Dave Tillotson is one of the co-op's 430 dairy producer-members who generate 1.6 billion poundsof milk annually. About 665 million pounds of member milk is processed by Upstate Niagara annually.
Upstate Niagara Goes Uptown
Team effort provides financing for modern, $35 million dairy plant
hen Upstate Niagara Cooperative Inc.
decided in 2004 to build a new dairy
processing plant to replace its century-old
facility in Buffalo, N.Y., hundreds of member
dairy farmers and the local community
welcomed the news.
Building a larger, more modern dairy plant in West
Seneca, N.Y., about 20 minutes outside of Buffalo, promised
to position the prominent Northeast co-op for greater
production and market growth. It would keep one of the coop’s
processing operations in the area, giving local dairies a
home — and added value — for their milk. And it would
boost the employment base.
But the plant’s estimated $35 million cost meant
significant capital expansion in costly New York State, posing
a “big risk” for the cooperative, says Ed Luongo, Upstate
Niagara’s chief financial officer. While the co-op’s 430 dairy
producer-members do a stellar job of producing milk — to
the tune of 1.6 billion pounds annually — they weren’t in a
position to write checks to cover the multi-million-dollar
price tag for the new plant’s construction.
“We needed financial partners who could either lend us
the money or reduce our costs,” Luongo remembers. “And
we found both.”
Financing partners
Chief among Upstate Niagara’s financing partners were
three Farm Credit System institutions: CoBank, which served
as the lead bank, and two Farm Credit associations, Farm
Credit of Western New York and First Pioneer Farm Credit.
In addition, much of the new plant’s equipment is leased
through Farm Credit Leasing, a CoBank subsidiary.
CoBank specializes in financing U.S. agribusinesses
(particularly cooperatives), as well as rural communications
and energy systems and agricultural exports. Although it’s
based in Denver, Colo., CoBank has other offices around the
country, including the Springfield, Mass., banking center that
worked with Upstate Niagara.
“CoBank really stepped up to the plate and was willing to
take the risk with us,” Luongo says.
To help fund the $30 million that Upstate Niagara sought
to borrow, CoBank turned to the two Farm Credit affiliates
with New York branches and decades of experience in
capitalizing agricultural businesses. Farm Credit of Western
New York is based in Batavia, N.Y., about an hour’s drive east
of Buffalo. First Pioneer Farm Credit has nine branch offices
in New York State.
The funding partnership among the three reflects a
growing trend in the nationwide, federally chartered Farm
Credit System, which has been around since 1916.
Increasingly, System members like CoBank are partnering
with other Farm Credit institutions, and even with
commercial banks, to provide the sizable funding that today’s
agribusinesses need.
“Some might say that combining three lending institutions
on a single transaction might have been easier not to do,”
says Tom Cosgrove, the CoBank relationship manager who
worked closely on the Upstate Niagara deal. “But we all
worked hard to make it happen.”
To meet Upstate Niagara’s funding need, CoBank lent $20
million, with the two Farm Credit affiliates each adding $5
million. The resulting $30 million meant Upstate Niagara was on
its way to building its new plant. But the co-op didn’t stop there.
Adding tax breaks to the deal
Besides borrowing money outright, Upstate Niagara
looked for ways to reduce the costs of its new capital
expansion. Community support for the plant investment
seemed feasible. After all, not many $35 million projects pop
up in Western New York. In West Seneca (population about
45,000), the Upstate Niagara plant would bolster the
employment base and generate additional property taxes to
help pay for schools and other public services.
As hoped, Upstate Niagara soon found a cost-saving
opportunity through the Erie County Industrial
Development Agency (ECIDA).
ECIDA is the economic development corporation for Erie
County. The New York State Legislature created the agency
in 1970 to provide economic incentives, such as tax
abatements and grants, to private-sector companies
undertaking capital expansion in Erie County. The agency is
self-funded; 90 percent of its budget comes from fees.
“Upstate Niagara was considering other sites for its new
plant, and we wanted to make Erie County as attractive as
possible,” says ECIDA’s Dave Kerchoff.
Because of Upstate Niagara’s
“significant capital investment in
West Seneca,” Kerchoff says,
ECIDA provided the co-op with
a package of tax incentives and
abatements that will save the coop
$6 million over 15 years.
The package included a salestax
reduction on building
materials and non-processing
equipment, such as forklifts and
computers. A property tax
abatement, worth $3.5 million,
was also part of the overall
package.
Upstate Niagara found
another financing partner in the
New York State Energy Research
and Development Authority. The
agency provided a subsidized
loan to the co-op for installing
energy-saving equipment in the
plant.
As promised, Upstate
Niagara’s manufacturing
investment empowered the West
Seneca community, using local
vendors and companies to build the plant. The co-op’s old
plant even took on a new life when it was sold as a local car
museum.
Delivering the goods
Since the new plant produced its first container of yogurt
in May 2006, it has more than met Upstate Niagara’s
expectations. The facility processes 110 million pounds of
raw milk annually, twice the old plant’s capacity. As a result,
the co-op has nearly doubled the capacity of its cultured
products line, jumping from 50 million pounds to 90 million
pounds a year. Sales rose to almost $500 million last year, up
by about 9 percent.
“By creating a more efficient facility, we’re a tougher
competitor,” says Luongo.
A post-plant merger with neighboring Niagara Milk
Cooperative also helped Upstate Farms strengthen its market
position. Upstate Niagara now ranks among the top 20 U.S.
dairy cooperatives.
At 205,000 square feet, the new plant is twice the size of
the old facility, which stood three stories tall. The new
facility stands only one story tall, but its high ceiling allows
for “better utilization of space,” Luongo says. In the plant’s
modern cooler warehouse, workers can stack five pallets of
finished products atop each other to reach 35 feet high.
A computerized inventory system helps with stocking and
distribution of the plant’s 275 products. Trucks can unload
330 gallons of milk per minute at two bays. Two robots can
stack 50 cases per minute for
shipping. New technology in the
plant has allowed the co-op to
extend the shelf life of its yogurt
products from 45 days to 90 days.
The plant’s efficiencies and
newly increased product lines
“will pay for the plant over the
next eight years,” says Luongo.
Sold on the plant
That’s good news to co-op
members such as Dan Wolf,
chairman of the board of Upstate
Niagara. His 300-cow Holstein
dairy near Lyons, N.Y., has
produced milk for the co-op for
decades.
“We decided to move
forward with the new plant
because we saw an exciting,
bright future for our products,”
says Wolf. “We also knew that if
you’re going to grow, you can
expect an increase in debt. You
just have to concentrate on
making the business work.”
What sold the project, Wolf says, was a series of meetings
with members to explain the process of building the $35
million plant and marketing its new products. “Not one
member voiced opposition to the plan,” he recalls.
The new plant “is performing beyond expectations,” both
financially and with the products it creates, says Wolf.
Today, the plant’s 142 employees produce the quality
yogurt, cottage cheese, sour cream and dips that have earned
the co-op strong brand recognition in the market.
At its three other plants in Niagara Falls, Buffalo and
Rochester, the co-op processes fluid milk and produces juice,
iced tea, lemonade and eggnog. The co-op also owns 86
percent of the O-AT-KA processing plant in nearby Batavia.
In all, Upstate Niagara markets its dairy products and
beverages to all 50 states under its Upstate Farms, Bison and
Intense brands.
As Wolf and Luongo see it, Upstate Niagara’s major plant
undertaking proved to be a win-win situation for the co-op
and the region it calls home. “By strengthening our
competitive position, we’ve helped ensure that jobs stay in
western New York,” Luongo says. Moreover, he adds, “the
new plant will allow us to capture our next generation of
customers.”
Editor’s note: This article is an expanded version of one which
originally appeared in CoBank’s 2006 annual report. Learn more
about Upstate Niagara at: www.upstatefarms.com.
