Generating rural progress
Study finds that new-generation and traditional co-ops have major beneficial impacts on rural communities
Editor's note: A group of Midwest university professors collaborated on a study that includes a close look at five cooperatives and the impact they have had on their respective communities. These included three new-generation cooperatives, a traditional cooperative that had changed its relationship with members, and a group of local governments using a cooperative business model to deliver services in rural areas.
Coordinating the study were David Trechter, University of Wisconsin-River Falls, and Robert king, University of Minnesota. Contributors were: Robert Cropp and Anne Reynolds, University of Wisconsin Center for Cooperatives; Kimberly Zeuli, University
Of Kentucky; Roger Ginder, Iowa State University; Evert Van der Sluis, South Dakota State University; Michael Cook, Deanne Hackman and Kristi Livingston, University of Missouri Columbia; Gary Goreharn and Frayne Olson, North Dakota State University; Beth Honadle, University of Minnesota; and Linda Jacobson, University of Wisconsin-River Falls.
The following material has been excerpted or summarized from their study, USDA/RBS Research Report 177, by Patrick Duffey, a writer/editor with USDA Rural Development's public affairs office. The full text can be accessed on the USDA Rural Development web-site at: www.rurdev.usda.gov/rbs/pub/research.htm.
s the new millennium opens, the U.S. food system is still in the midst of profound structural changes that will have a significant impact on farmers, agribusinesses (including cooperatives), rural communities and consumers. These changes include a wave of new farmer-owned processing cooperatives formed by growers who see their best odds for success hinging on their ability to keep more of the value-added dollars generated from their crops and livestock. Consider the case of Great Plains wheat producers, who in 1997 received only 10 cents of each consumer dollar spent on cereal and bakery products. Nationwide, farmers reaped just 2 3 cents for every consumer dollar spent on food in 1997, compared with 37 cents per food dollar in 1980.
During the 1990s, more than 50 new cooperatives were established in the Upper Midwest, with most of them based in rural communities. This surge of interest in forming new-generation cooperatives (NGCs) is creating spin-off economic benefits to the communities where these new businesses locate.
This study focused on the Midwest because it is the home of the greatest concentration of cooperatives in the United States. Nine of the top 10 cooperatives, when ranked by 1997 revenues, are located in the Midwest. Among them are Farmland Industries, Cenex Harvest States, Growmark, Land 0'Lakes and grocery wholesale cooperative Associated Wholesale Grocers of Kansas City. There are also many smaller co-ops in the region, ranging from credit unions and rural electric cooperatives to natural foods, housing, and agriculture co-ops.
One of the objectives of the study, conducted during the fall of 1997 and the winter of 1998, was to summarize the experiences of cooperatives and their impact on local communities.
Soybeans are inspected prior to processing at a plant built by South Dakota farmers who were tired of shipping out raw product and bringing back in finished product. Photo courtesy South Dakota Soybean Processors
How co-ops boost rural communities
All cooperative businesses, the study notes, are based on three fundamental operating principles: one vote per member; the business is owned by those who use it; and earnings are returned to members in proportion to how much they use the cooperative. These principles exemplify the differences between cooperatives and investor-oriented firms (IOF). IOF voting is based on the number of shares owned, ownership is not limited to those using the business, and earnings are returned to stockholders in proportion to investment.
"As user-owned organizations, cooperatives provide a model for individual self-help and empowerment that strengthens bonds leading to greater community awareness and involvement," says Randall Torgerson, deputy administrator of USDA Rural Business-Cooperative Service (RBS). "Cooperatives have been created in response to the needs of agricultural producers and other rural residents faced with rapidly changing forces that affect their livelihoods and well-being. Cooperatives not only provide access to markets not otherwise reached, but also provide member-owners with an opportunity to improve incomes and services."
Traditional agricultural cooperatives are easy to join and difficult to leave. In contrast, new-generation cooperatives are more difficult to join, but often easier to leave. The substantial up-front investment farmers or ranchers need to make in new-generation cooperative stock is linked to delivery rights and responsibilities.
Cooperatives usually have a positive impact on rural communities in part because operating and service decisions are made locally. Thus, cooperatives have little incentive to close or move their operations in order to increase their return on investment. Net earnings are returned to members and cooperatives contribute to local economic development. They also help to foster an attitude of self-help and self-initiative in a community.
When agricultural commodities that had been shipped out of a region are instead processed locally, it generates more jobs and local income. Processing and other new cooperative facilities enhance the local tax base and strengthen the demand for retail sales and services, triggering the creation of other local businesses. This, in turn, may trigger the need for new housing and improvements in local schools and other community facilities.
Cooperatives may also increase the social cohesion of a community by providing local meeting places and a greater sense of community pride. A cooperative store may become the social and economic hub of a community. Cooperatives also make donations to local service clubs and create scholarships.
Following are highlights from the research report relating to each of the five cooperatives studied.
New-generation cooperatives get farmers closer to the consumer through value-added processing, and the organizations that these innovative farmers build help bring diverse economic vitality to rural communities.
Farmers' Cooperative
Association, Keota
Farmers' Cooperative Association, Keota (FCAK), is a farm supply and grain marketing cooperative located about 40 miles southwest of Iowa City. It had gross sales of more than $22 million in 1997 and a membership of 668. It employs 47 people, making it one of the larger employers in Keota.
FCAK is working with Farmland Industries on an innovative program that could help reverse the decline in the state's hog industry. In 1997, Iowa ranked first among all states for hog production, with 22 percent of the nation's hogs. But production is shifting to the South and Southwest, and some producers felt their operations had to change.
Iowa farm numbers have fallen and the remaining operations are growing larger. The decline is a major concern because hog production adds value to the state's corn crop, creates a market for other feedstuffs and demand for farm services and equipment. It also creates jobs in the marketing, slaughter and processing sectors.
New production technologies have led to the construction of large-scale, low-cost hog production farms. These farms are designed to meet consumer demand for leaner, more consistent pork products. In turn, meat packers need large numbers of uniform-quality hogs from a single source. Also, an increasing percentage of this country's food supply is distributed via highly integrated agribusiness firms. Larger scale hog operations have benefited from these trends.
The "traditional" hog producer with less than 500 sows is struggling to compete with these mega-farms. Capital costs and associated market risks prevent many young people from entering hog production.
FCAK had been losing business to competitors offering various services to farmers, such as record keeping. The cooperative's board approached Farm-land Industries for assistance and met with an Iowa State University Extension specialist to discuss possible responses to these structural changes in hog production.
Farmland offers a "contract-building system" for its farmer-owners, and manages another type of swine program for independent producers, known as an "alliance farm system." Traditionally, farmers have retained ownership of production facilities and their hogs, accepted all risks and reaped all returns for production. The alliance system offers a way to help smaller operations expand hog production, including construction guidelines for buildings and simplified financing, as well as a source of high-genetic quality feeder pigs. Farmland offers marketing agreements that include market price-risk sharing programs, futures contracts and carcassmerit pricing. Other services include access to swine specialists to assist with management, and feed and services provided by the local farm supply cooperative.
Iowa producers are meeting consumer demand for leaner, more consistent pork products by following a Farmland swine program. Meeting consumer expectations can mean better prices to producers. Photo by Jim Tucker, courtesy Farmland
Under the contract-building system, farmer-members invest in the hog-finishing buildings and provide labor for the hog-finishing process. Farmland retains ownership of the pigs, assumes price and production risks, provides the feed and covers health maintenance costs. In some contracts, a premium is paid for reaching defined performance standards, but most participating farmers receive a guaranteed payment per pig space.
Both programs require that the hog farmer purchase feed from FCAK if the farm is located within a 25-mile radius of the cooperative. This agreement holds for 10 years, after which a farmer is free to purchase feed from anyone. Thus the local cooperative benefits from higher feed sales and other services.
Each month for nearly a year, the board discussed the pros and cons of participating in Farmland's hog production systems. The FCAK board had to decide whether to invest members' capital to encourage hog production (which would require building a new feed mill), or to expand grain handling and storage facilities.
The board eventually opted for the Farmland hog programs, and held three meetings to present its proposal to the members. Member reaction ranged from those who thought the proposal was a great idea, to those who saw the plan as a threat to their own hog operations and a loss of their economic independence.
Based on member reaction, the board voted to adopt the Farmland hog programs (state law required a membership vote to formalize the plan), even though it lost members in the ensuing controversy. By 1997, eight members were participating in the Farmland program a small number, but those eight farmers represent about half of the cooperative's feed business. Their increased level of business justified the cooperative's investment in a new feed mill, which is benefiting all members. FCAK was also able to hire a grain-marketing specialist who provides members with precision agricultural services. Those members with Farmland contracts have reduced their market risks. The Farmland program has also helped younger producers obtain the resources needed to enter the business.
The program got off to a somewhat rough start some members felt Farmland should have provided more details early on about the contractual arrangements, and there were some initial disease problems. But since then, participating farmers appear to be happy with the program.
Some farmers initially had trouble securing credit to participate, but local financial institutions are now more familiar with the program and are more willing to make loans to farmers wishing to enroll in it. Between 1990 and 1997, gross sales for the cooperative increased 137 percent, from $9.4 million to $22.2 million, although not all that growth can be attributed to the swine program.
Ultimately, this swine program boosted economic activity in the city and county. Higher net corn prices resulted because corn no longer had to be trucked out of the area. The higher profit levels and experience in financing the programs increased the availability of credit from the local bank. Construction of hog facilities provided employment for local building contractors and increased the need for local veterinarians. More young people have been able to remain in the community. The cooperative added employees and other local businesses also gained. A new library has been built, the local park has been improved, and community pride has increased.
The co-op has also provided benefits to non-members. With a gas station and tire service, home heating and air conditioning services, etc., FCAK provides the community with much needed competition for both agriculture and consumer goods and services.
Because contract-hog production is often controversial, a cooperative entering this business arena must provide ample information to its members outlining the benefits to them, the impact on the cooperative's profitability, availability of new services, and the potential economic impact on the local community in terms of business and employment. Such major projects take a minimum of two years.
The cooperative feels it is keeping hog production in the hands of farm families and can have many multiplier effects by offering more services to its members and the community. Enhanced profitability of the farmers spills over to enhance business activity in the local community and more local employment opportunities.
Northeast Missouri Grain Processors (NMGP)
Northeast Missouri Grain Processors (NMGP) cooperative opened Missouri's first ethanol plant on April 29, 2000, at Macon, Mo., about 60 miles north of Columbia. When fully operational, it will produce 15 million gallons of ethanol and 100 million pounds of dry distiller's grain (DDG), a high quality livestock feed, annually from 6 million bushels of corn.
The cooperative's 311 farmer-owners invested $5.6 million in the facility, which cost $23.5 million to build. The project was launched in 1994. Like many other ethanol plant operations, this one is structured as a new-generation cooperative. While Missouri is not the epicenter of the new-generation co-op movement, this ethanol cooperative nonetheless illustrates the opportunities and challenges faced by those attempting to transplant this business innovation into new areas.
NMGP, organized in 1995, currently has a 13-member board and 30 employees. During the organizational phase, site applications were received from nine counties representing 15 communities. Information meetings were conducted in 25 counties. A limited liability company was eventually formed to own and operate the plant and sell the byproducts.
Initially, 274 members purchased 1,632 units of stock at $2,500 per unit, or slightly more than $4 million in producer equity. In a second equity drive, both existing and new members purchased an additional 428 units at $3,000 each.
NMGP holds an 84 percent share of the LLC that owns the ethanol plant. The cooperative faced an initial challenge in raising equity capital. Local farmers were unfamiliar with new-generation cooperatives and there was uncertainty about federal and state legislation affecting ethanol production. Missouri's variable weather also often puts heavy demands on a farmer's cash flow reserves, and state law restricts the sale of investment securities. Once Macon was selected as the plant site, cooperative backers had to contend with a drop-off in support for the venture among producers in other area communities who had hoped their town would win the new facility.
After an initial period of uncertainty about this new organizational form, the state of Missouri has been very helpful in the formation of new-generation cooperatives. The Missouri Department of Agriculture hired a cooperative marketing specialist to assist producers with cooperative development. The state legislature created grant programs to assist with activities such as feasibility studies and business plans for projects that add value to agricultural commodities. The state also provided partial loan guarantees for value-added projects.
Producers consider increased profitability derived from processing their corn as the primary direct benefit of the new cooperative, and they anticipate higher corn prices as well. New jobs and an expanded local tax base are rated as the primary community benefits. The cooperative is also credited with stimulating related business activity, such as trucking.
Northeast Missouri producers are putting their commodity product into a new ethanol plant. Photo courtesy NMGP
Five key lessons for those launching new cooperatives were learned from this case study: 1) remain flexible (NMGP changed its initial opinion about the type of technology to be employed at its ethanol plant and regarding the prerequisites of a good plant site); 2) don't underestimate the time required to develop a new-generation cooperative (it took time to educate farmers, lenders, state legislators and state agencies); 3) state statutes governing new-generation co-ops must be well understood and may need to be changed; 4) economic development programs at the state and local level are often ill suited to cooperatives; and 5) tap the knowledge and expertise of others interested in rural development, such as rural electric cooperatives.
If this cooperative proves successful, the board, farmers and community leaders say they believe it will provide a powerful model for other value-added processing cooperatives in Missouri. As board Chairman John Eggleston said, "It will be much easier to be second than to be first."
South Dakota
Soybean Processors
South Dakota Soybean Processors (SDSP) transforms members' soybeans into soy oil and soy meal. Prior to its existence, lack of a soybean processing plant in the state forced producers to ship soybeans to neighboring states. About 40 percent of the processed beans were transported back to South Dakota again in the form of soy meal for livestock feed.
This new-generation cooperative began operating in late 1996. It processes raw soybeans into crude soy-bean oil, high- and low-protein soy-bean meal, and soybean hulls. Soy meal is sold throughout the Midwest, the Pacific Northwest and Canada. Soy oil is marketed to Harvest States Cooperative in Mankato, Minn., where the oil is further refined for human consumption. The hulls are pelleted by SDSP and sold to an outside vendor.
To launch the cooperative, organizers conducted nearly 200 meetings, reached 6,000 farmers and developed a limited membership plan and a uniform marketing agreement. Members were initially required to purchase a minimum of $5,000 in shares. The board voted to build the $32.5 million plant in Volga, S.D. It is still the only soy-bean processing plant in South Dakota.
As of 1998, the cooperative had 2,092 members, about 70 full-time workers, an annual payroll of $2 million, total assets of $48.4 million and $29.2 million in member-owned equity in the plant. Sixty-eight percent of the $8.5 million in net proceeds in 1998 was returned to members as cash patronage refunds.
The cooperative's processing capacity was expanded from 50,000 to 65,000 bushels of soybeans per day in the first six months of the plant's operation, and later expanded again to 70,000 bushels. As has been the case in many similar projects, the site-selection process caused a temporary rift to develop among the founders of the cooperative.
Farmers and other community members needed a large amount of information to convince them to commit to the cooperative. SDSP would not have been possible without a group of very active individuals committed to achieving the goal of developing a soy-bean processing facility.
The plant has helped raise soybean prices in the area and has generated profits during its first two years of operation. However, continued vigilance by the cooperative's members and management will be critical to its continued success. They will need to monitor regional, national and global market conditions for soybeans and soy-based products.
Soybeans harvested in South Dakota can now be processed by a farmer-owned cooperative, which benefits not only growers, but the rural economy of the area. Photo courtesy South Dakota Soybean Processors.
Resources required for developing and operating a successful cooperative often are limited in rural areas. New-generation cooperatives, like other cooperatives, must operate efficiently, which requires sufficient member territory. On the other hand, SDSP`s early success motivated local leaders to become involved with other value-added endeavors in the region and has inspired others to seek financial opportunities by participating in new-generation cooperative activities. Perceived negative impacts include heavier rail and truck traffic and possible reduced economic opportunities for local grain elevators.
The cooperative is credited with stimulating the local economy, creating new jobs, a higher tax base and new activity in service industry businesses. Directors and co-op members take a great deal of pride in having created a locally owned soybean processing cooperative in a market dominated by large, powerful multi-national companies and regional cooperatives.
The Dakota Growers Pasta Co.
The Dakota Growers Pasta Co. (DGPC) at Carrington, N.D., is recog-nized as one of the most successful new-generation cooperatives to emerge in the Great Plains. New-generation cooperatives such as DGPC appear to do best when they develop and/or exploit a niche value-added market. DGPC capitalized on the growing popularity of pasta and established itself in this expanding niche market.
In 1996, North Dakota was the country's leading producer of durum wheat, which is the primary input for DGPC pasta, but durum production has been hit by serious disease problems in recent years and production had been declining.
Dakota Growers mills its durum. wheat into semolina, which is used to produce pasta products. The cooperative is one of only a few fully integrated pasta manufacturers in the United States. The cooperative was developed under nearly ideal conditions with substantial assistance from the state for feasibility and marketing studies and other facilitation assistance from the state association of rural electric cooperatives. Most of the 1,085 members reside in South Dakota. In 1997, DGPC had 247 employees.
DGPC state-of-the-art facilities turn durum wheat into high-quality semolina, durum. flour, and millfeed; the co-op then processes semolina using advanced Italian pasta processing equipment. By 1998, annual capacity reached 30 million pounds. Net revenues, sales, net incomes and patronage dividends have climbed steadily.
DGPC gave Carrington a psychological boost and came on the heels of an agricultural decline and very demoralizing time for farmers. The plant is credited with helping to boost durum prices substantially, although the smaller harvests have also played a role in the higher prices. Members gained a market for durum wheat, new crop research on durum and production advice from the cooperative. DGPC also benefited non-members by improving the market for durum wheat (non-members can access DGPC's grain-marketing pool). Members also learned about the food industry and why durum of the highest quality is required for production of pasta.
An improved tax base and more and better jobs are seen as major benefits of the pasta plant. Among negative factors cited by some is that the plant contributed to a housing shortage, increased traffic and a more transient population. This study reveals that, in addition to higher income, farmers also choose to join NGCs based on the likely impact on their community.
Locating a new-generation cooperative manufacturing plant in a community works best when community and cooperative officials focus on their shared interests. Strong, hard working, visionary leadership is essential both to initiate the cooperative venture and to attract the manufacturing plant to a community. Farmers need informa-tion from trusted sources, including the cooperative's officials and leaders and neighbors in their own communities.
Western Areas Cities and Counties Cooperative (WACCO)
Local governments, especially those in rural areas, are facing a number of challenges. Population levels, particularly in the Great Plains, are stagnant or shrinking. Agriculture, long the economic bulwark for many rural areas, is undergoing a structural transformation toward fewer, larger, more vertically integrated and much more technologically sophisticated farms and ranches.
Consolidation means fewer potential local leaders, fewer children for the schools, and consumers who often bypass local stores. Resistance to increases in taxes, particularly the property taxes upon which many local governments depend, has created significant fiscal constraints. Within this context, Western Areas Cities and Counties Cooperative (WACCO) at Fergus Falls, Minn., was developed.
WACCO is a cooperative organization owned by the governments of seven counties and 18 small towns. It is a model that could have widespread application throughout the United States, especially in rural areas. Local governments nationwide are facing increasingly complex demands as activities previously performed by federal or state govern-ments are being transferred to the local level. Citizens are also demanding more efficient delivery of services.
A common response to similar pressures in the private sector has been to consolidate into fewer, larger firms. There has been no parallel trend in the public sector. Resistance would likely be quite vigorous if two counties proposed a merger. WACCO allows local units of government to realize the economies of scale associated with consolidation without the real and emotional costs that come with disbanding existing local governmental structures.
WACCO's initial goal was to purchase municipal supplies and services (e.g., snow plow blades, road salt, office equipment and supplies) at reduced prices. By aggregating orders and acting as a broker with competing suppliers, WACCO generated significant sav-ings for its members.
Photo courtesy Dakota Growers Pasta Co.
WACCO also has facilitated equipment sharing among member governments. It has created an inventory of equipment available in each of its member communities. Members negotiate rental terms among themselves. Leased equipment is moved from community to community as need arises. One community realized substantial savings by renting a rarely used piece of equipment from a neighboring municipality. This one transaction more than paid for annual dues to WACCO.
WACCO has become a major provider of training for local governmental employees. Prior to WACCO, training workers typically took place in the Twin Cities, at significant expense. WACCO has been able to bring trainers to western Minnesota. WACCO also acts as a clearinghouse of information and a liaison with state and national regulatory agencies.
WACCO estimates that during a typical year it saves members in excess of $500,000.
Cooperatives, which played a key role in the evolution of the food system, are increasingly viewed as an institutional tool for enhancing farm profitability and fostering the development of rural communities. In the best cooperative development projects, there is a synergistic relationship between the project and the community. The cooperative benefits from the expertise and financial assistance of the state and local governments and the communities receive real (jobs, taxes) and intangible
(psychological boost, model for others) benefits.
Return to Table of Content
