 2005 as “SunLiteAll Natural-Low Carb Potatoes.”Sunfresh began its marketing cam-paign by targeting grocery stores inthe southeast, including regional andnational chains. With marketing assis-tance from the Florida Depart-ment ofAgriculture and Consumer Services(FDACS), each bag of SunLite low-

carb potatoes brandishes appealinglabeling and an eye-catching logo. Themarketing strategy is “to sell the sizzleand not the steak,” says SunfreshCooperative president and “SunLite”potato farmer Wayne Smith.

Over the past eight months, thelow-carb potato has been featured innumerous publications, including cov-erage on major newswires and networktelevision. Smith said that spendingtime with reporters and photographershas become somewhat commonplacefor him.

Looking aheadCurrently, all grading, packing and

shipping is done in the co-op’s St.

Augustine facility. The first year’s pro-duction of the new variety will comefrom an estimated 4,000 acres and willtriple in the second year, according toSmith. As many as 30,000 acres areprojected to be in Sunlite productionin three years.

SunFresh cooperative growers alsohave planted SunLites near Immokaleein south Florida. Flexibility in harvest-ing and shipping is a distinct advantageas the market moves from the south tothe north. And, with multiple growinglocations, co-op members believe theyare better protected against bad weath-er, which has besieged Florida grow-ers in recent years.

Smith says that Sunfresh will addadditional producer members asdemand for the innovative tuberexceeds current member’s capacity.There will also be a need to add pro-duction during times when Floridagrowers have no potatoes to sell. Theco-op’s five-year plan calls for spread-ing production to 10 states and devel-oping six packing and distributionfacilities.

If there is a downside to marketingSunLite as a premium table potato, itis the larger percentage of culls —potatoes that don’t pass visualappearance standards. Althoughculls, or “No. 2s,” are identical innutritional value to their more visu-ally appealing counterparts, evensmall surface blemishes result in

downgrading. This has spurred theco-op to look into additional markets,such as the school lunch system. Asproduction increases, additional possi-bilities include a variety of frozenpackaged potato products.

The future of Florida’s potato farm-ers is looking brighter these days, andas USDA Rural Development StateDirector Charles W. Clemons Sr. saidat a press conference last summer:“Not only will the low-carb potatobring desirable options to theAmerican consumer, it will energizeFlorida’s potato industry withincreased market share.” And that’s nosmall potatoes for Florida’s $120 mil-lion industry. ■

SunLite potatoes are bagged at the co-op'spacking house. Three-pound bags were fetching$4 in some stores in March.


Editor’s note: Information for this articlewas compiled by the Statistics Staff ofUSDA’s Rural Business-CooperativeService, including Celestine C. Adams,Katherine C. DeVille, Jacqueline E. Pennand E. Eldon Eversull.

armer-owned coopera-tives had gross sales ofnearly $117 billion in2003, up 4.4 percentfrom $112 billion in

2002. Increases in crop and livestockproduction helped boost total sales,more than offsetting the effect of thebankruptcies of two large cooperatives.

Total co-op farm marketing (whichincludes the sale of all crops, livestockand value-added goods) climbed 4 per-cent, farm supply sales increased 7.5percent and receipts from farm serviceswere up marginally (table 1), accordingto an annual survey conducted by theCooperative Services office of USDARural Development.

Income (before taxes) for all U.S.farmer cooperatives was $1.4 billion in2003, up from $1.2 billion in 2002.

Overall, cooperatives saw higher lev-els of equity capital on their balancesheets, but it still remains low, averag-ing 42 percent of all assets. Cooperativeassets increased 1 percent, liabilitiesremained about the same and equityincreased about 2 percent (figure 2).

The bankruptcies of the federatedco-ops mentioned above resulted indrastically lower patronage refundincome for local farmer cooperatives,which fell by 78 percent. As a result,many cooperatives experienced awrite-down in their equity accounts.Overall, net income before taxes

increased by almost 18 percent, evenwith lower patronage income.

Farmer cooperatives remain one ofthe largest employers in many ruralcommunities, with overall employmentincreasing by 1 percent, to 223,000 in

2003. Full-time employee numbersdeclined by almost 2 percent, to164,000, while part-time and seasonalemployees increased almost 10 per-cent, to 59,000.

Farmer co-op bus iness vo lume nears $117 b i l l ion

Fcontinued on page 39

By Erica Coble

Editor’s note: Coble grew up on her fami-ly’s beef cattle and alfalfa hay farm in thesouthwest Missouri town of Dadeville. Sheis a senior majoring in ag journalism,with a minor in ag economics, at theUniversity of Missouri-Columbia.

consumer walks into agrocery store looking fora meat product that’s easyto prepare, stores conve-niently and is safe for her

family. Walking down the canned foodaisle, the consumer spots a productshe’s never seen before. There on theshelf, wrapped in a red label, isHeartland Farm Foods’ fully cookedground and chunked beef. Curious, theconsumer picks up the can and turns itaround to look at the ingredients; onlyone is listed: beef. In addition, the beefis hormone-free, has no preservatives,salt or other additives and can be tracedback to the farm where it was raised.

Heartland Farm Foods LLC, a sub-sidiary of the Farm FoodsCooperative, was formed in 2001 by39 east-central Missouri farm families.Headquartered inMontgomery City,Mo., the coopera-tive uses familyhome-canningrecipes to producehigh-quality cannedground and chunkedbeef. The shelf-sta-ble product is all-

natural and contains only beef. Canning food is, of course, a tradi-

tional food-preservation techniqueused by Americans for generations. Itremained popular longer in rural areas,especially where electricity for refrig-eration was slow in coming. IreneEdwards of Montgomery City hadbeen canning beef for years and givingit away in glass jars. People loved theflavor and the convenience. The familygradually realized there might be abusiness opportunity in those jars.

After a study showed market poten-tial for the product, the Edwards fami-ly shared the plan with their neighborsand decided to pursue a value-addedbusiness venture. The goal: provideconsumers with a convenient, tasty,high-quality beef product while creat-ing a new business channel that wouldhelp farm families realize more profitsfrom their cattle.

Since the initial introduction of twocanned-beef products, the co-op andits LLC subsidiary have been workingto build brand recognition and to gettheir product on the shelf. Four yearsafter the launch, the cooperative has itsown canning facility that employs fivefull-time employees and is set to intro-duce new products this spring.

Shares prove popular Forming cooperatives can be an

attractive idea for producers, but thefarmers involved in Heartland FarmFoods will tell you that it is not an easyventure to undertake. Building a suc-cessful business takes hard work andpatience. The first organizationalmeeting was held in December 2000, a steering committee was formed inearly 2001 and the business was orga-nized as a new-generation cooperativein December of 2001.

Once the steering committee wasformed, the group set out to create thegoverning rules and elect a temporaryboard. “The steering committee wentthrough a lot of challenging times,”

says Adam Blaue, aMissouri beef producerfrom Wellsville andboard chairman of theFarm Foods Cooperative.“It’s always an interestingprocess when you get agroup of six to eightfarmers together who allhave different experi-ences and strong opin-

Trad ing on Trad i t ionHeartland Farm Foods uses countrytradition to market members’ beef

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

A



ions on how a business should work.” The group initially incorporated as

Farm Foods Inc. As they progressedtowards becoming a value-addedenterprise, they were advised by legalcounsel to form an LLC to address lia-bility concerns. This resulted in thecreation of the co-op’s wholly ownedsubsidiary, Heartland Farm Foods.

In February 2002, the temporaryboard started selling memberships on aper cattle basis. The initial goal was tosecure 1,000 cattle per year, with mem-bers required to commit a minimum of10 and a maximum of 50 head of cattle.Each share sold for $200 and repre-sented a commitment by the memberto deliver one head of cattle per year.

It didn’t take long for the idea tocatch on. In just two weeks, 90 per-cent of the memberships were sold;within a month all were sold.Membership was extended to 39 farmfamilies in Montgomery, Audrain,Pike, Lincoln and Warren counties.

The goal of the first phase of theplan was to get the business moving assoon as possible, so a decision wasmade to keep membership under 40.

Key help from USDA, ExtensionAssistance has come from a number

of sources. Jim Foster, vice presidentof the board, says that Gary Hoette, alocal University of Missouri extensionagent, played a key role in helpingorganize the cooperative. “Gary hadhelped in getting an ethanol coopera-tive started, so he had been there andknew how to advise us on things thatcould have been potentially disastrousfor us,” Foster says. Hoette now servesas the co-op’s at-large board member.

The business received additionalhelp from Chris Cobb with theUniversity of Missouri Extensionoffice. She advises and assists the coop-erative on a variety of issues.

Business and financial support fromUSDA Rural Development and theMissouri Department of Agriculturewas instrumental in getting theresources the group needed to gettheir business started. Farm Foods Co-op Inc. received a $200,000 Value-

Added Producer Grant (VAPG) fromUSDA Rural Development in 2002.

Funds were used for working capitalto support the start-up operations ofthe hormone, steroid- and antibiotic-free beef canning operation. Thesefunds were matched with the co-op’sinvestment and $118,000 in grantfunds from the Missouri Department

of Agriculture for a feasibility studyand a business plan.

“We were very excited that FamilyFarms Co-op could benefit from theVAPG program, which had to competewith 712 applications requesting over$121 million when only $33 million wasavailable in 2002,” says NathanChitwood, business and communityspecialist for USDA Rural Develop-ment in Missouri. “Their proposal waswell written and complied fully with theintent of the VAPG program.”

Heartland Farm Foods was awarded

a second VAPG grant of $150,000 inthe fall of 2004. “Rural Developmentbelieves that providing funds to helpfarmers and ranchers launch value-added businesses such as this project isvital to the future of the nation’s agri-culture economy,” says Greg Branum,Missouri state director for USDARural Development.

Strong manager essential The membership drive netted

$200,000 to go toward building theprocessing plant. An anonymous dona-tion helped pay for the rest of the$425,000 in construction costs. Thegroundbreaking ceremony was heldMarch 21, 2003, where Farm FoodsCooperative owns a 10-acre lot.

From the beginning, the board setthree main goals for the cooperative:(1) supply a high-quality product toconsumers; (2) be a positive influenceand support the community, and (3)create a consistent, profitable marketfor member cattle and create a futurefor the next generation of beef farmers.

Members knew that an experiencedgeneral manager to move their ideasand vision forward was vital to theirsuccess. In October 2002, the boardhired Mark Uthlaut, who has an exten-sive agricultural background. He was afarm manager at Iowa State University,has marketed wool products for acooperative marketing group andworked in retailing farm meats.

“Mark has been a big factor in tak-ing us where we need to go,” saysBlaue. “He went through a USDArequired processing school and throughHazard Analysis Critical Control Point(HACCP) certification in Nebraska.”

Traceability reassures consumers From the beginning, members want-

ed consumers to know that the co-op’sproducers take good care of their ani-mals, which helps ensure that they geta safe, high-quality beef product.

“The main selling point of ourproduct is that it is born, raised andprocessed in the USA,” says Foster.“With all of the concerns about food

continued on page 38

The co-op has threemain goals: (1) sup-ply a high-qualityproduct; (2) be apositive influenceand support thecommunity; (3) cre-ate a consistent,profitable marketfor member cattleand create a futurefor the next genera-tion of beef farmers.

By Paul Darby, Southern States

Cooperative Development Foundation

Editor’s note: Bill Brockhouse, a co-op development specialist withUSDA Rural Development in Washington, D.C., also contributedto this article.

etermination is “the act of deciding definitelyor firmly,” according to Webster’s Dictionary.In the world of cooperative development,determination can be defined as having “fire inthe belly.” The Shenandoah Valley-area poul-

try growers who formed the Virginia Poultry GrowersCooperative (VPGC) possess plenty of each attribute; other-wise, they could never have launched their business undersuch intense pressure and in such a time frame.

In the Harrisonburg, Va.-area, if you mention the namesof Sonny Meyerhoeffer Jr., the co-op’s first president, SteveLong, its vice chairman, or those of a half-dozen otherturkey growers who helped lead the co-op’s organizationaldrive, people will tell you these individuals refused to bucklein the face of unbelievable obstacles and challenges. Theystood tall when the heat was on. As a result of their determi-

nation, the co-op is nowprocessing and marketingmembers’ birds at their ownbusiness — one that embodies thehope for the future of the Valley’spoultry industry.

“I’ve rarely seen people so driven to succeedin the face of adversity,” says Peter Thomas,business and cooperative programs administratorfor USDA Rural Development. “I’m glad USDAwas able to lend its support to help keep this vitalindustry alive in the Shenandoah Valley. This pro-ject shows how much can be achieved when youhave a total commitment by producers and theircommunities.”

Plant closure stuns ValleyThis story begins when Pilgrim’s Pride — one of the

nation’s major poultry companies — announced that it wasexiting the Shenandoah Valley turkey industry and would beclosing its processing plant near Harrisonburg by Sept. 1,2004. That news sent a shock wave throughout the Valleyand into neighboring West Virginia. The region was looking

D

The Virginia Poultry Growers Co-op plant (foreground) is nes-tled in the rich farm country of the Shenandoah Valley. Theplant was slated for closure, but a combined effort by poultryproducers and supporting agencies will keep it open underfarmer ownership. Photo by Nathan Holleman

Unf lappablePlant closure forces Virginia poultrycooperative launch onto fast-track



at the loss of $200 million to the localeconomy, the loss of 900 plant-relatedjobs and more than 130 farmers wouldnot have a contract to grow turkeys.These growers quickly came to gripswith the fact that they were likely tolose their farms if they didn’t actquickly.

Turkey producers (grow-out, breed-ers and egg producers) almost immedi-ately hit on the idea of forming agrower co-op that could take over theprocessing plant operation in Hinton,Va., as occurred in recent years in Iowaand Michigan. They had an unwaver-ing faith (personal and professional)that they could develop a successfulbusiness, even though circumstancesmade it impossible for them to followthe standard cooperative developmentformat. What they didn’t have wastime, and they knew that a businessplan rushed has been the doom ofmany an otherwise sound business.

But the producers believed fromDay One that they could, and would,succeed in spite of the conventionalwisdom that says it takes 12-18 monthsto plan, determine the feasibility anddevelop a business plan for a newvalue-added processing business. Dueto the short window of opportunity,poultry growers had to move towardimplementation before completingthese steps.

The perennial problem of capital-ization of a value-added venture wassolved through a package of resourcesthat included producer capital, com-mercial financing from the FarmCredit System, funding from USDARural Development and funding fromboth Virginia and West Virginia stategovernments.

All of this happened after the April26, 2004, announcement by Pilgrim’sPride that it was closing its turkey-pro-cessing plant at Hinton, Va., and can-celing grower contracts. Pilgrim’sPride said the closure was brought onby major changes in the turkey indus-try and by its desire to focus opera-tions on other plants that producedvalue-added turkey products (such as

sliced deli meats), as opposed to thebird parts produced in the Hintonplant.

Not just Pilgrim’s Pride, but theentire turkey industry is undergoingmajor changes. Many major players arechanging their marketing strategiesand focus. While on-farm and whole-sale turkey prices have been aboveaverage in the past six months, thefive-year average is far lower. Out-breaks of avian influenza in early 2004in the Valley and in the adjacent statesof Delaware, Maryland, New Jerseyand Pennsylvania, as well as in Texas,hit the industry hard. But these factsdid not deter the producers.

The likely impact of all those lostjobs, farms and related revenue soonattracted the attention of local, state,and federal government officials, whobegan offering technical and financialhelp.

How they did itSo how did the turkey producers

manage to make the transition fromcontract growers to owners and opera-tors of a major turkey processing busi-ness and feed mill in just 181 days?Here are the major steps:

(All dates in 2004)• May 21 — growers met and voiced

support to determine whether theycould buy the Pilgrim’s Pride plantin Hinton.

• May 26 — growers file articles ofincorporation for the VirginiaPoultry Growers Cooperative; char-ter issued.

• May 31 – co-op steering commit-tee/board sends letter to turkeygrowers requesting growers con-tribute 15 cents per-square-foot ofhousing. Within two weeks, morethan 90 growers had contributed$994,000 for the feasibility effort.

• June — Pilgrim’s Pride stops placingpoults (young turkeys) with mem-bers.

• June — Southern States CooperativeFoundation becomes involved inhelping the new cooperative on legaland feasibility issues, agreeing to

Co-op President Sonny Meyerhoffer addresses growers during the membership drive forthe new co-op. The plant, operating under the co-op since November, is exceeding pro-jected operating goals. Photo by Michael Reilly, Courtesy Harrisonburg, Va., Daily News-Record

These individualsrefused to buckle inthe face of unbeliev-able obstacles andchallenges.


develop an integrated financialmodel to capture and test assump-tions.

• June — board begins purchasingeggs to place poults in growers’poultry houses.

• June - Pilgrim’s Pride announcesplans to sell its hatchery, but not tothe co-op. This creates additionalissues, because 20 percent of thegrowers are breeder-producers, whowould have to switch to grow-outoperations.

• June 26 — co-op holds second grow-er meeting.

• July 12 — co-op converts to a stockcorporation, enabling it to raise capi-tal through the issuance of preferredand common stock.

• July 14 — co-op holds third growermeeting and announces that it hassigned a non-binding letter of intentwith Pilgrim’s to purchase theHinton plant, the Broadway, Va.,feed mill and inventory of suppliesand birds on or before Aug. 31,2004.

• July 16 — co-op files an applicationwith the Internal Revenue Service(IRS) for recognition as a tax-exemptcooperative under Section 521 of theInternal Revenue Code.

• July 22 — IRS approves the 521application, meaning that the co-op

can have members in both Virginiaand West Virginia, without theexpensive and time-consumingprocess of SEC registration.

• July — co-op finalizes agreementwith a national premium deli meatprocessing company on products tobe produced; the company alsoagrees to invest in the plant.

• July — co-op meets with CoBankand other Farm Credit Systemlenders to secure financing.

• August — negotiations with Pilgrim’sPride continue.

• September 15 — co-op signs pur-chase agreement with Pilgrim’s Pride.

• September-October — co-op beginsto hire management staff andannounces plans to begin processingof turkeys after Thanksgiving.

• October — co-op begins interview-ing and taking applications for pro-cessing staff.

• October 13 — co-op receives $8 mil-lion loan under USDA RuralDevelopment’s Rural EconomicDevelopment Grant (REDLG) pro-gram (through Shenandoah ValleyElectric Co-op).

• November 28 — co-op begins pro-cessing members’ turkeys.

Thus, in just six months, did VPGCgo from having an idea to implement-ing that idea.

Today, the co-op has 136 membersin a 10-county area of Virginia andWest Virginia. It owns a multi-million-dollar turkey processing plant, a feedmill and associated equipment to pickup turkeys from members’ farms. Itsmembers currently have plans to growmore than 6 million turkeys annually.It has significant, sustainable contractswith customers throughout the easternUnited States.

Factors for successfulco-op development

But the question remains, why hasthis group of producers been able toadvance its co-op far more rapidly thanso many others?

When the Southern StatesCooperative Foundation conducts aninitial evaluation with a new group ofproducers — as it did with these poul-try growers — it shares with them thekeys to success that any business pro-ject must have. These include:1) a good idea;2) a clear vision;3) committed leadership;4) producer support (putting their dol-lars at risk);5) government support (local, state,federal);6) access to commercial credit; 7) focused planning and analysis;8) good communication with members;9) perseverance.


Here’s the Foundation’s perspectiveon how well Virginia Poultry GrowersCooperative met these criteria: • VPGC had a good idea — though

execution was a challenge, especiallydue to the time constraints;

• Members absolutely had a clearvision and could articulate it withpassion;

• Leadership was absolutely commit-ted to the co-op, even to the extentthat their farms and families took aback seat for at least six days a weekfor virtually the entire six months.

• Producers stepped up with dollars —almost $1 million in the first 30 daysand a significant amount thereafteras the purchase neared. However,they fell short of what was needed tosecure sufficient commercial financ-ing to fully capitalize the coopera-tive.

• Poultry growers had vitally impor-tant government support at all levels.Locally, the county is providingincentives to the cooperative. At thestate level, the Virginia Dept. ofCommerce made a $500,000 grant tothe cooperative; the West VirginiaDepartment of Agriculture provided

$250,000 to growers on its side ofthe state border to invest in thecooperative. Support from theUSDA Rural Development was criti-cal to the project’s success. It provid-ed assistance on two levels. First, itprovided significant financial assis-tance in the form of the $8 millionREDLG and a still-pending $5 mil-lion Business & Industry loan guar-antee. The other level of help was intechnical assistance from RuralDevelopment’s Cooperative Servicesoffice, which helped with organiza-

tional guidance and support. Rep.Robert Goodlatte of Virginia, chair-man of the House AgricultureCommittee, and his staff also provid-ed critical support.

• The co-op has had access to com-mercial credit, which was essential tothe cooperative’s purchase of theprocessing plant and feed mill. Thatcredit came through Farm CreditSystem’s institutions: Farm Credit ofthe Virginias and CoBank.

• The cooperative made a clear,unequivocal commitment to plan-ning and analysis. The SouthernStates Foundation was given out-

standing cooperation in the develop-ment of the financial feasibilityanalysis and modeling. SSCF’s legalcounsel worked closely with the co-op’s local counsel.

• At every step of the process, goodcommunication with growers andperseverance of the steering commit-tee and the board kept this coopera-tive focused and on-plan.

Grower contractsreflect member input

Another element leading to thecooperative’s success was the foresightof the steering committee to involvegrowers in the design of grower con-tracts. This created trust and coopera-tion, and removed any hint of “us vs.them,” which so often occurs in thepoultry industry between integratorsand contract growers.

The board also made a commitmentto hire quality, professional manage-ment to oversee operations. Early on,the board identified a well-qualifiedmanager for the cooperative, a sea-soned veteran in the processing indus-try, skilled marketers, and food safetystaff to train processing staff and moni-tor and test product quality.

Is the future success of the cooper-ative assured? Of course not, but ithas a strong game plan for success.Are there bumps in the road ahead?Absolutely. No business has ever gonethrough start-up without encounter-ing the “hidden bummer factor.”

That this development project suc-ceeded in a co-op launch can clearlybe attributed to a number of impor-tant factors, mainly: unwavering dedi-cation and the hard work of the co-op leaders and members; the cooper-ation and coordination of many pro-ducers and professionals and a doseof luck.

VPGC can stand as a model forproducers on how to create “co-opdevelopment fever,” and for profes-sional development practitioners, pri-vate businesses and government eco-nomic-development staff on how tocoordinate and work together to makea cooperative vision a reality. ■

Sonny Meyerhoffer, third from left, and other co-op officers receive a ceremonial check for$8 million from USDA Rural Development outside the plant’s headquarters at Hinton, Va.


By Dan Campbell, Editor

n its final years, FarmlandIndustries was trapped ina “death spiral of debt,”made worse by a series ofbusiness blunders that

evidence reckless and negligent behav-ior by the co-op’s managers and board,according to a lawsuit filed in Februaryby the estate trustee for Farmland.

The lawsuit accuses the co-op’s for-mer managers and directors of “grossnegligence and acts of corporatewaste” in carrying out their duties,resulting in the largest co-op bank-ruptcy in the nation’s history. Theboard was little more than “a rubberstamp” for management’s high-riskventures, the lawsuit says, and direc-tors repeatedly failed to demand thatother obvious alternatives be explored.

The 34-page lawsuit reads a bit likea “how-not-to-run-a-cooperative”primer, complete with lessons in“throwing good money after bad.”That impression could, of course,change markedly when the defendantsfile their response (which was due inMarch, after the copy deadline for thismagazine). The pre-trial hearing hasbeen slated for May 10.

The lawsuit, filed in U.S.Bankruptcy Court in Kansas City byJ.P. Morgan Trust Co., does not painta pretty picture of how the ship ofstate was being guided in the finalyears of Farmland. It provides adetailed look into how Farmland triedto grow its way out of debt by takingon even more debt as it constructedmajor new facilities and acquired

another failing farm sup-ply business. In the end,Farmland succeeded only inswamping itself in an ever-deepening sea of red ink, whichled to its bonds being downgradedto “junk” status.

That resulted in the co-op having topay higher interest rates. A “run on thebank” by panicked bondholders ensuedwhen press reports picked up on theco-op’s intensifying financial troubles.Farmland filed for Chapter 11 (reorga-nization) bankruptcy in 2002. Sincethen, the assets of the one-timeFortune 500 company — with $11.8billion in annual sales and 600,000members — have been sold off.

The suit builds its case on a seriesof seemingly self-destructive actionsthe co-op took, or didn’t take, primari-ly during the tenure of CEO HarryCleberg from 1992 until 2000. Thesuit also names his successor, RobertHonse, along with 27 former boardmembers.

Ben Mann, a Kansas City attorneyrepresenting Cleberg and formerChairman Al Shively, says the lawsuit“is nothing but second guessing” bythe trustee, and that none of the claimshave merit. He declined further com-ment pending his clients’ formalresponse to the lawsuit.

Fertilizer plant: a co-op killer?

Perhaps the handwriting on the wallfor Farmland Industries appeared in1999, when CHS members voted downa proposed merger with Farmland. Inturning it down, CHS members cited

their concernover the massive

debt levels Farmland had assumed anddispleasure with the big pay checksmanagement of the two co-ops wouldhave collected as part of the deal.

The biggest nail in Farmland’s cof-fin, according to the lawsuit, was thedecision to build a $300-million nitro-gen fertilizer plant close by its petrole-um refinery in Coffeyville, Kan. Thenew fertilizer plant was to use a com-mercially unproven technology fromTexaco that used petroleum coke (pro-duced as a byproduct of refining petro-leum) instead of natural gas as a fuelsource for anhydrous ammonia-basedfertilizer. This technology was notbeing used commercially anywhere inthe United States at the time and invery few places globally.

Farmland relied on fertilizer salesfor up to 70 percent of its income inthe 1990s, the lawsuit says. However,in the early ‘90s, management had rec-ommended that Farmland exit thehighly volatile fertilizer business.Fluctuating demand caused by changesin cropping patterns and governmentfarm programs, weather conditions andcompetition from imports were mak-ing the fertilizer trade seem like anendless rollercoaster ride. Natural gasprices also fluctuate widely, butFarmland believed the long-term out-

A Per fect Storm Farmland trustee sues ex-officers, directorsfor ‘gross negligence’ in co-op’s collapse

I

Etchings: Gustav Doré


look was for steadily rising gas prices,hence its decision to seek an alterna-tive energy source for the manufactureof anhydrous ammonia.

The lawsuit says the board approvedthe fertilizer plant “after woefullyinadequate due diligence,” relying pri-marily on “self-serving data providedby Texaco.” Further, this investmentwas made at a time when the co-opwas already carrying close to $1 billionin debt, when demand for fertilizer wasdropping and imported fertilizer wasgrabbing more of the domestic market.

Farmland calculated the payback onthe new plant would have been $28million per year, or nine years torecoup the construction expenses.

Inadequate research alleged“Farmland never hired any third

party or outside consultant to advise[it] on the completeness and accuracyof Texaco’s representation,” the suitsays. The co-op’s main research con-sisted of a single trip by Honse andone other co-op employee (a formerTexaco employee) to a small plant inJapan that was using the technology.No board members made the trip, andno contacts were made with customersof the plant, which had experiencedstart-up problems.

Gasification technologies other thanTexaco’s were available in the UnitedStates at that time, and the TennesseeValley Authority had built a gasifierthat used petroleum coke to produceammonia. None of these options wereinvestigated by Farmland, the suit says.

Another promising alternativewould have been to expand the co-op’sjoint venture with MississippiChemical on the Caribbean island ofTrinidad, where Farmland was thensecuring natural gas for only 40 per-cent of the cost of domestic naturalgas. But that option was given “only acursory consideration,” the lawsuitsays. Other off-shore suppliers alsocould have been tapped as low-cost gassuppliers, but again, such options werenot explored.

Ultimately, the co-op spent lessthan $2 million investigating the mer-

its of the Coffeyville fertilizer plant,and allotted only 25 minutes of itsagenda to the topic before approving itin April of 1997, the suit says. Theentire Coffeyville complex — fertilizerplant and refinery — were eventuallysold for just $11 million, leaving itwith a $300 million loss on the fertiliz-er plant alone.

Farmland’s decision to enter somemajor joint ventures — with ADM forgrain marketing and with other co-opsin Agriliance for fertilizer — caused itto lose control over the ability to setprices for those commodities, the law-suit says.

SF Services acquisitionJ.P. Morgan Trust contends that

Farmland’s leaders failed to performdue diligence when it decided in April

1998 to acquire SF Services, a falter-ing, federated farm-supply co-op with$100 million in debt. SF Services wasnot only losing money and burdenedwith debt, it had “a significant problemwith its pension plan” and was lockedin a dispute with the IRS. Farmland“hired no outside consultant to adviseit regarding the merger,” the lawsuitsays.

SF Services — which did business inArkansas, Louisiana and Mississippi —never made money for Farmland. “Allthe money was lost. These losses wereforeseeable and completely avoidable,”the lawsuit alleges.

These types of actions, it continues,reflected Cleberg’s philosophy that“Farmland needed to grow ever bigger.During his tenure as CEO, the focuswas on growing sales volume anddiversifying operations, not on the bot-tom line — profitability. From 1996 to2000, the co-op took on an additional$400 million in debt, boosting totalindebtedness to $1.3 billion.”

The lawsuit alleges that accountingtricks were used to mask its true finan-cial condition. “Gross revenuesincreased significantly until 2002, giv-ing the appearance that Farmland wasa growing company, when its prof-itability was in truth steadily declin-ing.” Expansion, including theCoffeyville fertilizer plant, “was fundedthrough the use of off-balance sheetfinancing.” Furthermore, Farmland“changed certain accounting practicesthat added billions of dollars in rev-enue to the company,” masking howleveraged it was, the suit alleges.

Rubbing salt in the wound was a$700,000 “sweetheart bonus” Clebergreceived in 1999, during a year inwhich his primary focus was on secur-ing approval for the merger with CHS.Having failed to accomplish this goal,the suit questions why he was given abonus equal to more than his annualbase salary. Cleberg and Honsereached a settlement with the creditorslast September which allowed them tocollect $7.4 million and $3.6 million(respectively) in deferred compensationand retirement benefits.


A perfect storm While the defense attorneys aren’t

saying much at this point, some otherswho have followed the case say a num-ber of negative factors converged tobring down Farmland. The Coffeyvilleplant was “located in just about theworst place it could be,” says DavidBarton, director of the Arthur CapperCooperative Center at Kansas StateUniversity. “It was located in an ‘over-supplied’ market with limited market-ing flexibility resulting in relatively lowprices and needed major environmen-tal updating.”

And while he agrees that it was amajor negative for the co-op, Bartoncites three primary reasons forFarmland’s failure: • it pursued a high-risk business strate-

gy based on highly leveraged growth; • it failed to execute properly when

confronted with major problems; • it was hit by a “perfect storm” of

negative conditions that con-verged on it in the final years ofits operation, the biggest of whichwas probably high natural gasprices that “totally changed theeconomics of manufacturing fertil-izer. Farmland just couldn’t re-position itself fast enough toswitch over to off-shore supplies,”Barton says. There was also “a sea change”

occurring in the grain businesswhich worked against Farmland.Less grain volume was beingshipped to its traditional inlandgrain terminals and instead wasmoving to smaller, high-speed trainload-out facilities dispersedthroughout the grain belt.

“Recklessness” hard to prove Farmland had shown strong

intentions of wanting to transitionfrom being a farm supply and grainbusiness to being a producer ofprocessed meats. It had been movingin that direction and was operatingsuccessful pork and beef operationswhen the roof began to fall in.

Had Farmland started sooner inmaking the transition to a food co-

op, perhaps today we would be hailingit as a model of a co-op that successful-ly reinvented itself for the 21st century,rather than as the biggest co-op failurein history.

But the good performance of themeat processing businesses was notdirectly serving the needs of its prima-ry owners and patrons, the Farmlandlocal co-op members, who wanted theco-op to perform better as a source offarm supplies and as a grain marketer,says Barton.

There also may have been a methodto what the lawsuit paints as madnessregarding the money spent on theCoffeyville fertilizer plant. Farmlandhad been trying for years to sell theCoffeyville petroleum refinery, butwithout success. Had the fertilizerplant been successful in using byprod-ucts from the refinery to produce fer-tilizer, it might have made that entireoperation marketable.

According to a March 11 report inKansas City Star, the Coffeyville com-plex, which some called an albatross, isnow paying off for Pegasus Capital,which paid only $22 million in cash(plus some other considerations) forthe refinery and fertilizer facilities. Inits first year running the plant, Pegasussays it will earn $100 million in operat-ing income, making it what the ownerscall "the lowest-price producer of fer-tilizer in the world." So perhaps thetechnology was not flawed, but only inneed of fine-tuning.

The business, now operating underthe name Coffeyville Resources, hasannounced that it is going public andhopes to raise $300 million.

It is the job of the trustee to get asmuch as he can for the debtors in abankruptcy, but proving recklessnessmay be an uphill battle in this case,according to some legal experts. It isimportant to note that this lawsuit

does not allege fraud, nor thatactions were taken for the personalenrichment of the defendants. Andwhile the suit certainly alleges thatsome very poor business decisionswere made by management and theboard, the court may not agree thatthis constitutes negligence or fail-ure to perform due diligence. Thatis a heavy burden to prove. If itdoes, most companies and co-opscarry liability insurance to protectthe directors from any personal lia-bility.

In essence, the lawsuit poses thequestion: at what point do (alleged)bad business decisions cross the bor-der into the realm of failure to per-form due diligence?

The closest the lawsuit comes toalleging fraud is when it makes alle-gations of “off-balance-sheet financ-ing” and “changing accountingpractices” to mask indebtedness.

In this environment, managementand directors more than ever needto do their homework, properlyresearch major business moves andmake sure all accounting and finan-cial statements are above board andaccurate. ■


Heads have been turned and eyebrows raised in co-op circles by reports of the unusually high payouts cred-itors are receiving from the estate of bankrupt FarmlandIndustries. Secured creditors (essentially the co-op’slenders) have been paid in full, about $500 million. The60,000 unsecured creditors (including about 20,000bondholders) have been paid 95 cents on the dollar, ormore than $800 million, with prospects for getting evenmore.

Those are remarkable payback figures, consideringthat the average in bankruptcy cases is closer to 10cents on the dollar for unsecured creditors and 80 centson the dollar for secured creditors.

Holders of $100 million in Farmland preferred stockhave not fared as well, with an estimated payback ofonly about $4 million at this time. Local co-ops lost all oftheir equity investment (or common stock) in Farmland.

So why wasn’t Farmland reorganized, as are so manyother companies that file for Chapter 11 Bankruptcy?The case seems to have been handled as a Chapter 7liquidation almost from the start — and it seems therewas never any real intent to save the business, someformer co-op members have complained. Some havealso questioned whether Smithfield Foods was able toexert pressure to steer the case toward liquidationbecause it wanted to gain control of Farmland’s highlycoveted pork operations.

Larry Frazen of the Kansas City law firm of BryanCave, Farmland’s attorney, says he understands whyformer members and others are doing a double takewhen they read reports of how well creditors havefared, but he does not share the belief that this is anindication that Farmland should have, or could have,been successfully reorganized.

“Sometimes the assets of a co-op may be worth farmore when it is broken up than when whole, as in thiscase,” Frazen says. In the case of Farmland, it operatednumerous divisions and joint ventures — fertilizer,petroleum, grain, pork, beef, feed, transportation —which did not necessarily complement each other well,he notes. Furthermore, no one anticipated the very bigsale prices many of the co-op’s best assets fetched.

The management team did make an offer to reorga-nize the co-op, Frazen says, but the two unsecured credi-tors’ committees (one for bondholders and one for tradecreditors) wanted to liquidate. “They wanted cash.”

While Smithfield did indeed buy up some creditors’claims against Farmland, Frazen said it was never to theextent that the Virginia-based pork company could have

blocked a reorganization had the creditors’ committeesdecided to go that route. But Smithfield did gain stand-ing on the creditors’ committees, he noted.

The creditors included banks that were adamantabout being repaid, and many bondholders who wereequally eager to get their cash out. It was many of thesesame small bondholders who were spooked by pressreports of Farmland’s growing debts that sparked a “runon the bank” in 2002.

The resulting “cash crunch” was the culmination ofwhat Frazen also calls “a perfect storm” of events thatdoomed the co-op. Farmland had been greatly weak-ened by three successive years of poor planting condi-tions, causing fertilizer sales to plunge just when the co-op could least afford it.

David Barton, director of the Arthur Capper Coopera-tive Center at Kansas State University (KSU), cites twomain reasons for Farmland’s inability to reorganize underbankruptcy: 1) bondholders would have had to agree toconvert their bonds into preferred stock in the co-op,and few had any interest in doing so; and 2) memberswould have had to invest more money in the co-op, andfew showed a willingness and interest to do so.

“Local co-op members had other options where theycould take their business, rather than investing more inFarmland,” says Barton, who has been tracking Farm-land’s fate both as an academic whose work focuses onco-ops, and as an unsecured creditor himself (he wasowed for some consulting he did for the co-op). TheKSU Co-op Center was also an unsecured creditor.

Because so many of the co-op’s bondholders wererelatively small investors living in rural areas and asso-ciated with local co-ops, some of whom had investedthe majority of their retirement funds in the bonds, therewas a strong sentiment at Farmland to strive to repay asmuch of the bond debt as possible, Barton says.

Once the co-op’s assets went on the block, somespirited bidding wars broke out, none keener than forFarmland’s pork operations, where Smithfield vs. Cargillbidding ran up the price to $481 million. Smithfield evenpicked up the obligation for Farmland employee pen-sions, a real stroke of good fortune for workers caughtup in a bankruptcy, Frazen says.

“It is kind of funny that you can get criticized fordoing your job almost too well — for getting as much asyou can for the creditors — in a case like this,” Frazensays. “Farmland’s management worked very hard tomake sure as few as possible were hurt by the co-op’sbankruptcy.” ■ — Dan Campbell, editor

Why wasn’t Farmland reorganized?


Thomas W. Gray, Ph.D

Rural Sociologist USDA Rural Development

Agricultural cooperatives are at once democratic asso-ciations of member-producers as well as businesses. Thisdual function of democracy and business results in varioustrade-offs and tensions that become a basic part of cooper-ative structure. Embedded are values of equality, equity,participation and self-governance (the democracy func-tion,) but also values of efficiency, performance and eco-nomic return (the business function.) In their operations,cooperatives struggle to meet both sets of needs, some-times successfully dancing between them, sometimesfalling to one side or the other.

Many cooperatives were formed to help empower farm-ers to compete with much larger business organizations.Farmland Indus-tries, from itsinception as UnionOil in 1929, wasformed to opposethe market powerof such giants asStandard Oil andSunoco. Farmlandsought to empow-er farmers bycompeting withBig Oil. This ledthe cooperativedown a path (withmuch of the rest of U.S. agriculture) of energy-intensive,agricultural industrialization, and into big business opera-tions.

Conglomeration has been the predominant organization-al strategy of big business, commencing with the Depres-sion and World War II. Spreading investments across sev-eral different activities, subsidiary firms and locations(conglomeration) can diversify organizational vulnerabilityand risk. In an era that has come to be dominated with mul-ti-nationalized firms, Farmland Industries grew to operate inall 50 states and 60 counties, with 600,000 members and1,700 local cooperative owners.

Cooperatives are organized with the member in mind.Members are to be the prime beneficiaries. However, in amulti-national cooperative such as Farmland, complexityrules. It can become unclear who the prime beneficiariesand critical decision makers are.

Do the primary benefits of cooperatives get lost in shiftsbetween business management prerogatives vs. the demo-cratic rights of the members? Do membership interests getlost to the investment interests of “outsiders” in joint ven-tures? What group of interests is making crucial decisionsof the organization that shape future directions? Complexity“confuses” any easy answer to these questions.

Had Farmland taken a different, less extensive path ofdevelopment, member participation in the organization mayhave been higher. Complexity always leads to losses ofmember involvement and, generally, to increases in central-ized decision making. To the extent that centralizationoccurs, the cooperative is less member-oriented becausemembers are less involved.

More member involvement allows for more input andcan produce greater flexibility and creativity. We mightwonder if a more active democracy (one closer to the mem-

bers) could haveled to differentstructures andoperations (ifmore modest) andto better survivalrates of farmersand, ultimately, ofthe organization.

However, thetension from thebusiness side ofthe organizationmay claim thatwhile democracy

is central to cooperative organization, to act without recog-nition of market imperatives (e.g., the need for earnings,market innovation, and countervailing power in the marketplace) can very easily eliminate the cooperative all togeth-er.

Ultimately, the members of a cooperative can demandthat: 1) those who own and finance the cooperative arethose who use the cooperative; 2) those who control thecooperative are those who use the cooperative; and that 3)the cooperative’s sole purpose ultimately is to provide anddistribute benefits to its users on the basis of their use ofthe organization (Dunn).

However, the ease with which these principles can bestated belies the complexity of responding to memberneeds and rights of use, in an environment of globalization,industrialization, multi-national competitors, and such ever-present needs as capitalization. ■

Farmland faced classic co-op dilemma


By Angela Dawson,

Communications Director

Northcountry CooperativeDevelopment FundCenter for CooperativeEnterprise and Innovation

n manufacturedhome park commu-nities in ruralMinnesota, it’s com-mon for residents to

own their homes but to rent thelot on which their home is located.The park owners usually don’t livein the park, but still make the rulesfor people who live there.

Eventually, an eager commercialreal estate developer approachesthe land owner with an attractivebid to buy the park. Too often, the

story plays out with the eviction offamilies from the homes they’ve livedin for years, and a permanent loss ofaffordable rural housing.

In the case of Sunrise VillaManufactured Home Park in CannonFalls, Minn., Rick and Becky Ruddyhad come to know Sunrise Villa as

home for 15 years. Then theowner decided to sell the park.Instead of packing up andlooking for another home, theresidents of Sunrise Villa —with the help of NorthcountryCooperative DevelopmentFund (NCDF) — got orga-nized and became Minnesota’sfirst manufactured home parkcooperative.The creation of Sunrise VillaCooperative goes against anunfortunate trend of mobilehome park closings across thestate, a trend that NCDF

Cour t o f Prefe renceMinnesota co-op helps manufactured home residentsavoid closures, evictions that plague other courts

I

NCDF recently launched www.coopliving.coop, an on-line housing co-op listing service that adds value to theco-op housing market. Until now, co-op housing resi-dents were forced to use conventional methods to listand sell shares in their units, including listings in localpapers or multiple listing services.

Unfortunately, the listings compete with thousands ofconventional real estate listings, and sellers couldn’t tar-get the market of interested cooperative buyers. Not anymore! In an effort to make it easier to buy and sell a co-op housing share, the co-op listing service provides acentralized location in which buyers and sellers of co-ophousing can connect.

NCDF has also published the Cooperative HousingToolbox: A Practical Guide for Cooperative Success.

This toolbox is a “bestpractices” guide for hous-ing cooperative boards ofdirectors, committees andmembers. For informationon ordering, contact: (612) 331-9103, [email protected].

NCDF is a cooperatively owned and operated financialintermediary which acts as a catalyst for the develop-ment and growth of cooperatives. NCDF embodies thesixth Rochdale principle of “cooperation among coopera-tives,” offering co-ops and socially motivated institutionsand individuals a means to pool surplus funds and thenreinvest those funds in the community. ■

Co-op Living Web site brings value to co-op housing market

Resident-members of Sunrise Villa have formed Minnesota’sfirst manufactured housing cooperative. Photo courtesyNorthcountry Cooperative Development Fund



By Marlis Carson

Vice President, Legal, Tax and AccountingNational Council of FarmerCooperatives

Donald Frederick

Program Leader for Law, Policy & GovernanceUSDA Rural Development

wo recent developmentsshould remind agricul-tural cooperative leadersthat they can not take forgranted the limited

antitrust protections accorded associa-tions of producers.

The first is the decision by the newAntitrust Modernization Commissionto study all antitrust exemptions,including those enacted to promotecooperative marketing of agriculturaland aquacultural products. The secondis the settlement of an antitrust suitagainst a mushroom marketing cooper-ative that resulted in the associationagreeing to cease activities the Depart-ment of Justice felt were outside thescope of applicable antitrust shields.

Antitrust Modernization CommissionIn 2002, Congress created the

Antitrust Modernization Commission(AMC) to examine whether the anti-trust laws should be “modernized” andto submit its findings to Congress andthe President. The AMC is a 12-

member, bipartisan commission con-sisting primarily of antitrust lawyerswith large law firms and major corpo-rations. The commissioners plan tocomplete a draft report by the summerof 2006 and to submit a final report inthe spring of 2007.

Once appointed, the AMC estab-lished eight working groups to developrecommendations for issues the com-missioners should study. The AMCmet on Jan. 13 in Washington, D.C.,to discuss those recommendations.

At their January 2005 meeting, thecommissioners unanimously agreed toaccept the Immunities and ExemptionsWorking Group’s recommendationthat the AMC study all antitrustimmunities and exemptions (bothstatutory and those based on case law)to determine whether they should beeliminated if not justified by the bene-fits they provide, or if they should oth-erwise be time-limited. The list ofexemptions to be considered includes:• Section 6 of the Clayton Act (autho-

rizes the formation of non-stockagricultural co-ops);

• The Capper-Volstead Act (permitscooperative marketing by associa-tions of agricultural producers), and

• Fishermen’s Collective MarketingAct (similar to Capper-Volstead, butprotects associations of aquaculturalproducers).In a letter to the AMC, the Depart-

ment of Justice did not mention any ofthe producer-oriented exemptions but

did call attention to exemptions thatcan “...undermine our global leader-ship in advocating market-basedapproaches in other jurisdictions.Among the immunities and exemp-tions that deserve to be studied are theShipping Act, 46 U.S.C. § 813, theExport Trading Company Act, 15U.S.C. §§ 4011-21, and the Webb-Pomerene Act, 15 U.S.C. §§ 61-66.”

At the conclusion of the Januarymeeting, the working groups wereinstructed to prepare written proposalsdetailing how their recommendationsshould be carried out. The commis-sioners anticipate they will eventuallyhold hearings and receive testimonyfrom industry representatives.

Information about the AMC, itscommissioners and the initial reportsof all Working Groups are available at:http://www.amc.gov. Producer-ownedmarketing cooperatives will want tokeep abreast of commission actionsand be ready to defend their antitrustprotections if necessary.

Mushroom growers case settledIn December 2004, the Department

of Justice simultaneously filed anantitrust lawsuit against the EasternMushroom Marketing Cooperative(EMMC) of Kennett Square, Pa.,while also entering into a consentdecree settling the case. EMMC, in anattempt to limit mushroom productionby non-members of the cooperative,

L E G A L C O R N E R

Ant i t rus t deve lopments ; case aga inst mushroom growers ’ co-op set t led

T



By David Chesnick, Ag Economist

USDA Rural Development

here was a dramaticchange in the landscapeof the nation’s 100largest agriculture coop-eratives in 2003. No

longer were Farmland and Agwayincluded in the top 100 co-op list, asboth closed their doors. However, thisdoes not mean the agriculture cooper-ative sector, as a whole, is on a down-swing. Indeed, quite the contrary istrue. In preliminary findings, thelargest agriculture cooperatives had ajump of 7.8 percent in total operatingrevenue while net margins and patron-age to members each soared 39 per-cent in 2003 (table 1).

Based on USDA’s annual survey ofcooperatives, the top 100 co-ops hadoperating revenue of $58.3 billion, upfrom $54.1 billion in 2002. That’sabout half of total revenue for thenation’s 3,000 farmer-owned co-ops.Marketing activity contributed 72 per-cent, farm supply sales 26 percent and“other revenues” 2 percent of totalrevenue for the top 100 co-ops.

Leading the increase were the “diver-sified” category of cooperatives, with ajump of $2.1 billion in total revenue.Farm supply sales for diversified cooper-atives — those that primarily marketmembers’ grain and sell them farm sup-plies — were up 38 percent, to $8.1 bil-lion. This marks the first time farm sup-ply sales were greater than marketingrevenue for diversified cooperatives.

Grain and farm supply cooperativesalso showed substantial gains in rev-enue, with each group adding more

than $1 billion to total revenue. Fruitand vegetable cooperatives had a $1billion decline in total revenue.However, most of the decline was dueto a restructuring activity that willhelp a co-op improve its bottom line.

Margins soar Net operating margins (gross mar-

gins less operating expenses) were up10.4 percent, to $980 million. Most ofthe increase came from diversifiedcooperatives, where net operating mar-gins jumped $125 million, to $268 mil-

Upswing Cont inuesDespite loss of Farmland & Agway,revenue, income climb for top 100

TTable 1—Combined Operating Statement-Top 100, 2002-03

2003 2002 Difference Percent $ thousand Change

RevenuesMarketing 42,224,706 41,473,012 751,694 1.81%Farm Supply 15,088,921 11,700,590 3,388,331 28.96%Total Sales 57,313,627 53,173,602 4,140,025 7.79%Other Operating Revenues 1,025,113 931,834 93,279 10.01%Total Operating Revenues 58,338,740 54,105,436 4,233,304 7.82%Cost of Goods Sold 53,169,267 49,038,973 4,130,294 8.42%Gross Margin 5,169,473 5,066,463 103,010 2.03%

ExpensesOperating Expenses 4,189,713 4,178,604 11,109 0.27%Net Operating Margins 979,760 887,859 91,901 10.35%Other Revenues (Expenses)Interest Expense (422,183) (479,844) 57,661 -12.02%Interest Revenue 27,291 36,331 (9,040) -24.88%Other Income 334,954 358,402 (23,448) -6.54%Other Expenses (113,360) (73,455) (39,905) 54.33%Patronage Revenue 99,167 64,201 34,966 54.46%Net Margins from Operations 905,629 793,494 112,135 14.13%Non-Operating Rev. (Exp.) (34,993) (170,694) 135,701 -79.50%Net Margins 870,636 622,800 247,836 39.79%

Distribution of Net MarginsCash Patronage Dividends 264,589 191,048 73,541 38.49%Retain Patronage Dividends 453,028 397,276 55,752 14.03%Nonqualified Noncash Patronage 7,097 4,249 2,848 67.03%Dividends 9,728 9,858 (130) -1.32%Unallocated Equity 87,343 3,879 83,464 2151.70%Income Tax 48,851 16,490 32,361 196.24%Total Distribution 870,636 622,800 247,836 39.79%

lion. Poultry/livestock cooperativesshowed the largest decline in operatingmargins, which fell $106 million, leav-ing them with a net operating loss of$41 million.

Overall net margins from operations(which exclude all non-operating rev-enues and expenses) hit $906 million in2003, an increase of 14.1 percent forthe top 100. Much of the gain was dueto fruit/vegetable cooperatives, whichsaw net margins from operations climbby $105 million, to $261 million. Non-operating revenues and expenses gener-

ally include gains or losses from dispos-ing capital assets, accounting changesor other one-time revenue or expensesnot related directly to operations.

Net margins — the bottom line forcooperatives — increased 39.8 percent,to $870 million for the top 100 co-opsin 2003. With the exception of diversi-fied, grain and poultry/livestock coop-eratives, all commodity groups showedsubstantial gains in net margins.Poultry/livestock cooperatives were theonly commodity group to have a netloss ($64 million).

More patronage goes to membersThe top 100 cooperatives allocated

82 percent, or $718 million, of netmargins back to their members aspatronage in 2003. Of that amount,$265 million was in cash payments tomembers while the remaining $453million was retained by the co-ops.Dairy cooperatives led the way, allocat-ing 94 percent of net margins back tomembers.

Non-qualified, non-cash patronagerefunds were up 67 percent, to $7 mil-lion. Dividends remained fairly con-stant, at $10 million. Unallocated equi-ty, which was used to absorb net lossesin prior years, absorbed $87 million ofthe net margins, up $83 million from2002. Fruit/vegetable cooperatives wasthe primary co-op group still usingunallocated equity and tax benefits toabsorb net losses.

Patronage refunds received by thetop 100 co-ops reached $99 million in2003, up 54.5 percent. Much of thisincrease was reaped by diversifiedcooperatives, which saw patronageincrease 125.2 percent, to $61 million.

Goods, labor costs riseCost of goods sold by the top 100

co-ops was up 8.4 percent, with mostof the increase occurring among diver-sified, grain and farm supply coopera-tives. These three commodity groupsalso accounted for the largest increasein total operating revenue.

Operating expenses were up a slight.3 percent, to $4.2 billion, due in partto higher labor costs. Cooperativesthat reported labor expenses indicatedcosts were up 5 percent from 2002.Labor as a percent of total expensesrose from an average of 65 percent oftotal expenses to 68 percent in 2003.

The largest increase in operatingexpenses occurred in the grain sector,up 12.2 percent, to $541 million.Dairy cooperatives’ operating expensesjumped up $42 million, to $807 mil-lion. Fruit/vegetable cooperatives sawthe biggest decline in operatingexpense, dropping 12.7 percent, to$855 million, despite a 5-percentincrease in reported labor costs.


Table 2—Combined Balance Sheet-Top 100, 2002-03

2003 2002 Difference Percent Assets $ thousand ChangeCurrent AssetsCash 980,404 666,959 313,445 47.0%Accounts Receivable 4,644,641 4,547,146 97,494 2.1%Inventory 5,127,491 4,957,569 169,922 3.4%Other Current Assets 1,195,117 965,117 230,000 23.8%Total Current Assets 11,947,652 11,136,791 810,862 7.3%InvestmentsCooperative Banks 256,593 269,062 (12,469) -4.6%Other Cooperatives 1,497,540 1,469,814 27,726 1.9%Other Investments 1,799,779 1,821,580 (21,801) -1.2%Total Investments 3,553,912 3,560,456 (6,544) -0.2%Net PP&E 6,987,926 7,123,988 (136,062) -1.9%Other Assets 2,271,118 2,195,705 75,413 3.4%Total Assets 24,760,608 24,016,940 743,668 3.1%LiabilitiesCurrent LiabilitiesTotal Short-term Debt 2,132,679 2,380,554 (247,875) -10.4%Accounts Payable 3,133,000 2,839,547 293,453 10.3%Member Payables 501,278 528,358 (27,080) -5.1%Patron and Pool Liabilities 1,532,544 1,341,910 190,634 14.2%Other Current Liabilities 1,417,321 1,334,457 82,865 6.2%Total Current Liabilities 8,716,821 8,424,825 291,996 3.5%Long-Term Debt

Less Current Portion 4,949,874 5,084,611 (134,737) -2.6%Other Liabilities and Deferred Credits 1,130,702 1,045,426 85,276 8.2%Total Noncurrent Liabilities 6,080,576 6,130,037 (49,461) -0.8%Total Liabilities 14,797,397 14,554,862 242,535 1.7%

Minority Interest 924,098 769,413 154,685 20.1%Member EquityPreferred Stock 1,631,929 1,531,343 100,586 6.6%Common Stock 178,859 164,428 14,431 8.8%Equity Certificates and Credits 6,108,943 5,976,173 132,770 2.2%Unallocated Capital 1,119,382 1,020,721 98,661 9.7%Total Equity 9,039,113 8,692,665 346,448 4.0%Total Liabilities and Equity 24,760,608 24,016,940 743,668 3.1%


Low interest rates, coupled withfalling debt, pushed interest expensefor the top 100 co-ops to its lowestlevel since 1994. Interest expense fell12 percent, to $442 million. However,most of this decline can be traced toone cooperative which underwentmajor restructuring. Without thatcooperative, overall debt levels wouldbe higher. There was also a slightincrease in interest expense of $1 mil-lion.

Lower interest rates caused interestincome to fall 24.9 percent, to $27million. Nearly all commodity sectorsexperienced falling interest revenue.Other income, indirectly related tooperations, was also down 6.5 percent,to $335 million. However, interest andother income generally accounts forless than 1 percent of total revenue forall top 100 cooperative.

Other expenses not directly relatedto operations were up 54.3 percent in2003, to $113 million. This is thelargest amount of indirect expenses forthe top 100 co-ops in the past 10 years.

Income taxes paid jumped nearly200 percent, to $49 million.

Non-operating expenses were down79.5 percent, to $35 million. Theseexpenses are caused by accountingchanges, extraordinary gains and loss-es, as well as income and expensesfrom other marginal interests. Theseexpenses and revenues are generallynon-reoccurring.

Co-ops build asset valueTotal assets for the 100 largest agri-

culture cooperatives were up 3.1 per-cent, to $24.7 billion (table 2) in 2003.Leading the increase were currentassets, which jumped 7.3 percent, to$11.9 billion. Investments droppedslightly, falling .2 percent, to $3.6 bil-lion. Fixed assets also slipped margin-ally, from $7.1 billion to $7 billion.

The largest increase in currentassets was in cash balances. Cashjumped 47 percent, to $980 million.Higher net margins from operationshelped fuel the increase in cash bal-ances, with almost all commoditygroups having higher cash balances at

the end of 2003. The exception wasrice cooperatives, which used the high-er cash flow generated by operations topay off debt.

Investments in other cooperatives,excluding cooperative banks, was up1.9 percent, to $1.5 billion. Most ofthe investments in other cooperativesreside with diversified, farm supply,grain and poultry/livestock coopera-tives. Investment in cooperative bankswas down 4.6 percent, to $57 million.Cooperatives carried less debt in2003, especially from cooperativebanks. Non-cooperative businessinvestment was down 1.2 percent, to$1.8 billion. Most of these invest-ments (63.7 percent) were held bydairy cooperatives.

The value of fixed assets fell 1.9percent, to $7 billion, continuing atrend that started in 2001. However,much of the decline in 2003 can beattributed to one cooperative whichsold off substantial amounts of itsfixed-asset base. The average value offixed assets purchased was up $253,000from 2002, to $8.5 million.

Despite overall lower debt levels,total liabilities were up 1.7 percent, to$14.8 billion. The increase in liabili-ties was due mostly to higher currentliabilities, which jumped 3.5 percent,to $8.7 billion. An increase in accountspayable and liabilities owed to mem-bers fed the increase in current liabili-ties. Accounts payable jumped $293million, to $3.1 billion, and fundsowed to patrons were up $164 million,to $2 billion. Total funds owed tomembers included member payablesand other liabilities owed to patrons.

Working capital loans were down10.4 percent, to $2.1 billion, the lowestlevel in more than 10 years. Diversifiedcooperatives accounted for the majori-ty of the decline, with loan valuefalling $333 million.

More cash flow from operations Cooperatives were able to generate

higher levels of cash flow from opera-tions, allowing them to rely less onworking capital loans. The increase inaccounts payable and funds owed to

members are more likely in responseto higher sales. The ratio of these lia-bilities to cost of goods sold remainedsteady, at around 9.7 percent.

Non-current liabilities fell .8 per-cent, to $6.1 billion. Again, lower debtlevels were the driving force. Totallong-term debt, less current portionowed, was down 2.6 percent, to $4.9billion. Generally, this decline can betraced to lower investments in fixedassets. However, higher margins, alongwith higher cash balances, gave manycooperatives flexibility to pay downoutstanding balances without acquiringnew loans.

Eighteen top 100 cooperatives heldmajority holdings in subsidiaries in2003. The top 100’s minority interestin subsidiaries was up 20.1 percent, to$924 million. Most of the minorityinterest is concentrated in the dairysector, with dairy cooperatives holdingmore than 51 percent of the total.Diversified and sugar cooperativeshold 45 percent of the other minorityinterest. Each of those sectorsincreased the amount of minorityinterest.

Stronger equity positionCooperatives’ improved their equity

position in 2003, continuing the trendof the past few years. Total equity grew4 percent, to $9 billion. Total equityallocated to members grew $248 mil-lion, to $7.9 billion.

Unallocated equity increased 9.7percent, to $1.1 billion. The increasein unallocated equity reversed a declin-ing trend of the past five years.

Diversified co-ops led the increasein equity. Their equity balance climbed$175 million, to $2.4 billion. Dairy andgrain cooperatives among the top 100also increased their equity balance by$76 million each.

The dairy sector placed most of itsincrease in unallocated equityaccounts, while grain cooperatives allo-cated a majority of income back tomembers in the form of equity credits.Poultry/livestock cooperatives were theonly commodity group to suffer adecline in total equity. ■


By David Chesnick


e can take a closer lookat what the numbers inthe preceding article(page 25) reveal aboutthe financial perfor-

mance of the nation's 100 largest agri-cultural cooperatives by using table 1(page 29). In this analysis, average per-formance measurements are used.This “averaging” will, in effect, lowerthe influence of the largest coopera-tives of the top 100 and reflect less“swing” between commodity groups.The average ratio generated givesequal weight to all cooperatives andprovides an additional perspective onthe performance of the nation’s largestfarmer cooperatives.

Average liquidity rose in 2003 forthe largest cooperatives. While theaverage current ratio for all the top 100edged up from 1.37 in 2002 to 1.38 in2003, the average quick ratio jumpedfrom .74 to .78. This indicates betterinventory control by cooperatives. Anincrease in cash balances helped reducethe amount of debt and reliance onoutside sources for working capital.

However, not all commodity groupswere able to generate higher liquidity.The better performers were concen-trated among diversified and poultry/livestock cooperatives, which showed atremendous increase in both theiraverage current and quick ratios. Bothcommodity groups showed a broaddecrease in debt and an increase incash balances.

On the other hand, cotton coopera-tives had a build-up of inventory. This

inventory appears to be financed most-ly by working capital loans, since therewas a net outflow of cash from opera-tions. Thus, the average liquidity ratiosfor cotton cooperatives were down.

Leverage ratios examine the use ofdebt. One of the most important is thedebt-to-assets ratio, which illustratesoutside ownership in a business’ assets.The average debt-to-asset ratio for thetop 100 co-ops remained fairly stag-nant in 2003, at 61.4 percent.

The highest leveraged commoditygroups were sugar, poultry/livestockand diversified, with ratios of morethan 65 percent. The least leveragedcommodity groups were cotton andrice cooperatives. Rice cooperativeshad a debt-to-asset ratio of 47.5 per-cent, the only group to have a debt-to-asset ratio of less than 50 percent.

Long-term debt-to-equityfalls, but still too high

Long-term debt-to-equity exam-ines the long-term stability of a busi-ness. The average long-term debt-to-equity ratio fell from .87 to .78 in2003. This signals less reliance ondebt and more equity for long-termfinancing.

However, a long-term debt-to-equityratio of .78 is still relatively high com-pared to the ratio between .5 and .6recorded from 1999 to 2001. Cottonand rice cooperatives do not use muchlong-term debt in their capital structure.

Due to a reorganization of one coop-erative, the fruit/vegetable group saw itsaverage long-term debt-to-equity ratiodecline from 2.74 to .65. Excluding thatone cooperative, the average ratio stillimproved, from .75 to .69.

Poultry/livestock had a tremendousjump, from 3.12 to 7.20 in average long-term debt-to-equity. Much of this jumpresulted from a transfer of short-term tolong-term debt. Sugar cooperatives arealso highly leveraged, with an averagelong-term debt-to-equity ratio of 1.18.

Being leveraged, in and of itself, isn’ta problem. It becomes a problem whenthe operations do not generate enoughmargins to cover interest expense,resulting in default on the loans.

Times-interest-earned is a ratio thatlooks at how many times margins cancover interest expense. In 2003, thelargest agriculture cooperatives had anaverage times-interest-earned ratio of12.45, down from 14.32 in 2002. Muchof this decline can be attributed to thedairy sector. However, the dairy coop-eratives fall from an average of 68.06to 56.27 in 2003 should not be a causefor concern.

What may be a cause of concern forsome sugar and poultry/livestock co-ops is having both low times-interest-earned values and high long-termdebt-to-equity values. Poultry/live-stock cooperatives had an average ratioof .72 while sugar co-ops had a ratio of2.14. On a positive note, sugar cooper-atives have shown improvement onthis score in each of the past five years.

Efficiency ratios examine how abusiness uses its assets to generate sales.The average local asset turnover for thetop 100 increased from 3.10 to 3.14times in 2003. Most of the commoditygroups had a ratio of between 2 and 3.Cotton, dairy and sugar co-ops werethe exception. Both cotton and dairycooperatives had a declining local-asset-turnover ratio. However, both

Measur ing top 100 co-op per fo rmance

W


were above the average. Cotton cooperatives fell from 4.69

to 3.91 and dairy cooperatives fell from6.01 to 5.49. Sugar cooperatives oper-ate in a heavily capitalized industry, sotheir turnover ratios reflect this withaverage lower values. This will be moreevident in their fixed-asset-turnoverratio. The average total-asset-turnoverfor sugar cooperatives was .96 in 2003.

The average fixed-asset turnover forall of the top 100 was up slightly from2002, from 14.57 to 14.66. Most com-modity groups had a turnover rate thatranged from 10 to 15 times. The moreprocessing a cooperative performed,generally the lower the turnover rate.

As mentioned earlier, sugar cooper-atives are highly capitalized and theiraverage fixed-asset turnover was 1.92in 2003. Despite the low value, theyshowed a strong improvement from2002, when the ratio was 1.75. Othercommodity groups which do less pro-cessing — such as poultry/livestockcooperatives — have higher fixed asset

turnover ratios. In 2003, poultry/live-stock co-op turnover ratio was 31.43,up from 30.30 in 2002.

Dairy cooperatives also had a highturnover value of 29.21 in 2003.However, there was a high variationlevel between dairy cooperatives,which ranged from a high of 175.28times to a low of 4.83 times.

Gross margins reflect pricing strategy

While most cooperatives do not haveprofit as their primary objective, theystill must generate margins in order tocontinue operations. Profitability ratiotrends indicate whether a cooperative isheaded for failure.

Gross margin percent generallymeasures pricing strategy of the coop-erative. In other words, it looks at mar-gins generated after the cost of goodssold is subtracted from total operatingrevenues. If a marketing cooperative ispaying too much to its members upfront for their commodities, the gross

margins left may not be enough tocover expenses. So, looking at changesin gross margins as a percent of totalrevenue can help determine a co-op’spricing strategy.

The average gross margin percentfor the largest agriculture cooperativesin 2003 was 14.29. This value has beendeclining steadily from a high in 1999of 16.48. Most of the commoditygroups tend to have a ratio between 10and 20. However, co-ops that performmore processing tend to generate high-er expenses and will require highergross margins to cover those expenses.

Changes in gross margin percentare only half the story. If cooperativesare becoming more efficient in theiroperations by lowering operatingexpenses, they will not need highergross margins. Therefore, memberscan benefit directly on the front end byreceiving higher prices for their com-modities they market through thecooperative or pay lower prices for


Table 1—Average selected ratios by commodity group, Top 100 Cooperatives, 2002-03

Top 100 2002 1.37 0.74 61.27% 0.87 14.23 3.10 14.57 70.90 16.41 14.65% 1.36% 5.62% 5.28%2003 1.38 0.78 61.35% 0.78 12.45 3.14 14.66 46.31 17.41 14.29% 1.68% 5.98% 13.09%

Cotton 2002 1.50 0.71 47.92% 0.28 6.35 4.69 16.81 15.01 23.64 17.72% 4.02% 10.76% 18.33%2003 1.44 0.55 51.84% 0.27 6.47 3.91 15.36 9.87 24.96 17.83% 4.73% 10.90% 20.53%

Dairy 2002 1.32 0.95 59.78% 0.44 68.06 6.01 32.85 273.82 24.53 9.43% 1.26% 5.94% 15.40%2003 1.32 0.94 60.82% 0.41 56.27 5.49 29.21 134.43 22.82 9.55% 1.17% 4.75% 10.27%

Diversified 2002 1.19 0.81 68.92% 0.75 2.83 2.02 8.97 11.66 7.40 12.09% 1.61% 5.73% 10.74%2003 1.38 0.93 68.00% 0.94 2.66 2.22 9.02 12.42 9.48 12.92% 1.43% 6.38% 11.54%

Fruit/Vegetable 2002 1.60 0.72 68.50% 2.47 2.69 2.32 10.37 46.72 11.94 20.00% 1.52% 7.91% -11.43%2003 1.59 0.76 61.72% 0.65 4.64 2.42 11.64 31.96 12.57 21.17% 3.99% 13.38% 38.84%

Farm Supply 2002 1.32 0.71 56.51% 0.44 2.64 2.35 10.40 9.47 10.56 15.99% 1.21% 4.64% 6.22%2003 1.31 0.77 58.15% 0.47 3.61 2.48 10.94 10.55 11.04 15.19% 1.63% 5.61% 10.10%

Grain 2002 1.26 0.58 61.24% 0.40 3.89 2.58 9.38 8.95 18.35 12.71% 0.87% 4.53% 8.19%2003 1.26 0.63 62.58% 0.45 2.49 2.87 10.58 12.37 21.28 11.42% 0.54% 3.30% 5.63%

Poultry/Livestock 2002 1.77 1.34 65.78% 3.12 1.08 2.78 30.30 217.50 13.85 7.99% 2.23% 4.95% -25.44%2003 2.14 1.70 68.28% 7.20 0.72 2.92 31.43 251.70 13.31 7.58% 0.56% 2.69% 1.58%

Rice 2002 1.67 1.03 50.42% 0.38 7.87 2.26 4.92 11.37 10.31 34.00% 2.86% 7.62% 14.30%2003 1.69 0.76 47.46% 0.38 9.34 2.44 5.34 9.28 12.39 36.11% 4.19% 10.89% 23.39%

Sugar 2002 1.35 0.60 65.33% 1.17 1.55 0.94 1.75 5.79 10.05 26.18% 2.28% 4.83% 5.39%2003 1.35 0.59 66.62% 1.18 2.14 0.96 1.92 5.74 9.83 25.41% 3.19% 5.62% 8.42%

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By Kimberly Zeuli,

Assistant Professor

& Judy Turpin, student researcher

University of Wisconsin-Madison

Editor’s note: This is the second of threearticles with highlights from the seventhannual Farmer Cooperatives Conference,Cooperative Innovation, held last fall in Kansas City. Part I appeared in theJan–Feb. 2005 issue. Part III will appearin the May–June issue.

artnerships are businessesformed when two or morecompanies or people joinforces to accomplish morecollectively than they can

individually. According to RogerGinder, a professor at Iowa StateUniversity, there are three general typesof partnerships: (1) Horizontal partnerships (both firms

are at the same level in the valuechain); Example: Agriliance, anagronomy partnership between tworegional cooperatives, Land O’LakesInc. and CHS Inc.

(2) Vertical partnerships (firms that areat different levels in the value chain);Example: Land O’Lakes partneringwith local co-ops to build jointlyowned feed mills.

(3) Complementary joint venture with afirm outside the value chain; Example:

West Central Co-op’s joint venturewith Todd & Sargent, a corporateconstruction firm, to form theRenewable Energy Group (REG),which builds turn-key biodieselplants and provides start-up assis-tance and ongoing plant manage-ment for clients.Ginder says that horizontal partner-

ships between cooperatives andinvestor-owned firms (IOFs) are one ofthe most challenging partnerships toestablish and maintain. Two differentexamples — with two very different out-comes — of local cooperatives enteringinto a partnership with Cargill werepresented at the Cooperative Innovationconference.

Ag Partners LLCTroy Upah, CEO of Ag Partners

LLC, described the creation and successof his firm, a partnership equally ownedby Albert City Elevator, an Iowa farmsupply and grain co-op established in1905, and Cargill. The two partners feltthat a joint venture would improve theirvalue to local farmers, improve efficien-cies and allow them to update facilitiesthey operated in an overlapping tradearea.

Albert City brought nine grain,agronomy and feed facilities and 900farmer-members to the partnership;Cargill brought four similar facilities tothe partnership. In 1997, the two busi-nesses agreed to a five-year partnership.Instead of updating some of the currentdry fertilizer facilities, the two compa-

Per i l s & P leasures o f Par tnersh ipsKey issue for co-ops in businesspartnerships: who do you trust?

P

Global Berry Farms is a marketing partnership that provides services to co-ops producingblueberries, strawberries, blackberries and raspberries. Photos courtesy Global Berry Farms


nies built a new, 15,000 ton dry plantto take the place of five smaller plants.This saved $1 million that would havebeen needed to upgrade the older andsmaller facilities.

The two partners operateautonomously, with Ag Partners LLChaving decision-making power andexerting influence on budget andstrategic planning. Upah cautionedthat the decision-making process forthe partnership, however, has to beboth business-centered and sensitive tolocal concerns. Challenges to the part-nership have included initial customerconcerns regarding either partner hav-ing a controlling influence, marketperceptions about Ag Partners operat-ing as a truly independent organiza-tion, and supplier misconceptionsabout the structure of Ag Partners(which is often misconstrued as beingmore of a Cargill entity instead of aseparate business).

These challenges were overcome,and Ag Partners has been successful,with improved efficiency and positivefinancial results for both partners,Upah said. Overall, “The value of aninvestor-owned partnership lies ingreater access to resources — includingcapital, risk management and market-ing — than each owner would have ontheir own in Northwest Iowa. We alsogain a very strong board of directorswith industry knowledge and solid out-side perspectives,” he noted.

Agri Grain Marketing Another Iowa partnership between a

co-op and Cargill that did not workout as well is Agri Grain Marketing(AGM). Created in 1986 by AGRIIndustries, a farmer-owned coopera-tive, and Cargill, AGM was formed toprovide both partners with grain mar-keting and other services. The partner-ship went well until 2002, when prob-lems between the partners surfaced. By2004, the partnership dissolved.

Sue Tronchetti, a board member ofAGRI Industries, described the part-nership failure as the result of a shift inthe business goals of both companies.“Agriculture has witnessed many

changes from 1986 through the 1990sthat brought about changes in eachpartner’s goals,” Tronchetti said.

The major difficulty AGRI

Industries faced in ending the AGMpartnership was the lack of a clear exitplan. The co-op had to decide how andwhen to end the partnership — whichwere both contentious issues. Therewere also considerable costs for endingthe partnership.

In the end, the partnership experi-ence with Cargill was not bad enoughto prevent AGRI Industries fromsearching for a new partner, evenanother IOF. The co-op started thesearch by first assessing what it neededfrom another firm and how to create apartnership that would allow for easierexit than the Cargill partnership had.

After consulting with industry lead-ers and its members, AGRI Industriesdecided to form a partnership withBunge North America, the NorthAmerican operating arm of Bunge Ltd.,a successful global grain and oilseedcompany. Bunge has worked extensivelywith cooperatives in the past.

This time, the partnership agreementincluded a commitment to the idea of anevolving partnership and a detailed exitstrategy. As Tronchetti noted, “Alwaystrust your partner, but prepare for theprobability that the partnership may notultimately work out.”

How do you create successful corpo-rate partnerships? Since cooperativeswill continue to rely on partnershipswith other firms for a variety of strategicadvantages, what should they do toensure success? Two successful cases dis-cussed at the conference are summarizedbelow. Perhaps not surprisingly, the ele-ment of trust is a key issue in each.

Global Berry Farms Global Berry Farms LLC (GBF)

has an ambitious mission for a compa-ny created just four years ago: to bethe premier fresh berry supplier toNorth America. John Shelford, presi-dent, described how GBF has struc-tured its relationship with three strate-gic partners to ensure they achievetheir goal.

Michigan Blueberry GrowersAssociation (MBGA), a 400-membermarketing cooperative representing25-30 percent of North America’s cul-tivated blueberries, had a marketingcontract with Hortifrut SA, datingback to 1991. Hortifrut is a closelyheld family corporation representing30-35 percent of all berry productionin Chile (raspberries, blueberries andblackberries) and 40 percent ofMexico’s fresh blackberry production.In 2002, Naturipe Berry Growers, aCalifornia marketing cooperativefounded in 1917 that represents 8-10percent of California’s fresh strawberrysales, became an equal partner.

The three organizations formed apartnership called Global Berry FarmsLLC, with MBGA, Hortifrut andNaturipe each holding an equal, 33.3percent interest.

GBF sales have increased from $72million in 2001 to a forecasted $214million in 2005. Although it does somenon-partner business, it tries to keeppartner-sourced sales around 90 percentof its volume. The partnership can pro-vide year-round fruit supplies to cus-tomers who are no longer satisfied withhaving to source fruit from multiple,seasonal suppliers. In addition, its fruitvolume is sufficient to mount a seriousmarketing campaign.

The partnership has not been with-out its challenges. MBGA and Hortifrutenjoyed a nine-year relationship;however, neither had any prior relation-ship with Naturipe. Therefore, trustand confidence had to be built in theyears following Naturipe becoming apartner. Since fruit prices are calculateddaily, trust is essential.

Perhaps more importantly, each ofthe partners had pride in, and an emo-

tional connection to, the success oftheir own operations. This pride wasdifficult to put aside when they eventu-ally agreed to adopt the Naturipebrand. As Shelford put it, “theNaturipe brand was almost a dealbreaker.”

How did they overcome these chal-

lenges? Two of the partners had a trackrecord which, Shelford acknowledged,had a “huge impact on workingtogether.” Shelford had also worked 18years at MBGA.

To build trust among the partners,MBGA established an intensive agendaof membership meetings and sent itsboard to Chile to learn more about

Hortifrut. Board members also trav-eled to California to learn more aboutNaturipe. Employees were integratedinto a new team at GBF, which experi-enced very little turnover.

Each partner has two representa-tives (their CEO and their board’s des-ignated representative) on the GBFboard. All decisions must be unani-mous. Shelford admits that he wasskeptical of this policy at first, but nowendorses it wholeheartedly. He feelsthat creating a united front is key totheir partnership.

Expenses are allocated based on afixed and variable basis to ensure equi-tability. The partners work together todevelop their supplies.

Shelford offered this advice for suc-cessful partnerships: (1) the strategicconsiderations for a partnership mustbe compelling; (2) the partners mustbe willing to invest an inordinateamount of effort into relationshipbuilding; (3) they should communicatethe partnership’s vision often; and (4)always deliver on promises.

Dairy Marketing ServicesRick Smith, CEO of Dairylea

Cooperative Inc. and chief operatingofficer of Dairy Farmers of America(DFA) came to the dairy industry afterbriefly working as a teacher and thenas a lawyer — both careers providing aunique perspective which he believeshas served his organization well.

In 1999, after years of intense com-petition among dairy co-ops in theNortheast, Dairylea and the then-newly formed Dairy Farmers ofAmerica (DFA) — decided to poolresources to create Dairy MarketingServices (DMS) as a larger, more effec-tive marketing organization for theNortheast.

Today, DMS is a partnership amongthree major co-ops (DFA, Dairylea,and St. Albans Cooperative Creamery),and has relationships with Land O’Lakes, many small co-ops and 2,000independent dairy producers. Smithsaid this diversity of owners is thestrength of the operation.


Keys to successfulpartnerships: (1)strategic considera-tions for partner-ships must be com-pelling; (2) partnersmust be willing toinvest an inordinateamount of effort intorelationship build-ing; (3) communi-cate the partner-ship’s vision often;and (4) alwaysdeliver on promises.



CWT Round II removing nearly 1-billion pounds of milk

Cooperatives Working Together(CWT) — a dairy industry funded andadministered program to help betterbalance milk supply and demand —has accepted bids from 363 farms toretire their dairy herds. These bidsrepresent 50,478 dairy cows, all ofwhich will be sold by the participatingfarmers for beef. The cows beingretired produced 908 million poundsof milk annually, or a little more than0.5 percent of the 170 billion poundsof U.S. milk produced in 2004.

“Our field auditors visited each ofthe 378 farms we initially accepted intothe program,” says Jerry Kozak, presi-dent and CEO of National MilkProducers Federation, which managesCWT. “We had excellent cooperationfrom all the farmers, which allowed usto complete our auditing process aheadof schedule. That process screened outa small number of bids that, it turnedout, didn’t meet our program’s criteria.”

The average bid acceptedin the second herd retire-ment program was$5.24/cwt, with no bidaccepted above $7.63. The363 accepted bids wereselected from 736 submit-ted. The 908 millionpounds of milk removed is4 percent higher thanCWT’s initial goal of 870million pounds. In the firstherd retirement program inthe fall of 2003, CWTaccepted bids from 299farms that retired 33,000cows representing 608 mil-lion pounds of milk.

“This program is a win-win for all of America’s dairy produc-ers,” Kozak says. “Producers whowished to retire their herds are able todo so through a bidding process thatassures they receive fair market valuefor their milk production capacity,while those dairy farmers who remainin business will benefit because of abetter balance between supply anddemand.” Under CWT, farmers bid tobe paid for the volume of milk thattheir herds produced, and also recoverthe market price for those herds whensold for beef.

Southern States Co-op acquiresAgway’s share of Co-op Milling

Southern States Cooperative Inc.(SSC) is now the sole owner ofCooperative Milling in Gettysburg,Pa., following its acquisition of the 50-percent interest Agway had held in thebusiness. The milling business pro-duces premium horse feeds under theTriple Crown and Legends brands, aswell as other livestock feeds. SSC plans

to expand distribution of the mill’s feedinto New York and Connecticut.

Agway is now defunct, havingdeclared bankruptcy in 2002, whileSSC has been making marked progressin restoring its operations back to fiscalhealth after several years of losses.Southern States has 300,000 membersand serves nearly 1,200 retail outlets in19 states with agricultural inputs andfarm and home products.

Bio-energy priority for USDA value-added grants

Agriculture Secretary Mike Johannshas announced the availability of $14.3million in grants that will support thedevelopment of value-added agriculturebusiness ventures and supportPresident Bush’s energy plan to developalternative sources of renewable energy.“The Bush Administration is commit-ted to working with rural farmers,ranchers and entrepreneurs to increasetheir economic opportunities, and tocreate jobs that boost local economies,”says Johanns. “These grants provideAmerica’s farmers and ranchers withthe investment funds needed to expandtheir role in developing and marketingvalue-added products.”

Priority consideration will be givento those grant applications that have atleast 51 percent of project costs dedi-cated to activities for a bio-energy pro-ject. The renewable energy projectsinvolve biodiesel, ethanol or windenergy production or the use of bio-mass to generate energy. The funds areprovided through the Value-AddedProducer Grant program, administeredby USDA Rural Development. Grantsare available to independent producers,agricultural producer groups, farmeror rancher cooperatives and majority-

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

More than 50,400 dairy cows will be taken out of produc-tion under the second round of the CooperativesWorking Together program. USDA photo


controlled producer-based businessventures. They may be used to: (1)fund planning activities needed toestablish a viable value-added market-ing opportunity for an agriculturalproduct (e.g. conduct a feasibilitystudy, develop a business plan, developa marketing plan), or (2) acquire work-ing capital to operate a value-addedbusiness venture that will allow pro-ducers to better compete in domesticand international markets.

Awards will be made on a competi-tive basis. Applications must bereceived no later than May 6, 2005.For more details about application andprogram requirements, visit:http://www.rurdev.usda.gov/rbs/coops/vadg.htm, or call (202) 690-2426.

DFA acquires Keller’s Creamery The producer-owners of Dairy

Farmers of America Inc. (DFA) haveacquired all of the ownership interestsin Keller’s Creamery LP, the nation’ssecond largest manufacturer of butterfor retail, food service and industrialuses. Terms of the deal were notannounced. Keller’s was formed inMay of 2000 as a joint venturebetween DFA and Frank Otis andGlenn Millar, the former managementteam of Sodiaal North AmericaCorporation (although dairy productshave been produced under the Keller’sbrand for more than a century). Withthis transaction, DFA becomes themajority owner of the partnership inthe butter business and will oversee themanagement of Keller’s warehouse andoffice operations in Harleysville, Pa.,and the butter processing plant inWinnsboro, Texas.

“For the past four years, our dairyfarm families have helped to supplymilk and cream that goes into Keller’sbutter churns,” says Gary Hanman,DFA’s president and CEO. “Thistransaction doesn’t really change theoperations, except it creates an evenstronger relationship between ourfarmers and the butter brands. It alsoprovides opportunities for future effi-ciencies and market synergies amongour processing units.”

In 2003, the Winnsboro, Texas,plant churned cream into more than100 million pounds of dairy products,including premium and bulk butter,butter oil, non-fat dry milk powderand other dairy ingredients. MarkKorsmeyer, president of DFA’sAmerican Dairy Brands (ADB) divi-sion, will assume managerial responsi-bilities for Keller’s marketing, sales andmanufacturing functions. ADB is theretail brand division of DFA’s manufac-turing group, which markets processedand natural cheese, as well as formulat-

ed, dairy-based beverages under DFA’sregional and national product brandsincluding: Borden cheese, CacheValley cheese, Sport Shake, SportShake Max and VitalCal.

Health care co-ops get boost in Wis., Minn.

President George Bush inDecember made official the $2.25 mil-lion earmarked for Co-op Care, theproject developed by WisconsinFederation of Cooperatives (WFC)and Minnesota Association of Coop-eratives (MAC) to increase access toaffordable health benefit plans. Thefunds will be used for establishmentand administration of a “stop lossfund” that will help diminish the high-risk label that insurers have attachedto many farmers and small businessowners.

“We are very pleased Co-op Carewas among the projects funded,” saidBill Oemichen, WFC President andCEO. “The funds will help pay forsome of the higher-cost claimsincurred by cooperative members,which will in turn help stabilize premi-um rates over a number of years, a pri-ority of the Co-op Care project.”

In related news, WFC and MACmembers gave their overwhelming

approval to unification of the twoorganizations. The action was taken atthe joint annual meeting of the organi-zations held in November.

LO’L sales top $7.7 billion;CEO Jack Gherty to retire

Land O’ Lakes reported $7.7 billionin sales for 2004, up sharply from $6.3billion in 2003. But net earnings of$21 million were down from $82 mil-lion in 2003. The co-op returned $35million in cash to members in 2004, upfrom $24 million in 2003, boosting theco-op’s five-year cash payout to mem-bers to $198 million.

Land O’Lakes is poised to trans-form itself into a farmer-owned orga-nization that is more focused, finan-cially stronger and positioned to deliv-er on the strategic and financial poten-tial of its recent growth initiatives,President and CEO Jack Gherty told2,000 delegates and visitors at LOL’s84th annual meeting in Minneapolis.He said LOL will focus on three keystrategies in driving this transforma-tion: building on a foundation of excel-lent people; accomplishing key portfo-lio initiatives and delivering industry-competitive results in core businesses.

“Organizations don’t transform peo-ple,” Gherty said. “People — the rightpeople — transform organizations.”Gherty, who has led the co-op since1989 and been on the staff for morethan 34 years, has announced that hewill retire at the end of this year. Theboard is now in the process of selectinghis successor.

Chief Financial Officer DanKnutson said the decline in net earn-ings was due to a $36.5 million chargerelated to the company’s $249.5 mil-lion investment in CF Industries (itsjoint venture fertilizer manufacturingunit) and a $23.1 million non-cashadjustment related to hedging losses.Proceeds from litigation settlementswere also $17.4 million less in 2004than in 2003.

“If you factor out these three items,and their tax impact, you would see netearnings of $66.5 million from ourbase business in 2004, a $13 million


increase from comparable base busi-ness performance in 2003,” saidKnutson.

Land O’Lakes also continued tomake progress in paying down debtand strengthening the balance sheet in2004, Knutson said. Since the compa-ny’s acquisition of Purina Mills in2001, total balance sheet debt is downmore than $200 million. In total, theco-op has achieved $416 million indebt reduction over that period. Healso indicated that the expected pro-ceeds from the recently announced saleof the company’s swine business wouldenable further debt reduction.

The co-op saw improved earningsin the Dairy Foods, Seed, andAgronomy businesses, as well as strongperformance in Layers/Eggs. AlthoughCF Industries’ 2004 performance wasstrong, domestic nitrogen manufactur-ers remain at a considerable competi-tive disadvantage in today’s global mar-ket, Gherty noted. “The doubling ofnatural gas costs over the past fewyears has created considerable stress onU.S. nitrogen manufacturers,” he said.“We are engaged with the other CFowners to aggressively evaluate thestrategic options to improve perfor-mance and returns.”

Preserving rural heritage, culturegoal of White House/USDA effort

Agriculture Secretary Mike Johannsmarked the second anniversary of thePreserve America initiative by announc-ing that Preserve America communitieswill be given priority consideration forcommunity facility funding projectsthat support efforts to preserve andencourage enjoyment of America’spriceless cultural and natural heritage.

“There are significant economic,educational and cultural benefits thathistoric preservation provides, espe-cially to rural communities,” saidJohanns. “Sustainable preservation isnot a cost for maintaining the past, it isan investment in the future. Ruralcommunities that are dedicated to his-toric preservation will be rewarded fortheir vision for the future, as theirefforts help revitalize their local econ-

omy and sense of community pride.”The Preserve America initiative,

announced by First Lady Laura Bushin March 2003, is a White Houseeffort to encourage and support com-munity efforts to preserve America’spriceless cultural and natural heritage.The goals of the initiative include: agreater shared knowledge about thenation’s past; strengthened regionalidentities and local pride; increasedlocal participation in preserving thecountry’s cultural and natural heritageassets and support for the economic

vitality of communities. To date, morethan 220 communities in 37 states havereceived the designation as PreserveAmerica communities and will be con-sidered for priority funding under theRural Development CommunityFacilities program.

“We want to provide incentives tocommunities to look for projects thatwill help rejuvenate their localeconomies, as well as preserve and pro-mote our national heritage,” said GilGonzalez, USDA Acting Under

Secretary for Rural Development. TheCommunity Facilities Loan and Grantprogram provides communities withfinancial tools and facilitates essentialcommunity facilities such as healthcare clinics, police and fire stations,schools and child care centers. Theprogram’s flexibility also allows fund-ing for projects that revitalize ruraleconomies, such as interpretative cen-ters, museums or restored historicalbuildings. Further information on eli-gibility for priority funding can beobtained by contacting any local

USDA Rural Development office or byvisiting www.rurdev.usda.gov.

Communities designated throughPreserve America receive nationalrecognition for their efforts. Benefitsinclude use of the Preserve Americalogo, listing in a government Web-based directory to showcase preserva-tion and heritage tourism efforts, andeligibility for special existing and pro-posed Preserve America grants andfunding through various governmentagencies. The next quarterly deadline

This farmer’s market in downtown Ritzville, Wash., was designated a Preserve AmericaCommunity in summer 2004. Located in the state’s eastern wheat belt, Ritzville (population1,736) was settled in the late 1870s, largely by German and Russian immigrants. The turretedbuilding is currently partly occupied by a senior center. Photo courtesy R. Bruce EckleyPhotography.


for Preserve America Community appli-cations is June 1, 2005. For moreinformation, application forms, andprocedures, visit:www.PreserveAmerica.gov.

CoBank pays record patronage; smaller board approved in vote

CoBank’s 2004 earnings of $275million climbed 5 percent from $261million in 2003. The increase was dri-ven largely by a lower provision forcredit losses — reflecting improvedcredit quality — and by lower financialassistance expenses for the FarmCredit System. The strong showingwill allow the co-op bank to return$160 million in patronage and stockretirements to customer-owners for2004. The cash distributions representa record 13.3-percent return on aver-age invested capital for customer-own-ers. For the past five years, CoBankcustomer-owners have received anaverage of $121 million per year incash as a result of their investment inthe bank.

Total loans and leases outstandingto U.S. and international customersdeclined slightly, to $24 billion, downfrom $24.8 billion in 2003. Most of thereduction can be attributed to chang-ing market conditions and refocusingportfolio strategy with core rural cus-tomers.

“For customers, patronage remainsone of the most tangible measures ofour success,” Douglas D. Sims,CoBank CEO said. “In 2004, we con-tinued to build on our history of con-sistent financial performance. Eventhough loans and leases declinedslightly for 2004, capital grew, our risk profile improved and earningsincreased.”

CoBank — part of the $125 billionU.S. Farm Credit System — hasenhanced its capital plan for 2004 byincreasing the overall rate at whichpatronage is calculated and by increas-ing the level of cash patronage paid tostockholders. With $30.9 billion inassets, CoBank specializes in financingfor agribusinesses and Farm Creditassociations, as well as rural communi-

cations, energy and water systems.In other developments, 96 percent

of the bank’s stockholders recently castvotes approving bylaw changes whichwill reduce the size of the current 26-member board to 15 to 17 members.Existing representational districts willbe combined into three regions (East,Central and West), each of which willelect four directors. The board willalso include a maximum of three out-side directors (who can have no cus-tomer affiliation with the bank) andtwo appointed directors (who mayhave a customer affiliation). Directorterms are being expanded from threeto four years.

Isom, Toelle NCFC’sdirectors of the year

The National Council of FarmerCooperatives (NCFC) has awardedHoward Isom, a farmer from Chico,Calif., and board chairman of BlueDiamond Growers, the FarmerCooperative Director of the Year awardfor directors with 12 or more yearstenure. Mike Toelle, a farmer fromBrowns Valley, Minn., and chairman ofCHS Inc., won the award for the direc-tor with less than 12 years tenure onthe board. Isom and Toelle were salut-ed for leading their cooperatives tomeet the needs of farmer-memberswhile positioning their co-op’s to com-pete in a rapidly changing global mar-ketplace.

Isom, a Blue Diamond membersince 1969 and a director for 16 years,farms 1,200 acres of almonds, walnutsand grapes. He is also president ofMatson and Isom, an accounting firmin Chico. Toelle, a co-op member his

entire adult life, works a 3,200-acregrain, hog and cattle operation withhis family near Browns Valley. “BothHarold and Mike are dedicated to theprinciples of farmer-ownership andtheir leadership of their respectiveboards makes them worthy recipientsof the Director of the Year award,”says Jean-Mari Peltier, president andCEO of NCFC. The awards were pre-sented Jan. 23 at NCFC’s 76th annualmeeting in Carlsbad, Calif. The awardwas established to recognize the out-standing achievements of farmer coop-erative directors who take the lead tohelp their boards make decisions vitalto their cooperative.

FCS America board electionreflects anti-sale sentiment

Results of a board election inJanuary for Omaha-based Farm CreditServices of America give further evi-dence of members dissatisfaction witha plan that would have sold the co-oplender to Rabobank had it not beenscuttled by member opposition and theconcern of Congress. Five directorselected to the co-op’s 17-memberboard were all endorsed by Farmersfor Farm Credit, the grassroots groupthat led opposition to the sale.

Myron Edelman of Watertown,S.D., chairman of Farmers for FarmCredit, which opposed the sale, saidthe election indicates that the coopera-tive’s members want to stay within thenational Farm Credit System, accord-ing to a report in the Omaha WorldHerald. “A strong majority of thestockholders seem to agree with ourposition,” Edelman said.

“Sometimes we forget, particularlyin large business entities, that they stillwork for the owners,” Neil Harl, anIowa State University professor, toldthe World Herald. “Sometimes theshareholders are goaded into takingmatters into their hands. I think this isone of those examples.”

Incumbent board members Alan J.Steffens and James K. Geyer weredefeated by Darrell Cain of Elwood,Iowa, and Larry Paulsen of Coleridge,Neb. Cain and Paulsen were nominat-

Mike ToelleHoward Isom


ed from the floor at the co-op’s annualmeeting. Incumbents Dean Chapmanof Russell, Iowa, Gene Hammen ofWellman, Iowa, and Lyndon Limbergof Gary, S.D., were re-elected.

“Payback” new CHS feed brandPayback is the new ‘umbrella’ brand

for all animal feed formulations fromCHS, available through some 500 localco-ops and independent dealers in ninenorthern states. “With the CHS cor-porate name change in 2003, it wastime to establish a product brand iden-tity for animal feeds that was separatefrom the company name,” says JohnSteffen, vice president for nutrition.“Our biggest challenge is reassuringdealers and producers that the formu-las have not changed.”

Payback products include a com-plete feed line for livestock, horse,swine and poultry, as well as specialtyblends that were manufactured fordecades by Harvest States Feeds, oneof CHS’ predecessor co-ops.

The process of establishing a newbrand name included developing aWeb-based survey sent to beef produc-ers in six states across CHS’ core tradeterritory. Overall, the single most

important attribute respondents saidthey wanted from their feed companywas the commitment to help them bemore profitable. The proposedPayback name ranked highest asappealing, memorable and relevant.

In other news, the CHS Foundation

has announced that it will contribute$172,840 to CARE for Asian tsunamirelief efforts. In early January, theCHS Foundation pledged an initial$100,000 contribution and implement-ed a match program for CHS Inc.member cooperative locations andemployees of CHS and AgrilianceLLC, a CHS joint venture company.

Michigan cattle producers unite to pursue market opportunities

Frustrated with the obstacles facingthe beef industry and the challengesposed by bovine tuberculosis, a groupof northeastern Michigan cattle pro-ducers have banded together to form

North Country Beef ProducersCooperative. The group was formed toexplore new marketing opportunities,increase profitability and provide edu-cational opportunities for members.

In addition to working to strength-en their business skills, the 40 mem-bers also are educating themselvesabout vaccination, animal health andnutrition, genetics and managementpractices for cow/calf producers as wellas backgrounders and feeders. As partof this effort, they approachedMichigan State University (MSU)Extension, the MSU Product Centerfor Agriculture and Natural Resources,and the Michigan Department ofAgriculture (MDA) to explore newmarketing opportunities to increaseprofitability.

“The biggest challenge is findingnew ways to market beef,” says DaveGlenn, Presque Isle County MSUExtension director. “We are lookinginto value-added options to increasethe profitability of beef producers innortheast Michigan. “Glenn is aninnovation counselor with the MSUProduct Center. He is working with acore group of seven of the coopera-tive’s members to create a business

The business structure of DMSallows different groups of farmers toparticipate in a single marketing unit.“Every member can wear whatever co-op’s hat they want, but they go to themarket together, as one,” Smith said.Individual identities are maintained, butby combining the milk supplies of inde-pendent and cooperative farms in thenational marketplace for the purposes ofcreating efficiencies and the reduction ofcost on milk assembly, field services andtransportation, all dairy producers caneffectively and efficiently market milk inthe most profitable manner.

DMS also emphasizes transparencyand candor in its business operations,which Smith considers essential forbuilding trust among partners. The

cooperatives have worked hard toappeal to their consumers, most ofwhom have some history of farmingand appreciate the dairy producers inthe organization.

This “team approach” to jointlymarketing milk has removed redun-dancy and reduced the cost on milkassembly, transportation and field ser-vices. Together, this has generatedmore revenues for sharing with alldairy producers involved. Risk man-agement has also improved since thejoint venture was created. Smithremarked, that “Any one of our coop-eratives could have been the best in themarket, but by working together, theprices have been elevated and thewhole market is better off.”

DMS has been very successful, earn-ing praise from processors, producersand the agribusiness community as amodel that has, indeed, created efficien-cies in all areas as well as high premiumsfor producers. The co-ops are commit-ted to keeping the Northeast dairyindustry competitive through coopera-tion, said Smith.

There are still 63 dairy cooperativesin New York, and a fairly high per-centage of farmers who do not belongto any co-op.

Smith believes that the key to suc-cessful partnerships is commitment.With the same level of commitmentfrom all partners, he says the gover-nance structure and other challengeswill work themselves out. ■

Perils & pleasures of partnerships continued from page 32


plan and determine the best way tomarket beef using options that are fea-sible for the group. One option beingconsidered is retained ownership —finishing the cattle rather than sellingyoung stock — which will result inincreased profitability.

“By feeding out our cattle, we don’thave to worry about as many obstaclesrelating to TB — this removes oneobstacle facing farmers in our area,”says Marty Galbraith, a member of

the North Country Beef ProducersCooperative. “One of the problemsmany of the producers face is that asindividuals, they don’t have sufficientcattle to attract buyers,” says veteri-narian John Molesworth, the co-op’sexecutive director. “Forming a coop-erative is one way of putting togetherlarger groups of like kind cattle toattract buyers.” For more informationabout the co-op, contact MartyGalbraith at (989) 826-3793.

Georgia Co-op Center gets boost from USDA grant

A $266,000 grant from USDARural Development to the GeorgiaCenter for Agribusiness andEconomic Development will giveGeorgia its first statewide farm co-op development center. The newGeorgia Cooperative DevelopmentCenter (GCDC) will be one of 20such centers in the United States.The GCDC will support fledgling

safety, our consumers know exactlywhere their product comes from.”

The cooperative has taken productaccountability to a high level.Numbers printed on the bottom ofeach can may be traced back to thefarm of origin.

“We are planning to have a Website so that consumers can see first-hand where their meat comes from,”says Uthlaut. “Consumers will be ableto enter the number on the bottom ofthe can into the Web site and pull upinformation about the exact family andwhere the animal was raised.”

Heartland Farm Food’s philosophyis based on promising the consumerthat they are getting the highest qualityand safest product possible. Cattle usedfor the product are produced under agrower agreement that requires that allcattle are hormone-free and must meeta number of other quality standards.

“We always told them [members]not to get involved unless they couldbe proud of the cattle they send,”Blaue says.

Cattle are needed throughout theyear. Producers typically let Uthlautknow when they have cattle ready tobe processed, and he solicits for cattlewhen it’s time to go into production.

Cattle are slaughtered at two near-by locations, and then brought to theMontgomery City facility to beprocessed. The ground and chunkedbeef products are fully cooked, creat-ing a broth and separating the fat from

the beef. No additives, salts or preser-vatives are added to the product, mak-ing it 100 percent pure beef.

In addition to helping with in-house processing, the five employeesfocus on opening up new market out-

lets, developing recipes and generalmarketing strategies. A big target mar-ket is outdoor and recreational con-sumers. The shelf life and convenienceof the product make it attractive forcamping and other outdoor use.

“We want to get our product intosome of the major outdoor shops, butwe have to make some changes beforethat is possible,” says Uthlaut. “It’s def-initely a high-priority market for us.”

Heartland Farm Foods ground andchunked beef products can currently be

found in super markets and specialtyfood stores in St. Louis and throughouteast central and central Missouri.

Expanding product lineBill Diechman, board treasurer, says

that members have been pleased withthe progress thus far, but he adds thatthis is just the beginning for HeartlandFarm Foods.

“The members have continuallyexpressed their support of the plans andfacilities,” says Diechman. “We keep intouch with the members throughnewsletters and annual meetings. We’resuch a small group that if a memberhas a question, they’ll come talk to usin town, or just come up to the facilityand find out what’s going on.”

“Our members have been so patientwith us, and that has been key,” saysBlaue.

The group is set to release six newcanned beef products this spring. Theproducts include beef and nacho cheesedip, beef ‘n’ bean dip, taco beef, chili,chili cheese dip, and new ground beef.

“If we want to get into more mar-kets, we’re going to have to have moreproducts,” says Uthlaut.

The co-op is also selling steaks tolocal restaurants and markets packagedunder the Heartland Farm Foods label. For more information, contact Uthlautby e-mail: [email protected], phone (573) 564-1600, orvisit the Web site: www.heartlandfarm-foods.com. ■

Trading on Tradition continued from page 13

“With all of the concerns about foodsafety, our consumersknow exactly wheretheir product comesfrom.”—Jim Foster


co-ops and help farmers who wantto form others, says CAED coordi-nator John McKissick. Before thegrant, he said, there weren’t enoughresources to meet all of the needs.The CAED is part of the Universityof Georgia College of Agriculturaland Environmental Sciences.

“The grant will focus on coopera-tive development and providing moreservices to those in agriculture whothink they have a future to develop as a

co-op,” McKissick said. It will fundtwo business development specialistsand other resources. The CAED hasplayed a key role in successful co-opssuch as Sunbelt Goat Producers inWashington County and Farm FreshTattnall, a co-op of roadside marketsand pick-your-own farms in TattnallCounty.

The new center’s steering commit-tee has already approved new feasibili-ty studies, board training, market an-

alyses, business plans or other supportfor four co-ops: an ethanol productionco-op of Georgia corn growers; theSunbelt Organic Gold co-op of southGeorgia poultry growers who want tomake and market organic fertilizerfrom chicken litter; a community foodnetwork that would match organicproduce growers with markets in sub-urban Atlanta, and a co-op that wouldmatch organic markets with grass-fin-ished beef.

hopes to change for good. “The residents were enthusiastic fromthe start,” says Warren Kramer, NCDF’s director of housing devel-opment. “They demonstrated interest in exploring the co-op modelas a way to secure the future of their housing in the park.”

Now that residents own the park, they can begin to act on theirlist of repairs, something over which they had no control last year.Florence Pirrung, 66, who lives next to her three great-grandchil-dren, is looking forward to the benefits of owning the park with herneighbors.

“We need changes; we need speed bumps and the roads need tobe resurfaced,” she says. The resident board is also working on plansto cap a well, overhaul the playground and replace the old rustymailboxes.

NCDF embraced the idea of helping mobile home park residentsbecome cooperative park owners after witnessing the success of simi-lar programs in California and New Hampshire. “In light of theimpact that a park closing has on residents, we definitely saw theneed,” explains NCDF Executive Director Margaret Lund. “Thecooperative ownership model has many applications in rural com-munities, beyond its traditional uses in agriculture, and the benefits— both financial and social — that the model brings to communitiesare really compelling.”

City officials supported residents’ efforts to purchase the park.Ultimately, the project delivers affordable homeownership to 47households, with no public subsidy.

Cannon Falls Mayor Glen Weibel supported the project from thevery beginning. He attended some of the organizing meetings tovoice his support to the residents.

“I think it’s fantastic,” Weibel says, designating Sunrise Villa asthe town’s “Court of Preference.”

Manufactured home park cooperative conversions are one dimen-sion of NCDF’s housing development agenda. NCDF is also active-ly pursuing the conversion of expiring Low Income Housing TaxCredit projects and USDA Section 515 properties into resident-owned cooperatives and is actively involved in the adaptive reuse ofbuildings as residential homeownership cooperatives in rural areas.

Find more information on other cooperative innovations at:www.ncdf.coop ■

Court of Preference continued from page 23

Table 1—U.S. farmer cooperatives,comparison of 2003 and 2002

Item 2003 2002 ChangeBillion $ Percent

SalesMarketing 79.6 76.6 3.90Farm supplies 33.9 31.5 7.54Service 3.4 3.4 0.84Total 116.9 111.6 4.84

Balance sheetAssets 47.8 47.5 0.68Liabilities 27.8 27.9 -0.29Equity 20.0 19.6 2.04Liabilities and net worth 47.8 47.5 0.68

Income StatementSales 116.9 111.6 4.84Patronage income 0.1 0.4 -78.15Net income before taxes 1.4 1.2 17.60

Thousand EmployeesFull-time 163.5 166.1 -1.55Part-time, seasonal 59.3 54.3 9.26Total 222.8 220.4 1.11

MillionMembership 2.7 2.8 -2.02

Number Cooperatives 2,982 3,140 -5.03

Farm numbers continue to decline, as do co-opmemberships and the number of farmer coopera-tives. Cooperative memberships stand at 2.7 mil-lion, down about 2 percent from 2002. Manyfarmers are members of more than one coopera-tive, hence cooperative memberships exceed U.S.farm numbers. There are now 2,982 farmer coop-eratives, down from 3,140 in 2002. ■

Farmer co-op business volume continued from page 11


GROWMARK forms allianceto offer grain-risk services

GROWMARK has formed analliance with Decision Commodities todeliver and develop grain-risk manage-ment products and services. GROW-MARK is a regional, federated cooper-ative system made up of local grain andfarm supply cooperatives across theMidwest. Decision Commodities pro-vides innovative forward contracts tograin producers. The company’s mar-ket-based pricing tool, DecisionContracts, provides farmers a means ofprotecting themselves from adverseprice movements.

According to Davis Anderson,GROWMARK vice president/grain,GROWMARK member cooperativeswere looking to find innovativegrain/risk management products andservices to help improve the profitabil-ity of their farmer-customers. “Deci-sion Commodities has demonstratedthe success of its business model work-ing with local cooperative elevators.The partnership will accelerate the useof the company’s contracts and providea foundation for competitive success

among our member cooperatives in thearea of producer risk management ser-vices,” Anderson says.

As part of the partnership, new ser-vices and products will be developedthrough shared work and resources ofGROWMARK and Decision Com-modities. GROWMARK will be mak-ing an investment in Decision Com-modities and will have a seat on theboard of directors.

Soybean association joinscrop insurance co-op

The Minnesota Soybean GrowersAssociation (MSGA) is joining with 17farm associations to sponsor GrowersNational Cooperative Insurance AgencyInc. GNC provides an alternative wayfor MSGA members to purchase federalcrop insurance. Through GNC, spon-soring associations will have a voice inproviding insurance tailored to the spe-cific needs of members. “This win-winprogram will lead to increased member-ship in MSGA and will provide aninnovative way to purchase federal croprisk management tools,’’ said RonJacobsen, MSGA president.

Co-ops have $6-billionimpact on North Dakota

Cooperatives provide full-timeemployment for more than 11,000people in North Dakota and con-tribute more than $6 billion to thestate’s economy, a North Dakota StateUniversity official says. Researcher andprofessor Larry Leistritz said the studyis the most comprehensive yet ofNorth Dakota co-ops, according to areport in the Bismark Tribune. Itlooked at the economic activity of alltypes of co-ops, taking into accountfactors such as retail trade, personalincome, total business activity, employ-ment and tax revenue. North Dakotahas 405 co-op businesses, most ofthem relating to agriculture.

Iowa, Illinois getnew winery co-ops

Iowa and Illinois are not usuallythought of as wine-producing states,but each has a growing number ofsmall vineyards and new cooperativesare forming to serve the growers. TwoRivers Grape and Wine Cooperative isthe first farmer-owned cooperative

inputs. The gain in efficiencies willmanifest itself in net margins. This iswhere net margin percent will showthe other half of the picture.

The average net margin percent forthe largest agriculture cooperatives wasup from 1.36 in 2002 to 1.68 in 2003.Leading the increase were cotton,fruit/vegetable, rice and sugar coopera-tives. Fruit/vegetable cooperativesenjoyed the largest jump in their aver-age net margin percent, whichincreased from 1.52 to 3.99 in 2003.Poultry/livestock cooperatives, onaverage, had the largest decline, fallingfrom 2.23 to .56 in 2003.

Return on assetsThe return on assets (ROA) looks at

net margins before interest and taxesare deducted. This attempts to look at

all returns for interested parties. In2003, ROA increased from 5.62 to5.98 for the top 100.

Due to a major co-op reorganiza-tion, fruit/vegetable cooperativesshowed a surprising jump in theirROA, increasing from 7.91 to 13.38.Cotton and rice cooperatives alsohad ROA of over 10 percent in 2003.All other commodity groups hadROA between 5 and 6 percent.Poultry/livestock cooperatives werean exception, with ROA falling from4.95 percent in 2002 to 2.69 percentin 2003.

Return on member equity (ROME)measures returns attributed only toequity investment. This excludesinterest and taxes from net margins.The difference between ROA andROME illustrates the benefit or curse

of leverage. ROME for the top 100 co-ops jumped from 5.28 percent, to13.09 percent.

With the exception of dairy andgrain cooperatives, all other commod-ity groups shared in the higherreturns to their members in 2003.The largest increase in ROMEoccurred in the fruit/vegetable andpoultry/livestock cooperatives. In2002, both of these commoditygroups had a negative ROME whileboth had positive ROME in 2003.Fruit/vegetable cooperatives had themost dramatic increase, jumping from-11.43 percent to 38.84 percent in2003. Declining values were felt inboth the dairy and grain commoditygroups in 2003. ■— By Dave Chesnick,


Measuring top 100 co-op performance continued from page 29


making wine and growing grapes inIowa, according to the Des MoinesRegister. The new winery is one ofabout a dozen planning to open soonin Iowa. It is more evidence, say Iowawine boosters, that the state is under-going a rebirth of an industry that wasall but wiped out by Prohibition andother factors.

“The wine industry is growing sofast, I’m having trouble keeping up,”White, of the Iowa State University

Extension, told the Register. “It is goingto happen in Iowa.” Iowa now hasabout 30 wineries that sold about76,000 gallons of wine in 2003. Morethan half of Iowa-produced wines aremade in the Amana Colonies.

Meanwhile, a new winery co-op hasalso been formed in Illinois, with 11small vineyards as members. ShawneeWinery Co-op is producing eightwines for its members, whose vine-yards range in size from half an acre to

eight acres. About $300,000in state and federal grantshelped to launch the co-op.It has a 4,000-square-footbuilding that includes aproduction area and a winetasting and retail area.

A 2003 study ofMissouri’s wine industryshows that the state’s 47wineries have a significanteffect in stimulating ruraleconomies.

Preliminary settlementreached in MCP lawsuit

A preliminary settlementhas been reached in a class-action lawsuit filed againstfive former executives of theMinnesota Corn Processors(MCP) for their role inconvincing farmers to selltheir ethanol and sweetenerbusiness to Archer Daniels

Midland for $400 million in 2002.That amount was only a fraction of thetrue value of the business, according tofarmers of the former co-op.

Although growers voted to approvethe sale of MCP, which had convertedinto a producer-owned limited liabilitycompany by the time of the sale, manynow feel they were misled by theirown officers, who they allege werelooking out primarily for themselves(see July/August 2004 issue of RuralCooperatives, page 22, for detailed back-ground on the MCP sale; past issuesare on-line at www.rurdev.usda.gov/rbs/pub/openmag.htm).

The lawsuit alleges that MCP CEODan Thompson and four other officersconspired in self-dealing to sell MCPfor personal gain. A sixth individual ischarged in the suit with alleged con-spiracy and breach of financial duties.Under the settlement, the five execu-tives would pay $5.75 million to thefarmers.

The MCP executives’ defense wasweakened by a note that Thompsonwrote to ADM officer Marty Andreas,in which Thompson says: “mythoughts are that I am the only personwho could get them to accept a lowernumber.” When read in context, it isclear that Thompson meant he wouldwork to convince farmers to take alower price than the true value ofMCP, the plaintiffs say. An editorial inthe Marshall (Minn.) Independent called

The Shawnee Winery Co-op in Illinois benefited fromRural Business Enterprise Grants from USDA RuralDevelopment. Photo courtesy Shawnee Winery Co-op.

purchased and leased land capable ofproducing mushrooms and placed deedrestrictions on the titles to the land.The deed restrictions barred mush-room farming on the land, usually for-ever.

Justice did not challenge theCapper-Volstead status of EMMC.Rather, the department asserted in itscomplaint that the Capper-VolsteadAct does not protect members of acooperative who conspire to preventindependent, non-member farms from

competing with the cooperative or itsmembers.

Under the terms of the consentdecree, EMMC agreed to remove allrestrictions on producing mushroomsfrom the deeds and to restrain fromsimilar activity in the future. No fineor other additional punishment waslevied against the association or itsproducer-members. Thus, EMMCmembers may continue to agree onprices and otherwise market theirmushrooms through their cooperative.

A consent decree does not set ajudicial precedent in the same way acourt decision can. However, thiscase should put marketing associa-tions on notice that the JusticeDepartment may intervene when itbelieves a cooperative’s actions artifi-cially reduce the acreage and facilitiesavailable to non-members to growand market the same product as thecooperative’s members, therebydepriving consumers of the benefitsof competition. ■

Legal Corner continued from page 24


that hand-written note a “smokinggun” of culpability.

“We are pleased this hard foughtlitigation has come to an end,” theclass action committee says on its Website. “We are particularly pleased thatthe facts behind this merger have beenfully debated. A trial and appeal of thismatter presented risks and costs toboth sides. The parties were wellserved by a conscientious and hard-working judiciary which identified the

respective strengths and weaknesses inthe parties’ positions prior to trial.Based upon this meaningful settle-ment, it now seems time for the issuessurrounding the ADM/MCP mergerto come to an end.”

Notice of the settlement was sentout to about 5,000 shareholders in lateFebruary. A final hearing has beenscheduled for April 12, at which timethe court will approve or deny the set-tlement, according to attorney Robert

Moilanen, of Zimmerman-Reed PLLPin Minneapolis, legal counsel for thegrowers. Some farmers elected lastyear to opt out of the class action, andwill not share in any disbursementarising from the settlement. Theycould, however, still pursue litigationon their own. Otherwise, if approved,members would share in the settlementbased on the number of shares theyowned in MCP (after attorney fees andexpenses are deducted). ■


By Peter J.Thomas, Administrator

Business and Co-op ProgramsUSDA Rural Development

he Value-Added ProducerGrants (VAPG) programis a great example of thecommitment USDARural Development has

made to carrying out President Bush’sagenda for building a stronger ruralAmerica. You can read about anexample of a project funded by thisprogram on page 12 and learn aboutfunding priorities and the next appli-cation deadline on page 33 of thisissue of Rural Cooperatives.

The VAPG program is helping toaccelerate the pace of the transfor-mation of the nation’s agriculturaleconomy to one focused on produc-er-owned, value-added businesses.With global competition increasingfor production of crops, many pro-ducers realize that their best bet forsuccess in the years ahead will be tomove higher on the value-addedchain that starts with their crops andlivestock.

Since 2001, USDA RuralDevelopment has awarded $100 millionfor 584 VAPG projects. Not only doesVAPG help producers generate moreprofits from their operations and keepthat income turning over in rural com-munities, it also helps create jobs. For example, Value-Added Partners Inc.(VAP) received a VAPG in 2001 for$500,000 to help market dough and

bread products made from hard redwinter wheat. The co-op was originallyformed by a group of producers lookingfor value-added processing alternativesfor their hard red winter wheat. Thisvariety is the region’s major crop, pre-ferred by producers as a consistentsource of clean, high-quality wheat that

has above-average test weights and pro-tein levels.

In 1999, VAP began its equity driveto purchase a site for a frozen-doughprocessing plant. The producerresponse was strong. VAP also obtaineda Business and Industry GuaranteedLoan from USDA for $7.5 million,allowing the cooperative to purchase asite in Alva, Okla.

The processing plant now producesseveral types of dough and breadproducts, including its latest addition:a frozen cinnamon roll that can bemicrowaved. The plant’s main lineproduces pizza crust and can process10,000 pounds of dough per hour.VAP has 80 full-time employees and

recently launched its own truckingcompany to handle the shipping ofits products.

Recently, we have revised theVAPG program so that it can bemaximized so that more people canbenefit. Because of this action, moregrants will be awarded, creatingmore jobs and strengthening theeconomies of more rural communi-ties. To echo Agriculture SecretaryMike Johanns, “the Bush Adminis-tration is committed to workingwith farmers, ranchers and ruralentrepreneurs to increase their eco-nomic opportunities and to createjobs that boost local economies.These grants provide America’sfarmers and ranchers with theinvestment funds needed to expandtheir role in developing and market-

ing value-added products.”Rural Development is committed to

providing determined leadership toincrease economic opportunities andimprove the quality of life for citizensliving in America’s rural communities.With 47 state offices and 800 fieldoffices, we look forward to workingwith you to bring opportunities to youand your communities. ■

VAPG program creates ru ra ljobs , boosts loca l economies

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

USDA Rural Development’s Peter Thomas (far right)delivers a check with financial assistance to a newturkey producers’ cooperative in Hinton, Va. (seepage 14).

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