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.

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