C 0 M M E N T A R Y
Co-op growth through acquisition
One good strategy not fully recognized or appreciated for establishing cooperatives is to convert an existing company to a farmer-owned cooperative. It happens more often than commonly realized. Many of these acquisitions have successfully placed cooperatives in position as value-added marketers when farmers gain ownership of physical facilities and an existing marketing base.
There have been a number of examples of this process in the past 30 years. One of the first during this period was the conversion of the American Crystal Sugar Co. to a cooperative owned by Red River Valley sugar beet growers in Minnesota and North Dakota, who were the major suppliers of sugar beets to American Crystal in 1970. This purchase was followed in 1971 by the acquisition of the Stolkley-Van Camp canning plants in Lodi, Oroville and Santa Cruz, Calif., by the then newly organized Pacific Coast Producers (PCP) cooperative. In each of these cases, growers belonging to associations already organized for cooperative bargaining decided to pursue ownership of value-added plants as a means of preserving a home for their raw products and the opportunity to gain additional income from marketing-derived margins for members.
More recently, sugar beet growers in Michigan and the eastern slope of the Rocky Mountains have been negotiating purchase or lease of facilities formerly operated by the Tate and Lyle and Imperial Sugar (Holly) companies.
In 1996, Iowa Turkey Growers Cooperative was formed and purchased the former Oscar Mayer (then a Kraft subsidiary) turkey processing plant in West Liberty, Iowa, and has run it quite successfully. Beef producers belonging to U.S. Premium Beef cooperative have purchased ownership in Farmland National Beef processing.
Likewise, Dairy Farmers of America and Land O'Lakes jointly purchased a Kraft Foods cheese plant in Melrose, Minn. Pork producers in several states have acquired ownership interests in packing plants. And olive growers in California are in the process of purchasing the former Obertti olive plant, part of the liquidation of assets formerly owned by bankrupt Tri Valley Growers.
On the farm supply side, Terra Resources was acquired by a consortium of regional cooperatives led by Land O' Lakes and Cenex. Land O' Lakes this past year also purchased the feed business of Ralston-Purina. These efforts require substantial up-front capitalization by members. The strategy is also not without its potential perils if plant and equipment assets are worn out or not well maintained. Similarly, the sometimes fickle, end-product market for value-added products has changed dramatically with the growing concentration of food distributors and may not be as sound as first anticipated.
The use of this acquisition strategy has been encouraged by two recent Congressional actions. The Taxpayer Relief Act of 1997 provides a capital gains tax break for company owners that sell their facility to growers who had been supplying their plant. This enables growers to negotiate a better purchase price than might otherwise be possible.
Secondly, the 1996 farm bill expanded the Business and Industry Loan Guarantee program to provide guarantees for stock purchase by farmers in newly created value-added cooperatives. Current deliberations over the 2002 version of the farm bill would extend this provision to owners of existing cooperatives that want to engage in value-added processing.
These examples demonstrate that farmers have been expanding their off-farm operations through cooperative ownership in an ever-expanding series of acquisitions. This is a sound strategy if: marketing feasibility can be demonstrated; experienced management is hired; proper capitalization is provided; and the acquisition price is right.
Randall Torgerson,
Deputy Administrator
Rural Business-Cooperative Service
