Foreign Affairs
Co-op leaders share strategies
for pursuing global markets
By Stephen Thompson, Assistant Editor
ike other markets, agricultural trade is
becoming increasingly international.
Hence, dealing with the globalization
of agricultural commerce was the
theme of the 2005 Annual Farmer
Cooperatives Conference, held Nov. 7 and 8 in
Minneapolis.
As barriers to international trade, capital flow and
communication come down, U.S. cooperatives today
are facing up to the necessity of building business
relationships outside of our borders to remain competitive.
Presenters at the conference, sponsored by
the University of Wisconsin Center for
Cooperatives, offered hope and useful suggestions
for participating in the international business arena.
But none of them said that doing so will be easy.
Participants may have felt that they left the gathering
with more questions than answers; the picture
they were presented was one of increasing change —
offering new opportunities, but also greater risk and
uncertainty.
Now what?
Terry N. Barr, chief economist with the National
Council of Farmer Cooperatives, presented co-op
leaders with this question: “The market in which
you had prepared to compete no longer exists! Now
what?”
Barr argued that world markets are changing
quickly and drastically, that “the rise of China and
India is the most important economic force in the
world,” and that the continued growth of those
countries will result in massive changes to the world
economy. He said that customers are taking advantage
of increasing competition to demand more
services and better quality. Lower transportation
costs and increasingly efficient communications are
breaking down barriers not only to the flow of
goods and services, but to capital and knowledge as
well. In fact, capital moves more quickly than physical
goods.
As a result, said Barr, U.S. ag cooperatives
will have to participate in riskier overseas
markets, make new partnerships with foreign
firms, and even invest in overseas ventures to
properly serve their members.
Unfortunately, the
huge reductions in
transportation and
communications
costs that have
encouraged more
Asian imports into
the U.S. market
have not stimulated
as rapid a growth in
U.S. exports.
While large volumes
of imported
goods from Asia
send many dollars
overseas, those dollars
often don’t
return as payments
for U.S. exports. A
combination of factors
has created this
situation. The government of China has provided
significant stimulus to investment over
consumption and uses high tariffs on imported
goods to protect domestic industries, such
as agriculture. At the same time, the income
and purchasing power of the Chinese consumers
is low and their savings rates are very
high.
As a result, the money American consumers
spend on foreign goods is used to
purchase U.S. financial assets, such as
Treasury bonds and other securities. Barr
pointed out that this is part of a conscious
growth strategy on the part of many Asian
governments to promote demand for their
exportable goods in the United States and
other regions, rather than rely on internal-demand
growth.
With export income being channeled into
purchases of U.S. securities and assets, Asian
countries help keep U.S. interest rates low.
Access to debt at lower rates further encourages
American consumers to buy more consumer
products, including imported goods.
But it also means that the consumption patterns
of Asian consumers don’t reflect the
same benefits: deprived of much of the
export income, they are discouraged by high
tariffs from raising their standard of living by
purchasing imported goods, such as agricultural
and other products from the United
States. Thus, both Asian consumers and
American farmers are missing out on much
of the potential benefit of globalization.
Net ag-exporter status ending
As a result of this changing world market,
the United States’ status as a net agricultural
exporter is coming to an end, Barr said. The
problem, he continued, is not in the commodities
sector — although bulk exports
have fallen. Rather, high-value products are
tipping the scales.
U.S. exports of high-value agricultural
products are actually rising, but, said Barr,
they are not rising fast enough to offset the
rising imports of such items as horticultural
products and other high value agricultural
goods. Meanwhile, commodity exports from
Brazil and other sources are continuing to
increase, and agricultural production continues
to consolidate.
Barr believes that the result will be a
growing trend on the part of producers to
attempt to break out of commodity markets
through product differentiation — whether
by product attribute, delivery capability, or
some other distinct value added to the product.
The use of new life-science technologies
will offer one route, resulting in new food
and energy products, as well as new pharmaceuticals
and other health products.
Serving consumer markets offers another
route, but it is an avenue fraught with complications.
Barr pointed out that trends in the
consumer sector are toward goods that are
customized to individual markets — no
longer can a firm expect simply to introduce
products into one market that have been
designed for another.
In addition, retail outlets are consolidating
rapidly — the Wal-Mart phenomenon —
and food processing companies are consolidating
in response, while at the same time
diversifying their product lines, using brand
names and private labels to meet the
demands of various markets.
The implications of Barr’s presentation
were clear: farmer cooperatives must be
willing to forge ties with foreign firms to
compete in the markets of today and tomorrow.
Such relationships may take many
forms, from straight client agreements to
joint ventures.
The most important international
markets for agricultural products are
also among the most difficult to deal
with: China and India, together having
38 percent of the world’s population.
The economies of both countries are
developing rapidly, and growing middle
classes are demanding more and more
processed foods. Joint ventures are the
most obvious avenue for market participation
in these countries.
China and India erect high tariff barriers
to agricultural imports,
and have laws that prevent
foreign firms from participating
by themselves in their
domestic markets. This
means that American cooperatives
seeking to break
into those markets will have
to develop joint ventures
with Chinese and Indian
firms.
How co-ops can compete
Barr listed the implications
of these trends for
farmer cooperatives. To
compete, he said a co-op
must understand what it
does better than anyone else
— that is the value that it
offers in any business relationship.
It must know the
market value of what it
“brings to the table” in any
potential agreement — and
what it would cost its potential
partner to duplicate it.
And it must approach the
international market from a position of
strength domestically: “Deploying
scarce capital resources and capital in
the world market should not take precedence
over domestic strategies,” he said.
“You need to have an integrated strategy.”
Cooperative management boards of
directors must develop ways of continually
finding and evaluating potential
joint partnerships, Barr emphasized.
This must include communicating with
customers and suppliers about their
own global strategies to identify emerging
opportunities and risks.
Further, they must be aware of how
changes in domestic farm and international
trade policy will affect their position
in the marketplace, and be ready to
respond.
Behind the curve
Elizabeth Hund of Rabobank told
the gathering that the U.S. agricultural
economy is “behind the curve” in comparison
to that of Europe. She pointed
out that the Netherlands, with only a
small fraction of the farm acreage of the
United States, holds the second-largest
share of the world ag export market,
with 10.6 percent compared to the
United States’ 15.5 percent share.
Hund said that the U.S. share of the
market is falling, while European countries
gain, because the European producers
are exporting high-value, value-added
goods. She agreed with Barr that
international joint ventures, while
involving difficulty and risk, offer
important opportunities to U.S. cooperatives:
“If you can’t beat ‘em, join ‘em!”
Other presenters gave the audience
some examples of successful international
collaboration. John Johnson,
CEO of CHS Inc., told the gathering
about that co-op’s experiences with
international joint ventures. CHS has a
well-established, highly profitable relationship
with the Japanese corporation
Mitsui — one of the largest publicly
traded corporations in the world.
Johnson said that the impetus for the
partnership came about by accident: a
subsidiary of Mitsui, Wilsey Foods, was
considering acquiring some
of the same smaller companies
at which CHS subsidiary
Holsum Foods was looking.
In addition, it was a large
customer of CHS products.
Both companies decided that
a partnership would avoid
duplication and provide new
opportunities.
The partnership agreement
between CHS and Mitsui was
signed in August 1996, at
which time CHS had $350
million in annual sales, with
$8.5 million in profits. Nine
years later, says Johnson, the
partnership has paid off big
for the cooperative. Ventura
Foods now has $1.2 billion in
annual sales. Profits have
increased more than 800 percent,
to between $60 and $70
million in profits, making for
a 25-30 percent return on
members’ equity.
Johnson presented a joint
grain-marketing effort in the
Pacific Northwest, called United
Harvest, as an example of the synergies
achieved by the partnership. Mitsui had
a global portfolio of customers for
American grain, while CHS had access
to the grain at the source. Both firms
each had an export facility in
Washington State — Mitsui at
Vancouver and CHS at Kalama — both
on the Columbia River. Both firms
needed to build new terminals for large,
single-cargo shuttle trains to feed those
facilities — an innovation at the time.
Mitsui at first planned to build shuttle
terminals, but turned the task over
to CHS with its superior expertise in
that field. The result, said Johnson, was
a venture that paid off for both parties.
Making it work
According to Johnson, the secret to
making an international partnership
work is a good working relationship
between top leadership officials. He
noted that differences between
Japanese and American cultures make
for different management styles,
which must be taken into account and
adapted to.
“Here in the U.S., we’re used to
doing things by Robert’s Rules of
Order, with an up-and-down vote,” he
said. “In Japan, everybody discusses
the issue until a consensus is reached.”
He said that this resulted in misunderstandings,
in which the Japanese
believed a decision had been made
while the Americans still anticipated a
formal resolution.
Other problems, said Johnson,
included ambivalence by older CHS
members who remembered being at
war with Japan during World War II.
However, a trip by the cooperative
board of directors to Mitsui Headquarters
in Japan helped cement cordial
relations. Johnson emphasized
that personal relationships between top
management must be cultivated, and
that he, as CEO of CHS, regarded his
ability to call and discuss issues directly
with the president of Mitsui as essential.
The CEO of Growmark, Bill Davisson,
presented his perspective on another
kind of international partnership:
having co-op members in other countries.
Davisson discussed Growmark’s
acquisition of bankrupt United Cooperatives
of Ontario (UCO) assets in
1995, saying that the similarities
between UCO and Growmark in structure
and core business were a good fit,
and gave Growmark the opportunity to
expand into an area more or less contiguous
with its area of operations in
the United States.
Problems with the merger included
dealing with UCO’s bankruptcy, anti-trust
regulation in both the United
States and Canada, and issues resulting
from differeing business regulations
and statutes, including UCO’s
commercial dealings with Cuba, which
are forbidden to U.S. firms. Cultural
issues, including dealing with French-speaking
members and Canadian attitudes
toward the acquisition of a
Canadian business by a U.S. firm, also
posed obstacles to success.
Personal relationships help
Like Johnson, Davisson emphasized
the importance of establishing personal
relationships — which in this case
involved getting Canadian and U.S.
leaders and employees together and
allowing them to discover how much
they had in common.
Another Growmark acquisition
involved gaining a 44-percent interest
in MaltaCleyton, Mexico’s second-largest
feed company. In the MaltaCleyton case, Growmark bought
into an investor-owned, non-cooperative
firm. The purchase gave Growmark
an entry into a growing market for
grain south of the border through a
financially sound investment.
Risks and challenges included a very
different political and cultural situation
from those of Canada and the United
States, which might have complicated a
relationship with a Mexican cooperative.
Davisson concluded that, when contemplating
international partnerships,
cooperatives must be true to their basic
principles and assiduous in calculating
risks and benefits. If they choose to
establish a relationship, they must carefully
monitor the results.
Relationships must be carefully nurtured,
he said, and local attitudes and
issues must be continually taken into
account.
Gaining access to technology
Dairy Farmers of America used a
joint venture with international partners
to gain access to new technology
and develop new markets at home, Don
Schriver, DFA executive vice president,
told the conference. DFA, one of the
largest milk marketers in the world,
represents nearly one third of U.S.
milk production, but had not developed
new fractionated products, leaving it
with limited outlets for its members’
production.
“Basically,” said Schriver, “we had
conventional dairy products, dried milk
powder and the government.”
DFA attacked the problem by starting
a joint venture in 2000 with
Fonterra, a multinational dairy company
owned by 13,000 New Zealand dairy
farmers that is the largest exporter of
dairy products in the world. The venture,
called DairiConcepts, combines
DFA’s U.S. production capabilities with
advanced technology developed by
Fonterra, to produce dairy and cheese
ingredients for processed food manufacturers.
Items produced by DairiConcepts
include various proteins, fats, dairy-derived
artificial flavors, milk- and
cheese-based modified powders, powders
for infant formula and adult nutritional
beverages and preparations, and
hard Italian cheeses. Many of its products
are used in the manufacture of
convenience foods such as snacks,
ready-to-eat meals, sauces, soups and
baked goods.
The partners initially each contributed
about $25 million to the venture, Schriver said. However, later
financing was fully secured by the venture’s
own assets, with no guarantees
by the partners. DairiConcepts currently
has annual sales of about $400
million.
Reducing transportation costs
Another successful DFA alliance is
with Ireland-based dairy processor
Glanbia PLC. DFA was looking for
ways to deal with surplus milk production
in the Southwest, the transport of
which out of the region was costing at
least $40 million per year.
Glanbia is a major international
cheese manufacturer, with annual sales
of more than 2.3 billion euros. It is the
largest cheese producer in the
Northwest United States and a major
producer of lactose, whey protein and
other bulk dairy products. DFA entered
into a cheese making venture called
Southwest Cheese Company LLC.
Unlike the DairiConcepts venture,
DFA is not involved in a direct relationship
with Glanbia, but instead shared
participation through an agreement
with other American cooperatives,
including Select Milk Producers, representing
dairy farmers in the Southwest.
DFA holds a 30 percent share in
Southwest Cheese, while Glanbia controls
50 percent.
Governance of the venture reflects
the ownership split, with three board
members from Glanbia and three from
the co-ops.
The $190 million Southwest Cheese
processing facility, in Clovis, N.M.,
began operations in December, and is
expected to generate $350 million in
sales annually while processing 7 million
pounds of milk per day.
Changing negative product perception
None of the conference presenters
portrayed working in the international
marketplace as easy. David Fuhrman,
president of Foremost Farms USA, said
that the export market continually presents
challenges. Foremost exports mostly
whey, beginning with the 1984 acquisition
of a firm already engaged in that
business. Its largest whey customer is
China.
Fuhrman says that the co-op had to
overcome a negative reputation of U.S.
whey, because of the tendency of U.S.
producers to “dump” inferior whey
product on foreign markets, while keeping
high-quality product for domestic
sale. Other challenges include packaging
the product to protect quality over the
long distances and less than ideal conditions
of overseas transport.
Paperwork on an order must be flawless
with foreign customers, said
Fuhrman, or they may think the
exporter is trying to “pull a fast one.” In
addition, local cultural quirks can add
problems. In Mexico, for example, entry
into ports is sometimes complicated by
requests for bribes. In China, “negotiations
never seem to end,” he said,
adding that Chinese customers often
look for ways to deduct from the agreed
price even after delivery.
Regarding quality, said Fuhrman,
“Expectations are not the same as specifications,”
meaning that customers may
not be satisfied even if the product
meets the letter of the agreed specifications.
While the firm receives complaints
about less than 1 percent of its
product sold domestically, it gets complaints
on about half of its overseas
shipments. In such an instance, he said,
“The customer is always right.”
Overall, exporting product is
“tedious, time consuming, and leaves no
margin for errors,” Fuhrman said. Despite
the problems and the fact that the
co-op receives less than 1 percent of its
revenues from exports, exporting has
been profitable, and has improved
Foremost’s overall business.
Capper-Volstead & foreign trade
USDA Rural Development
Cooperative Programs law specialist
Donald Frederick explained how the
Capper-Volstead Act's limited anti-trust
protections affect cooperatives which
accept foreign producers as members.
Frederick said that Capper-Volstead is
silent about whether non-domestic producers
may join a U.S. co-op, but that
legal rulings and precedents have endorsed
such relationships.
Given the increasingly concentrated
and global economy, large buyers are
the ones with substantial market power,
Frederick noted. They can negotiate
down prices paid to farmers by playing
farmers in one country against those in
other countries who produce the same
product. Foreign members in farmer
marketing cooperatives and alliances
with foreign producer associations are
important tools for creating economic
balance in the markets of the 21st century.
